Data reviewed by analysts at UBS indicates that Victoria’s Secret could be showing signs of “modest” progress, after a less-promotional March, the relaunch of its swim business, and other factors.
Discounts were down “slightly” year-over-year during the month of March thanks to the omission of a number of one-off promotions that took place in 2018, including an offer for a $15 gift card with the purchase of two bras.
The promotional decline was the first UBS has seen since September 2018, analysts said.
UBS also highlighted three other shifts that could indicate change is coming for the brand: Victoria’s Secret swim made a comeback; models selected to be “Angels” broke from the usual mold; and additions to the VS Sport line picked up on more loungewear and streetwear trends.
“The [swim] assortment is limited, but Victoria’s Secret did put advertising around it,” UBS wrote in a note.
And the addition of models like Leomie Anderson, the first Black British “Angel,” suggests Victoria’s Secret has started to listen to critics, who have come after the brand over issues of diversity and its marketing.
“All three suggest Victoria’s Secret is testing potential major strategic shifts,” analysts led by Jay Sole wrote. “We view this as a positive since it addresses one of our and, we believe, the market’s key L Brands concerns – whether management is willing to materially evolve the Victoria’s Secret business.”
Despite the steps, UBS isn’t ready to declare an upswing just yet.
“We think March Victoria’s Secret traffic was probably down high-single digits, likely offsetting promotional gains,” UBS said. “That said, our conversations with investors suggest real adjustments could drive significant near-term P/E expansion since these would likely cause the market to start anticipating Victoria’s Secret sales and margin trend improvement.”
UBS rates L Brands
shares neutral with a $28 price target.
In recent months, L Brands has off-loaded its high-end department store chain Henri Bendel and the La Senza brand to focus its energies on the core brands, especially Victoria’s Secret. L Brands’ portfolio also includes Bath & Body Works and Pink.
While not a tremendous moneymaker, analysts saw the swim business as a way for Victoria’s Secret to capture seasonal shoppers.
MKM Partners’ Roxanne Meyer isn’t so optimistic about that happening now.
“In our view, Victoria’s Secret competitive advantage in swim stemmed from a differentiated assortment at compelling price points and great fit – these have all potentially changed,” Meyer wrote in an April 1 note. The current selection appears to be “(much) pricier” than the previous iteration, and an online assortment won’t work for customers who want to try on a swimsuit before making the purchase.
The swim merchandise is largely comprised of third-party brands, MKM writes, with only 17% of the collection from the Victoria’s Secret brand.
“Several of the brands are sold at major department stores/select specialty stores in either the same or similar styles,” MKM said. “When this happens, price is the key differentiator across sellers, and we note that a handful of these brands were offered at 20% to 30% off an average at some point over the last two weeks.
“Consumers are speaking loudly on Instagram, expressing discontent with innovation, sizing and pricing,” Meyer said.
MKM rates L Brands stock neutral with a fair value estimate of $26.
Instinet analysts led by Simeon Siegel also questioned the strategy of relying on third-party brands for the swim relaunch.
“Recognizing management noted that removing swim from stores last year resulted in traffic headwinds, it would seem the strongest motivation for reintroducing the product line… is yet to be attained,” the March 18 note said. “Until that happens it is hard to imagine the category the company decided wasn’t worth selling will prove a needle-mover online.”
L Brands stock has gained 4.6% in 2019 while the S&P 500 index
has rallied 15% for the period.