Victoria Secret's biggest driver of growth is 'peaking'

Victoria’s Secret media relations
  • Victoria’s Secret’s PINK line is peaking as the company sees slower sales growth and smaller market share by other players, a Jefferies analyst found.
  • Shares of L Brands, the parent company of Victoria’s Secret, dipped after it reported a weaker-than-expected first-quarter forecast.
  • The company still beat Wall Street’s expectations, posting an adjusted $US2.11 earnings per share on revenue of $US4.82 billion.
  • View Victoria’s Secret parent L Brands’ stock price move here.

Victoria’s Secret’s PINK line – considered the company’s strongest growth engine – is “peaking,” a Jefferies analyst said.

Its parent company L Brands‘ choice to keep giving out promotions is devaluing the brand and raising customers’ expectations that they can keep buying cheap products at Victoria’s Secret stores, said Jefferies Analyst Randal Konik.

The lingerie chain is “losing pricing power” because it is offering cheaper bra options that “is driving [average revenue per unit] pressure, while training customers to pay less,” he said.

He was also critical of the company’s use of promotions for its PINK brand, which does not need as many promotions as Victoria’s Secret lesser known and more expensive products, Konik maintained.

In an earlier note, he warned, “With PINK being used as a main driver in many VS promos it’s clear the company is down to its last carrot to keep customers from fleeing to competitors.”

Meanwhile, American Eagle Outfitter‘s Aerie line is gaining market share due its emphasis on “realistic beauty standards.” The company has posted 15 consecutive quarters of positive comparable sales, Konik said.

Konik also argued L Brands is holding too many Victoria’s Secret stores in the US, exposing the brand to lower declining mall traffic that will impact its sales performance.

Much of this weakness is reflected in L Brands’ fourth-quarter earnings released on Wednesday. “In 4Q at VS, store traffic remained challenged, lingerie comps remained weak, merch. margins declined due to incremental promos, and PINK barely posted positive comps,” he said.

Shares of L Brands tumbled 11.37% Thursday morning despite the company posting quarterly earnings that topped Wall Street’s expectations. The company reported adjusted earnings of $US2.11 per share, above analysts’ expectations of $US2.04 per share, and revenue of $US4.82 billion that was in-line with forecasts, according to Bloomberg data.

However, the company said that it expects 2018 full-year earnings to be between $US2.95 and $US3.25 per share, and first-quarter earnings to be between $US0.15 and $US0.20 per share, below Wall Street’s expectations.

This forecast reflects the benefit of a lower tax rate due to tax reform legislation and an incremental investment in wages and benefits, principally for hourly associates, of approximately $US100 million,” the company said in a statement.

Konik believes L Brands shares are still overvalued. He gave shares a price target of $US30 per share, roughly 30% below itheir current level.

The company’s stock was down 23.78% for the year.

Read more about why this analyst believes Victoria’s Secret is making a wrong move with its promotions.

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