Don't Rush the Victoria's Secret Makeover

L Brands has a plan to stay relevant, but needs time to execute.
At Closing, April 23th
34.80 USD

Victoria's Secret parent L Brands Inc. might be down, but it's not out. 

Out of Style?

Shares in Victoria's Secret parent L Brands have dropped by 32% in the last year

Source: Bloomberg

Shares in the lingerie and beauty seller dropped by 8 percent Tuesday after it lowered sales forecasts for the quarter, stoking worries that a refashioning of Victoria's Secret stores would take longer than expected. The outlook cut also raised fears that L Brands's Bath & Body Works, Henri Bendel, and other mall-based chains weren't immune from the I'd-rather-shop-at-Amazon-itis afflicting malls across the country.

You can't blame some investors for selling: From February 2014 through February 2016, L Brands's shares nearly doubled. By August, the stock had shot up to around 20 times forward earnings, above its 5-year historical average of around 18. Sales have grown for 27 straight quarters. In other words, this puppy was priced for perfection, and any signs of slowing growth would cause it to tumble. 

Secret Sauce

L Brands has posted 27 straight quarters of year-over-year sales growth at existing stores

Source: Bloomberg Intelligence

And tumble it did. But watching L Brands founder and CEO Les Wexner explain, at the annual investor-day presentation Tuesday, how he plans to infuse new life into the company should provide some comfort to long-term believers.

On Sale

L Brands shares dropped 8 percent on Tuesday after reducing quarterly sales forecasts

Source: Bloomberg

Intraday times are displayed in ET.

Sure, listening to the folksy founder opine on the retail business can be awkward, with off-color jokes, uncomfortable political chatter, brutal -- bordering on offensive -- honesty, and some cursing. But along with that, Wexner also smartly explained that, in order to survive the fickle fashion business, retailers need to reinvent themselves every decade or so, which is what L Brands plans to do to stay relevant. 

And unlike Nike executives who refuse to entertain the idea their sales have slowed, Wexner had no issues acknowledging poor decisions, such as "selling silly s--- that was brand wrong and promoted in silly ways," he said. 

Instead of clinging to the push-up bras that made it famous, Victoria's Secret will also embrace the bralettes that are bringing millennials into its stores. It will finally stop letting Nike and Adidas do a pretty mediocre job at making sports bras and rightly reclaim its place in that market. It will stop selling stuff like Ugg boots and clothing available at other retailers.

And, thank goodness, it will kill its catalog, finally getting the memo that it's 2016 and customers aren't flipping through catalogs, they are ordering stuff from their phones, watches and speakers powered by artificial intelligence.

It will also scale back tired discounting schemes, a decision not only about reclaiming its industry-beating profits, but also about not denigrating its brand -- as Gap and Abercrombie & Fitch have done to theirs, in Wexner's view.

He explained that the difference between selling underwear and lingerie is emotion, and the only way to instill the right buying emotion in customers is to convince them the brand of underwear they're buying is special. Think Starbucks devotees walking past a Dunkin' Donuts only to pay more for a similar cup of coffee. 

Profit Play

L Brands stores are more than twice as profitble per square foot than those of the Gap and TJX

Source: Bloomberg Intelligence

Note: Data is based on 3Q 2015, the latest available

The changes at L Brands come with short-term pain. The company said Tuesday it doesn't expect to get to its targeted sales growth of 7 percent to 10 percent a year until the back half of 2017. Industry-beating operating margins will take a temporary hit.

But as fashion and beauty investors should know, lasting makeovers take time and patience.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at

    To contact the editor responsible for this story:
    Mark Gongloff at

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