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Why L Brands Stock Rallied 18% Out of the Gate Today

What happened

Shares of retailer L Brands (NYSE: LB) rose just shy of 18% at one point in the first half hour of trading on Thursday. Although the stock didn't hold on to all of its initial gains, it was still higher by 14% at roughly 10 a.m. EST. The big news was the company's after-the-close earnings release on Wednesday, which was better reading than Wall Street had expected.

So what

The big-picture story was that revenue in the third quarter rose 14% year over year, with a huge 28% increase in comparable-store sales. Adjusted earnings came in at $1.13 per share, up from $0.02 a year ago. Analysts had been expecting earnings of just $0.09 per share, and the retailer beat revenue expectations by roughly 15%. So not only was it a good quarter, but L Brands also handily bested Wall Street projections. It makes sense that the stock rallied on the news.

Image source: Getty Images.

That said, L Brands is really a story of two retail concepts, since it owns both the Victoria's Secret and Bath & Body Works nameplates. Victoria's Secret had a decent quarter overall, with comps up 4% year over year. But that was largely driven by the company's digital sales, since Victoria's Secret's physical stores witnessed a 10% sales decline.

The company has been struggling to get those stores back on a growth path, and that clearly didn't happen this quarter, which is the bad news here. Online sales obviously made up the slack and, on some level, that sales decline in the midst of a global pandemic is easy to forgive.

Bath & Body Works, meanwhile, had a great quarter, with overall sales up 56% year over year, including a 38% increase at physical locations. Bath & Body Works is benefiting from increased demand for soap and sanitizer, but its relatively strong showing compared to Victoria's Secret is really just a continuation of a longer trend here. Regardless, investors were obviously pleased with the total picture.

Now what

L Brands has been trying to balance two brands with vastly different trajectories, its struggling Victoria's Secret concept and the fast-growing Bath & Body Works brand. The company even tried to sell Victoria's Secret at one point, but that deal fell apart in the face of the coronavirus spread.

What's interesting is that there's been a shift this year, with Bath & Body Works now generating more revenue than Victoria's Secret. While third-quarter results were obviously cheered by investors, the big question for long-term investors right now might be how much of the COVID-19 related sales boost sticks around after the world has moved past the pandemic. If Bath & Body Works' sales growth proves temporary and Victoria's Secret continues to struggle, the mood here could shift back in a decidedly negative direction.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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