L Brands Success Story: Let’s Try Uncovering Victoria’s Growth Secrets

L Brands (NYSE:LB) is one of the most successful stocks in the specialty retail category right now. The owner of Victoria’s Secret and Bath & Body Works has witnessed around 30% growth in its stock price over the last year, whereas most of its contemporaries have lost value. The secret behind L Brands growth remains in the power of its adaptation to its target consumer‘s needs and demands. In this first part of a two-part analysis, we will discuss the success strategies of Victoria’s Secret. We will analyze the reasons behind Bath & Body Works’ growth in the second part of our analysis.

                                                     (Source: Google Finance)

Victoria’s Secret’s Products Are The New “Affordable Luxury” Products

 Victoria’s Secret products might comprise the new “lipstick index,” a term introduced in 2001 by Leonard Lauder, the chairman emeritus of Estee Lauder. Leonard Lauder wanted to describe “affordable luxury products” through this term, that is, luxury products whose sales are immune to economic slowdowns. While nail polish had displaced lipsticks to become the new recession-proof cosmetics since then, ^{[1] [2]} Victoria’s Secret’s lingerie and underwear products also seem to fall under the affordable luxury category. Even while the apparel sector withered under currency fluctuations, economic slowdowns, and the like, these relatively expensive products sold like hot cakes. The brand appeal and aspirational value, coupled with the brilliant marketing strategies, inventory management, and the power to adapt to technology and to the changing needs of its clientèle, had made Victoria’s Secret a favorite brand for American women and currently, abroad, as well.

Our price estimate for L Brands is at $87,  marginally below the current market price.

See our complete analysis for L Brands

The Secret Behind Victoria’s Secret’s Success 

Brand’s Evolution: Victoria’s Secret has transformed over the years and has molded itself along with consumer’s expectations. Entrepreneur Roy Raymond felt that women’s undergarment products didn’t receive adequate focus, and hence after 8 years of research, established Victoria’s Secret in the early 1980’s. However, initially it was aimed to make men comfortable with buying lingerie. This was because men held most of the purchasing power during those times. The décor was also suitably arranged with Victorian designed wood panels and with other details which men would find attractive. For example, instead of hanging the intimates on racks as was the custom during those times, those were mounted on frames with matching sizes and styles.

However, by 1983, the brand image was revamped to attract the female customers to the Victoria’s Secret stores. This was because women had started becoming financially independent by then, and with that came their desire to express independence and feel glamorous. Hence, the newer branding and advertisements were based on luxury and sensual appeal.

Victoria’s Secret was one of those discernible brands who used unique marketing strategies to target the same products to the opposite genders by portraying them through two different lenses. Once the brand started targeting female customers, it realized the opportunity of selling not only intimates but also apparels along with accessories. Hence, Victoria’s Secret extended its product range from lingerie to everyday undergarments, sleepwear, beauty, sport, clothing, shoes, swimwear, and its PINK line of products. ^[3] Currently, the company enjoys over 40% share of America’s $13.2 billion lingerie market. ^[4]

Marketing Strategy: The company has a refined marketing strategy to make women relate to its models, for example, Victoria’s Angel, Alessandra Ambrosio’s image of a wife and mother gives her a realistic image as a model.

(Image Source: instagram.com/alecambrosio)

Its PINK line of clothing is solely targeted to teenage girls which is another example of the lifestyle appeal of the brand. ^[5] The brand doesn’t usually pick famous movie stars or models as its ambassadors, instead it launches successful modeling careers for some of its Angels, who go on to become famous post their modeling experiences with Victoria’s Secret. ^[6]

What’s interesting is that women don’t flock to the brand for its low-priced or affordable goods. The brand appeal lies in providing the users with a luxurious experience. The pink wallpapers, visually appealing fitting rooms, experienced and friendly staff, and finally, the continuously fresh and innovative range of products, is what lures the customers and what has made the brand resilient to industry wide slowdowns or economic fluctuations. The aspiration factor attached to the brand is also an important aspect, as most women love owning its products. ^[5]

World Famous Fashion Show: Victoria’s Secret Fashion Show is one of the most successful international fashion shows which gives a significantly higher return to the brand over its $12 million setup costs (as of 2014). ^[6] The show is a glamorous infomercial about the various brands under Victoria’s Secret but the fame it has earned is so great that world-renowned performers like Taylor Swift had previously performed in the show.

