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Victoria’s Secret Promotional Problem Hits L Brands Bottom Line

L Brands Inc. and its Victoria’s Secret business continue to be caught in the promotional doldrums that drag down profits even as sales hold steady.

In a Nutshell: L Brands Inc., which operates the Victoria’s Secret, Pink, Bath & Body Works, La Senza and Henri Bendel chains, saw its net income slashed 98 percent in the first quarter, dragged down by its Victoria’s Secret business.

The company said it’s “not satisfied with this result and are very focused on improving performance at Victoria’s Secret” even though it remains a market share leader in the lingerie category with $1.5 million in annual sales. L Brands said it is “investing in a more experienced, more qualified sales team in the business that understands our assortment and can continue to provide customers with great service.” It is also increasing the investment in the Victoria’s Secret Direct business, which saw sales increase 23 percent in the quarter, including a re-platforming of the technology foundation that will roll out in 2019.

Sales: L Brands reported net sales increased 8 percent to $2.63 billion for the first quarter ended May 5 compared to sales of $2.44 billion for the quarter ended April 29, 2017, driven by square footage and international growth, the adoption of the new accounting standard for revenue recognition and the calendar shift resulting from the extra week last year.

Comparable store sales for the quarter increased 3 percent compared to the prior-year period. First quarter sales for the Victoria’s Secret segment increased 4 percent to $1.59 billion and comp sales increased 1 percent. Total digital sales increased 23 percent.

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Earnings: L Brands reported first quarter net income was nearly cut in half to $47.5 million compared to $94.1 million last year. Operating income declined 26 percent to $154.8 million from $209.2 million in the year-ago period, with growth at Bath & Body Works more than offset by a decline at Victoria’s Secret, which declined 48 percent to $83.2 million.

CFO’s Take: Stuart Burgdoerfer, executive vice president and chief financial officer, discussing cost savings at VS on a conference call with analysts, said: “We are looking at all costs and expenses. We’ve reduced our CapEx forecast to start with. We’re looking at our marketing programs. We’re looking at our supply chain to drive efficiency in all elements of the supply chain. We’re looking at other opportunities to improve operating income through expense reductions in other areas of the business that can benefit operating income…We’re looking at everything and there are substantial plans in place to contribute to the operating income result, and I would highlight in particular efficiencies we’re driving in the supply chain.”

“At the end of the day, in the Victoria’s business, we’ve had traffic pressure for reasons described, and we’re trying to drive traffic into the business through promotion. At the same time, the leadership in that business works very hard to have the most compelling product possible, and where we do, we get good result, and that allows us over time to reduce the amount of promotion in the business…It’s a balancing of four or five main factors, ultimately driving visits into the store, margin dollars and ensuring that we’re driving trial in new items. And now, over time, as we improve the merchandise or if we’ve got a key item that’s doing really well…whether it’s Bath & Body, Pink, Beauty, Lingerie. So it’s balancing a number of factors…ultimately looking to drive margin dollars in the business.”