Victoria's Secret Should Stop Pushing Up Prices

NEW YORK, United States — Remember when J.C. Penney Co. Inc. decided to abruptly get rid of the coupons customers loved, quickly wiping out more than $1 billion in sales and alienating loyal shoppers? The 2013 episode, led by former Apple Store chief Ron Johnson, was an instant-classic case study of what not to do in retail.

Apparently not everyone was paying attention.

Victoria's Secret parent L Brands Inc. is the latest retailer paying a price for trying to break consumers of their addiction to heavy promotions. The company's stock tanked more than 17 percent on Thursday after it reported poor quarterly results, for which it blamed weakening traffic at shopping malls.

L Brands warned comparable sales could suffer double-digit declines in the current quarter from a year earlier. Much of the pain comes from Victoria's Secret, whose February sales might end up down 20 percent from a year ago. The company suggested its sales declines could ease up in the second half of the year.

Don't count on it. I hate to break it to L Brands, but a big part of the reason people aren't shopping at Victoria's Secret is they're no longer getting catalogues and coupons encouraging them to do so.

Competition in the lingerie business is rising, with Amazon.com Inc. and other online players eating into L Brands's market share. In a bid to preserve its profit margins, Victoria's Secret is doing pretty much what Johnson did at J.C. Penney: pulling back on discounting and promotions for many of its core offerings. But that is leading to lower shopper traffic and sales.

On Thursday's earnings call, L Brands CFO Stuart Burgdoerfer defended the company's position, saying it wouldn't respond to sales declines by going back to spraying customers with "simple, not-brand-building coupons."

In fact, L Brands has steadily been raising prices, even as Forever 21, H&M, American Eagle and other fast-fashion retailers offer similar products at lower prices.

There is one bright spot for Victoria's Secret: Brisk sales of new, millennial-focused products such as sports bras and "bralettes," bras without underwire and padding that run counter to the company's legacy business of sexy lingerie and  push-up bras.

The sportier categories are selling well because they're in fashion with younger consumers who increasingly prefer more comfortable undergarments. But the other side of the demand equation is that, at $20 a pop, bralettes and sports bras are also much cheaper than Victoria's Secret's traditional padded bras, which usually run between $50 and $60.

The growing popularity of these new products is a growing threat to Victoria's Secret's business. Every 10 percent shift to bralettes from traditional bras equates to a 6 percent hit to bra sales and a 2 percent hit to total revenue, Konik estimates. If bralettes reach 20 percent of the brand's bra business over the next two to three years, then Konik reckons total brand sales could drop by 12 percent.

If he's right, then L Brands shares should be even lower than they already are.

Two-thirds of analysts followed by Bloomberg have lowered their 12-month price targets on the stock in the past month. Yet L Brands still trades at 14 times forward earnings, around the same multiple as competitors such as Urban Outfitters Inc. and even higher than American Eagle Outfitters Inc. and Ascena Retail Group Inc., which both trade at around 11 times forward earnings.

A lot of retail strategy comes down to the creative side of things, like fashion and fit. In this case, where L Brands goes from here is a simple matter of math and history.

By Shelly Banjo; editor: Mark Gongloff. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.