l brands victoria's secret leslie wexner bralette

Wall Street has push-up bras on the brain.

Stuart Burgdoerfer, chief financial officer and executive vice president of L Brands Inc., was repeatedly questioned about the core bra business at Victoria’s Secret, which is inching into the lower-cost sports bra and bralettes market and in the midst of a relatively painful repositioning.

Retail veteran Leslie Wexner, L Brands’ chairman and chief executive officer, took the reins of Victoria’s Secret in February and rolled up his sleeves, focusing the uber-sexy brand by eliminating apparel and swim and reducing promotions. He said the company was at an “inflection point” and noted at an investor meeting this month: “We had to make changes and in hindsight, the changes that we have made I wish we had taken those actions two years ago, or three.”

But that’s caused some financial pain just as Millennials are gravitating toward unstructured bralettes that are meant to be seen outside the bedroom and sports bras, while shying away from more structured styles. Victoria’s Secret has been adding bralettes and sports bras, but is still focused on its traditional core, which carries higher prices.

L Brands posted a 25.8 percent drop in third-quarter earnings late Wednesday and offered a weaker-than-expected outlook.

Although investors are giving the retail powerhouse the benefit of the doubt, pushing its stock up 2.5 percent t0 $69.64, analysts are closely examining its positioning.

Goldman Sachs analyst Lindsay Mann, asked on the call, “Is the structured bra business or the Victoria’s business, the core business, is any aspect of that getting worse versus [the third quarter]?”

Stuart Burgdoerfer, the company’s chief financial officer and executive vice president, said there was no indication that the core bra business was “‘getting worse’ by any stretch.”

“This is dynamic, and we manage it week to week and month to month,” Burgdoerfer said, noting there is a balance between driving customers to try sports bras and bralettes and managing gross margins.

At another point in the call, he noted: “We’re pleased with our results in the sport and bralette categories within the bra business. We drove a lot of unit volume growth, a lot of trial in those segments. And for that reason, pretty pleased with the result. What our company has been able to do pretty consistently over a long period of time is to get to a margin rate and an overall margin architecture that works well for the business over time. And I can think of numerous examples in the business over the years, including a Pink business five or seven years ago that didn’t have the same margin rate as the core lingerie business in Victoria’s, where through understanding the customer well, great delivery of newness and fashion and leveraging read/react capabilities and speed, we’ve been able to strike a right balance, an appropriate balance between dollar growth, dollar results and rate.”

Analyst Janet Kloppenburg from JJK Research asked if average unit retail prices could continue to fall with the growth of bralettes and sports bras.

“I would just start with the fact that the bra business is absolutely core to Victoria’s Secret,” Burgdoerfer said. “And a growing, healthy, very strong margin dollar growth, bra business is among our highest priorities in our company. You should know how we think about it, its importance, and what we’ll be working towards. There have been some important shifts in merchandise categories. But one of the other benefits is we have — that offset, at least in part, the lower [average unit retail prices] related to the sports bras and bralettes is we were doing a lot of those $10 off a bra promotions that, as you know, we have stopped doing. And so the timing and specifics of when do we get to meaningful dollar growth in the bra business and the outcomes that are so important to us, we’re working through some significant transitions right now.”

Wells Fargo analyst Ike Boruchow noted after the call that even though Victoria’s Secret saw bra unit sales increase by a percentage in the high-single digits, dollar sales are down.

“The brand is still in the early days of their shifting promotional strategy…still sees ongoing opportunity to drive productivity as they continue to improve in-store selling and the customer experience,” Boruchow said. “All in, the Victoria’s Secret business appears to be pressured by both their strategy shifts (which will persist into the first half) and declining underlying trends, casting much uncertainty on the strength of the core of the business.”

The uncertainty is expected to linger into next year.

L Brand’s third-quarter profits fell 25.8 percent to $121.6 million, or 42 cents a diluted share as sales rose 4 percent to $2.58 billion the fourth quarter will continued to be pressured. The company projected the final three months of the year would drive earnings per share of $1.85 to $2, down from the $2.15 the retailer achieved a year ago and the $2.03 analysts were projecting.

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