(Filed Under wholesale Lingerie News). Declining sales and comps at Victoria’s Secret and Pink, as well as an odd conference call, marked the first quarter financial release by parent company L Brands.
Combined Victoria’s Secret and Pink sales fell 4.9% in the quarter ended May 4. Comparable store sales in the U.S. and Canada, for the two brands, sank 7%. Comparable store and digital sales combined were down 5%.
L Brands also reported it had closed 35 Victoria’s Secret U.S. stores between February 2 and May 4, a reduction of 3.7%, dropping the total to 922 locations. During those three months it also opened one Pink location in the U.S., raising the total to 142, while maintaining its six Pink shops in Canada and five in the U.K. No changes were made to the fleet of 39 Victoria’s Secret locations in Canada and the 21 in the U.K. and Ireland.
In announcing the results for its lingerie divisions, the company offered little explanation except to state “performance at Victoria’s Secret Lingerie, Pink, Victoria’s Secret Beauty and International were largely in line with our forecast.”
The conference call with analysts to discuss the results resembled the throne room scene from The Wizard Of Oz. John Mehas, the new CEO of Victoria’s Secret, was referred to 15 times (13 times by CFO and EVP Stuart Burgdoerfer and twice by analysts). Only he wasn’t there to answer any questions. Amy Hauk, CEO of Pink, was mentioned ten times (nine by Burgdoerfer and once by an analyst). But she wasn’t there either. Neither, as has been the case in recent calls, was chairman Les Wexner.
So the answers to the questions were often Burgdoerfer saying, again and again: “John and Amy are working really hard, very intensely, and they are doing a great job...and we will have more answers from them on Investor Day on September 10. Remember, everything is on the table.” (My paraphrase).
But, as would be the case in the land of Oz, that was good enough for the stock market. On the same day as the call (May 23) a day when the down sank $286, L Brands’ stock closed 12.84% higher.
In the first question of the call an analyst asked if Burgdoerfer had noticed any “green shoots” popping up in the lingerie divisions. He replied: “so in terms of where we see strong consumer response and what we’re focused on is where we’re delivering significant fashion and elevation in the assortment. And it’s a big focus for us and that’s where we’re seeing the strongest consumer response. The Incredible Bra launch did well, but as a general theme it’s where we have fashion that resonates with the consumer. And again John is particularly focused on that and jumped right in. Frankly he has been with our business now 13 weeks and hit the ground running in a very good and intense way in the business and is very busy at work to impact fall assortments.”
“For Lingerie [code word for Victoria’s Secret] it’s about delivering compelling fashion in the major categories of bras, panties and sleep and loungewear. In the Pink business strong performance in intimates and a good volume result in sport bras particularly in again the intimates side of the business with very strong value for the consumer and that business Pink is focused on really continuing to advance the assortment in bras and panties and is doing important work to reposition the apparel assortments as well. But has a real advantage in the bra and panties side of the business.”
Merchandise margin rates have been declining since the end of 2015 at Victoria’s Secret, and one analyst asked what will happen there. “The simplest way to answer your question is we are expecting improvement in merchandise margin. You will remember as we report gross margin includes buying and occupancy costs, but we would expect, I trust you are asking about the Victoria’s business, but for Lingerie, Pink and Beauty, we would expect an improvement in merchandise margin, rate and a dollar result as we move through the year sequentially. That was our view going into the year. It remains our view and it’s a function of the work that John, Amy, and Greg [not present, Greg Unis, CEO Victoria’s Secret Beauty] continue to do on the merchandise assortment. So that is our expectation that was to find some improvement as we move through the quarters.”
One analyst asked about future marketing and the fate of the Victoria’s Secret fashion show, referring to a CNBC report claiming L Brands’ chairman Les Wexner did not think the show was still the “right fit” for network television. Burgdoerfer responded, that “as it relates to marketing” and “the fashion show, at the end of the day, as part of that fresh hard review of everything, we’re taking a hard look at the best ways to reinforce the equities and the strengths of the Victoria’s business and make appropriate adjustment to the positioning of the business. And then, in concert with the changes in merchandise, how do we most effectively market those changes. And that work, as you would appreciate, is in process when we have specific things to share publicly, we will. In some cases, we’ll do that right as consumers are experiencing it. Competitive reasons that you would understand. But there’s active work going on with respect to how the business is marketed, as indicated by our announcement recently about reevaluation of the fashion show.”
