Victoria's Secret can't pin its struggles on the retail apocalypse

Victoria's Secret media relations

• Victoria's Secret and PINK, owned by L Brands, have been struggling with growth. April marked the second month of declining sales for the two sister stores.
• The two lingerie brands may be hitting their ceiling after years of dominating the lingerie market.
• Watch L Brands trade in real time here.

Victoria's Secret and PINK, owned by parent company L Brands, posted a second month of declining sales in April, but don't confuse their struggles with Toys 'R' Us or Bon-Ton stores. The sister store brands aren't victims of the retail apocalypse or Amazon's growing ecommerce presence. Rather, it's the sheer size of the business that's starting to get in the way.

"Operationally, they've done a really good job," Nomura Instinet analyst Simeon Siegel told Business Insider. "I think the problem is the misquoted law of large numbers. It's just much harder to grow at such a large size."

The stores were once almost invincible, showing growth and maintaining customer interest even as other mall-dependent retailers faltered in the years dubbed the "retail apocalypse." Producing undergarments meant the stores faced fewer losses from the rise of -commerce as the difficult sizing of lingerie meant women needed to visit stores to find the right fit, according to Siegel. Now, their own success and large market share hinders growth. A business that isn't growing is falling backwards, he said.

American Eagle Outfitters' Aerie competes in the same lingerie and undergarments market but has seen considerable success, reporting 34% comp sales last quarter in February. However, Siegel notes Aerie is a much smaller company. The American Eagle-owned brand reported a fiscal year 2018 revenue of $0.49 billion compared to Victoria's Secret's $7.39 billion, Bloomberg data shows.

Smaller businesses grow faster and with more ease, standing to gain considerably from chipping away at the market share of giants like Victoria's Secret and PINK. The law of diminishing marginal returns works against more established businesses that tend to plateau after a certain size. He suggested PINK and Victoria's Secret may be hitting a certain level of maturity in its business cycle.

"I think they're hitting their ceiling," Siegel told Business Insider. "It's not, 'what's this surprise negative factor for PINK?' It's that this surprise positive factor has reached normalization."

Along with slowing growth, the rise of technology and the introduction of the bralette also created headwinds for Victoria's Secret and PINK. There are fewer barriers to entry into the lingerie market today than a decade ago, Siegel said. Technology makes it easier for apparel startup companies to try and produce their own products. Unlike the Victoria's Secret Fantasy Bra, bralettes didn't have to be custom fitted. They were easier to produce and were sold at a cheaper price which meant suddenly, anyone could make and sell a bralette. Lower pricing and increased competition for the bralette cut into Victoria's Secret's margins, he said.

PINK and Victoria's Secret are still the biggest players in the market, but he noted the addition of many small businesses over time can cut into their market share. When you're already near the top, you have far more to lose than to gain.

L Brands is down more than 42% this year.

Markets Insider