Editors Note:

With Amazon killing all the traditional retailers the brands that cannot be sold on Amazon should be doing fine. Unfortunately, that is not helping L Brands, the parent of Victoria Secret. Shares touched a seven-month low this week on a downgrade from Goldman Sachs.


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LB - L Brands - Company Description

L Brands operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. Everybody knows of Victoria Secret. They are the premier lingerie retailer in the country. They offer products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, CO Bigelow, White Barn Candle Company and many other brand names. They have 2,721 stores in the USA, 270 in Canada and more than 700 international stores in 70 countries.

Last week the company said it was cutting 200 jobs and restructuring into three divisions. Those will be lingerie, beauty and the teen brand PINK. The company said it was getting rid of multiple merchandise categories but they did not say which ones. The online business will be revamped and integrated into the main business rather than operating as a separate entity. They plan on reducing promotions and eliminating the catalog. Citigroup said eliminating the catalog could be a nightmare that could have serious repercussions. JC Penny's revived its catalog last year after seeing sales decline after it was discontinued. There is a rumor they are eliminating swimwear, a $500 million a year category. They plan on utilizing the retail space for sports clothing.

The company reported March sales growth of 5% to $1.027 billion. Same store sales rose +3%.

Goldman Sachs downgraded the stock from buy to neutral saying the restructuring and elimination of multiple merchandise lines would impact sales in the short term. Two weeks earlier Credit Suisse cut them from buy to neutral and JP Morgan made the same downgrade last quarter.

Earnings May 18th.

Shares fell off rather steeply ahead of the sales reporting and Goldman downgrade and then hit a seven-month low on the downgrade. Many traders thought it was a buying opportunity and shares rebounded promptly in Tuesday's short squeeze. However, on Wednesday the rebound fizzled to gain only 74 cents. This suggests the rebound may have run its course.

I am recommending we buy a put on a trade under today's low of $79.04. If the stock rolls over it will trigger the position, otherwise we are just watching. If shares fall below that $76 print from Tuesday there is a lot of air before the next support at $65.

With a LB trade at $78.85

Buy May $78 put, currently $1.95. Initial stop loss $81.35.