(Filed Under wholesale Lingerie News). L Brands executives faced extensive questioning from analysts about plans for the company’s lingerie brands during the conference call to discuss its second quarter results. Far less attention was given to the company’s other main business, Bath & Beauty Works.
Total sales for Victoria’s Secret and Pink stores in North America in the quarter ended July 30, 2016 were $1.4691 billion, up from $1.4375 billion in the same quarter last year. In addition, the direct business for the two brands rose to $398.3 million in the quarter compared to $368.9 million last year.
The focus by analysts on lingerie was prompted by the series of dramatic moves by Victoria’s Secret earlier this year and the mixed store results that followed. In February it announced the “resignation” of its longtime president, Sharen Jester Turney. Soon after it detailed the planned exit of about 300 employees, the elimination of its famous catalog, the end of discount coupon and free panty programs and the exit of swimwear and some apparel categories. Soon after there were up and down comparable results at the Victoria’s Secret and Pink North American stores, with sales flat in March, dips of 3% in April, 2% in May and 1% in July. Same store sales were up 4% in June.
For the entire first half (as well as the second quarter) Victoria’s Secret and Pink comparable store sales in North America rose 1%. With the direct business for the two brands added in, the increase was 2% for both the second quarter and first half.
The questioning revealed L Brands’ hopes and plans to discover new promotional strategies to replace the coupons and free panties, and to make up for the loss of swim and apparel sales. New details also emerged about Victoria’s Secret’s strategy for China, the imminent launch of its La Senza brand in the U.S. (see separate article), and what L Brands brings to the bralette business (a category where competitor Aerie has found tremendous success).
Stuart Burgdoerfer, CFO and EVP, began by noting “We’re pleased that we were able to deliver a slight increase in operating income against last year’s record result and a second quarter earnings result that was above our initial expectations, all in the midst of significant change in our business.” He added, “We remain confident that the changes we are implementing at Victoria’s Secret, which we discussed in detail on last quarter’s call, will simplify the business and position us for accelerated future growth.”
Burgdoerfer explained that in recent months the company has “shifted our promotional strategy from that free panty, $10 off a bra direct mail coupon generally to promotions intended to drive trial. And that might be a trial in beauty as we’ve talked about, it might be a trial in sport or sharp pricing and promotions related to the bra business and particularly the unconstructed bra business. I would say we absolutely have shown that we can drive trial in those important categories.” He added that the company had not “figured out” all the details of its new promotions “in the first few months,” but insisted, “good progress on it in the second quarter and I know we’ll continue to learn more in the third quarter and the fall season.”
Asked how the company will make up for the exit of swim and certain apparel categories, which the company previously estimated at about $500 million worth of business, Burgdoerfer was less specific.
“In terms of the exits there will be pressure in the first half of 2017,” he said, adding “we’re going to work like heck and we’re optimistic that we’re going to replace that volume with growth in other categories. And so we got to prove that, we got to do that, but you should know that that’s our mindset and we’re taking specific actions to do that this fall and certainly we’ll work to do that next spring. Does the math get harder next spring in terms of the dollar impact of those exits, it does. But again you should know that we’ll be working hard to offset that volume.”
One important area of growth is in the Pink brand. “With respect to investing in that business, a lot of the square footage that we’re adding and a lot of the capital that we’re spending on real estate is positioning and supporting Pink growth,” said Burgdoerfer. “So great business, great second quarter result, very optimistic about the fall and L Brands is investing very heavily in that business and getting very good returns.”
Earlier this year L Brands acquired 26 Victoria’s Secret Beauty and Accessories (VSBA) shops in China. Previously the almost 400 VSBA shops around the world, which do not sell much lingerie, had been operated exclusively by outside partners of the company. During the call, Martin Waters, president of L Brands’ international division, provided additional details about China. “We’re on track to open two full assortment stores probably towards the end of February 2017 and then another flagship store in Beijing around the middle of the year. And we’ll continue to trade the VSBA business and add to that collectively probably about six stores over the course of the next six months.” He added that the company will open, later this fall, a direct to consumer “full Chinese language, Chinese currency site which will initially be fulfilled out of the USA on a test basis ready for full fulfillment out of China in the middle of ‘17.”
He acknowledged that it is difficult to know how the Chines business will unfold but added, “The most important thing is to get the business up with the right brand presentation, in the right way, see what happens and then be flexible and agile and adopt as necessary.”
Burgdoerfer acknowledged that both bralettes and sports bras are currently “important trends” and said the company is “taking significant actions to participate in and frankly lead with respect to those trends.” He continued, “One of the important things about the bralette business or unconstructed bra business particularly is we do think it has a higher fashion element to it and we think that’s a good thing for us where we’ve been a fashion specialty retailer for a long time. Our abilities in terms of lead times and speed and read and react particularly play well into the bralette category. And while the AUR [average unit retail] in bralettes is below some of the other categories in bras, we believe that the unit volume or their frequency of purchase given the fashion element to it in part makes up for the lower AURs.”
Bralettes and sports bras are also beneficial, continued Burgdoerfer, because, “The customer is absolutely a younger customer. And we think that’s very important to our business. We’ve always been about marketing, segmenting, targeting customers certainly with a young mindset and any time any of our business we feel like the customer is starting to not be in that target of a young mindset, we get concerned. And the good news is through our efforts in unconstructed bralettes, sports bras we’re absolutely seeing a shift to a younger customer which we view very positively.”
L Brands as a whole reported a sales gain in the second quarter to $2.8897 billion, up from $2.7652 billion in the quarter ended August 1, 2015. — NM
A full transcript of the second quarter conference call can be found here: http://seekingalpha.com/article/4000709-l-brands-lb-q2-2016-results-earnings-call-transcript?page=1
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