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.
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.