Victoria's Secret is basically giving things away for free - but it's not working

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Victoria's Secret Shop The Show EventJasmine Tookes attends as VS Angels celebrate the Victoria’s Secret Fashion Show airing December 2 (10/9c) on the ABC Television Network at the new VIP Runway Experience located in the NYC Fifth Avenue flagship store on November 29, 2018 in New York City.Dimitrios Kambouris/Getty Images

  • Victoria's Secret parent L Brands on Thursday reported the lingerie brand's comparable sales declined in January.
  • Victoria's Secret's is selling items at a deep discount, but consumers are not responding, according to Jefferies.
  • L Brands also announced that its first-quarter dividend would be half last quarter's.
  • Watch L Brands trade live.

The Victoria's Secret brand is broken, Jefferies says.

The lingerie brand's parent company, L Brands, on Thursday reported that Victoria's Secret's total comparable sales (including stores and direct) declined 1% in January, driven by an 8% drop in store-only comps. That was below the Wall Street consensus of 1% increase, according to UBS.

Thursday's report shows "the brands are not wanted anymore," said Jefferies analyst Randal Konik, a long-term bear on Victoria's Secret and L Brands.

"Keep in mind that comps remain negative despite very high promos, which means true brand demand is even worse than reported as some consumers buy things when they are given away for free or marked down by more than 50-75%."

The retailer's heavy promotions in January included a "buy 2, get 1 free" discount code for bras and sleep, $20 gift cards for future purchases after $40+ in spending (versus $15 rewards card with $75+ spend last January), and a free overnight tote with a $75 Angel Card purchase.

Victoria's Secret sales represented 52% of L Brand's total sales in January. The iconic brand has been under pressure over the past year as it fought to attract orders and grab market share. Konik noted in March that American Eagle Outfitters' Aerie was stealing market share from Victoria's Secret and its Pink brand. In August, RBC said that Victoria's Secret was trading at "negative value."

But aggressive promotions are making things even worse, Wall Street warns. As Victoria's Secret didn't attract enough orders to offset its margin loss, the heavy promotions likely deteriorated its total sales numbers and led to an even lower profit, UBS analyst Jay Sole said ahead of the report.

L Brands on Thursday also announced that its quarterly dividend will be $0.30 a share in the first quarter, down from $0.61 last quarter. The dividend cut shows the company is having a problem generating cash, according to Konik.

"We still see significant risk to cash flows and believe in time the entire dividend may have to be cut," he said.

Konik has an "underperform" rating and $21 price target for L Brands - 22% below where shares were trading on Thursday.

L Brands was down 45% in the past 12 months.

LBMI

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