Decline of malls impacting L Brands
Victoria’s Secret and Bath & Body Works are mall staples that have done better overall than many of their retail neighbors in an era increasingly giving way to online sales.
But the decline in mall traffic, as well as competition in the lingerie business from Amazon and Abercrombie & Fitch’s Gilly Hicks brand, have taken a toll on L Brands.
On Wednesday, L Brands reported net income of $631.7 million or $2.18 per share based on $4.5 billion in sales for the fourth quarter. While that beat Wall Street expectations for earnings per share, it narrowly missed sales projections.
More important, the retailer revised its forecast for 2017 downward, disappointing investors and sending the company’s shares tumbling Thursday.
L Brands shares closed at $48.94, down $9.19 or 15.8 percent.
The company acknowledged the mall difficulties in its conference call with analysts Thursday to discuss the earnings report.
“There was a substantial reduction in mall traffic in February. It was a substantial falloff,” said Stuart Burgdoerfer, chief financial officer.
As a result, the company will cut back on spending on store remodeling and openings, but plans do not include significant store closings.
“We’ve pulled back about $125 million between (November) analyst day and our current view, split about equally between Victoria’s and Bath & Body Works,” Burgdoerfer said.
The drop in sales led L Brands to cut its earnings predictions for the first quarter and for 2017 as a whole. The retailer now expects to earn between 20 cents and 25 cents per share in the first quarter, well below Wall Street’s previous expectations of 49 cents per share.
L Brands is predicting profits for the full year of between $3.05 and $3.35 per share, also below analysts’ predictions of $3.70 per share.
Wall Street analysts expressed concern about the earnings report, both during the conference call as well as in notes to investors.
“There remains a nagging suspicion,” said analyst Richard Jaffe of Stifel, Nicolaus & Co. in a note, “that the malaise that has been impacting apparel consumption for nearly two years has crossed over to other consumer discretionary categories: intimate apparel and personal-care products as consumers focus their discretionary consumption elsewhere.”
Analyst Ike Boruchow of Wells Fargo observed in a note that tax refunds are coming later this year, meaning consumers had less to spend on discretionary items this month.
“But these numbers are simply worse than what any kind of shifts would typically create,” he said.
L Brands’ Burgdoerfer did note that sales for both Bath & Body Works and Victoria’s Secret “continue to be very strong online.”
The retailer is aggressively reacting to growing competition in the two emerging categories of bralettes and sports bras by offering discounts on both products. The discounts have worked, with executives noting “substantial growth” in sales, but they have hurt profit margins.
Analysts on Thursday’s conference call questioned executives repeatedly about when L Brands could begin easing up on such discounts.
Burgdoerfer indicated that profit margins would likely begin to stabilize in the second half of 2017.
“We will look to have margin rates over time similar to our overall bra business,” he said. “There was a time when Pink had margin rates significantly below Victoria’s Secret margin rates. That’s no longer the case. So we’ll be looking to do the same in the sports bra and bralettes categories.
“But that again is a function of how compelling our merchandise is.”
L Brands also announced during the conference call that the company on Thursday opened its first full-assortment Victoria’s Secret store in mainland China, in Shanghai. A second full-assortment store, in Chengdu, will open today.
For the past two years, the retailer has operated several Victoria’s Secret Beauty and Accessories stores in China, units that are smaller and offer limited merchandise.