What's going on?
L Brands’ second-quarter profit beat expectations late on Wednesday – but investors had nothing sweet to whisper about flagship brand Victoria’s Secret, and the company’s shares dropped 7% on Thursday.
What does this mean?
Fashionista L Brands’ sales fell short of investors’ expectations last quarter, but its profit was higher than predicted, thanks in part to a squeaky clean performance from Bath & Body Works (another of its brands). Investors, though, couldn’t take their eyes off Victoria’s Secret: it represents over half of L Brands’ revenue, even though its sales shrank last quarter. But it seems there’s nothing less attractive to an investor than a brand’s profit falling 86% from the same time last year – with cut-price unsold items partly to blame.
Why should I care?
For markets: New trends are all the rage.
Victoria’s Secret’s misfortunes can partly be explained by shifting consumer tastes, but its challenges aren’t insurmountable, as sportswear brand Lululemon proved last year. The brand canceled its catwalk show this year and now plans to make the brand more inclusive. Until then, investors might favor “everyman” brand Dick’s Sporting Goods, whose shares hustled 4% after a stronger-than-expected update on Thursday. And investors in struggling brand Gap will hope for a similar look when they try its earnings on for size.
The bigger picture: Does this store have an ecommerce section?
Department store chain Nordstrom reported a higher-than-expected profit, and investors sent its stock up 15% on Thursday. Although the company lowered its 2019 earnings forecast, investors might’ve been encouraged by its inventory management, which means it’s less likely to aggressively discount to clear stock (à la rival Macy’s). But they may still be wary: US department store sales are expected to lose customers to ecommerce and decline by over 20% this year. The US services sector, meanwhile, grew in August – even as its manufacturing activity shrank for the first time in a decade (tweet this) – suggesting the spending trend will continue this quarter.