(Filed Under Financial and General Interest News). Punished by sharp declines at Victoria’s Secret, parent company L Brands reported a 45.0% plunge in its second quarter earnings as well as a 4.7% decline in combined company sales. The firm also owns Pink, Bath & Body Works, La Senza and Henri Bendel.
Earlier this month L Brands had reported combined sales for its Victoria’s Secret and Pink stores in the U.S. and Canada had fallen 8% in the three months ended July 29, 2017, while at the same time its direct to consumer business for those brands in North America had plummeted 25.9%. One of the factors hurting direct sales is the absence of Victoria’s Secret’s iconic catalog which it ceased printing and mailing last year.
Total sales for Victoria’s Secret and Pink company owned stores in the U.S. and Canada fell from $1.469 billion for the quarter ended July 30, 2016 to $1.351 billion in the same quarter this year. Meanwhile the direct sales for the two brands fell from $398.3 million last year to $295.3 million in the same three months this year.
Company-wide, L Brands earned $138.9 million on sales of $2.755 billion in the second quarter of 2017 compared to $252.4 million on sales of $2.890 billion in the same period in 2016.
In the conference call to discuss the quarter with analysts, executives at the company revealed several of the plans, predictions and strategies for its lingerie brands.
Stuart Burgdoerfer, L Brands EVP and CFO said the firm expects “continued solid performance at Pink and Bath & Body Works, and continued improvement versus our first-half results at Victoria’s Secret lingerie and beauty. While store traffic, particularly at Victoria’s Secret has been challenging, we believe a large part of the decline is related to the exit of swim and a pullback in promotional activity versus last year.”
“We continue to be pleased with the first two full assortment Victoria’s Secret stores in mainland China, and we successfully transitioned to the T Mall domestic digital platform within country fulfillment back in July,” stated Martin Waters, CEO and president of international operations. “We continue to be very bullish about our growth opportunities in China and around the world. And 2017 will be an exciting year for us, as we continue to establish our business in China and build on our footprint in other geographies globally.”
Waters emphasized “we have seen positive comps in Victoria’s in China and I think what you should expect to see is that we grow stores in the third and fourth quarter,” adding the company expects to have “10 to 12 more full assortment stores coming in 2018” in China.
He also pointed to some negative comparable sales figures in the UK, caused by the company’s exit of swim and certain apparel categories, as well as lower retail bra prices there. “That said, we have seen significantly, I mean really significantly higher unit sales of bras in the UK, so we are winning share with bra, which is obviously a positive.”
Jan Singer, who last year was named CEO, Victoria’s Secret, underlined the brand’s shift away from the strategy of using free panties as a promotional tool. “I think that when we talk about panties and promotions, it’s a balance and we have to be selective. Do I want new customers to know what we have? Yes. Is there a brand accretive way to do that without giving away panties to everybody that walks in the store? I do believe so. So for me, panties are a business. They’re not just a marketing tool, and we’ll be continuing to build that business and getting paid for that work. And we’ll balance that with trial when we think that we can get a conversion from that conversation.”
Singer added, in response to another analyst’s question about panties, “We did not talk about lowering price point on panties at all. In fact, we think there’s more opportunity in the upward motion than the down. The opportunity I’m talking about is making sure that our team is as fast as possible on content, and that the conversation we’re having with the customer through the design of that panty is current We’re doing a lot of things to reset and make sure we put more value in those panties, but not take price down.”
On the subject of bralettes, a category where competitor Aerie has had tremendous success in the past, Singer noted, “In terms of the mix, it’s less than 5% of bralettes as we go forward. Again, I think anybody can make a bralette and that was a moment that will come and go, it will come again. But for us, we make constructed bras best. And when we do, even in our bralette business, bralettes that have more construction in them, we get paid for that work.”
EVP and CFO Burgdoerfer emphasized the importance of brick and mortar stores for all of the L Brands. “To reiterate our philosophy on it and to be very clear about it, including the example that Jan spoke about a minute ago, in terms of that in-store experience and bra fitting, the store part of our business is critical whether it’s fragrance of Bath & Body Works, or bra fittings at Victoria’s Secret lingerie or Victoria’s Secret Pink or fragrance at Victoria’s Secret Beauty, that in-store experience is a critical part of our brands, our customer experience, et cetera, just inherent in the categories of business that we are in.”
He added, “Our sales productivity, our financial results, our metrics related to our store fleet are very, very strong on a selling foot basis with productivity over $800 a foot in total, and continuing at 99% of our stores being cash flow positive. An additional point I would make is that, we’re opening and closing stores literally every year. And so based on performance and consumer experience, we very actively manage our real estate fleet. With respect to the number of stores that we should have for the business at the end day that will be performance-based. Again, store – a store-based experience we believe is foundational to our major brands and it will be performance-based and we see the opportunity for some additional square footage in North America and obviously significant expansion internationally.”
Despite substantial sales declines at Victoria’s Secret during the past year, the company has made only minor adjustment to its lingerie store count. In the months between January 28 and July 29 it open two and closed just six Victoria’s Secret shops in the U.S., reducing the total slightly to 994. During the same period L Brands opened two and closed one Pink store in the U.S., raising the total to 134. In Canada it opened an additional two Victoria’s Secret shops, raising the total there to 39. Pink Canada closed two shops, dropping the total to seven. L Brands added one Victoria’s Secret store in the U.K., raising the total there to 16, as well as adding its first two full service stores in China. Finally, the company opened one and closed two La Senza stores in Canada, dropping the total there to 121. — NM
A complete version of the transcript can be found here: https://seekingalpha.com/article/4099911-l-brands-lb-q2-2017-results-earnings-call-transcript?page=1
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