(Filed Under Financial and General Interest News). Victoria’s Secret and Pink comparable store sales in North America were 12% lower in the first quarter of 2017 than they were in the same period last year.
However, Victoria’s Secret’s direct-to-consumer business dropped even more sharply, by over 20% (or $73.2 million) in the quarter, to $286.5 million, down from $359.7 million in the first quarter of 2016. Significantly, Victoria’s Secret discarded its iconic print catalog last spring, and now relies (just like all of its competitors) on its website and emails to reach consumers.
Sales for Victoria’s Secret’s and Pink’s combined businesses in the thirteen weeks ended April 29, 2017 were $1.533 billion, down $207.9 million from sales of $1.741 billion in the same period in 2016.
In addition to eliminating its print catalog last year, Victoria’s Secret also exited swimwear and apparel, and did away with certain discount coupons as well as a free panty program. The head of the division left the company and several hundred employees were laid off.
Sales for parent company L Brands, which also owns Bath & Beauty Works, La Senza and Henri Bendel, were significantly impacted, dropping from $2.614 billion in the first quarter of 2016 to $2.437 billion in the first three months of this year.
Shares at L Brands, which reached $99.47 December 4th, 2015, before many of the changes were announced, dropped to as low as $47.27 on April 7, 2017.
During the conference call with analysts to discuss the latest results, CFO and EVP Stuart Burgdoerfer rejected the notion that any mistakes have been made. “So, in terms of the significant changes that we made at Victoria’s Secret, are we considering reversing or stepping back from any of those changes? The short answer is no. We feel very good about the decisions that we made and that they are the right changes to drive focus and accelerated growth for the business.”
He added, “we continue to feel that the elimination of the catalog at Victoria’s Secret was fundamentally an appropriate move for the business in the day and age that we’re in. So that would be the first major changes that we made and again, feel that, that was a strong move.”
Referring to the “highly promotional offers” of Victoria’s Secret’s past, including “dollars off bra and getting a free panty,” he said the company has now “moved through 2016 and into ‘17,” and is “contacting customers more than we were a few months ago through direct mail, but doing so in a brand appropriate way and with a range of offers that we believe are more compelling and more interesting and not as brand damaging.”
Aerie (the intimates and swim brand from American Eagle Outfitters) is the competitor that has provoked the most intense comparison to Victoria’s Secret because of its strikingly better sales results. For the first quarter of this year Aerie brand comp sales were up 25% as opposed to the 12% decline for Victoria’s Secret and Pink. And while Victoria’s Secret decided to exit swim and apparel in the past year, Aerie has, during the same period, expanded aggressively in both areas.
Bralettes were a big part of the sales growth at Aerie over the past couple of years, but now have become widely available at many retailers, including Victoria’s Secret. Commented Burgdoerfer, “In the first quarter of last year, the bralette business for Victoria’s Secret lingerie was pretty small. And now it’s running about 10% of the total. So that’s where we’re on that business in terms of growth and penetration. And as we commented on earlier, we wouldn’t expect that, that will get significantly larger than it is today.”
He denied there is a “deemphasis,” on bralettes and sports bras (which also had been a major emphasis at the company), “but rather, I would just say, an increased flow of newness and compelling bra launches in the constructed bra space that we believe will improve the result in the constructed bra space and get it back to the growth trajectory that we would expect.”
Burgdoerfer added, “With respect to driving unit growth and trial in bralettes and sport bras, I mean, we were extremely aggressive about that in the fall and into the spring. And we’ve been successful in driving a lot of unit growth in those two subsegments of the bra business. We would expect that growth to moderate in the back half of the year, still to be relevant and healthy and those are important segments. But the constructed bra business continues to be the substantial majority of the bra business for us.”
Asked about average unit retail pricing, which has been impacted recently, Burgdoerfer asked in return, “Do we expect to see stabilization in overall AURs as we move through 2017? The answer to that is absolutely yes. Given the growth that we drove in the back half of ‘16 and the first part of ‘17 in the bralette and sport bra businesses, that will stabilize.” Other factors that will lead to price stabilization: “Newness and innovation and compelling bra launches in the constructed space in the back half of the year.”
One analyst who reports on L Brands, Randal Konik at the investment bank Jefferies, has claimed that Pink’s sales have slowed significantly recently. A comment by CFO and EVP Burgdoerfer during the call appeared to confirm that notion. He said of Pink, its “business does well north of $1,000 a foot.” Previously the company has published a significantly higher rate of sales. In an investor presentation dated September 2016, posted on the L Brands website, the company claimed, “Pink free-standing store productivity is more than $1300 a square foot.” BODY asked Amie Preston, chief investor relations, at L Brands if, indeed, sales had declined 30% at Pink. Her emailed reply: “I think “well north of $1000 a foot” is consistent with “more than $1300 a foot”.”
Maintaining a high rate of sales at Pink is important for L Brands, especially since Victoria’s Secret stores generate, according to a previous investor presentation, only “about $800” a square foot.
Whatever the current rate of sales per foot at Pink, Burgdoerfer stated “we believe that, that business has the potential to literally double in North America. And that’s a pretty bullish statement.” He added sales will grow by adding “additional square footage. As you know, many of our stores today don’t have sufficient square footage to offer the full assortment of Pink merchandise to our customers.”
As of April 29, L Brands was operating 133 Pink stores in the U.S., as well as eight in Canada (after having closed one earlier this year), and three in the U.K. Since the end of January the company has opened two and closed one Victoria’s Secret store in the U.S., raising the total to 999. The firm opened one additional Victoria’s Secret in Canada since January, raising the total there to 38.
L Brands operates 15 Victoria’s Secret stores in the U.K. as well as 121 La Senza shops in Canada and four in the U.S.
Asked during the conference call about China, where Victoria’s Secret opened two full assortment stores in February, Martin Waters, CEO and president, international operations, revealed, “We have four more stores in the pipe for the balance of this year and then building to 10 to 12 stores next year. So very good progress there.” In addition to the lingerie stores, L Brands now owns 31 Victoria’s Secret Beauty and Accessory (VSBA) stores in China.
The first two full assortment stores have experienced “good results, very strong customer reaction,” and “those VSBA stores, double-digit comps in the first quarter. Our third business would be the direct-to-consumer business in China which started back in the fall and has been building month-on-month. And we’re excited that we’ll move to China next-day delivery for that business during the summer, so good update there.”
Waters said that “In terms of the patterns of demand and customer behavior that we see, I would say that it’s more of the same in the sense that our replication model works in pretty much the same way everywhere. What we find is bestsellers here tend to be bestsellers there.” — NM
The full L Brands conference call transcript can be found here: https://seekingalpha.com/article/4074511-l-brands-lb-q1-2017-results-earnings-call-transcript?page=1
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