L Brands Inc. shares skyrocketed 12.8% in Thursday trading after the company reported strength in its Bath & Body Works beauty chain, but questions remain about how to turn around its ailing signature brand, Victoria’s Secret.
L Brands LB, +2.39% stock is down 2.9% for the year to date, and more than 29% over the past year. In contrast, the S&P 500 index SPX, +0.14% has gained 12.9% in 2019, and 3.8% for the last 12 months.
The company reported better-than-expected fiscal first-quarter earnings of 14 cents per share, well ahead of the breakeven FactSet forecast. Same-store sales fell 5% at Victoria’s Secret, but jumped 13% at Bath & Body Works.
Chief Financial Officer Stuart Burgdoerfer said the beat was “principally driven by a strong performance at Bath & Body Works and some favorability in income taxes.”
Executives spoke specifically about what was working at Bath & Body Works. The launch of the Gingham body care and fragrance lines, for instance, had strong consumer response because it’s “sophisticated.”
But for Victoria’s Secret, there are still many questions, particularly about marketing and merchandising, that Burgdoerfer said the company is in the process of answering.
“Is it being worked on?” he asked. “Yes. Very actively by the right folks and there will be change coming.”
Among the “right folks” is John Mehas, the chief executive of Victoria’s Secret lingerie, who has been in the role for 13 weeks.
What Burgdoerfer could say about Victoria’s Secret is that it’s a brand that’s about “fashion.”
“We’re not about selling basic commodity product year after year after year,” he said, according to the FactSet transcript. “We’re about fashion. And when we lack fashion, lack newness, lack innovation, where it’s not interesting, the result becomes apparent.”
Something else that’s still up in the air: the Victoria’s Secret Fashion Show. With ratings tanking and the show seemingly a demonstration of how out of touch the brand has become, there was a Wall Street Journal report that the event would no longer be broadcast on television.
There was no further comment about the fate of the runway show besides that it’s being “reevaluated.”
And Victoria’s Secret just recently brought back swim wear, though some analysts take issue with the higher price of the latest assortment.
Burgdoerfer said it was an “initial test” that is “doing well.”
“What we have learned despite what might be out there on the internet is that there has been strong positive reaction to the assortment generally including at higher price points in addition to the more moderate price points that we had historically been in,” he said.
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UBS analysts led by Jay Sole call L Brands first-quarter results a “solid” beat, but lack full confidence in a Victoria’s Secret turnaround.
“In our view, Victoria’s Secret must evolve not only its product offering, but also its brand and we haven’t heard enough about how the brand messaging may change to become bullish,” the UBS note said.
UBS rates L Brands shares neutral with a $27 price target.
“We continue to believe that inflection at Victoria’s Secret will be necessary to make the stock work longer term, and we do not yet see evidence of this taking place,” wrote Cowen analysts led by Oliver Chen. “We are encouraged that changes are underway, however we need greater visibility into the nature of changes and how Victoria’s Secret is addressing customer needs and preferences.”