Victoria's Secret Fashion Show 2018

Victoria’s Secret, the company known for its overtly sexy lingerie, is going through an ugly patch.

Shares of parent company L Brands have fallen more than 40 percent over the past year, with the Victoria’s Secret brand prompting most of the investor angst. Last year, Victoria’s Secret’s comparable sales fell 2 percent on top of an 8 percent drop in 2017. 

That’s a sign of weakness at a company that, while still profitable, is losing ground. L Brands’ net income dropped 34.5 percent $643.9 million last year and adjusted profits fell 14.4 percent to $786.7 million.

And the company said it would close 53 Victoria’s Secret stores this year while a number of smaller brands are creeping in on Victoria’s turf, hoping to take up some of its market share.

Many shoppers appear to have lost interest in the brand as consumer preferences shift to lingerie that showcases all types of beauty.

Among L Brands’ businesses, Bath & Body Works remains the most lucrative. Jay Sole, an analyst at UBS, called Victoria’s Secret “the main source of weakness” at L Brands and said he doesn’t see substantial improvements in the business coming anytime soon.

“We see no obvious reason for this to happen,” he wrote in a note, pointing out that L Brands’ earnings per share estimates for 2019 could fall by more than 10 percent. EPS estimates were already lower than analyst expectations. 

All signs are pointing to a business losing traction.

Even so, Victoria’s Secret still holds the largest market share in the intimates category — about two-thirds — and sold more than $3 billion of goods in its core lingerie business last year.

“Somewhere in that $3 billion of lingerie sales is a healthy business,” said Simeon Siegel, senior equity analyst at Nomura Securities. “Unless you’re a tech company, you can’t make $3 billion and lose money. That doesn’t make sense. What that suggests to me is that the business is too large.”

Recently, John Mehas entered the c-suite and the company is instituting strategies to help revive the brand. They include reintroducing swimwear, starting in March with a limited selection available online, new lingerie and less promotional activity. Henri Bendel and La Senza have also been shed from the larger L Brands portfolio in the last year. In addition, the company said it would stop releasing monthly sales reports, one of the last public companies to discontinue this practice, and instead focus on its quarterly reports. 

“We are taking a fresh, hard look at everything in the business,” Stuart Burgdoerfer, chief financial officer of L Brands, told investors Thursday morning during the conference call.

“We’ve gotten a bit behind on that in some of these core bra franchises and you can be sure that John [Mehas] and the team there are intensely focused on that very question and that big opportunity, frankly, and that’s going to be a big — is a big priority as we move through 2019,” he said.

In fact, Burgdoerfer called the lingerie “a great category.”

“I think the one observation or reflection I would have on others entering the category is they’re doing so because it’s an attractive category,” he said.

“The opportunity in margin rate at Victoria’s Lingerie, Pink and Beauty is a very substantial one,” Burgdoerfer said. “[Lingerie] inherently, when it’s intimate apparel versus underwear, has emotional content, and from that, a lot of economic value can be created.”

That could be why brands like American Eagle OutfittersAerie, ThirdLove, Adore Me and even Target are expanding their businesses in the category.

Teen retailer Aerie surpassed $1 billion during a single quarter last year. Same-store sales at the bra and underwear retailer rose 32 percent during the same three-month period. Target has also recently revealed new intimates lines.

And ThirdLove is also keeping a close eye on Victoria’s Secret. In addition to recently securing $55 million in funding, ThirdLove’s chief executive officer Heidi Zak has openly criticized Victoria’s Secret more than once for catering to “a male fantasy” and not real women.

Adore Me is also expanding and known as an intimates brand that promotes inner confidence. (The company also recently acquired maternity apparel business Belabumbum).

In its six-year life span, the start-up has helped shake up the intimates industry with its all-inclusive range of bra sizes and styles and is now pulling in roughly $110 million a year.

Even so, chief operating officer Romain Liot admits “We are nothing compared to Victoria’s Secret. Every day they sell as much as we sell in one year.”

“There was a reason Victoria’s Secret was so successful for so many years and all the other players in the industry were very bad,” Liot said. “Because Victoria’s Secret was the only one that really cracked it at scale.”

Victoria’s Secret has more than 1,100 stores in North America, along with international locations. Many digitally native companies have only a handful of physical stores, if any at all.

Still, investors are looking for swift results and so far are not satisfied. The stock was down more than 9 percent at one point Thursday, closing 4.6 percent lower to $26.14.   

“[Low single-digit] comps suggests the [Victoria’s Secret] turnaround is still in the early innings,” said Kate Fitzsimons, an analyst at RBC Capital Markets. “While the [brand’s] turnaround gets the benefit of new blood, it will likely take time for new [Victoria’s Secret] head Mehas to have an impact, with longer-term [Victoria’s Secret] bombshell brand positioning a question in a more body positive environment.”

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