How Victoria’s Secret’s Stagnant Brand Image Might Dampen L Brand’s Valuation

Victoria’s Secret is the biggest driver for the huge success of its parent company, L Brands (NYSE:LB). Besides enjoying a lion’s share of the lingerie industry with no close competitors in sight, Victoria’s Secret seems to be poised for steady future growth. However, there has been several questions raised by competitors, media, and consumers about Victoria’s Secret’s brand image. It seems that the brand focuses on a certain body type, as is evident from its brand ambassadors, who are all highly airbrushed supermodels. The brand doesn’t cater to plus sized women and it has also been criticized for heavy usage of Photoshop to make its models look even thinner. In one word, the brand image seems to be incongruous with the modern women who think that beauty is several layers deeper than the skin, with women who want to feel attractive irrespective of their size, and celebrate their inherent beauty rather than concede to a certain stereotype. Unlike other lingerie brands who talk about being pretty at all sizes and every woman being uniquely beautiful, Victoria’s Secret doesn’t seem to be relating to all  consumers’ sentiments. Though the brand is too big to fail in recent times, in the business world, adaptability is a key to survival and success. We feel that if Victoria’s Secret doesn’t alter its brand image according to the changing times, there might be problems for the company in the future which might adversely impact L Brand’s stock price.

Our price estimate for L Brands is at $80, and is over 15% below the current market price.

See our complete analysis for L Brands

What Makes Victoria’s Secret So Successful?

L Brands has displayed consistent growth in its quarterly sales for over two years now. 99% of its ~3000 operational stores are cash positive and the specialty retailers stocks have grown by over 20% in the last one year. Victoria’s Secret’s domestic sales contribute to almost 70% of L Brand’s revenues. And even after its maturity in the U.S. markets, Victoria’s Secret still has ample room for growth. Internationally, the brand has only 400 stores and plans to open an additional 100 in 2016. According to Guggenheim Securities analyst Howard Tubin, there is a lesser chance of users to switch to a different brand as it has a 62% share of the $9 billion lingerie store market. Some brands like Lane Byrant only target plus sized customers and  Chico’s Soma, targets women 35 years of age and older. Also, the technical expertise to make well-fitted lingerie is much more specialized due to the differences in fits and shapes, rather than making regular garments such as t-shirts. ^[1]

Then, What Is The Problem?

Even after owning 35% of America’s $13.2 billion lingerie market with its closest competition holding a low single digit market share, ^[2] it seems that Victoria’s Secret brand might be losing steam on account of its brand image.

Lingerie makers such as New York based AdoreMe are not only poaching Victoria’s top designers to offer the same products at a more reasonable rate ^[3] but they are also emphasizing the point that unlike ‘more popular brands’ they make lingerie for women belonging to all sizes — because they believe that every woman deserves to feel sexy, confident, and beautiful. ^[4] This was a jab made at Victoria’s Secret which doesn’t sell bigger sized lingerie according to customers.

 Size Does Matter!

AdoreMe has bra sizes varying from 30A to 44G — a significantly wider range than Victoria’s Secret or La Senza which stock sizes only up to 38DD. ^[4] The company’s largest panty size is XL, equivalent to a size 16, while the fashion industry defines plus size from size 12 to 24 and some retailers even offer up to size 28. ^[3]

Who Is Perfect?

In fact, Victoria’s Secret’s ‘perfect body’ advertisement, depicting toned, slim models as the ideal body type, raised such flak that the company later on, had to apologize.

(Source: Business Insider)

Plus-sized retailer Lane Bryant, with an aim to redefine what constitutes a woman’s sex appeal, aired advertisements with the hashtag #ImNoAngel to counter the long time running Victoria’s Secret’s advertisements featuring Victoria’s “Angels.”  The ad features plus sized models wearing Lane Byrant’s Cacique collection.

Women loved the body positive image of the brand and started posting their own photos on Twitter and Instagram with the hashtag #ImNoAngel. ^[5]

(Source: Twitter)

One important thing which businesses need to always keep in mind is:

“It is not the strongest or the most intelligent who will survive but those who can best manage change.”
― Leon C. Megginson

Currently, Victoria’s Secret seems to be having no dearth of customers. Their intimates are what most women aspire for, and their store experiences are what make customers visit them so often even in this era of online shopping. But will the brand not be even more popular if it becomes more inclusive? If it sells more variety of sizes and shows women’s bodies in a more realistic light?

