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L Brands Income Rises, VS Strategies Adjusted

(Filed Under Financial and General Interest News). In the conference call to discuss its first quarter earnings, L Brands acknowledged a modest reduction in the number of U.S. lingerie stores it plans to open this year, said it is exiting some apparel and make-up categories, and confirmed its emphasis on opening new Pink stores as opposed to Victoria’s Secret stores in this country.

Overall, first quarter was good for the company with net income increasing to $157.0 million compared to $142.5 million for the same period last year. Company-wide, sales rose to $2.391 billion for the 13 weeks ended May 3, 2014, “an increase of 5% compared to sales of $2.268 billion for the 13 weeks ended May 4, 2013. Comparable stores sales increased 2% for the 13 weeks ended May 3, 2014.”

In addition to Victoria’s Secret and Pink, L Brands operates Bath & Body Works, La Senza and Henri Bendel.

Looking ahead, L Brands said it “expects 2014 second quarter earnings per share to be $0.57 to $0.62 compared to earnings per share of $0.61 per share last year. For 2014, the company expects earnings per share of $3.00 to $3.15 versus its previous guidance of $3.00 to $3.20. The updated guidance reflects an estimated negative impact of about $0.10 to $0.12 related to the exit of certain non-core categories in the Victoria’s Secret direct and beauty businesses to allow the brand to focus on faster growing, more profitable product lines.”

In the conference call to discuss the first quarter results (as transcribed by Morningstar), Sharen Jester Turney, president and CEO of Victoria’s Secret reported “In order to increase our focus on our fastest growing most profitable businesses, we are exiting some of our non-core apparel categories in direct as well as Victoria’s Secret Makeup. This will reduce our annual direct apparel business from roughly $485 million in sales in 2013 to between $200 million and $220 million in 2015, with this year being a transition year. The exit of our Victoria’s Secret Makeup business will impact our business by about $45 million on an annual basis. This is an exciting, long-term opportunity for Victoria’s Secret, as our omni-channel categories are our most profitable aligning offerings across the channel, not only allows us to better focus on our core, but also provides a seamless customer experience.”

Turney explained that “In the direct channel, first quarter sales were flat to last year as the high single-digit increase in lingerie, PINK and sports was offset by a high single-digit decline in apparel. The merchandise margin rate was down to last year, primarily due to the higher promotional activity in the apparel business. Expenses were about flat to last year, so the decline in merchandise margin resulted in a decline in operating income.”

In its first quarter earnings presentation, L Brands presented charts and information that show how it plans to expand in the lingerie category in 2014. In the U.S. it is clear the firm is putting its emphasis on Pink, which targets generally young and college-going customers. For example, the company now projects it will end the year with only one additional Victoria’s Secret store in America, raising the number from 977 at the start of the year to 978 by the end of 2014. By comparison, L Brand started 2014 with 83 Pink stores in the U.S. but plans to end the year with 114, an increase of 31.

Earlier this year, during its conference call to discuss its 4th quarter 2013, company executives had said it planned to add “approximately 50 new stores” in the lingerie category in the U.S.

In answer to a questions during the conference call, Turney denied the smaller number of openings was a shift. “There is no change in our strategy about us being aggressive with PINK. Very excited about the new store openings...We still see a lot of growth and opportunity within PINK. So, we’re fully excited about that. But there has not been really a change in terms of real estate.”

In Canada, the story with Pink is more conservative. The company has no plans to add to the 10 Pink stores there, but reported it will add seven Victoria’s Secret stores to the 24 already there, raising the total to 31 by the end of the year.

Also, in Canada, the firm plans to reduce the number of La Senza intimates stores by 9, ending the year with 148 locations. Overall, there were recently 331 La Senza International stores elsewhere around the world, a number L Brands reported it will reduce, through closures, to 307-314 by the end of 2014.

There will be nine or 11 Victoria’s Secret stores the U.K. by the end of 2014 (the report from L Brands had two charts, each showing a different total) up from five at the start of the year. Currently there are two Pink stores in that country, with none additional planned for this year.

The number of Victoria’s Secret Beauty & Accessories shops around the world, which sell only a limited amount of intimates and are located often in airports, will increase dramatically from 198 at the start of 2014 to an estimated 290-300 by the end of the year.

Discussing her lingerie assortment moving forward, Turney said, “As we transition to the second quarter, we will continue to focus on newness and are looking forward to our upcoming bra launches which have tested well....While select category exits and continued investments in real estate will put pressure on our results, we’re confident in our core categories of bras, panties, fragrance and PINK.” She later added, “We’re excited about our sport business, and as you know, we rolled sport bras to all stores in the fall season, and it has continued to exceed our expectation. We only have our full assortment in about 80 stores right now from a sport perspective. We think that there’s a huge opportunity not only in the store channel but as well as in the direct channel. We continue to incubate ideas in this full assortment stores and continue to be pleased, and really in exceeding our expectation. The only thing that gets in our way of growth right now is just real estate. So as you see, all the real estate moves that we’re making this year in terms of Victoria’s Secret will allow us to continue to expand upon this category.”

“I’m also pleased with the innovation that we’re doing, and in fact, in about another week, we’ll be launching a new sport bra that we actually have the technology patent, and we call it the Knockout Bra but it’s also zip and click which is just a great front closure sport bra with lots of technology to help support, and has continued in attempting to really blow everything else out of the water in terms of what we’ve done. We have a full pipeline of innovation that we continue to see ideas much stronger than we did last year in the sport bra category. So we’re well positioned. We’re excited about it. I feel like that we’re going a little slower than I would like, primarily just to the real estate that we need to continue to push this category forward.”

Commenting on the company’s La Senza brand, Martin Waters, president, L Brands International, admitted, “La Senza continues to be a bit of a challenge for us,” adding, the “Canadian retail environment...has been tough and also foreign exchange rates which has gone against us somewhat, but, that said, we continue to be very positive and optimistic about the positioning of La Senza. The team’s working incredibly hard to fix it. We’ll stay the course and we hope to have good news soon.”

more Financial and General Interest News >>

Published 06-02-2014 by Nick Monjo

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