Victoria's Secret is broken and its Pink franchise is in the 'early innings' of a long decline

Pascal Le Segretain/Getty Images

• Victoria's Secret and its Pink branch, owned by L Brands, are in the "early innings" of a long decline, according to an analyst at Jefferies.
• Increased promotional activity in Victoria's Secret has not only failed to drive sales, but has also weighed on margins.
• Watch L Brands trade in real-time here.

The decline for Victoria's Secret and its Pink branch, owned by L Brands, is just beginning, according to analysts from Jefferies.

Victoria's Secret's August same-store sales dropped 5% compared to the previous year, below the 3.8% decrease expected. That was "despite heavy promotions that drove the merchandise margin down significantly YoY," a team of analysts led by Randal Konik wrote in a note sent out to clients on Thursday.

In a previous note, Konik warned that Victoria's Secret was taking a "scary" step in promoting its "buy 2 get 1 free" Body By Victoria bras offer and selling $3 panties for its Pink members, the lowest ever price point for panties across Victoria's Secret and its Pink branch.

"Victoria's Secret brand is broken and Pink is now breaking," Konik said in an August 20 note.

Victoria's Secret's owner L Brands has been under pressure since last month. In its second-quarter earnings, the retailer beat earnings both on the top and bottom lines, but cut its full-year guidance. L Brands also announced that Denise Landman, CEO for Victoria's Secret Pink brand, will retire and be replaced by a leader from the Bath & Body Works [BBW] franchise.

Konik said that BBW is performing well, but questioned it's potential to offset the decline at Victoria's Secret.

"BBW continues to be strong, with favorable customer acceptance to new product driving [comparable sales] up 15%, well ahead of the consensus of 5%," Konik said. "However, we note that the business is cyclical, and we think it will eventually moderate."

"With little value left for VS, Pink in the early innings of what we believe will be a long decline, and BBW, while strong, not capable of supporting the entire business, we see cash flow prospects declining and believe shares can move much lower," Konik added.

Konik has a price target of $20 on L Brands, 25% below its current price.

Shares of L Brands are down 55% since the start of this year.

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