Enter The Eagle

In this context, we can think of American Eagle Outfitters (NYSE:AEO). The company’s performance has improved significantly over the past few quarters. The teen clothing chain posted record sales for its second quarter 2015 earnings in August. The company’s revenues grew by 12% to around $800 million, along with an 11% growth in same store sales (as against a 7% decline for the same quarter last year). Its comparable store sales in the third quarter were up a promising 9%, while several of its peers such as Urban Outfitters (NASDAQ:URBN), Aeropostale (NYSE:ARO), Gap Inc (NYSE:GPS), and Abercrombie & Fitch (NYSE:ANF) still continue to struggle.

While it is ahead of its peers and striving to maintain that position, American Eagle is apparently also eyeing a piece of the lingerie market. The company’s intimates sub-brand, Aerie, was a big driver for the company’s success in Q2 2015. Comparable sales for Aerie grew by 18% in the quarter. The brand’s collection of bras, underwear, and bikinis for teenage girls is considered to be sweet, sporty, and affordable. This is in direct contrast to Victoria’s Secret’s lavish products complete with heavily padded bras adorned with sequins and animal prints. ^[6]

Aerie also focuses on models of various sizes and doesn’t airbrush its models that are often seen posing with visible tattoos, piercings, and scars. The company was lauded widely in 2014 when it made the decision to stop retouching its models’ photos. In contrast, Victoria’s Angels are extremely glamorous super models. Also, Victoria’s Secret had been criticized for the over usage of Photoshopping to create unrealistic photos of its models. ^[7]

Aerie’s simple and realistic image, devoid of over sexualization seems to be striking the right chord with teenagers and their parents. It has been estimated that Aerie’s 2014 sales might be well above $100 million and the brand is currently on its way to reach $500 million in sales. According to Aerie ‘s global brand president, Jennifer Foyle, the goal is to reach $1 billion. ^[6]

(Source: Facebook)

What Women Want..

According to certain branding experts, Victoria’s Secret might be in danger of losing the relevance of its brands, just like what happened with Abercrombie & Fitch. The brand is being labeled as being sexist and dull.

The former leader in teen fashion, Abercrombie & Fitch, failed to adapt to changing times with the arrival of fast fashion players such as Forever 21 and H&M. The company also faced criticisms for excluding plus-size customers and minorities in its stores. ^[3]

Victoria’s Secret’s concepts of fantasy bras and angels are considered to be outdated in today’s world of independent women fighting stereotyping and sexism. The sophisticated and intelligent women of today are increasingly looking for brands that accept them as they are instead of sending a message that they are not perfect like the supermodels wearing Victoria’s Secret’s clothing. The brand’s depiction of glamorous models is not the problem, however, the company should focus on the aspect that this image shouldn’t make regular women feel excluded from the brand. The customers love to experience sincerity and connect with brands. It seems imperative that Victoria’s Secret start celebrating the diversity of women’s bodies, instead of classifying a certain body type as the ideal one, in order to keep up with the changing times. ^[3] Otherwise, though its fundamentals are rock solid for the time being, there is no dearth of disruptions in business as we are all well aware.

We currently forecast Victoria’s Secret’s revenues per square foot to increase from $800 in 2014 to around $950 by the end of our forecast period. We also forecast Victoria’s Secret’s Stores EBITDA margin to remain close to its 2014 level of 27% till the end of our forecast period. However, if the brand image starts losing its appeal and we see the rise of more promising players in the lingerie arena, then these parameters can take a hit. If Victoria’s Secret’s revenues per square foot remain at $800 and its EBITDA margin falls to its 2013 level of 26% by the end of our forecast period, then there can be around a 10% decline in L Brand’s stock price valuation.

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1. Does Victoria’s Secret have room to run?, CNBC, Nov 11, 2015 [↩]
2. Victoria’s Other Secret: The Low-Key Billionaire Behind The Lingerie Giant, Forbes, September 30, 2014 [↩]
3. Victoria’s Secret is in real danger of losing its relevance, Business Insider, April 14, 2015 [↩] [↩] [↩] [↩]
4. Revealed: Plus-size models sell more lingerie than slim models – and brunettes sell more than blondes, Independent, Mar 24, 2015 [↩] [↩]
5. Lane Bryant’s ‘I’m No Angel’ Campaign Takes Aim at Victoria’s Secret Ads, Breitbart, Apr 8, 2015 [↩]
6. How American Eagle Is Moving In On Victoria’s Secret: Wholesome Bras For Teens, Forbes, Aug 19, 2015 [↩] [↩]
7. That editing job’s a real bummer! Victoria’s Secret under fire for yet another ‘Photoshop fail’ as brand shows off image of model who appears to be missing half of her bottom, Daily Mail, Oct 7, 2015 [↩]