What happened

Shares of L Brands (NYSE:LB) gained 18.7% last month, according to data provided by S&P Global Market Intelligence. There was no company-specific news to send the share price up. The retail industry got caught up in the trade war in August, which sent the stock tumbling. But as September rolled around, investors realized the economic situation might not be as bad as many feared.

It also helped that during L Brands' fiscal second-quarter conference call in late August, management disclosed that the company is not as exposed to tariffs on Chinese imports as other retailers, which likely buoyed investor confidence. 

Victoria's Secret store front

Image source: L Brands.

So what

L Brands sources less than 20% of its inventory from China, and that percentage has been dropping over the last four years as management diversifies its supply chain. What is perhaps the greater problem facing L Brands is the weak performance at Victoria's Secret, which accounts for 56% of L Brands' business year to date in 2019. 

Victoria's Secret has been losing market share to competitors, especially American Eagle Outfitters' Aerie brand. In the most recent quarter, Victoria's Secret experienced a decrease in comp sales of 6%, versus Aerie's comps increase of 16%, which highlights how weak Victoria's Secret is right now.

Now what

Improving the Victoria's Secret brand is management's top priority. The company has made significant changes to the fall assortment, which management expects will improve the sales performance in the short term.  

Unless the declining sales trend reverses, the stock has limited upside despite its low valuation. Analysts currently expect L Brands to report earnings per share of $2.42 this year, down 14% from fiscal 2018. Next year, analysts expect earnings to improve slightly to $2.46 per share on 2% sales growth.