Thursday 23 May 2019

Strategy shift at Victoria's Secret should lift growth


Victoria’s Secret, which is well-known for its fashion show, has seen its share price almost half
Victoria’s Secret, which is well-known for its fashion show, has seen its share price almost half

Aidan Donnelly

Anybody who has walked Dublin's Grafton Street in recent weeks cannot fail to notice the significant amount of refurbishment work being done to the former BT2 store.

The slick black hoarding with large gold lettering announces the arrival of the first flagship store in Ireland for Victoria's Secret.

To the sartorially uninitiated, Victoria's Secret is a designer, manufacturer and marketer of women's premium lingerie, womenswear and beauty products - a company well known around the world for its annual fashion show.

To the corporately uninitiated, Victoria's Secret is one of the two main speciality retail concepts operated by the US-listed company, L Brands.

The other flagship brand from L Brands is Bath & Body Works - which sells fragrances and personal care products. L Brands sells primarily through company-operated stores and e-commerce in North America and Britain. It also has a growing international business.

The company targets high single-digit sales growth annually - driven by a mixture of opening new stores in the US, growing sales at existing stores, and international expansion. The company has significant opportunities to grow international sales and profits.

L Brands has a history of quality company management. It has also set out the strategy it wants to follow and has run the company firmly in line with that strategy.

Despite this, the last 12 months have proven to be difficult, with the share price nearly halving over that time. Visibility around the sustainability of their strategy has become cloudy for investors as competitive pressure increases for traditional 'brick-and-mortar' retailers in the US.

On top of this, some company-specific disruptions impacted their results. Last year was a year of change for the company in terms of key people and products.

Following the departure of the long-time head of Victoria's Secret, the company announced a series of adjustments to the structure of the company.

But the most significant change came from the exit of certain apparel categories, namely Victoria's Secret swimwear and certain non-athletic apparel categories that were sold in its direct channel (online) and not in stores.

Although this had a large impact on sales, the rationale for this move was to focus the company's energy and expertise on its core categories.

The other large disruption was a change in promotional strategy. For years the company had run a fairly simple 'money off' promotional strategy through its direct mail catalogue.

However, last year, management decided to discontinue this promotional tactic in favour of offers that would persuade customers to trial different types of products.

These changes have had a substantial impact on the sales numbers for L Brands.

However, L Brands is market leader in a number of the product categories which it sells (such as bras and lingerie) and ultimately this should allow it overcome this short-term hiccup and return to growth rates seen in the past.

In time, the changes made by the company in 2016 may well be viewed as a long-term positive for the health of the brand and not a sign of deteriorating underlying fundamentals.

As we move through 2017, the sales disruption seen last year will be passed and growth rates should move to being positive, thereby providing a much-needed boost for investors.

Aidan Donnelly is head of equities in Davy Private Clients.

Sunday Indo Business

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