(Filed Under wholesale Lingerie News). As expected, L Brands reported its first quarterly loss in over a decade, citing, among other things, an “$80.9 million non-cash impairment charge related to certain Victoria’s Secret store assets.”
The company also reported a decline in sales for both VS and Pink in the quarter, and said it was cutting its annual dividend in half, from $2.40 to $1.20. In addition to naming John Mehas as the new Victoria’s Secret CEO, the company also said it was bringing back swimwear and other apparel.
L Brands chairman Les Wexner explained in a press release, “our number one priority is improving performance at Victoria’s Secret Lingerie and Pink. In doing so, our new leaders are coming in with a fresh perspective and looking at everything … our marketing, brand positioning, internal talent, real estate portfolio and cost structure. Most importantly, we are focused on our merchandise assortment – it all starts with the customer saying ‘I’ll take it.’”
L Brands as a whole announced a loss of $42.75 million for the quarter, compared to a profit of $85.99 last year. The company, which includes the healthy Bath & Body Works division, “reported net sales of $2.775 billion for the 13 weeks ended November 3, 2018, an increase of 6 percent, compared to net sales of $2.618 billion for the quarter ended October 28, 2017. Comparable sales increased 4 percent” for the same period last year.
However, total sales for VS and Pink in the U.S. and Canada remained just about flat in the quarter, $1.539 billion last year compared to $1.529 billion this year. While the direct business for those two brands rose 18.6% (from $295.9 million to $351.0 million), sales at the stores fell 5.2% (from $1.243 billion to $1.179 billion). Comparable sales were also down 2% for the two brands in the two countries.
The conference call to discuss the quarter and the various changes, included sharp questioning from analysts for L Brands’ EVP and CFO Stuart Burgdoerfer, the only key management executive to attend. Neither chairman Wexner nor Amy Hauk, the newly appointed head of the Pink division, were there.
“Our overall results are unacceptable driven by declines in Victoria’s Secret Lingerie and Pink,” emphasized Burgdoerfer at the start. “We made some important decisions in the quarter including the decision to close the Henri Bendel business, pursuing alternatives for La Senza, and reducing our dividend and committing to deleverage to enable us to increase our focus on our core businesses and strengthen our company in the long term. Our number one priority is improving performance at Victoria’s Secret Lingerie and Pink.” He continued, “we’re committed to a full review of the business. Everything is on the table, including our brand positioning, marketing, talent, real estate, cost structure and most importantly our merchandise assortments.”
In terms of merchandise, he began, “we’ll be back in the swim business in the spring of 2019,” adding “we’re going to be entering some other exited categories. We’ve already begun marketing and selling boots, for example, but also eyewear and other licensed businesses.
Asked by one analyst about the decision, about two years ago, to exit swim, which many thought hurt the overall business, the CFO replied, “Okay. So on swim, we are where we are. I’m not going to spend a lot of time looking back, frankly. You can look back and learn, but I’m not going to go into that at length. As to why we made the decision that we did, fundamentally, it’s about what the customer is telling us. And again, one could question the original decision. Again, the decision at that time was to focus our energy and our resources on our most critical categories, that being bras and panties at Victoria’s Secret lingerie. But as we evaluate the situation today, a very important decision and we believe a good one to reenter the swim business again driven principally by customer feedback that we’ve received.”
Burgdoerfer discussed other recent missteps and successes in detail. “Margin rates, particularly in the Pink business, were pressured in the third quarter, and deliberately so, on our part. We launched the fall season with a distortion into bling, apparel with a lot of embellishment and a lot of investment in the product. The customer didn’t respond to that in the way that we’d hoped for. We didn’t get paid for that investment. And we very aggressively took markdowns to clear through much of that inventory in the third quarter, which put a lot of pressure on the Pink margin rate which had a big impact on the overall segment margin rate.” He added, “but once we saw that, our view was let’s clear it, let’s get through it, let’s adjust as quickly as we can.” He concluded, “importantly, Pink ending the third quarter moving through substantially all that inventory. The AUC [average unit costs] pressure will go on a bit more into the fourth quarter because we haven’t sold through all those goods, but substantially all of them.”
The CFO defended Hauk’s recent merchandise decisions at Pink in response to questions from one analyst. “In candor, that’s one of the hardest things for anybody to evaluate which is probably why you’re asking about it, and I respect the question. What I do know is that Amy is a very talented leader that has spent 10 years with us and a lot of time prior to that in this industry and her curiosity, her energy, her action orientation, her understanding of the business end-to-end is very, very strong. With that said, Rome wasn’t built in a day, as you appreciate. And so do I believe that Amy is making a difference? Absolutely.”
On the positive side, Burgdoerfer stated “the sport business within Pink is working well. Sleep, in that business, also working well. And Sherpa – and this is a broad-based trend in the industry. There are offerings in Sherpa selling through very well with a very strong response to it.”
Still speaking about the quality of merchandise, he continued, “if it’s fresh, new, distinct, compelling, she responds well to it and we get paid for that work through volume and pricing. Examples within Victoria’s Secret would be the T-shirt bra, which has been a very, very strong success. Selling in the mid-$20 range, been priced up multiple times, has “Victoria’s Secret” prominently as part of its look on many of the straps that are sold on that bra, in terms of her interest in the brand, and been a terrific success. Another example of success would be the Illusion bra within Victoria’s Secret, which sells in the mid-$30s. So a higher priced bra. And it’s got a fabric and a fit and a feel that is well received by the customer and has driven a lot of volume at a very healthy margin rate. So those would be two examples within the bra business at Victoria’s that have worked very well.”
“Conversely, where we’ve got bra franchises, where we haven’t had enough innovation recently, the Body by Victoria franchise or the Angels collection within the bra business. We’ve had softer results and more challenged results and we’ve had to take pricing down and be more promotional to drive reasonable volume, et cetera, in those businesses.”
“The sleep business at Victoria’s, an area of distortion for us this fall and very relevant to this time of year, very strong consumer response to that assortment, it’s been heavily tested. We’re making a big investment in that business this fall. And based on testing, we’re optimistic that we’ll deliver meaningful growth at a healthy margin in that business.”
One analyst who has sharply criticized L Brands management strategy in the past, Paul Lejuez at Citi, asked about a key absence during the call. “You mentioned everything’s on the table. I’m curious where you’re putting your emphasis currently spending your time. How is Les spending his time? And I’m also curious if all of this work is happening now on the Victoria’s Secret side or if we have to wait until John gets there before we start to see maybe some changes. And also curious just about the decision for Les to not be on the call today.”
In reply, Burgdoerfer listed the many decisions and personnel appointment already announced and added, “the most important thing that we can do and that we’re focused on is addressing the opportunities in the Victoria’s Secret Lingerie and Pink businesses. And first and foremost again consistent with our mindset over a long period of time, it does start with the merchandise.”
Burgdoerfer continued, “you’re asking if we’re looking at everything now or whether some of that will wait. Certainly everything is on the table, but understandably some of these things will take more time than others.” He concluded by stating that he himself spends “a lot of time with the Wall Street community and [is] comfortable representing the company in this form. Les spends time with investors and we’ll have an investor update sometime in the first part of 2019 and certainly Les will be critical and lead that update.”
A full transcript of the conference call can be found here: https://seekingalpha.com/article/4223649-l-brands-inc-lb-q3-2018-results-earnings-call-transcript?page=1. — NM
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