As L Brands (BBWI 6.61%) prepares to spin off Victoria's Secret into a stand-alone, separately traded company, investors should ask whether the lingerie giant waited too long to make a critical change in its direction to alter the downward trajectory it finds itself on.
On L Brands' recent earnings call, Victoria's Secret CEO Martin Waters told analysts: "We're moving from a look to a feeling. It's about including most women rather than excluding most women and being grounded in real life rather than mostly unattainable."
Inclusivity in fashion is on the rise these days, but it may be too little, too late for Victoria's Secret. It could have taken some lessons from Abercrombie & Fitch (ANF 12.23%), which had its own issues with being too exclusive, but eight years ago changed course and today finds sales soaring.
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Nearly a decade ago, Abercrombie & Fitch faced controversy when its then-CEO was recorded saying:
That's why we hire good-looking people in our stores. Because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don't market to anyone other than that.
But as fashion changed, so did the tastes of consumers who found such narrow mindedness distasteful and Abercrombie's sales went into a years-long tailspin. Really, it's only been in the past few years that the teen retailer managed to pull out of the slide. It just reported first-quarter earnings where sales surged 60% and it posted a profit of almost $42 million compared to a loss of $244 million a year ago.
Victoria's Secret has also been spiraling downward for years, which is why L Brands is going to unload the business. It tried to sell it off at first, but those interested in buying didn't want to spend up for a brand in decline.
Stripped down to the essentials
And declining it is. While Victoria's Secret still generates substantial revenue, over $1.5 billion in the first quarter and $5.4 billion in 2020. That's down from $7.5 billion the year before and the peak of $7.8 billion it reached in 2016.
Certainly last year was an anomaly, and Victoria's Secret has closed hundreds of stores over the past few years, but that's a result of its declining popularity.
In its place has sprung up rivals, notably American Eagle Outfitters' (AEO 9.00%) Aerie brand, which marketed its loungewear specifically as a body positive, inclusive experience and which analysts see growing into a $2 billion to $3 billion brand over the next few years.
While that's about half of what Victoria's Secret is selling today, one brand is ascendant and the other atrophying. Aerie now generates 40% of American Eagle's total revenue.
It also likely underscores why Victoria's Secret has suddenly decided lingerie for everyone instead of just the beautiful people is a better retail strategy.
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While Martin admits in his comments that the lingerie brand's marketing was actually geared more often toward men than women, can the change come fast enough and change enough minds about what Victoria's Secret represents?
Certainly, it has the kind of name brand recognition others can only dream of achieving. According to YouGov surveys, Victoria's Secret is recognizable by 98% of consumers, but it also comes with a lot of baggage attached. Just 56% of consumers hold a positive image of it with 17% holding negative opinions.
Focusing on just one type of body is misguided, and Victoria's Secret should have realized it sooner. Abercrombie & Fitch did so nearly a decade ago and made a change for the better. While Victoria's Secret's brand recognition could be on its side, the resistance to change may have already done its damage.
When the lingerie retailer is finally spun off on its own, investors may want to hold off to first see whether consumers are willing to forgive and forget.