L Brands Inc. chief executive officer Leslie H. Wexner reassured investors that the Victoria’s Secret business could go from stale to stellar again by trimming down to grow more profitably, but Wall Street was in a “show me, don’t tell me” kind of mood.
Shares of the company fell 1.3 percent to $65.67 Wednesday after dropping 7.9 percent Tuesday on word that Victoria’s Secret’s comparable sales fell 2 percent in October and that third-quarter earnings would total about 40 cents a share, instead of the 40 cents to 45 cents previously projected.
The company’s results are being dogged by its decisions to exit apparel and swimwear and cut back promotions at Victoria’s Secret, which will hurt sales through the first quarter.
Wexner maintained the moves were necessary for the brand to grow and said the company is at an “inflection point.” L Brands is looking to grow sales by 7 to 10 percent, but that won’t start until the second half of 2017.
Although Wexner is widely viewed as one of retail’s top ceo’s, investors appear to be waiting for that growth to be on more of the immediate horizon.
“While we believe that [L Brands] is taking necessary measures to best set themselves up for healthy long-term growth, near-term visibility is severely limited,” said Ike Boruchow, retail analyst at Wells Fargo. “Given that the company is known for taking a conservative approach to their quarterly outlook, we believe lowering their guidance is particularly concerning from an investor standpoint, signaling meaningfully weaker, unanticipated sales trends. It also feels as if their prior [fourth-quarter] outlook may prove optimistic as well, given this recent development.”
Boruchow noted it will be harder for Victoria’s Secret to manage its inventory as it cuts back on broad-based promotions and steps up category-specific deals that are intended to engage the consumer in certain products.
And while China is a big focus of growth for L Brands, which sees its business there potentially growing to be as big as its U.S. business, it’s a big bet. Boruchow noted that the firm said its Chinese business will require $50 million in investment in its first year, $10 million more than the analyst initially estimated.
Cowen and Co. analyst Oliver Chen noted Victoria’s Secret needs to change to “remain forever young.” He said the brand’s plan to focus on its lingerie, beauty and Pink businesses while trimming its workforce and eliminating its catalogue “are the right moves for the long-term health of the business.” But he also noted that they will “create some short-term pressure.”
Chen also praised the company’s commitment to an emotion-driven in-store experience and the stores themselves.
“We continue to be impressed with [L Brands’] real estate profile, in that 99 percent of their stores are cash-flow positive,” he said. “Their ability to deliver growth and high profitability across multiple location types is a testament to management’s prioritization of investing in the store base.”
L Brands pours about 70 percent of it capital expenditures into its stores.