(Filed Under Financial and General Interest News). Victoria’s Secret and Pink parent L Brands reported a third quarter loss of $252.0 million on sales of $2.677 billion, compared to a loss of $42.8 million on sales of $2.775 billion in the same period last year.
Much of the loss in the latest quarter resulted from a variety of pre-tax charges that the company was forced to take due to the diminished value of its Victoria’s Secret stores and other assets.
During the third quarter, Victoria’s Secret and Pink comparable sales in the U.S. and Canada, for both the direct and store businesses, fell 7%. Comparable store sales alone, for Victoria’s Secret and Pink in the two countries, were down 8%.
It was also revealed that as of November 2nd, Victoria’s Secret was operating 923 stores in the U.S., down from 957 on February 2nd, after closing 38 and opening just four locations in the intervening months. Meanwhile, in the same period L Brands opened two Pink U.S. stores, raising the total to 143, while maintaining six Pink and 39 Victoria’s Secret locations in Canada. In the U.K. and Ireland it maintained its 21 Victoria’s Secrets and five Pink locations, and in China it added six full service Victoria’s Secret stores, raising the total there to 21. It also opened nine and closed five Victoria’s Secret Beauty & Accessories stores (which are located primarily in China) bringing the total to 42.
In issuing its report for the quarter ended November 2, L Brands stated the results included “the following significant items: In 2019, pre-tax charges of $284.7 million ($0.93 per share) as follows: A $247.5 non-cash impairment charge ($0.83 per share) related to certain Victoria’s Secret store and other assets; and A $37.2 million charge ($0.10 per share) to increase reserves related to ongoing guarantees for the La Senza business which was sold in the fourth quarter of 2018. In 2018, pre-tax charges of $101.2 million ($0.32 per share) as follows: An $80.9 million non-cash impairment charge ($0.26 per share) related to certain Victoria’s Secret store assets; and A $20.3 million charge ($0.05 per share), principally cash, related to the closure of the Henri Bendel business.”
L Brands noted that “excluding the above charges, adjusted third quarter earnings per share were $0.02 compared to $0.16 last year, adjusted operating income was $96.3 million compared to $155.6 million last year, and adjusted net income was $5.7 million compared to $45.0 million last year.”
During the conference call to discuss the results with analysts, EVP and CFO Stuart Burgdoerfer was asked about the charges and replied, “With respect to the impairment and what geographies were included in the impairment. China was the greatest amount of impairment,” adding “we impaired stores and there was charges associated with the UK and Ireland and a little -- and some in the United States as well.”
Burgdoerfer also spoke about Pink’s performance during the quarter, and explained that Amy Hauk, the brand CEO, “and her team have made product improvements and have also developed an assortment architecture that has very sharp price points that make the intimate offerings very accessible to the Pink consumer. So very strong unit growth results, a strong sales result again a re-balancing of the mix there to really distort to sharp price points and highly accessible from a retail price positioning for intimates in Pink, and the consumer has reacted well to that, and it’s driving a strong overall result. With respect to improvements that the team is making in apparel and particularly in the tops business, obviously there are adjustments happening on an ongoing basis. There is some strength in the apparel assortment.” Later in the call he admitted Pink sales were “up in bras and panties and down in the apparel categories driven by tops.”
As for Victoria’s Secret, an analyst suggested that the “strategic direction” proposed by brand CEO John Mehas had apparently “not been received well.” Burgdoerfer responded, “I really believe it’s substantially too early to come to any conclusion,” adding that there are new offerings “that have had strong positive customer response, meaning, new stuff, customer bought a lot of it, indications that glamor and elevation in product at higher price points when executed well, get a strong customer response. Examples of that more specifically would include the match back panty categories that come at substantially higher AURs [average unit retail] and that have a real fashion content to them, along with sexy sleep and lounge offerings that have gotten a strong customer response.”
But he conceded that the successful products have “not been sufficient to overcome the year-on-year declines in other very significant categories within the intimate apparel and sleep and lounge businesses. So we’re very clear minded about where we are on an overall basis with a lot more work to do. John is working smart and very hard building a new team, focused on improving execution in stores and online along with some evolution on the marketing of the business and there are signs of progress for sure, but as again commented on in our pre-released information, lapping a lot of promotion and some weakness in legacy, core frames that are big books of business. And what’s happening there, as you would expect us to be doing, is a lot of development work, where we think we will have significant relaunch activity in 2020 in some of those, early 2020, in some of those core frames that are big books of business that has meaningful year-on-year declines that we’re not able to overcome with the progress we’re seeing in some of the new items introduced.”
“So that would be my overview of it. This is a business that’s had challenges. Lingerie now for three of four years and it’s going to take some time to stabilize it, and get it back to where it should be. I absolutely believe John and his team are working on the right stuff, signs of progress, but it’s going to take some time.”
Asked by an analyst how the elimination of the Victoria’s Secret annual fashion show will impact current business, Burgdoerfer replied, “did we see specific material impact on short-term sales response to the airing of the Fashion Show? As a general matter, the answer to that question is no. So, if you like, oh my god, Stuart, are you freaked out about today as for the Fashion Show result and what’s going to happen, based on -- it did air at different times over the years and we didn’t see a material impact on the next few days results. With that said, it was a very important part of the brand building of this business and was an important aspect of the brand and a remarkable marketing achievement.”
He added that for the holiday season “we’ll be communicating to customers, but nothing that I would say is similar in magnitude to the Fashion Show. But you can be sure we’ll be communicating with customers through lots of vehicles including social media and various more current platforms, if you will.” Asked if “mailings” had increased over last year, Burgdoerfer replied, “Generally consistent.”
During the conference call Burgdoerfer compared the price structures at Pink and Victoria’s Secret. “The businesses are going after different target customers that are in different stages of their life and otherwise just have some distinction. And so as a result of that, as you know John [at Victoria’s Secret] is pursuing -- developing pursuing offering, more elevated product, more glamor, more passion, a lot of emotional content, and over time we expect it will get paid for that work through AUR in margin rates.”
“Amy [at Pink] has -- and team have also done customer work, consumer work, and one of the things that they have assessed is that they really want to make sure that our offerings to that customer, again a younger customer, that the offerings are highly accessible from a pricing standpoint. So there is a natural delineation in average unit retails. As it relates to margin rate with the context I just provided, and over time, or as a target, we would expect that both the businesses and including in the broad business should earn healthy margin rates, consistent with those strategies. And so again over time, I don’t start with the point of view that the margin rates would necessarily be different between the two. Again, the price levels are different, but I’m not sure that the margin rates would be different.” — NM
The full conference call transcript can be found here: https://seekingalpha.com/article/4308327-l-brands-lb-q3-2019-results-earnings-call-transcript
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