One of the advantages of writing for a public audience is that readers and other investors who follow the companies and industries we’ve written about, start to send their own information. We recently posted a short thesis on L Brands on SumZero and followed-up with a LinkedIn article discussing the risk in the company dividend. So, it wasn’t a surprise when readers started telling us about their experiences with Victoria’s Secret underwear.
Our initial short thesis focused on deteriorating company financials, a challenging fashion trend away from expensive underwire bras, and the risk in the dividend. It turns out that Victoria’s Secret has a quality problem as well. We’re hearing reports that Victoria’s Secret panties don’t last very long and that the nice lace touches on the company’s underwear start to fall apart and tear after too-few washes. The comment from one of our readers that really hit home was that VS panties are both inexpensive and a bad value.
Based on conversations with competitors, we believe the company is making money on its bundles of panties. It took regular price increases for years, but pricing has been roughly flat for the past year. The company even took a recent price decrease, and is currently offering a $20 reward card with a $40 purchase. Victoria’s Secret and L Brands’ margins are decreasing as is pricing power in the underwear category. That means the company may be faced with the bad choice of losing sales due to poor product quality, or cutting margins further by investing in more-expensive better-quality product.
We don’t think this makes the company collapse tomorrow, but more than anything, Victoria’s Secret sells women on feeling sexy. We suspect that most women don’t feel particularly sexy in underwear that’s falling apart. Quality problems like this negate the huge amounts the company spends on advertising, and have a way of leading to long-term slides in product perception and sales.