L Brands Inc.’s plan to turn around the Victoria’s Secret lingerie brand includes offering fewer discounts, which could be a big problem for customers, analysts say.
L Brands LB, -0.05% , whose portfolio also includes the Bath & Body Works chain and the Pink brand that targets young consumers, hosted its investor day event on Tuesday. Executives spent time explaining their strategy for the ailing Victoria’s Secret label, which has seen sales stall and backlash ensue as tastes veer away from the over-the-top sexy, male-gaze perspective that has been central to the brand for much of its existence.
“Victoria’s Secret, particularly its Pink division, is repositioning its brand to be more about ‘femininity as empowerment’ and individuality,” wrote UBS analysts led by Jay Sole in a post-event note. “We were surprised almost none of the imagery in the presentations featured well-known supermodels and much of it included non-airbrushed photos of ‘regular-sized’ women.”
The decision about whether or not to continue with the televised fashion show is still up in the air.
John Mehas, Victoria’s Secret’s chief executive of lingerie, detailed a strategy that will focus on “emotional connections” and “product that she wants” with a “refreshed in-store experience” and an “updated brand strategy,” according to a FactSet transcript of the event.
(Victoria’s Secret also has a chief executive of the Pink brand, Amy Hauk, and the beauty division, Greg Unis.)
“There was a lack of innovation on core franchise [items] and she refused to pay full price for it,” Mehas said, referring to the brand’s customers. “Our position skewed heavily promotional and significantly broad-based brand eroding activities, which impacted other categories on top of bras.”
Executives said the brand has been promotional for more than three years, and they discussed the headwinds that come with that.
“You will start to see us lead with emotion, not promotion,” Mehas said.
That could be difficult, which is why UBS maintained its neutral stock rating and cut its price target to $19 from $24.
“[W]e think Victoria’s Secret’s performance could get worse before it gets better and weigh on the stock price,” UBS said, noting that executives said they would take time to shift the marketing message to keep from causing customer confusion.
“Other retail turnarounds have shown this process can have a disproportionately negative effect on same-store sales growth and we think the same could be true for Victoria’s Secret,” UBS said.
KeyBanc Capital Markets also maintained its sector weight rating after the event.
“A focus on innovation, reduction in promos, and importantly, acknowledgment that societal changes are redefining sexy are all key in a turnaround,” wrote analysts led by Edward Yruma. “Turning Victoria’s Secret will take time, but we see reasons to be optimistic. More importantly, we are starting to see concrete signs that marketing and brand imagery are embracing inclusivity.”
MKM Partners’ Roxanne Meyer has less clarity about what will happen at Victoria’s Secret. Meyer notes that L Brands’ investor event usually coincides with the company’s launch for the holiday season, which was not a focus of this event.
Moreover, it’s early days for the Victoria’s Secret turnaround. While some of the early signs are that the brand is moving in a more “glamorous, emotional, and highly differentiated” direction, there are questions about whether shoppers will respond positively.
“We note the more fashion-forward and sexy pieces from prior leadership didn’t work well, and the company walked away from sexy pieces from prior leadership didn’t work well, and the company walked away from sexy sleep a few years ago given a lack of customer interest,” Meyer wrote. “Even if the product/vision does take hold, it could take several quarters to wean customers off of the intense promotional activity they expect.”
MKM rates L Brands shares neutral and lowered its price target to $21 from $26.
L Brands stock has tumbled 34% over the past year while the S&P 500 index SPX, +0.47% is up 3.6% for the period.