L Brands on Wednesday reported fourth quarter sales rose to $4.85 billion from $4.82 billion in the year-ago quarter, as net income fell to $540 million from $664 million a year ago.
The company's Victoria's Secret lingerie brand continues to struggle. The brand's comps declined 3%, as comps at its Bath & Body Works unit rose 12%, for an overall comp rise of 3%, according to a company press release. Taking out direct-to-consumer sales, store comps at Victoria's Secret fell 7% as Bath & Body Works store comps rose 8% for an overall store comp decline of 1%, the company said.
For the full year, net sales rose to $13.2 billion from $12.6 billion the previous year. Overall comparable sales for the year rose 3% year over year. By brand, Victoria's Secret comps dropped 2% for the year as Bath & Body Works comps rose 11%. Full-year adjusted net income fell to $786.7 million from $919.5 million the previous year, according to the release.
With its sexy image falling out of favor and too many locations in sub-par malls, Victoria's Secret is shuttering a total of 53 stores, after closing 30 last year, to help right-size its operations, L Brands executives said in prepared remarks ahead of their conference call on Wednesday.
That could help, in light of some observers' belief that the brand's footprint is too large. But, while executives on the conference call said that they are focused "on the customer and on the merchandise," they didn't say all that much about how they're responding to their vulnerability in the market, according to UBS analysts.
"The main source of weakness likely remains Victoria's Secret," the UBS team led by Jay Sole said in a note emailed to Retail Dive. "LB said it expects its FY19 gross margin rate to be down to last year, driven principally by a decline in the merchandise margin rate. This probably means FY19 gross margin is lower than the consensus' 37.5% forecast and also continuing pressure ahead on Victoria's Secret. ...It makes no mention of evolving the brand message and the UBS Evidence Lab Market Thinking Game shows this is investors' top area of focus. The market may conclude the Victoria's Secret situation is getting worse."
The situation is forcing discounts and executives said the brand has been "more promotional than we like." Meanwhile, competitors, including Urban Outfitters and emerging DTC brands, are taking share as "VS continues to ignore consumer interest and trends in the lingerie business," according to a note from Jane Hali & Associates analysts emailed to Retail Dive.
"VS is not showing any real signs of improvement in product or tweaking their messaging. As we continue to shop their stores, we are also noting the quality remains poor. The product continues to promote the sexy ideal and in their messaging," Jane Hali wrote. "Not only do these [competing] brands have positive on-trend messaging, they are also solving the fit problem of intimates in general and the DTC specifically. DTC brands disrupting the category include, Lonely Lingerie, Negative Underwear and Adore Me to name a few."
The company's Bath & Body Works is a different story, with "a concept that resonates with today's consumer," Jane Hali also said. "Wellness, holistic and home fragrance have been key categories. Unlike VS, we have noted the retailer tweaking their packaging and presentation to look minimalistic and sleek."
L Brands shares fell sharply after the report Wednesday, but some analysts are taking the long view. Newly arrived executives at Victoria's Secret and its sub-brand PINK will need "several months" to "enact real change at the brands — both from a marketing and merchandising perspective," Wells Fargo analyst Ike Boruchow said in a note emailed to Retail Dive.
"[P]atience is required in our view given the overall strategic direction at VS will remain somewhat unknown until we get closer to holiday," he wrote. "Our hope for a re-rating in the stock is now predicated on stabilization at PINK and a new direction for the VS brand (e.g. changes to real estate, marketing, promotional cadence/AUR and international growth all remain unclear at the moment) - both of which we should gain clarity on by [the second half of the year] when new management has had sufficient time to clarify and enact their strategies."