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How L Brands Plans to Rescue Slumping Victoria’s Secret Comps

L Brands hopes to inject its Victoria’s Secret business with a fresh merchandising approach and upgraded fabrics as it looks to pull the chain out of the doldrums.

In a Nutshell: Brought down by its struggling Victoria’s Secret business, L Brands saw its earnings tumble and sales dip, but feels better times are coming.

Chief financial officer (CFO) Stuart Burgdoerfer told analysts that it will end the year with inventories at Victoria’s Secret in “a clean position” so that it start 2020 in a “healthy inventory standpoint, both financially and numerically, and also in terms of the freshness and the quality of the assortment that we carry over into the spring season.” In addition, the company plans to balance promotional levels to “drive volume engagement with customers, profit…the management of inventory flow and sell downs,” he said.

L Brands said it is merchandising Victoria’s Secret with “significantly more emotional content,” shifting the underwear business to include more single-ticket panties that come at higher average unit retails. In the sleep and lounge business, a significant investment is being made in the product “in terms of quality of fabrics, hand feel, quality of fashion and design aesthetic.”

Looking ahead to the fourth quarter, the company stated that it expects earnings per share (EPS) to be about $2, which would result in full-year adjusted EPS of about $2.40 compared to its previous full-year guidance range of $2.30 to $2.60.

L Brands, through Victoria’s Secret, Pink and Bath & Body Works, operates 2,944 specialty stores in the U.S., Canada, the U.K. and China, and its brands are also sold in 700 franchised locations worldwide.

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Sales: Net sales for the third quarter ended Nov. 2 fell 3.6 percent to $2.68 billion compared to net sales of $2.78 billion for the quarter ended Nov. 3, 2018. Victoria’s Secret net sales were down 8.5 percent to $1.08 billion from $1.18 billion in the year-ago period.

Comparable sales for the whole company, which also includes the Pink and Bath & Body Works chains, decreased 2 percent for the 13 weeks. Victoria’s Secret comparable sales were down 7 percent versus a decline of 2 percent in the year-ago quarter.

Earnings: The net loss in the quarter plummeted nearly fivefold to $252 million from a net loss of $42.8 million in the year ago quarter. The per share loss was 91 cents in the period compared to a loss per share of 16 cents for the year-ago quarter.

The third-quarter operating loss was $151.2 million compared to operating income of $54.4 million last year.

In the quarter, L Brands took pre-tax charges of $284.7 million, or 93 cents per share, including a $247.5 non-cash impairment charge related to certain Victoria’s Secret store and other assets, and a $37.2 million charge to increase reserves related to ongoing guarantees for the La Senza business that was sold in the fourth quarter of 2018.

This compared to the third quarter of 3018 in which pre-tax charges of $101.2 million were taken, including an $80.9 million non-cash impairment charge related to certain Victoria’s Secret store assets and $20.3 million charge, principally cash, related to the closure of the Henri Bendel business.

Excluding the above charges, adjusted third quarter earnings per share was 2 cents compared to 16 cents last year, adjusted operating income was $96.3 million compared to $155.6 million last year and adjusted net income was $5.7 million compared to $45 million last year.

CFO’s Take: Stuart Burgdoerfer, executive vice president and CFO, speaking on a conference call with analysts, said: “Outperformance at Bath & Body Works was offset by a Victoria’s Secret result that was at the low end of our expectations. New CEOs John Mehas and Amy Hauk are very focused on getting close to our customers and making improvements to our merchandise assortments, marketing and customer experiences in stores and online. We have more work to do and we recognize that it will take some time to see improvement in the business.”

“We are up against aggressive promotions from last year and the time period between Thanksgiving and Christmas is six days shorter than last year, therefore our fourth-quarter guidance assumes a Victoria’s Secret merchandise dollar decline in the high-single-digit range, which is consistent with our third-quarter result,” Burgdoerfer continued. “We’re very focused on executing a successful holiday. We will continue to rely on the strength of our agility, and we will continue to test pricing and promotion strategies, react to customer preferences and chase into proven product winners to drive results.”