Victoria’s Secret should stop pushing up prices

FILE PHOTO - Performers dance during the Victoria's Secret fashion show in Hollywood

FILE PHOTO - Performers dance during the Victoria's Secret fashion show in Hollywood

Published Feb 25, 2017

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Remember when J.C. Penney decided to abruptly get rid of

the coupons customers loved, quickly wiping out more than $1 billion in sales

and alienating loyal shoppers? The 2013 episode, led by former Apple Store

chief Ron Johnson, was an instant-classic case study of what not to do in

retail.

Apparently not everyone was paying attention. 

Victoria's Secret parent L Brands is the latest retailer

paying a price for trying to break consumers of their addiction to heavy

promotions. The company's stock tanked more than 17 percent on Thursday after

it reported poor quarterly results, for which it blamed weakening traffic at

shopping malls. 

L Brands warned comparable sales could suffer

double-digit declines in the current quarter from a year earlier. Much of the

pain comes from Victoria's Secret, whose February sales might end up down 20

percent from a year ago. The company suggested its sales declines could ease up

in the second half of the year.

Don't count on it. I hate to break it to L Brands,

but a big part of the reason people aren't shopping at Victoria's Secret

is they're no longer getting catalogues and coupons encouraging them to do

so. 

Competition in the lingerie business is rising, with

Amazon.com Inc. and other online players eating into L Brands's market share.

In a bid to preserve its profit margins, Victoria's Secret is doing pretty

much what Johnson did at J.C. Penney: pulling back on discounting and

promotions for many of its core offerings. But that is leading to lower shopper

traffic and sales. 

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On Thursday's earnings call, L Brands CFO Stuart

Burgdoerfer defended the company's position, saying it wouldn't respond to

sales declines by going back to spraying customers with "simple,

not-brand-building coupons."  

In fact, L Brands has steadily been raising prices, even

as Forever 21, H&M, American Eagle and other fast-fashion retailers offer

similar products at lower prices. 

There is one bright spot for Victoria's Secret:

Brisk sales of new, millennial-focused products such as sports bras and

"bralettes," bras without underwire and padding that run counter to

the company's legacy business of sexy lingerie and  push-up bras.

The sportier categories are selling well because they're

in fashion with younger consumers who increasingly prefer more comfortable

undergarments. But the other side of the demand equation is that, at $20 a pop,

bralettes and sports bras are also much cheaper than Victoria's Secret's

traditional padded bras, which usually run between $50 and $60. 

Read also:  How Victoria's Secret became a household name

The growing popularity of these new products is a growing

threat to Victoria's Secret's business. Every 10 percent shift to

bralettes from traditional bras equates to a 6 percent hit to bra sales and a 2

percent hit to total revenue, Konik estimates. If bralettes reach 20

percent of the brand's bra business over the next two to three years, then

Konik reckons total brand sales could drop by 12 percent. 

If he's right, then L Brands shares should be even lower

than they already are. 

Two-thirds of analysts followed by Bloomberg have lowered

their 12-month price targets on the stock in the past month. Yet L Brands still

trades at 14 times forward earnings, around the same multiple as competitors

such as Urban Outfitters Inc. and even higher than American Eagle Outfitters

Inc. and Ascena Retail Group, which both trade at around 11 times forward

earnings.  

A lot of retail strategy comes down to the creative side

of things, like fashion and fit. In this case, where L Brands goes from here is

a simple matter of math and history. 

This column does

not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG

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