'Giving stuff away for free won't work' for Victoria's Secret and Pink

Victoria's Secret Shop The Show Event

Dimitrios Kambouris/Getty Images

Josephine Skriver, Elsa Hosk and Jasmine Tookes attend 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.

  • Victoria's Secret and its Pink brand's aggressive promotions are pulling demand forward and hurting long-term pricing power, Jefferies says.
  • Victoria's Secret, together with Pink, is selling cheaper and cheaper bras and panties and yet the consumer still isn't responding, according to Jefferies' tracking of data.
  • As part of L Brands' third-quarter earnings, the company announced Victoria's Secret CEO Jan Singer was on the way out.
  • In August, the company said Denise Landman, Pink's CEO, would retire at the end of the year.

Victoria's Secret and its Pink brand's aggressive promotions won't solve the problem of its declining popularity Jefferies says.

Last weekend, Victoria's Secret offered a "Buy 3 Get 3 Free" sale. However, blowout promotions like that only pull demand forward and hurt long-term pricing power, according to Jefferies analyst Randal Konik. Advertisement

"Giving stuff away for free won't work for VS/PINK," Konik, a long-time bear on Victoria's Secret and its parent company L Brands, said in a note sent out on Monday. "We believe investors are underestimating just how impaired these brands are and thus how deep/long the issues will continue be."

By Konik's tracking of the data, Victoria's Secret, together with its Pink brand, is selling cheaper and cheaper bras and panties and yet the consumer still isn't responding.

"The infrastructure and rent expenses associated with the VS/PINK businesses cause massive incremental pressure on profit margins and that creates real earnings risk still for the entire LB earnings model, on our estimates," Konik said, adding that the L Brands' earnings before some items could get cut in half.

L Brands' third-quarter earnings missed on revenue but topped on profits. The company also announced that Jan Singer, CEO of Victoria's Secret, had resigned. Tory Burch's president, John Mehas, will replace Singer in early 2019.

That wasn't the only management change to take place at Victoria's Secret recently. In August, the company announced that Pink CEO Denise Landman would retire at the end of the year and be replaced by Amy Hauk, head of merchandising and product development at Bath & Body Works.Bath & Body Works has been a bright spot at the company, contributing 13% same-store sales growth in the third quarter while Victoria's Secret was dealing with a 2% same-store sales decline. But Konik said that BBW is near a cyclical peak as promotions at the shop are beginning to accelerate.Advertisement

Konik has an "underperform" rating and a $21 price target - 34% below where shares were trading Monday.

L Brands was down 46.57% this year.

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