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Victoria’s Secret: Has It Begun To Stabilize?


(Filed Under wholesale Lingerie News). Victoria’s Secret and Pink second quarter sales in the United States and Canada fell 39% to $977.5 million, compared to $1.606 billion in the three months ended August 3, 2019.

Meanwhile, sales at the Victoria’s Secret and Pink “direct business, which remained open throughout the quarter, increased by 65% to $613.9 million compared to $373.1 million last year,” according to parent company L Brands. Victoria’s Secret and Pink store comparable sales decreased 10 percent during the period in which stores were open. (Excluded from that calculation were all the days in which the stores were shut as a result of the pandemic).

Yes, things are still challenging for VS and Pink. But as L Brands listed all the fixes it has put in place at the lingerie brands, and discussed the overall conditions with analysts during the quarterly conference call, a sense also emerged that a turnaround may be in the offing.

L Brands moved quickly on its plan to close about 250 lingerie stores in 2020, by shuttering 198 Victoria’s Secret stores, while opening two, in the U.S. between February 1 and August 1, reducing the total by the end of that period to 713. At the same time it opened one Pink store in the U.S. (while closing none) raising the total to 145. During the same period in Canada it closed nine Victoria’s Secret stores, dropping the total to 24, and three Pink stores, dropping the total there to two.

Interestingly L Brands predicted that “while the closure of these stores will result in a decrease in sales, we expect the impact to overall profitability to be about neutral, as we expect roughly 30% to 40% of sales from the closed stores to transfer to nearby locations or the direct channel.” During the conference call L Brands EVP and CFO Stuart Burgdoerfer (who is also the interim CEO of the company’s Victoria’s Secret segment) estimated “5%, I’m generalizing, is going to the digital business, the balance going to nearby stores.”

In the UK and Ireland L Brands has maintained, during the past six months, 21 Victoria’s Secret and five Pink shops. The division controlling those stores was placed into a form of bankruptcy by L Brands in June, and the company began to “explore the sale of the business to a joint venture or franchise partner.” L Brands subsequently entered into “an exclusive period of negotiation to explore such a deal “with a major fashion retailer.”

In China, L Brands opened three and closed one Victoria’s Secret shops between February and August, raising the total to 25. At the same time it closed three and opened one Victoria’s Secret Beauty and Accessories shops, dropping the total to 39. In explaining the moves the company stated that a key closure was “our unprofitable flagship store in Hong Kong,” adding it is “nearing a resolution to restructure lease terms on other unprofitable stores,” and has “implemented a significant overhead expense reduction plan.”

L Brands announced it recently hired both Goldman Sachs and J.P. Morgan to advise it on its planned move to sell or in some other way deliver Victoria’s Secret and Pink as a separate, stand-alone company.

Burgdoerfer emphasized that the company is pushing to achieve a strong holiday season. And he implied, during the conference call, that any deal for the lingerie brands may not come until next year. “It’s important to get a read on holiday results to value the business and to ensure that we strike the right balance in terms of timing, execution risk, and getting an appropriate valuation for the business.”

L Brands emphasized that it has “managed inventories with discipline, including working with suppliers to identify opportunities to reduce merchandise costs in order to increase merchandise margin rates at Victoria’s Secret. As a result of this effort already underway, spring inventory receipts for Victoria’s Secret were down approximately 45% compared to last year, and fall receipts are expected to be down approximately 50% compared to last year.”

“Second quarter adjusted operating loss for the Victoria’s Secret segment was $38.9 million compared to operating income of $16.6 million last year,” the company revealed, adding that “selling and marketing expense” for its two lingerie brands “were down meaningfully in the quarter.”

“The Victoria’s Secret merchandise margin rate increased significantly in the second quarter, reflecting a meaningful pullback in promotional activity and better pricing during semi-annual sale.”

During the conference call, as management discussed the conditions at the two lingerie brands, one analyst was moved to remark, “as it relates to VS, it seems like there is some stabilization going on there, though a little bit muddled, given the pandemic.” Burgdoerfer agreed. “I think, in many respects, it is. Earlier in this call, we talked about the benefits of a more conservative posture on inventory purchase levels, how aggressive we’re buying and how that has an effect on promotional activity. So that’s been an important change. It’s starting to bear some fruit.” He added he is seeing, for both brands, “across all major categories healthy average unit retail growth and meaningful margin rate improvements, which is certainly indication of a better, stronger response from consumers with respect to what we’re selling.”

“I see the opportunity for that stabilization and then for resuming to the pattern of growth.” Burgdoerfer concluded that he is “feeling like the business is stabilizing and that we’re creating the platform for growth. So that’d be my perspective on Victoria’s.”

He was asked if the aggressive inventory reductions are harming the customer experience at the lingerie stores. “Obviously, being appropriately in stock for the customer in core categories and key sizes is a fundamental, and something that needs to be and we will remain very focused on delivering a good experience for her. So we understand the importance of that. We’re managing that well,” he replied.

“But really, the need to fundamentally become much more conservative on the inventory buy or the purchases, again, triggered by the pandemic has a silver lining to it, in that it provided a real clarity to the organization about buying much more conservatively and then chasing in the business when the trend was in fact there.”

He concluded the new approach “is going to get us to a much healthier balance between inventory levels and purchases and the underlying demand.”

As of the end of its second quarter, L Brand estimated a total of 691 Victoria’s Secret and Pink stores in the U.S. and Canada were reopened “representing the majority of our stores.”

During the conference call, an analyst asked if executives had seen business trends slowing as the second half of the year began. And Burgdoerfer responded, “so, with respect to very recent results, we have not at VS NewCo.” He added, “We at VS NewCo have not seen any change in trend, any deceleration of the trend over the last several weeks. I realize other retailers have reported on that. We have not seen that in the VS NewCo result.”

Asked by another analyst about marketing expenditures during the second half, Burgdoerfer explained, “they’ll return back to more typical levels. So we’ve pulled back on a lot of stuff, as you could understand, but they’ll return to more normal levels as we move into the holiday period.” — NM

The full conference call transcript can be found here: https://seekingalpha.com/article/4369947-l-brands-inc-lb-ceo-andrew-meslow-on-q2-2020-results-earnings-call-transcript?part=single


more wholesale Lingerie News >>

Published 08-24-2020 by Nick Monjo

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