In response to a question about the company’s international business, Burgdoerfer continued, “so everything is on the table. Certainly you mentioned international and how we’re looking at that business. There are no constraints, only time frame. You would understand and in that evaluation one has to think about lease terms and lease flexibility and those kinds of things, but we’re in a position where everything is on the table. Les Wexner has always led with that mindset, that it is always about looking forward and about change and on an overall basis certainly he’s navigated and led that well over a long, long time in specialty retail and we’re very focused on it as a management team.”
In answer to questions specifically about Pink, Burgdoerfer noted that currently the “merchandise mix between intimates and apparel and at present it’s about 50-50, so bras and panties together are about 50% and the balance of the business largely apparel about 50%.” But he continued, referring to the absent executives, “it’s our intention, Amy’s intention, Les’ intention, the team’s intention, to grow the intimate business faster than the apparel business. So I would expect that that mix of about 50-50 will skew to intimates being obviously greater than 50% over the next year or two.”
The reason for the shift? “We believe we have our greatest competitive advantage and strong attributes around customer or consumer loyalty in the intimate apparel business.” He added, “Amy will comment on all of this on September 10, when we have our time together. She’s re-looking at all of it, in terms of price points, good-better-best opportunities, fabric and fabrication, surface design, various logo treatments, et cetera. She’s looking at all of it, testing a lot of things, seeing some positive consumer reaction to some of the things that have been tested.”
Burgdoerfer concluded, “I’m not going to sit here and tell you that she’s got all the answers because she doesn’t, but she’s working and seeing some working very actively and applying the BBW [Bath & Body Works] and other retail playbook to this business. And we’re encouraged based on what we’re seeing, but the result of her work will show up most in the fall season. You know that we’ve got campus reps, that we have very active dialogue with, and she’s certainly making good use of that resource and ensuring that that resource is truly telling us what we need to hear, and I think they are. So, a lot going on and we’re optimistic that certainly as we move through the year and particularly in the fall season that it will stabilize and then get back to positive growth sales and margin in Pink.”
Burgdoerfer also spoke to the possibility of expanding swim at Pink. “There is some what we call Gym-to-Swim offering in the assortment now, where at leisure tops and bottoms that would be suitable in terms of their style and so on would be suitable for use in that occasion or as part of her life in that way. They are offered today, it’s a small offering, but there’s an open-mindedness to it, but it won’t be a key thing for the balance of this year but we’ll see how it progresses as we move into the following year. “
He added that the Victoria Secret re-entry into swim earlier this year had gone well. “We’re encouraged about the test and we’ll be expanding our business there over the next several years.”
Burgdoerfer repeatedly cited the efforts of Victoria’s Secret’s absent leader. “I believe that we have leadership positions in many of those attributes or those characteristics that consumers are looking for. But John is on it, he brings good experience, his team is on it with him, he’s leading, he’s got a clear point of view and substantial changes to the assortment are coming. You’ll see that beginning in August, John will be with investors, with the balance of the team on the 10 September to more fully articulate his assessment and his game plan. And we’ve got strong reasons for optimism about the progression in 2019 for the Lingerie business.”
Burgdoerfer added, later in the call, that “we’re about fashion and when we lack fashion, lack of newness, lack innovation where it’s not interesting the result becomes apparent.”
“And so, in answer to your question, about, is John focused on that or what’s his assessment, again, he’ll more, he’ll, for himself, articulate all that in early September. But our observation, his observation is that there is a substantial opportunity to remix the assortment and that’s not just words on a Power Point charter, my comment on an earnings call, but he’s doing real work on that with the team and it’s substantial work, and he’s working with our sourcing partners and our vendor partners which we have strong relationship and good capability and there’s a lot happening. Will it all be perfect and all work right out of the box? I’m sure it won’t, but he’s making substantial change, we believe it’s positive change that makes sense and that the specifics of that will become apparent as we move through the fall season. And again, he’ll share his thinking in September with you and in the investment community.”
In all, L Brands, which also owns Bath and Body Works, reported earnings of $40.3 million on sales of $2.629 billion in the quarter ended May 4, compared to net income of $47.5 million on sales of $2.626 billion in the same period last year. — NM
A full transcript of the conference call can be found here: https://seekingalpha.com/article/4266080-l-brands-inc-s-lb-management-q1-2019-results-earnings-call-transcript
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