Limited Brands (NYSE:LB) reported its monthly sales for June that beat expectations but margins missed in a sign that discounts were necessary to drive sales. When we look at the brands, Victoria's Secret sales were up 6% versus estimate of 1.3% while Bath & Body Works saw sales up 7% versus estimate of 3.7%. These were solid sales trend given the concerns that millennial are shifting away from shopping malls and other affordable brands. But the stock was largely unchanged after the news because solid sales came at the expense of margins as management cited that increased penetration of clearance and beauty. In addition, the company guided low-single digit growth for July. I believe that the investors will remain muted on the stock in the near-term as there is more downside catalysts rather than upside due to the uncertain demand and volatile comp sales.
In the long-term I believe that ecommerce and international market such as China should be a bigger catalyst for the stock. On China, LB will operate VS China as a directly owned business is an aggressive strategic move having acquired 26 VSBA stores in April and plans to open 6 more in the region this year as well as two full line VS stores. Although near-term cost will be high, VS is actually very well perceived in China given the amount of VS products the Chinese consumers bring back to the country from their overseas trips. Word of mouth marketing is very effective in building the VS brand in the country and I see this trend to be helpful to VS in that its competitors are of lower quality Chinese and Korean/Japanese lingerie markers. The other foreign brands in China are European ones such as Agent Provocateur and La Perla but those are very high-end and expensive. If VS can be priced as mainstream as they do here, then I think we have a winning formula in China.
Ecommerce is another area in both the US and overseas market. Digital commerce is the most effective way to build brand equity in the long-run and will be important for VS to drive its future growth as the traffic in specialty retail declines over time. Integration of the physical store and digital experience will be an important aspect for VS to maximize sales opportunity and better connect with the consumers. We have seen examples of this thorough-out China where brands set up physical stores as a show-room and accepts orders online. Because same-day delivery is available in most of the big cities (LB's target market), consumers are indifferent between ecommerce and in-store purchase.
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