Victoria’s Secret parent cuts guidance again and stock promptly tanks

Victoria’s Secret parent L Brands Inc.’s stock was slammed Thursday, after the company cut guidance for the second time this year, as the Pink line that targets a younger, college-educated consumer continued to stall.

Same-store sales at Pink fell in the mid single-digit range for a second straight quarter, Denise Landman, CEO of that segment, told analysts on the company’s earnings call, according to a FactSet transcript. But lingerie and lounge wear—pajamas—also saw declining sales, while the swim category, which Victoria’s Secret is exiting, continued to be a drag, she said.

Landman is leaving the role at the end of the year and will be replaced by Amy Hauk, who is currently president for merchandising and product development at Bath & Body Works, another L LB, -11.95%  business.

The company cut its full-year per-share guidance to $2.45 to $2.70 from a previous range of $2.70 to $3.00. For the third quarter, it said it expects breakeven to 5 cents a share, well below the FactSet consensus of 10 cents, with margins expected to remain under pressure and sales, general and administrative costs expected to rise more than 200 basis points.

Instinet analysts said the second cut in guidance is a dynamic that has not been seen in years and makes it difficult to overlook the clear struggles at the business.

The earnings “raised a number of red flags (severe margin contraction at LB, bloated inventory, BBW returning to margin contraction and critically issues at PINK are proving hard to ignore),” analysts led by Simeon Siegel wrote in a note.

JP Morgan said the company has not forecast a breakeven EPS quarter for more than a decade and fretted that the management transition would create business disruption.

“The LB long pitch primarily predicated upon “mindset” change at Victoria’s Secret (swim/sport/leadership) is now more complicated in our view with the turnaround timeline currently undefined at two of the company’s three concepts despite operating in arguably the best underlying consumer backdrop in over a decade,” analysts led by Matthew Ross wrote in a note.

AT MKM Partners, analyst Roxanne Meyer summed it up by saying L Brands is “no closer to bringing sexy back,” and agreed that its struggles come at a time “when the consumer appears to be its healthiest and most willing to spend on apparel and other items since pre-recession, and underscores the degree to which issues are self-inflicted.”

Victoria’s Secret has experienced sales challenges for several quarters, as customers shift their preference to less expensive bralettes, which don’t have padding, as opposed to the higher-priced ‘constructed’ bras, like the Very Sexy line that Victoria’s Secret is known for.

The brand is facing competition from the likes of American Eagle Outfitters Inc.’s AEO, -1.01% Aerie brand in the bralette category, and Amazon.com Inc. AMZN, +0.13%  which has a growing roster of private labels, is also selling low-cost bras.

“We can’t help but think the cure goes well beyond newness in lingerie, particularly since all VS merchandise categories experienced declines in merchandise margins,” Meyer wrote in a note.

The path to stabilizing the business will likely be long, she said.

‘It will take time to evolve the assortment, to wean the customer off of intense promotions, and to acknowledge that perhaps there’s a branding/image issue. In the near-term, ramping up pajamas could be an opportunity and could help mask some of the pain as sport did...but it is not the solution.”

MKM and Instinet rate L Brands at neutral with a $31 stock price target, equal to. JP Morgan has a neutral rating but lowered its price target to $26.

L Brands said it earned $99 million, or 36 cents a share, in the second quarter, compared with $139 million, or 48 cents a share, in the year-ago period. Net sales rose to $2.98 billion, compared with $2.76 billion a year ago. Comparable-store sales rose 3% in the quarter.

Analysts polled by FactSet had expected L Brands to report earnings of 34 cents a share on sales of $2.98 billion.

L Brands shares tumbled 10.7% Thursday to their lowest level since January 2011. Shares have fallen 52% in 2018, while the S&P 500 SPX, -0.18%  has gained 7% and the Dow Jones Industrial Average DJIA, -0.40%  has gained 4%.