(Filed Under Financial and General Interest News). In the second quarter, combined online and comparable store sales for Victoria’s Secret and Pink in the U.S. and Canada fell 6%. Comps for those stores alone were down 9% from the same quarter last year.
Combined total direct and stores sales for the two brands also declined in the second quarter, dropping to $1.61 billion from $1.72 billion in the same period last year. Total stores sales alone, for the two brands in the U.S. and Canada, fell to $1.23 billion in the three months ended August 3, 2019, compared to $1.36 billion in quarter ended August 4, 2018.
Meanwhile, Victoria’s Secret and Pink direct sales jumped to $373.1 million in the second quarter, from $360.0 million last year.
Operating income in the second quarter for Victoria’s Secret and Pink direct business, as well as the stores in the U.S. and Canada, plummeted 86%, dropping to $16.6 million from $114.2 million in the same three months last year.
In the conference call to discuss the results, L Brands’ EVP and CFO Stuart Burgdoerfer snapped at back at one analyst who questioned the urgency with which management is responding to the dramatic declines in the lingerie business. “The urgency -- there couldn’t be greater urgency on management. So if you don’t feel urgency, then we’re not communicating well. Okay.” He went on, referring to the CEO’s of the Victoria’s Secret and Pink divisions, John Mehas and Amy Hauk: “We’re about as urgent as we could be. And what the merchant leaders are focused on, John and Amy, is improving the merchandise offerings, and then, again executing those well in terms of all the aspects of delivering that well to consumers in stores and online.”
Interestingly, neither of those two executives attended the conference call (for the second call in a row), but their attendance was promised by Burgdoerfer “at our Investor Day, which is scheduled for September 10th.”
Responding to doubts about the performance of Victoria’s Secret and Pink going forward into the second half of the year, Burgdoerfer insisted that consumer reaction to new lingerie assortments “has been favorable and positive” in recent weeks. But he admitted “it hasn’t been, to-date, sufficient to overcome weakness in the balance of the lingerie assortment, including the effect of heavy promotions from a year ago that will continue through the fall season.” He promised, “there will be additional new merchandise flowing through the fall season. So the full fall assortment was not in stores in the first few weeks of August.”
Burgdoerfer emphasized that going forward the lingerie brands should benefit from changes to the company’s marketing strategy. Noting that the company’s long time chief marketing officer Ed Razek is leaving, he said that the company is considering changes to all aspects of its promotions including “the messaging, the imagery, the photography, the words, the pricing promotional aspects of it, the medium of communication, the integration of marketing between stores and digital and social channels.” He concluded, “I expect that there will be meaningful and hopefully a thoughtful change in our marketing approach as we move through fall and into 2020.”
Burgdoerfer revealed that “Victoria’s marketing, as a percent of its sales is about 5% historically and that’s an all-in definition, including GWPs and all forms of marketing.”
Parent company L Brands is following through on its previously announced plans to close weaker Victoria’s Secret locations. It reported that since February 2 it has closed 37 and only opened one location, reducing the total to 921 shops as of the start of August. During the same period it opened two Pink stores in the U.S., raising the total to 143, while maintaining six Pink and 39 Victoria’s Secret stores in Canada.
In the U.K. and Ireland the company continues to maintain 21 Victoria’s Secret and five Pink shops. In China, since February 2, it has opened six and closed five Victoria’s Secret Beauty and Accessories shops, raising the total to 39. It also opened three full assortment Victoria’s Secret stores there, raising the total to 18.
During the conference call, Burgdoerfer referred briefly about the stores in China. “With respect to China, it’s a multi-year situation. We do have some flagship stores there that play an important role in marketing the business. But they are generating some losses. And our view, at this point, would be, it’s a three or four year journey in China to get to the near to a profit profile in that business.”
An interesting detail on the L Brands’ shipping strategy was provided by Burgdoerfer during the conference call when he confided that “With respect to the use of airfreight frankly, substantially everything that we have produced outside the United States is on an airplane, other than some gift and accessory business, and it’s because the value, in our judgment, of speed and agility,” he continued, “far outstrips the incremental cost of moving stuff on a boat. And, as we like to say around here, you can’t sell it if it’s on a boat, by the way.”
In response to a question during the conference call about tariffs, Burgdoerfer replied that for L Brands, “China represents less than 20% of our total sourcing activity and has moved down almost 10 percentage points over the last three or four years based on very deliberate efforts by the sourcing production teams in our business to make sure that we have a -- continue to have a well diversified base of supplies.”
Responding to a question about margins and the promotional climate going into the holiday season, Burgdoerfer stated that for Victoria’s Secret lingerie “the initial markup or the inherent markup in the goods is substantially greater than what it had been. And so that provides the opportunity for higher margin rate results and more flexibility or room if needed to promote the business.” He continued, “going into every holiday there’s commentary about how it’s going to be more promotional than ever,” concluding, “the truth is, absent a dramatic change in the environment like we saw in ‘08 and ‘09, we sell relatively affordable things. They are discretionary but they’re relatively affordable.”
As part of the makeover with its lingerie divisions, Burgdoerfer said “what John and Amy have done is to have a clear demarcation between the Victoria’s Secret Lingerie and PINK businesses. Again PINK is targeted toward a college-aged customer. And Lingerie more typically -- somebody that would be post-college and at higher price points and with a greater degree of sophistication.” — NM
A full transcript of the conference call can be found here: https://seekingalpha.com/article/4287408-l-brands-inc-lb-q2-2019-results-earnings-call-transcript?page=1
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