Victoria’s Secret and PINK parent L Brands announced first-quarter sales and earnings results last week that met or topped expectations, but offered subdued guidance for the second quarter on expected tough comparisons to last year when it exited non-core businesses.
In the Victoria’s Secret business, the company continues to invest in its bricks-and-mortar infrastructure, adding and expanding stores, improving the selling environment, and investing in educating sales associates to improve productivity and the customer experience.
Total and comparable store sales for the three months ended May 2 grew by 5 percent to $2.51 billion in the period, in line with Wall Street expectations, quite a feat considering last year’s first quarter included $80 million in sales from the discontinued sportswear and make-up categories.
Victoria’s Secret sales growth was driven by PINK and lingerie sales, which more than offset declines in the beauty business. Sales of core categories (bras, panties, PINK, sport, fragrance and lounge) were up by mid-teens.
Gross margin improved by 90 basis points to 42 percent of net sales, driven by an increase in merchandise margin rate. Victoria’s Secret CEO Sharon Turney told analysts on the quarterly earnings conference call, “We are seeing our biggest margin expansion coming from the fact that we are using our speed, taking less mark-downs, doing more regular price selling, less promotional activity. And we continue to be focused on those things.”
SG&A expense increased by 38.1% to $684 million, or 27.2% of net sales, 20 basis points higher than in the prior year period, primarily due to investment in store selling payroll to improve the customer experience.
Net income increased by 24.5% to $181.5 million, or $0.61 per share, a penny above analyst estimates, from $157 million, or $0.53 per share, in the prior year quarter.
Net sales at Victoria’s Secret stores increased by 8 percent, while sales in the direct channel fell by 6 percent. Sales in the international division increased by 29 percent to $91.5 million.
Comps increased by 5 percent at Victoria’s Secret stores in the U.S. and 4 percent at Bath & Body Works. Direct-to-consumer sales fell by 6 percent, primarily due to the exit from the direct sales sportswear business.
In the quarter, the company opened 12 owned stores and closed 15, finishing the quarter with 2,966 stores. A total of 29 non-company-owned (licensed or franchised) stores were opened in the period, and 11 closed, for a total of 668 as of May 2.
Total company-owned Victoria’s Secret and PINK stores were 1,156 at the end of the quarter, up from 1,107 at the end of the first quarter of 2014.
Victoria’s Secret square footage in North America is expected to increase by about 4 percent this year due to 25 new store openings and the expansion of some existing stores.
For the current quarter and fiscal year, the company expects a low-single-digit comp store sales increase, improvement in merchandise margins, and increase in buying and occupancy expense. Total sales growth is expected to be slightly higher than comps due to increases in square footage and the international business. Foreign currency translation is expected to negatively impact sales growth by about a percentage point.