Is L Brands A Buy After Its Stock Rises 163%?
Back in July 2020, I told you to Avoid L Brands Stock to protect your retirement portfolio…
Today, I give an update after it released its latest quarterly earnings and answer – Is A Buy A Buy After Its Stock Rises 163%? You can read the full article above.
But if you don’t want to; here’s a quick recap of why I said to avoid it in the previous article…
At least 250 store closures in 2020.
Not able to pay its rent to landlords and having to renegotiate its lease terms.
At least 850 jobs lost.
Stores not opening or seeing far less traffic due to the coronavirus.
A 45% reduction in sales at its Victoria Secret stores already.
And a 50% reduction in sales in the fall expected.
These are the lowlights of L Brands (L) latest press release on July 29th, 2020 announcing its plans for the rest of 2020.
L Brands own’s popular brands like Victoria’s Secret, Pink, and Bath & Body Works and mostly operates in enclosed malls…
The ones that have seen mass closures. And the ones that are now seeing hugely reduced traffic even after opening back up due to fears of the coronavirus.
The companies next quarterly report is expected to be brutal when it releases… Which is why its prereleasing some of this bad news via a press release.
And I can’t even tell you when that is because on the company’s upcoming corporate events tab on its site it doesn’t even show when its next earnings are coming out.
On top of all this though is something far more worrisome…
Its massive debt.
As of this writing L Brands has a market cap of $7.1 billion.
It’s got cash on hand of $1 billion.
And total short term and long-term debt and leases of $9 billion.
Its debt position is so bad that total liabilities make up 119.7% of its balance sheet.
In other words, after you subtract total assets from total liabilities there is negative number. Which means the company’s equity based on its book value is worth less than $0 per share today.
This means the equity – shares – you can buy on the market at your brokerage for L Brands is worth less than $0 per share… And yet people are buying its shares in droves on this news.
As of this writing, L Brands shares are up 34.2% today on the news of this cost cutting and store closures.
Its shares are now selling at $25.66 per share as of this writing… Ones that after you subtract the company’s debt are worth less than $0.
Like many of these articles I write where I tell you to avoid a stock – this makes no sense.
Especially with coronavirus cases still exploding in the US and worldwide which will keep people out of their stores.
Even worse is that in time this stock is likely to go to $0 or be bought out at a discounted price to the “Retail Apocalypse”.
It’s impossible to give you exact stats on the following due to the slow decline of individual companies in the retail industry.
But millions of jobs have been lost to this trend already. And thousands if not tens of thousands of stores have closed nationwide.
And it’s only going to continue with the rise of people shopping and then getting things delivered directly to their houses.
This has been going on for years… But retail store closures due to the coronavirus is accelerating this.
Since the start of the coronavirus pandemic in March the following retailers declared bankruptcy.
- JC Penney
- Brooks Brothers
- Lucky Brands
- J. Crew
- Neiman Marcus
And according to reports many other retailers are preparing to file for bankruptcy.
But it won’t work.
Normally in these articles I show you profitability metrics, valuations, and more.
But frankly none of those matter in this case.
Stay away from owning L Brands stock.
This thesis to avoid L Brands continued to play out since July after it released its most up to date quarterly earnings… Sort of.
Full year 2020 revenue was down 8.3% to $11.85 billion.
The company closed 278 stores during the year… With 248 of them being Victoria’s Secrets worldwide.
But operating profits were up huge in the full year from negative $181.5 million for the full year 2019 to positive $1.092 billion in the full year 2020.
And this massive increase in profits helped skyrocket its shares in 2020 – even while most malls and its stores were either locked down or saw far lower traffic for most of the year.
In the last year its stock is up 163.6% due in large part to this massive increase in profits.
So was I wrong to tell you to avoid L Brands stock?
No… At least not yet.
Yes profits are WAY up in 2020 which is fantastic… This is especially important because of the negative effecgts on malls – where most L Brands stores are located – due to Covid.
Frankly its amazing honestly.
But it still closed 278 stores worldwide to achieve these results.
I’m not ready to say this is a trend and you should 100% now buy L Brands without more data.
If they continue to grow profits welll – without closing a ton of stores again – I’ll tell you to buy L Brands and admit I was wrong for telling you to avoid it last July.
However, if the only way it can continually generate huge profits is by closing a ton of stores and firing people is not sustainable… Because eventualy you run out of stores to close and people to fire.
Until that happens though, I stand by what I said last July to tell you to avoid its stock due to factors around Covid… Its huge debt load because it still has more than $9 billion in debt and leases. And more importantly the Retail Apocalypse.
Yes… Even after its huge rise in share price.
For the reasons above… And because I’ve already found other potential great stocks for you to consider buying as well.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.