Just when I thought that retail was getting boring following a very interesting year with seemingly endless value opportunities, the plot thickens again.
First, L Brands Inc. (LB) , parent of Victoria's Secret and Bath & Body Works, took it on the chin last week after reporting better-than expected second-quarter earnings but lowering guidance. While revenue of $2.98 billion exceeded consensus estimates by $50 million and earnings per share were two cents better than the expected 34 cents, L Brands reduced full-year EPS guidance from a range of $2.70 to $3.00 to a range of $2.45 to $2.70. The market was not amused and sent L Brands shares, which now are down more than 50% year to date, to a seven-year low.
LB trades at 10x next year's consensus estimates, but the big question at this point is whether there is a dividend cut on the horizon. L Brands currently yields 8.7% with a 60-cent quarterly dividend, and the market seems to be expecting a cut. Current estimates and guidance suggest that LB could cover the dividend, plus the company ended the quarter with $1.03 billion in cash, but the question remains open. Shares may fall further this week in reaction to a weekend Barron's piece, which was not positive on the name. This is where things could get interesting; we'll see if the market pushes the name to an irresistible price for the dumpster divers among us.
Elsewhere, Hibbett Sports Inc. (HIBB) , a member of my 2018 Double Net Value Portfolio and a very profitable trade over the past year, was absolutely hammered on Friday, off 30% following its own second-quarter earnings release. The company missed on revenue ($211 million versus $215 million consensus) and earnings per share (six-cent loss versus seven-cent consensus profit), and also lowered full-year EPS guidance from a range of $1.65 to $1.95 to a range of $1.57 to $1.75. The market punished it harshly.
I'd closed my remaining Hibbett position early last week, satisfied with a 180% gain and just past the one- year holding mark for long-term capital gains treatment (shares sold early in the year were in a non-taxable account). It was not a move based on the earnings release; I've never been adept at predicting positive or negative surprises, and don't even try. Indeed, the way the stock was moving higher later in the week, after I sold and prior to the release, it appeared that the market was expecting a positive surprise.
I felt that the drubbing Hibbett took on Friday was an overreaction to the downside and did something very uncharacteristic: I took a new position, just days after unloading it.
Following the earnings/ guidance disappointments, Hibbett trades at 10x next year's earnings. That might not be all that cheap for retail these days. However, Hibbett ended the quarter with $120 million, or about $6.40 per share, in cash and less than $1 million in debt; that's nearly a third of its market cap in net cash. What's more, the company continues to buy back stock; it reduced shares outstanding by another 336,000 shares and still has nearly $196 million left on its buyback authorization. A serial share repurchaser, Hibbett has reduced shares outstanding by nearly 27% over the past three-and-a-half years.
I don't expect another 180% run-up from here for Hibbett, but the hit its shares took on Friday may have put some meat back on the bone. HIBB currently trades at about 1.16x tangible book value per share and about 1.56x net current asset value.