Why Victoria’s Secret is so Gloomy

Why Victoria's Secret is so Gloomy

Victoria’s Secret’s parent company, L Brands, Inc. (NYSE:LB) is not performing up to investors’ expectations. Incursions into new markets have taken a huge toll on revenues, and profits realized in any one segment are offset by dwindling sales in other segments.

L Brands, Inc. is a fashion apparel retailer headquartered in Columbus, Ohio. LB’s products deal with personal care and beauty products and women’s intimate apparel. In addition to its most renowned brand, Victoria’s Secret, LB is also home to Bath and Body Works, Pink, La Senza and Henri Bendel. The 53-year old fashion house has grown through several acquisitions over the years, including:

  • 1982- Victoria’s Secret, bought from Roy Raymond for $1 million
  • 1982- 207 Lane Bryant stores
  • 1985- One Henri Bendel store for $10 million
  • 1985- 798 Lerner Stores for $297 million
  • 1988- 25 Ambercrombie & Fitch Stores for $46 million

Limited Too, Structure, Victoria’s Secret Beauty, and Bath and Body Works were developed and incorporated into the main business in the 1990s.

Today, LB operates through 3 main segments: Victoria’s Secret, Bath and Body Works, and Victoria’s Secret and Bath and Body Works International. Under the PINK brand, Victoria’s Secret markets fragrances, women’s intimate apparel, fashion collections and oversees the VS fashion shows.

The global fashion industry has a value of more than $3 trillion dollars, or roughly 2% of the world’s Gross Domestic Product. The US is the largest market for apparel, valued at $385.7 billion as of 2016.

2016 saw a drop in customer spending, along with rising costs of production and manufacturing.

The specialty retailer posted 7% decline in comps for the four-week ended May 27 after registering a decline of 5%, 10%,13%, 4% and 1% in April, March, February, January and December, respectively. Moreover, net sales for May decreased 5% to $774.3 million.

L Brands’ comps declined 14% at Victoria’s Secret, while increased 6% at Bath & Body Works. The exit from the swim and apparel categories had a 10 percentage points and 14 percentage points adverse impact on overall company and Victoria’s Secret comparable sales, respectively.

Moreover, for the 17-weeks ended May 27, the company’s comps had declined 9% while sales decreased 6% to $3.211 billion. L Brands expects comps to decline in the range of mid to high-single digits in the months of June. The exit from the swim and apparel categories will impact the comps by nearly 7%. Management had earlier projected comparable sales (excluding Victoria’s Secret swim and apparel) to decline in the mid-single digit range in the second quarter.

WHY THE DECLINE?

1. Victoria’s Secret’s decline wasn’t just about swim and apparel

L Brands had explicitly warned that its decision to stop selling swimwear and most of its apparel offerings would dent its top line. But the label’s weakness wasn’t entirely related to those changes.

Instead, as the company pushes harder into lower-price sport bras and unstructured bralettes, sales in its core lingerie business posted a mid-single-digit drop. Meanwhile, it’s struggling to drum up excitement in these two new, highly competitive categories.

“Victoria’s Secret’s strong differentiation in sexy lingerie, bras, and panties allowed it to continuously gain share in an already-strong category for years,” Evercore ISI analyst Omar Saad told investors.

“However, as the focus has shifted towards the much-more-competitive categories of bralettes and sports bras, L Brands’ pricing power and brand differentiation have faltered.”

2. Promotions are hurting profitability

Victoria’s Secret traded out its habitual “free panty” offers for aggressive, but more targeted, promotions designed to introduce shoppers to its bralettes and sport bras. They include a $30 athletic pant with the purchase of a full-priced sport bra.

While these deals did encourage shoppers to try new products, CFO Stuart Burgdorfer admitted management is still trying to figure out the right balance between driving store visits and volume.

3. Two of the company’s top performers are slowing down

Strength at Bath & Body Works and the teen-focused Pink brand have helped L Brands offset declines at Victoria’s Secret. But both of these businesses are now sending warning signals.

After recording a 5 percent comparable-sales gain in the fiscal fourth quarter, Bath & Body Works is now on pace to report a mid-single-digit decline in February. Those stores have not experienced a comparable-sales decline result in nearly three years.

And while Pink continues to be one of the company’s best categories, its growth has slowed from years of double-digit gains to its second quarter of high-single digit expansion.

“We believe this deceleration suggests that the concept is nearing saturation,” Jefferies analyst Randal Konik said. “As competitors such as Aerie pick up steam, Pink will lose market share.”

4. Swim is taking a big chunk out of sales

L Brands CEO Les Wexner discontinued Victoria’s Secret’s swim line because the category wasn’t growing. Yet while the company and several analysts contend that is the right decision for the long term, it nonetheless eliminated roughly $500 million in annual sales.

The missing revenue from swim and apparel will take $160 million away from Victoria’s Secret during the first quarter and pressure its comparable sales by 9 percentage points, the company said.

“We believe that the company significantly underestimated the size of the speed bump that the exit out of swim/apparel combined with the lower promotional messaging would cause,” BMO Capital Markets analyst John Morris said.

THE GOOD NEWS

Despite this downturn, it’s not time to say goodbye to this brand or this company. There are a number of positive attributes that will keep them going while they figure out this rough spot in the road, including:

• Almost a $2 billion cash stockpile

• Comfortable gross margins of over 40%

• Earnings of #0.33 a share Qtr1, 2018, which beat analysts expectations

• Revenues of over $12 billion

In summary, it’s not time to say goodbye to the angels anytime soon.