Victoria's Secret

Victoria’s Secret’s comeback strategy continues to take shape and investors have taken note. 

Shares of parent company L Brands shot up by more than 35 percent in trading Wednesday and hit a fresh 52-week high after the retailer late Tuesday revealed plans to reduce annual costs by about $400 million, including a reduction of headcount at its corporate headquarters of about 15 percent. 

“While there has been much concern around [L Brands’] cash burn rate (particularly given VS’ pre-COVID-19 profitability struggles), management put liquidity fears to rest — announcing that they are in a strong cash position at 2Q end,” Ike Boruchow, senior retail analyst at Wells Fargo, wrote in a note. 

That cash position totaled more than $2.5 billion as of July 24 as well as a $1 billion asset-backed loan facility that has yet to be tapped into. 

In addition, L Brands, which includes the Bath & Body Works brand in the greater portfolio, gave Wall Street a preview of its latest quarterly earnings ahead of the Aug. 19 release date, saying it expects total company sales to be down about 20 percent year-over-year. That works out to roughly 10 percent at Bath & Body Works and 40 percent at Victoria’s Secret. Still, the numbers were enough to tame investor fears — at least for now. 

“Things may be beginning to shift now that new leadership and ownership is in place at both VS and Pink,” Boruchow said. “While brand health has been damaged, it does not appear to be irreparable given that VS remains the share leader in women’s intimates.” 

Victoria’s Secret’s woes have been playing out in the public market for the last three years as top-line revenues continue to falter. The company has been criticized for failing to adapt to consumer preferences. There have also been allegations of sexual harassment within the company. L Brands’ founder and chairman emeritus Leslie Wexner’s ties to disgraced financier and registered sex offender Jeffrey Epstein — who managed Wexner’s fortune for years — did little to help. 

In February, L Brands unveiled plans to sell the Victoria’s Secret business — including the lingerie, beauty and Pink divisions — to private equity firm Sycamore Partners in an effort to turn things around. When that deal fell through in May, the company said it would move forward with plans to spin off the lucrative Bath & Body Works brand — thereby unlocking value — while taking the lingerie division private, out of the public eye and away from investor scrutiny. 

But more headwinds were to come, including the coronavirus and subsequent shutdowns around the globe. 

L Brands, which operates 2,897 company-owned specialty stores in the United States, Canada, the U.K. and Greater China, shut down all of its North American stores in March. The Victoria’s Secret brand also briefly shut down its web site. Stores did not begin to reopen until late May. 

As of Tuesday, the company said the majority of Bath & Body Works and Victoria’s Secret stores in North America have reopened. Still, the damage was done. The company lost $296 million last quarter. 

To help cut costs, the company has previously said it would close some Victoria’s Secret stores (roughly 250 in 2020, with more in 2021 and beyond) and continue to evaluate the China and U.K. businesses. 

In June, Victoria’s Secret’s U.K. business entered into a “light-touch administration,” a process that is similar to a Chapter 11 bankruptcy in the U.S., in an effort to refinance and potentially seek a buyer. 

“The company subsequently signed heads of terms with a major fashion retailer and is in an exclusive period of negotiation,” L Brands said Tuesday. 

Meanwhile, the company closed its Victoria’s Secret flagship in Hong Kong that same month and now said it will likely close other unprofitable stores in the Greater China market, or at least renegotiate leases. 

L Brands said the latest measures — reducing spring and fall inventory receipts, “changes in management structure” and trimming the corporate workforce by 15 percent, or about 850 people — will save the company about $175 million in fiscal year 2020. (Although the retailer expects pre-tax severance costs of about $75 million in the second quarter.) 

“We believe that value can be unlocked eventually through a [Bath & Body Works] separation,” said Boruchow, reiterating his “overweight” rating on the stock. “The biggest issue in the stock today is the ‘when?’ question, but we continue to believe that longer-term investors should look to [L Brands] as a compelling idiosyncratic retail play.”

Jen Redding, equity analyst at Wedbush, said L Brands’ stock is best seen as a value buy for long-term investors. 

“However, the current VS business desperately needs a revamp of branding as well as merchandise to become profitable again,” she wrote in a note. “L Brands is taking initial steps working towards a profitable turn for the Vickey’s brand, but is absent of a needed lynch pin for the long-road brand rebuilding process.”

Redding pointed out that while $2.5 billion in cash may look good on paper, the company also has about $6 billion in debt. 

Meanwhile, BMO Capital Markets managing director and senior retail analyst Simeon Siegel emphasized his stance that L Brands needs to shrink — including revenues and store count — in order to grow profits in the niche lingerie market. 

“We continue to believe that though one of the largest brands of all time, VS underearns because it oversells, with material opportunity to grow profits by shrinking revenues,” Siegel wrote in a note. “Critically, on top of these [selling, general and administrative expense] savings, we believe meaningful merch margin improvement has barely even begun.”

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