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Victoria’s Secret saved cash this year by canceling its annual televised fashion show, which should help the ailing women’s underwear retailer after a holiday season that MKM Partners says was probably the most promotional since the recession.
Canceling the show was one of many steps Victoria’s Secret parent L Brands Inc. LB, -0.71% has taken to turn around the brand.
“[D]espite weakness at both Pink and Victoria’s Secret, we believe [L Brands] results are being helped by lower marketing related to the absence of the fashion show this year, cushion from exiting Henri Bendel and La Senza in Q4 last year, incremental categories (luxury lingerie) which are priced higher even at excessive discounts, and ongoing strength in sales and margins at Bath & Body Works,” wrote Roxanne Meyer, managing partner at MKM.
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MKM thinks this holiday season was likely the most promotional since the Great Recession of roughly a decade ago, which will put pressure on margins even though Mastercard SpendingPulse data shows that sales grew 3.4% during November and December.
Meyer says promotions were everywhere throughout the holiday shopping season, from “Black Friday Week” to “Cyber Week,” and retailers didn’t let up on promotions due to concerns about the shortened holiday shopping season. In addition, there were merchandise issues at some retailers and the shift to off-price retailers like TJX Cos. TJX, +0.62% and Ross Stores Inc. ROST, +1.34% that competing retailers had to deal with.
“The deals we saw on designer product (on down) were shocking and reflected the extent of dislocation, particularly in the department store segment, which carried over to select mall-based retailers and online retailers as well as those that were forced to compete on price for the same merchandise,” she wrote.
Traffic at Victoria’s Secret was the “softest” that MKM said it has ever seen.
MKM rates L Brands shares neutral with a $17 fair value estimate.
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L Brands has an average hold rating and $19.88 price target according to 28 analysts polled by FactSet. Shares have fallen more than 29% in 2019 while the S&P 500 index is up 28.5%.
Michael Kors parent Capri Holdings Ltd. CPRI, +0.05% was hurt by exposure to the department store channel. And Urban Outfitters Inc. URBN, -0.65% could miss margin expectations because of promotions at the namesake chain and Anthropologie.
On the other hand, Lululemon Athletica Inc. LULU, +0.35% continues to be an analyst darling by avoiding deep discounts on most merchandise.
“Strong store traffic, product newness and stronger personalized emails likely supported ongoing momentum,” MKM said.
MKM rates Lululemon shares buy with a $258 price target.
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Lululemon stock has nearly doubled in 2019, up 90%. Shares have an average overweight rating with a $244.15 price target according to 31 analysts polled by FactSet.
For 2020, MKM cites ongoing China tariff uncertainty, weak U.S. tourist sending, pressure from “disruptive” business models and the 2020 election as headwinds. But consumers are healthy, Meyer said, and where there are brands that provide innovative product with convenient multi-platform shopping capabilities, they will spend.
“In our view, 2020 is a critical year for execution, with many challenged retailers experiencing CEO changes in 2019,” MKM said. “We anticipate store closings to be ongoing, but measured, as REITs help keep stores afloat. We continue to view the athletic and off-price segments as best positioned to gain market share.”
