The termination was viewed negatively by traders and most sell-side analysts.

(Bloomberg)—L Brands Inc. shares sank Tuesday in pre-market trading after the Victoria’s Secret and Bath & Body Works owner reached an agreement with Sycamore Partners to terminate their deal, under which the private-equity firm was to acquire a controlling stake in the Victoria’s Secret lingerie unit.

The termination was viewed negatively by traders and most sell-side analysts. Wedbush’s Jen Redding told clients that “we see the termination as a bitter pill to swallow for L Brands in light of troubling performance at Vicky’s over the past three years, exacerbated by the current environment, and compounded by overwhelming debt.”

However, one Wall Streeter took the opportunity to upgrade the shares to outperform from market perform. BMO Capital Markets’ Simeon Siegel wrote that “with the Sycamore news extinguished, noise will dissipate and it will become harder to ignore underlying fundamental value.”

Shares traded as low as $10.26 pre-market, down 15% from Monday’s close. Since the upgrade hit, the stock has pared its decline to about 8%. L Brands is down 49% since Feb. 20, when Covid-19 concerns began to escalate in the U.S.

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L Brands is No. 27 in the 2020 Digital Commerce 360 Top 1000.

Here’s more of what analysts are saying:

BMO Capital Markets, Simeon Siegel

“The reality is a COVID-19 related revenue decline may actually provide management a very unique opportunity to re-evaluate all aspects of the brand, from revenue and fleet to sizes, to promo cadence and brand imaging, emerging a smaller and healthier VS, a scenario we have been advocating for anyway.”

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As for Bath & Body Works, Siegel expects the candle unit’s comparable sales to return to pre-virus levels. He will be watching margins, which might “prove a different story.” Still, “even stress-testing to lower margins would still suggest upside from current levels.”

Wedbush, Jen Redding

The April 23 amendment to the revolving credit facility should serve as a “temporary relief to LB’s short-term liquidity risk.”

However, the non-purchasing obligations of $1.167 billion in fiscal 2020 and $3.609 billion in fiscal 2021 to fiscal 2023 leaves Redding “uncertain about the company’s ability to stay afloat in the mid-to-long term,” especially as L Brands’ debt-to-capital ratio of 1.37 makes it even more difficult for the company to raise additional capital.

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Jefferies, Randal Konik

“Sycamore is making the smart move here,” as improving Victoria’s Secret’s results “would have been very difficult” given stagnation in the intimates category and rising competition.

The fact that neither L Brands nor Sycamore is paying a termination fee is another indicator of L Brands’ “limited resources.”

Medium-term solvency questions are “now on the table” given the losses from Victoria’s Secret and pressure on Bath & Body Works from lower mall traffic and fewer candle sales.

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Konik expects “limited appetite from investors for a standalone VS.”

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