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Victoria’s Secret Is Fading Into Obscurity, Jefferies Warns

Janet Freund

(Bloomberg) -- Victoria’s Secret lingerie is sinking into irrelevance, Jefferies analyst Randal Konik said on Thursday after the company’s parent reported a drop in holiday sales.

L Brands Inc. reported Thursday that quarter-to-date comparable sales at Victoria’s Secret sank 12%, while store traffic was down by the mid-teens -- worrisome signs for a company that’s struggled with changing consumer preferences. Increased promotional activity also crimped margins. Pink, which is the company’s young adult-focused brand, reported that same-store sales plunged by a mid-teens percentage rate.

Konik also said Pink’s weak results implied the brand “is not wanted any longer.” In a meeting with investors last year, L Brands executives touted the brand as a key part of its growth strategy.

L Brands representatives didn’t reply to a request for comment about Konik’s statements. It’s not the first time the analyst has strongly recommended against investing in L Brands.

Despite the report, L Brands shares rose as much as 6.3% on Thursday. Konik said bullish investors may be betting that the performance at Victoria’s Secret and Pink is “so bad it will force a split” of the brand from the better-performing L Brands company, Bath & Body Works.

B. Riley FBR’s Susan Anderson agrees with that assumption, writing that Street expectations for a Bath & Body spinoff have increased. She estimates the Bath & Body Works unit could be worth $30 alone as a “best-in-class retailer.” She rates L Brands buy, with a 12-month price target on the company of $30.

Konik said Bath & Body Works results, however, are “not as good as you think.” While comparable sales rose 9% during the holiday period, he highlighted deteriorating margins. This trend is “a canary in the coal mine, as it tells you that the peak of cycle has been reached” for the brand.

Konik rates the shares underperform. He reduced his price target to a Street-low $12 per share, from $14. He predicts Victoria’s Secret and Pink will “collapse and start losing money” while Bath & Body Works sales will deteriorate and margins decline. That will result in lower profit and a cut to the dividends, he said.

(Adds B. Riley FBR comments in sixth paragraph)

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jonathan Roeder

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