Victoria’s Secret Angels Soar on Wall Street

The recovery continues at Victoria’s Secret, with both Wall Street and at least some consumers rallying behind the lingerie brand. 

Parent company L Brands released quarterly earnings results Wednesday evening, beating analyst expectations and improving on both top and bottom lines, year-over-year.

While most of the gains were in the Bath & Body Works business, the lingerie giant showed some signs of progress as well. Total comparable sales were up 4 percent in the Victoria’s Secret business, while sales in the direct-to-consumer channel, which includes e-commerce, rose 42 percent for the quarter, year-over-year. Comparable Victoria’s Secret stores sales, meanwhile, were down 10 percent during the quarter. 

“Based on the third-quarter results, we’re ahead of where we thought we would be,” Stuart Burgdoerfer, executive vice president and chief financial officer of L Brands, and interim chief executive officer of Victoria’s Secret NewCo, told analysts on Thursday morning’s conference call. “With that said, we’ve got a lot more to do. We’re taking it one week at a time, and one month at a time, and trying to do the right stuff with respect to the merchandise assortments, the customer experience, the brand positioning, the quality of the team and the culture of the business.”

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That includes updating the marketing materials to include plus-size models and less overtly sexy offerings, along with a greater selection of comfort-based styles — something Victoria’s Secret has long been criticized for taking too long to do. 

But these days, Burgdoerfer said the lingerie brand has “developed, you know, pretty, pretty clear points of view about the future direction of the brands and the significant categories. But I wouldn’t want to suggest from that comment that we won’t continue to listen and learn and evolve, because we will. The merchant leaders, the merchant ceo’s, have developed points of view that are resonating with consumers, as evidenced through the results, and [we have the] ability to improve margin rates meaningfully while still delivering very healthy volumes.”

Investors seemed to agree. The company’s stock shot up more than 15 percent at the start of Thursday’s trading session.  

“L Brands posted a material beat, with [Bath & Body Works] proving itself a top pandemic performer, and VS turning a profit on lower sales,” Simeon Siegel, managing director and senior retail analyst at BMO Capital Markets, wrote in a note. “Core to our May upgrade was VS’ ability to earn more by selling less. VS revenues declined [by] $224 [million], but profits increased [more than] $185 [million], as mid-40 percent traffic declines were offset by conversion and average unit retail increases and a significantly higher merch margin. This is what we were looking for and we believe this is only the beginning. Buy the shares.”

His firm raised L Brands price target to $45 a share. 

Ike Boruchow, senior retail analyst at Wells Fargo, added in his own note, “Simply put, [Bath & Body Works] just delivered one of the strongest quarters we’ve ever seen, while VS also managed to pull-off a material comp/profit beat and appears to be back on track.

“Since 2016, VS has made several strategic changes intended to strengthen the business that have yet to show positive results, while their younger sub-brand Pink began to struggle more recently in 2018,” Boruchow continued. “As a result, [operating] income at the business has decreased approximately 90 percent since 2015. While brand health has been damaged, it does not appear to be irreparable given that VS remains the share leader in women’s intimates. Trends may be beginning to shift now that new leadership and ownership is in place at both VS and Pink and meaningful changes (right-sizing store base, cost cutting initiatives) are being made to the business.” 

Fewer promotions and clearance sales in the most recent quarter throughout the portfolio also helped improve margins. (Andrew Meslow, ceo of L Brands and Bath & Body Works, said the soap and fragrance brand didn’t have to have its normal end-of-third-quarter fall sale, because demand remained so high.) 

But the same effect rang true for Victoria’s Secret. Burgdoerfer said the lingerie business had significant average unit retail growth during the quarter, along with price increases that the company expects to continue in the important holiday shopping season, all positive signs for the business’ turnaround efforts.

“We have better inventory position, where we don’t have to have as many broad-based promotions, along with better assortments, better selling effectiveness online and in stores,” Burgdoerfer said. “I would say that potential is, when executing well, that there should be, you know, a 10 [percent] to 15 percent operating income rate business. And that’s potential that we should be able to realize in the next several years, the next year or two, if we really execute well.” 

In addition, aside from loungewear and other popular work-from-home attire during lockdown, Pink’s selection of bras and panties was strong through the quarter. 

“Considering getting comps and profitability to move in the right direction has been a challenge at VS over the last several years, this inflection is indeed impressive,” Kate Fitzsimons, an analyst at RBC Capital Markets, wrote in a note. “On categories, a better balance of good, better, best pricing and a focus on fashion is driving higher [average unit retails] on lean inventories as well.”

Still, the lingerie business has been struggling with declining revenues for the last several years. Victoria’s Secret’s market share in the U.S. women’s intimate apparel category has fallen from 32 percent to just 16 percent, as of September 2020, in the last five years, according to market research firm the NPD Group. 

In February, L Brands revealed plans to sell a majority stake of the Victoria’s Secret business — which includes the lingerie, beauty and Pink divisions to private equity firm Sycamore Partners for $525 million. The deal fell through amid the pandemic.   

L Brands later revealed plans to spin off the Victoria’s Secret arm of the business into a private company, allowing Bath & Body Works to stand alone on the public market — something the company said it still intends to do, although no date has been set. 

“The board’s been clear about the strategic intent for Bath & Body Works in Victoria’s Secret,” Burgdoerfer said on the call. “And that is to ensure that both businesses are valued appropriately, including the appropriate valuation of Bath & Body Works, which we believe will be enhanced through a separation of the businesses. We continue to be on a path.

“After we get a good visibility to the full Q4 results to work with, our advisers that we hired back in August — JP Morgan and Goldman Sachs — [we plan] to work with those advisers and to begin, you know, a process in earnest to to pursue the options for the separation of the two companies fast,” Burgdoerfer said. 

He added that with the recent gains in the lingerie business and L Brands’ stock price — which is up more than 125 percent, year-over-year — the Victoria’s Secret business might actually be more valuable now than it was at the start of 2020, when the business was for sale. 

“Businesses are valued off of, you know, historic and forward looking EBITDA on cash flow,” Burgdoerfer said. “We’ve made material progress on those measures in the third quarter. And we would expect that the business is worth meaningfully more than it might have been in the recent past.

“We’ve just finished one solid quarter, so we got a lot of work in front of us,” Burgdoerfer added. “But there’s a lot of opportunity.” 

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