Limited Brands‘ (NYSE:LTD) Victoria’s Secret is the biggest brand for intimates in the U.S. and also offers some apparel products such as sweaters, knit dresses, maxi dresses, skirts, tunics, leather jackets and coats.  In the recent quarters, the apparel industry in the U.S. has stumbled due to a weak macroeconomic environment and a change in shopping trends. Although Victoria’s Secret has felt the impact of these economic headwinds, it still managed to post positive growth driven by strong intimate product offerings.
During the last two quarters, the brand’s comparable store sales increased by 1% and 3% respectively when most retailers couldn’t match their own previous year’s levels.  Victoria’s Secret continued its momentum in August 2013 registering comparable store sales growth of 3% on top of a 9% increase in August 2012.  These figures suggest that the brand has been successful in fending off the industry weakness so far and can sustain growth in the future.
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Demand For Apparel Has Been Soft
Here the term ‘apparel’ refers to clothing other than ‘intimates’. The demand for apparel products in the U.S. this year has been weak mainly due to the sluggish economy and cautious spending. In the first quarter, the 2% payroll tax increase and delayed tax refunds weighed on consumer spending. Moreover, the U.S. witnessed one of its coldest and longest winter seasons this year, which subdued the demand for spring clothing. The situation didn’t change much during the second quarter which was impacted by the payroll tax hike and high unemployment. 
As a result, a number of apparel retailers including Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO), Aeropostale (NYSE:ARO) and Guess (NYSE:GES) reported disappointing results. Even Victoria’s Secret’s direct-to-consumer revenues declined by 6% in Q2 fiscal 2013 mainly due to weak apparel sales, which weighed on its comparable store sales growth.  The industry weakness continued in August as the month saw large discounts being offered across the industry to increase store traffic. Also, the U.S. shoppers started diverting some of their spending towards cars and houses to take advantage of the still-low interest rates. 
However, Intimates Are Driving Victoria’s Secret
Despite the slump in apparel sales during the previous two quarters, Victoria’s Secret registered positive growth due to strength in its core category – intimates. In the second quarter of fiscal 2013, the customers continued to respond positively to lingerie and PINK. The company launched a new line of bras – Body by Victoria bras – which was very well received.  Even American Eagle Outfitters’ intimate brand Aerie performed relatively well throughout the quarter.  This suggests that although customers might be holding back on apparel products, they are still buying intimates.
In its August sales transcript, Limited Brands stated that Victoria’s Secret’s 3% comparable store sales growth was mainly attributable to strong results from bras and panties.  Products such as Body by Victoria bra, New Victoria fragrance, PINK wear everywhere bra and fabulous bra received a good customer response. Driven by the strength in intimates, even direct-to-consumer sales improved by 3% during the month. It is clear that Victoria’s Secret’s strong footing in the niche market is helping it survive the edgy apparel retail environment. We expect this strength to continue as the brand launches new intimate products such as closeup bra (planned for September).
Our price estimate for Limited Brands $ 60, implying a premium of about 10% to the market price.Notes:
- Victoria’s Secret Clothing, Victoria’s Secret [↩]
- Limited Brands’ SEC filings [↩]
- Limited Brands Reports August 2013 Sales, Limited Brands, Sept 5 2013 [↩]
- Unemployment rates rise in most US states in July, CNBC, Aug 20 2013 [↩]
- Limited Brands’ Q2 fiscal 2013 earnings transcript, Aug 22 2013 [↩] [↩]
- U.S. retailer rely on deep discounts to win back-to-school shoppers, Reuters, Sept 5 2013 [↩]
- American Eagle Outfitters’ Q2 fiscal 2013 earnings transcript, Aug 21 2013 [↩]
- Limited Brands’ August Sales Transcript, Limited Brands [↩]