Why L Brands Stock Dropped 29% in 2019

The company continued to be a tale of two brands. On one side, the Bath & Body Works business has been L Brands’ better half, reporting comp sales growth of 10% through the first three quarters of fiscal 2019. That is consistent with the performance in the previous year.

On the other side, it’s clear that Victoria’s Secret is losing market share to competitors. Comp sales have been ugly, falling 6% in the first three quarters of fiscal 2019, which shows a worsening trend following the 1% decline in the previous year. And given that Victoria’s Secret makes up most of the company’s revenue, weak performance there is pressuring results for the whole company.

Retail spending is an important trend to watch with consumer discretionary stocks. The recent holiday season looks to have been a healthy environment for most retailers, according to the latest data from Mastercard SpendingPulse. But that doesn’t appear to have helped Victoria’s Secret. L Brands reported a decrease in comp sales of 3% for the holidays and lowered full-year earnings guidance to $1.85 from the previous guidance of $2.00.

The exterior of a Victoria's Secret store.

IMAGE SOURCE: L BRANDS.

So what

Victoria’s Secret used to be an iconic retail brand, and in some ways it still is, but the brand obviously has an image problem.

Here’s the deal: Victoria’s Secret is famous for using supermodels to market its product, but sales are falling. Meanwhile, American Eagle Outfitter‘s Aerie brand is designing and marketing its product for all body types, and sales are exploding. Two different approaches, and two completely opposite outcomes.

Supermodels might have been the ticket in the 1990s, but not in the 2020s. The good news is that management gets it. The long-running Victoria’s Secret Fashion Show was cancelled last year, and that might be a sign that L Brands is starting to adjust its marketing approach to respond to competitors.

Now what

Victoria’s Secret still has tremendous brand awareness going for it. It can use that to its advantage and turn itself around, but it needs an entire makeover from product design to marketing, but a comeback won’t be easy.

One problem for L Brands is that it has cornered itself by relying heavily on discounts to drive sales. Once a retailer goes down that rabbit hole, it’s tough to dig itself out. Customers become trained to wait for discounts before they buy, and that makes it very difficult to keep margins firm.

New managers are trying to rework the assortment and pricing strategy at Victoria’s Secret Lingerie and the PINK brand, but investors are probably not going to send the stock higher until Victoria’s Secret proves it can string together a quarter or two of comp sales growth.

[“source=fool”]