Strategic changes at Victoria's Secret, including the decision to exit multimillion-dollar categories such as swim, are likely to cause near-term shakiness for parent company L Brands, according to one analyst.
Goldman Sachs' Lindsay Drucker Mann on Tuesday downgraded the retailer to "neutral" from "buy," and removed it from the firm's conviction list. She said last week's announcement that Victoria's Secret will stop selling certain categories, reduce its promotions and eliminate the catalog "could dampen Victoria's Secret comparable sales growth in the near term."
The company's shares were nearly 2 percent lower in early afternoon trading Tuesday.
"CEO Les Wexner's track record of successful innovation and investment leaves us comfortable that these actions will create value long term," Drucker Mann told investors. "That said ... we prefer to stay on the sidelines until the full scope and impact of these actions are better understood."
She added that the stock is likely to "tread water" until that visibility improves.
Longtime Victoria's Secret President Sharen Jester Turney, who led the division for a decade, resigned in February. She was replaced by Wexner, founder and CEO of L Brands.
Wexner announced the forthcoming changes to Victoria's Secret during L Brands' March sales release, during which the retailer announced a 3 percent comparable-sales increase. Though the timing seems "unusual" given the company's strong business trends (it's by far considered a leader in the retail space), Drucker Mann said Wexner's track record of "going against conventional wisdom" makes her confident the moves will "ultimately create value for shareholders."
That doesn't mean the transition will be smooth. Citi analyst Paul Lejuez, who called Victoria's Secret's decision to eliminate its catalog "every guy's worst nightmare," said that although the action could save L Brands more than $100 million annually, it could have repercussions.
"Eliminating the catalog completely could end up hurting sales, as the brand may be less top of mind," he said.
Brands including J.C. Penney, which revived its catalog last year, and Restoration Hardware have continued to use these print publications as a means to drum up excitement in an increasingly digital world.
Though Victoria's Secret's swim business had "trended down" over the past few years, eliminating a roughly $500 million category could be a drag on comparable sales, Lejuez said. Management said the space in its stores would be better served by focusing on its burgeoning sport category.
"Coming off a record year, now is the best time to make improvements … going from best to even better," Wexner told investors.