Please ensure Javascript is enabled for purposes of website accessibility

Why Victoria's Secret Will Continue to Be a Drag on L Brands

By Adria Cimino - Jan 30, 2020 at 5:58AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Analysts are upgrading L Brands, but declining revenue at the Victoria’s Secret chain means recovery still remains far off.

It's no secret that Victoria's Secret has been the reason for L Brands' (BBWI -0.94%) earnings woes. The company's once-adored lingerie brand has seen revenue dwindle as shoppers turn to rivals that focus more on comfort than glamour. And yet, this month analysts at Bank of America, Deutsche Bank, Keybanc, and Barclays all upgraded the shares, even suggesting an eventual L Brands breakup, according to CNBC.

Bras in beige, red, and black are shown in a shop drawer.

Image source: Getty Images.

Investors may want to bet on an L Brands turnaround, and some might consider sales at the company's Bath & Body Works bath products chain a reason to be optimistic. Same-store sales rose 9% in the third quarter and were up 10% over the first three quarters of the year compared to the prior-year period.

But here's where the problem lies: At least for now, L Brands isn't just about Bath & Body Works, and the bath chain's sales gains fail to compensate for declines at Victoria's Secret. The lingerie chain's quarterly sales slipped 7% and were down 6% year to date,  and related impairment charges resulted in a net loss for L Brands. More recent financial data doesn't brighten the picture. After L Brands' comparable sales fell 3% over the holiday period, the company lowered its guidance for fourth-quarter earnings per share to $1.85 from $2.

An image problem

So what's the issue at Victoria's Secret, and what's the company doing about it? A big problem is image. Victoria's Secret has failed to keep up with the needs of today's shopper. These days, many women prefer a brand that emphasizes comfort over fashion. About 40% of millennials say their closets hold mostly "comfort wear," according to research by The NPD Group. Further, the report showed that millennials were responsible for more than a third of women's intimate apparel sales in 2017 and 2018.

L Brands has made some efforts to align Victoria's Secret with shoppers' new priorities. The brand sells the comfortable sports bras and bralettes (bras without wires or padding) that have gained popularity, therefore reducing its reliance on items like the pushup bra. The cancellation of the Victoria's Secret Fashion Show featuring glamorous models wearing lingerie and angel wings may also signal that change is ahead. On the third-quarter earnings call, chief financial officer Stuart Burgdoerfer said, "It's important to evolve the marketing of Victoria's Secret."

Emotional content

But investors need to see more before scooping up L Brands' shares with confidence. Though the company seems to be toning down the Victoria's Secret glamour-above-all-else image, it's unclear if the plan is to reshape the brand's image or just make a few adjustments. As for concrete changes, management said that in the sleep and lounge business, the brand is investing in higher-quality fabrics, and overall the aim is to increase product quality and "emotional content" across all categories. Still, this doesn't offer us more clarity about what Victoria's Secret will look like a year from now or further down the road -- and that makes it difficult to bet on an L Brands recovery.

If L Brands decides to truly transform the Victoria's Secret image, a new question arises: Will it be successful? The strength of the image -- once a benefit -- now may be the brand's downfall. It won't be easy to change the image of pink, lace, and beautiful models most people see when they think of Victoria's Secret.

Too early or too late?

Of course, it is possible that with or without an image revamp, L Brands will successfully boost sales at Victoria's Secret. It's also possible that an L Brands breakup will happen and improve the financial picture. In either case, results won't be delivered overnight, and any such plan will be costly for the company in the near term. For the long-term investor, this is exactly why now is too early to bet on better days at Victoria's Secret and L Brands.

Or, from another perspective, it's too late. Last year, the shares traded at about 8 times earnings, their lowest by that measure in at least 10 years, and finished the year with a 29% decline -- but that's no longer the story today. They've rebounded 15% this year, sending L Brands' valuation to more than 15 times earnings. There may be short-term gains ahead as some investors react to analyst upgrades and speculate on recovery scenarios, but until signs of improvement or a new strategy emerge, the shares seem too risky.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bath & Body Works, Inc. Stock Quote
Bath & Body Works, Inc.
$30.66 (-0.94%) $0.29
Bank of America Corporation Stock Quote
Bank of America Corporation
$32.23 (-0.23%) $0.07
Deutsche Bank Stock Quote
Deutsche Bank
$9.40 (-0.58%) $0.06
Barclays PLC Stock Quote
Barclays PLC
$158.64 (-0.19%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.