L Brands’ Q2 FY 2017 Performance Was Dragged Down By Victoria’s Secret And The Beauty Segments

 L Brands, the parent company of Victoria’s Secret (VS) and Bath & Body Works (BBW), held its second quarter fiscal 2017 (fiscal year ends in January) earnings call on August 17th. The results fell below management’s expectations. Though the teenage lingerie brand, PINK, and the personal care brand, BBW, grew steadily, the most important segment for the company, VS’s lingerie, as well as the Beauty segment are still lagging behind in their performances. This is dragging down the overall results for the company. The exit from the swimwear and apparels category coupled with a decline in footfall in the VS Stores are some of the biggest drivers for VS’s poor performance. For the second quarter that ended in July, the comparative sales declined by 8% (lower than the initial guidance of a mid-single digit decline) while the company’s total sales saw a 4.7% y-o-y fall to around $2.76 billion. The earnings per share also declined by over 30% to $0.48, however, it exceeded the initial guidance of $0.40 to $0.45. This improvement was achieved through tightening of expenses and some non-operating income gains.

The management expects PINK and BBW to continue with their healthy performances in the second half of the year. The VS Lingerie and the Beauty segment might show some improvement in their performance as compared to the first half. In view of the disappointing Q2 performance, the management has revised the comparative sales growth rate downwards for the third quarter from the previous low single-digit growth to low single-digit y-o-y decline.

Victoria’s Secret’s Strategies To Increase Its Brand Appeal

The VS Stores and VS Direct together make up for almost 80% of our valuation of L Brands. Hence, the brand not performing well is the main driver behind L Brands’ poor performance over the last few quarters. Though the exit from the swimsuit and apparel categories has been a reason behind this performance, the declining footfall in the North American brick-and-mortar stores is also worsening the performance of the brand. Towards that end, the company had appointed Jan Singer as the Lingerie CEO in September 2016. In the Q2 earnings call, Ms. Singer spoke about a few strategies through which the company is trying to revive the demands for VS’s lingerie.

• Understanding the customer and her needs well, so that the products become relatable and appealing enough for her to buy.
• Strengthening the core bra business with products that excel in terms of design, innovation, and fitting.
• Providing customers the freedom to shop wherever and whenever they desire by building on an efficient team focusing on the values of diversity and inclusion.
• Focusing on the holiday season for the second half of 2017 as both VS and BBW tend to get a stronger footfall and hence higher sales during this season.

International Business Faced Headwinds But The Future Might Look Better

The international business faced headwinds such as a lackluster demand in the Beauty category, slowdown in the Middle East and the U.K. markets, and continued spending in the China business. There were some improvements in VS franchisee and in the travel retail segments. The first two full assortment VS stores are fully functional and doing well in Mainland China and the company has also entered into the T Mall domestic digital platform in July.

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