(Bloomberg Opinion) -- Consumer stocks as a whole were slammed on Thursday amid fears about the trade showdown between the U.S. and China. L Brands Inc. bucked the trend: Not only were the retailer’s shares spared, they were on pace for their best one-day gain since 2009 after a better-than-expected first quarter earnings report.
Investors were clearly dazzled by the strong performance of its Bath & Body Works chain, which delivered booming comparable sales growth of 13% from a year earlier – a gain that’s especially impressive given that it came on top of an 8% lift on this measure a year earlier. But body lotion and bath bombs can only take L Brands so far. The health of the company depends on a revitalization of its largest brand, Victoria’s Secret, and these latest quarterly results did little to demonstrate that real change is taking hold there.
Comparable sales at the lingerie chain sank 5% in the quarter from a year earlier, owing to weak results at its brick-and-mortar stores. Gross margin was “down significantly” in the quarter from a year ago, as the brand continued to rely on promotions and low prices to draw in customers. And its reintroduction of swimwear, a reversal of an unwise 2016 decision to exit the category, doesn’t seem to be moving the needle. Executives said it is meeting expectations, but is “not having a material impact” on the business.
That leaves me badly wanting to hear exactly what John Mehas, the recently appointed head of Victoria’s Secret, plans to do to overhaul its marketing, merchandise, pricing strategy and store environments. But it sounds like I’m going to have to be awfully patient.
Mehas’s predecessor, Jan Singer, used to regularly join L Brands’ quarterly earnings calls. Mehas didn’t participate on Thursday’s call, and CFO Stuart Burgdoerfer said Mehas wouldn’t outline his strategy until an investor day event in September – roughly eight months after he arrived. It’s a similar situation for Amy Hauk, the head of Pink, the college-oriented sister brand of Victoria’s Secret. She was named to the job last August and assumed the role when her predecessor retired at the end of 2018. But we won’t know what her vision for the chain is until September, either. With the lingerie empire in such a rough patch, it seems tone deaf for the company to not have these key leaders out there sharing at least initial impressions of what needs to be done and providing an early flavor of their ideas.
L Brands has made major changes lately at Victoria’s Secret and beyond, and that may be giving investors a measure of comfort. It closed dozens of Victoria’s Secret stores and has said it will rethink its televised fashion show, an acknowledgment that the annual panty parade feels dated and not in sync with what women want.
The company is taking other steps, too, that show it knows incremental change won’t cut it. It slashed its dividend last year, closed its Henri Bendel chain and sold its La Senza brand.
But all of that, to my mind, was just clearing the deck for the new leadership to make an impact. And with these latest gloomy sales results, and scarce details about what’s next for Victoria’s Secret, we simply don’t have any assurance that those changes are coming. So, at this point, I worry that Bath & Body Works, with its robust sales and fat operating margins, is giving investors a false sense of security.
It reminds me, somewhat, of the situation at Gap Inc., where investors have sometimes been willing to forgive weak results at the namesake chain and Banana Republic because Old Navy was such a retailing rock star. But that dynamic is only sustainable for so long, as came into sharp relief earlier this year when Gap announced it is splitting into two companies. No wonder, then, that investors at Barington Capital sent a letter to L Brands CEO Les Wexner earlier this year urging him to explore spinning off Victoria’s Secret or pursuing an IPO for Bath & Body Works.
I still think there’s a chance Victoria’s Secret can stage a comeback, particularly with a serious investment in refreshed marketing and innovative, comfy garments. But until we see signs of those changes, be careful about relaxing too much in that soothing Bath & Body Works bubble bath.
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Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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