Perfect Synchronization Between Store, Digital, and Mobile Experience: Along with its catalog sales, Victoria’s Secret introduced buying product online and being able to return in a store the online sales, for over two years now. This has resulted in improved customer engagements and reduced user attrition. Mobile channels currently make up 25% of Victoria’s Secret’s direct business, and mobile sales witnessed 72% year-over-year growth in Q2 2015. The company’s future plans include: the upgradation of Victoria’s Secret catalog and investments in further enhancement of its mobile technology. ^[7] The data trends that the company gathers about the consumer preferences and popular products through the digital medium helps it in determining the stocks of products in its retail outlets, as well. For example, a hot selling item online can be offered with attractive discounts etc in the stores in order to positively influence the in-store purchasing decisions. ^[6] Similarly, brands that are promoted in-store can also be prominently displayed online. ^[5]

Controlled International Expansion: Victoria’s Secret has adopted a controlled approach towards global expansion. Only after monitoring the performance of stores that it opened in London, did the company think of furthering its international footprints. The company just entered mainland China in 2014 and this could further lead to larger expansions in the future. It has recently started including more Asian models in its catalogs and fashion shows probably to attract the emerging Asian middle class. ^[5]

 (Image Source: L Brands Investor Handouts)

Failure Is Just A Stepping Stone To Success For The Brand: 

The brand didn’t hesitate to pull out from a $350 million worth apparel segment when it felt that it was a weak link to its otherwise impressive growth story. Victoria’s Secret’s direct-to-consumer business had been faltering for 2013 and 2014 because of the underperformance of its apparel division and absence of shipping and handling revenues. The apparel industry slowed down during these periods due to changes in consumer spending patterns and Victoria’s Secret’s apparel sales also suffered, even though its intimate product sales were growing steadily as usual. The company categorized its products into “go forward” and “non go forward” categories and started clearance sales for the latter category. This helped the growth of the direct-to-consumer business for which the revenues fell by 4.8% in 2013 and then shrunk further by 0.6% to $1.5 billion in 2014.

As a result, in Q2 2015, though the brand couldn’t meet its usual operating margin target of 10% to 15%, Victoria’s Secret registered sales of $1.8 billion in Q2 2015, witnessing an improvement over its record performance last year. This was after forgoing $65 million of business which was generated from makeup and apparel divisions in Q2 2014. In Q2 2015, comparable store sales increased by 3% and operating income grew by 2% to $298 million, on a year-over-year basis. Hence, we believe, that the growth is going to be even stronger in the future after the initial hiccups of sacrificing a category has been taken care of. ^{[7] [8]}

 (Image Source: L Brands Investor Handouts)

With all the marketing and adaptability techniques, Victoria’s Secret might continue winning women’s hearts domestically and abroad in the years to come. Its closest competitor currently holds a 1% market share, next to L Brands’ 40% share and the Victoria’s Secret brand (along with its models), which currently has 33 million followers on Twitter, which is more than Twitter’s own followers! ^[4] Hence, it might take quite some time to displace this behemoth from its dominant position in the lingerie department.

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1. What Lipstick Tells Us About the Economy, TIME, Sep 14, 2011 [↩]
2. Redefining the “Lipstick Effect”– Examples of Recession-Proof Categories, Euromonitor International, November 9, 2013 [↩]
3. Skin Story: The Brand Development of Victoria’s Secret, element three, January 15, 2014 [↩]
4. Victoria’s Other Secret: The Low-Key Billionaire Behind The Lingerie Giant, Forbes, September 30, 2014 [↩] [↩]
5. How Victoria’s Secret Will Continue To Crush The Competition, Business Insider, September 9, 2014 [↩] [↩] [↩] [↩]
6. What Makes Victoria’s Secret Successful?, Inc. Plan, December 10, 2014 [↩] [↩] [↩]
7. L Brands’ Q2 fiscal 2015 earnings transcript, August 20, 2015 [↩] [↩]
8. L Brands Second Quarter Earnings Presentation, Aug 19, 2015 [↩]