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2018 Operating Profit Plummeted At VS, Pink

Two new bras from the ‘Body By Victoria’ collection.
Two new bras from the ‘Body By Victoria’ collection.

(Filed Under wholesale Lingerie News). Adjusted operating income for Victoria’s Secret and Pink stores in the U.S. and Canada, combined with the direct business plummeted 45% to $512.4 million in the 52 weeks of fiscal 2018, down from $932.3 million the 53 weeks of fiscal 2017.

As it announced the financial results, parent company L Brands reported plans to close 53 Victoria’s Secret stores in 2019 after closing 30 in 2018. A chart showed it started this year with 957 Victoria’s Secret stores in the U.S. and 39 in Canada and expects to add three Pink stores in the U.S. in 2019, raising the total to 144, while maintaining the six Pink shops it has in Canada.

During the conference call to discuss the financial results, the company also said it had pulled back on “the remodeling of stores substantially over the last several years.”

Combined sales for the two lingerie brands slipped only slightly in fiscal 2018, down to $7.375 billion from $7.387 billion the year before.

Fourth quarter comparable sales for the two brands in the U.S. and Canada were down 3%, while the comps for the stores alone (without the direct business added in) were down 7%. For the entire fiscal year 2018 the combined comps for the two brands were down 2%, while the store only comps were down 6%.

In discussing the fourth quarter at Victoria’s Secret the company reported that “the merchandise margin rate was down significantly across all major merchandise categories as we increased promotional activity to drive traffic and successfully clear inventory.” It added that “substantial growth in sleepwear was offset by a decline in intimate apparel.”

“Turning to Pink,” L Brands continued, “comps decreased in the low-double digit range for the fourth quarter, with the most significant dollar decline in the loungewear category. The total Pink merchandise margin rate was down significantly to last year.”

Looking ahead, the company gave a few details on its previously reported return to swimwear, noting it is introducing, in March, “a limited, curated digital-only Swim assortment.”

During the call Stuart Burgdoerfer, L Brands EVP and CFO, addressed the question of shrinking margins. “With respect to Victoria’s Secret, the mindset or the thinking is the same which is when you get the merchandise more right than wrong; you’re able to reduce promotion. As you can appreciate, substantial change in the assortment will occur, more in the back half of 2019 than in the front half of 2019. So, we have been more promotional than we would like over the last several years.” He added, “with ongoing disciplined management of inventory, we would expect that we’ll be able to reduce promotional levels as we move forward. But it’s going to take a little bit of time.”

Questioned by an analyst about the possibility of improving merchandise margin rates, Burgdoerfer responded, “the opportunity in margin rate at Victoria’s Lingerie, Pink and Beauty is a very substantial one. And we won’t get all of that opportunity in 2019, but we would expect to make progress as we go through the year. But just to mention the opportunity versus the record year of 2015, we’re in the order of five or six percentage points versus 2015. So there’s a very substantial opportunity. Am I from that comment suggesting we’re going to get all of that in 2019? I am not.”

A recent article in BODY, (“Harder To Selling Lingerie? It’s The VSM Effect,” January 17, 2019), reported that the merchandise margin rate for Victoria’s Secret and Pink have fallen every year, and almost every single month, since the end of 2015, impacting pricing in the rest of the lingerie market.

In response to a question during the call, Burgdoerfer admitted problems in 2018 with “some of our core franchises and particularly Body by Victoria” that “had a deceleration in front, year-on-year pressure, that got more significant as we moved through 2018.” He continued, noting that the “pressure in those core franchises, again, not limited to, but principally Body by Victoria, is really what drove the further pressure as we moved through 2018.”

“In terms of what drove the change in performance, it is that deceleration and some big books of business that were, what I’d call, core sub-brands, that have existed for a long time, that weren’t sufficiently updated with fashion or innovation to continue their strength.”

Recently various commentators have criticized Victoria’s Secret’s marketing as well as its fashion show. And Burgdoerfer admitted changes are coming. “We’ve taken a fresh look at all of the marketing. We don’t have any specific announcements about the fashion show. We don’t typically make announcements about the fashion show at this time of year, but we’re looking at all aspects of the marketing of the business.” He added, “there’ll be more to report as we move through 2019.”

Parent company L Brands, which also includes Bath & Body Works, which is doing better than the lingerie business, earned $643.9 million on sales of $13.237 billion in fiscal 2018, compared to $983.0 million on sales of $12.632 billion in the year before.

When sales and comps were rising at Victoria’s Secret and Pink, monthly sales reports must have been enjoyable. With things going in the opposite direction, not so much. As a result L Brands announced, “we will report sales results quarterly and discontinue the reporting of monthly sales results,” adding that monthly reports “can lead to misinterpretations of business performance.”

In a down year, now, only four bad reports to publish instead of twelve. — NM

The full transcript of the conference call can be found here:

more wholesale Lingerie News >>

Published 03-13-2019 by Nick Monjo

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