4 reasons Victoria's Secret's results sent investors running for the exit

A shopper carries a Victoria's Secret bag while walking on Steinway Street in the Queens, New York.
Mark Kauzlarich | Bloomberg | Getty Images

Investors bolted from L Brands' stock Thursday, as shares saw their second-worst day in 35 years of trading. The dropoff came after the parent company of Victoria's Secret's shocked the market with a weak outlook.

Less than three weeks after predicting the company's same-store sales would decrease in a mid-single-digit range this month, L Brands said it now expects that metric to log a more severe mid- to high-teens decline.

The retailer's first-quarter and full-year predictions also jarred investors, coming in well shy of what Wall Street was expecting. The company's shares fell nearly 16 percent on the news, ending the day at $48.94.

Here are five things from L Brands' report that sent investors running.

1. Victoria's Secret's decline wasn't just about swim and apparel

L Brands had explicitly warned that its decision to stop selling swimwear and most of its apparel offerings would dent its top line. But the label's weakness wasn't entirely related to those changes.

Instead, as the company pushes harder into lower-price sport bras and unstructured bralettes, sales in its core lingerie business posted a mid-single-digit drop. Meanwhile, it's struggling to drum up excitement in these two new, highly competitive categories.

"Victoria's Secret's strong differentiation in sexy lingerie, bras, and panties allowed it to continuously gain share in an already-strong category for years," Evercore ISI analyst Omar Saad told investors.

"However, as the focus has shifted towards the much-more-competitive categories of bralettes and sports bras, L Brands' pricing power and brand differentiation have faltered."

2. Promotions are hurting profitability

Victoria's Secret traded out its habitual "free panty" offers for aggressive, but more targeted, promotions designed to introduce shoppers to its bralettes and sport bras. They include a $30 athletic pant with the purchase of a full-priced sport bra.

While these deals did encourage shoppers to try new products, CFO Stuart Burgdorfer admitted management is still trying to figure out the right balance between driving store visits and volume.

3. Two of the company's top performers are slowing down

Strength at Bath & Body Works and the teen-focused Pink brand have helped L Brands offset declines at Victoria's Secret. But both of these businesses are now sending warning signals.

After recording a 5 percent comparable-sales gain in the fiscal fourth quarter, Bath & Body Works is now on pace to report a mid-single-digit decline in February. Those stores have not experienced a comparable-sales decline result in nearly three years.

And while Pink continues to be one of the company's best categories, its growth has slowed from years of double-digit gains to its second quarter of high-single digit expansion.

"We believe this deceleration suggests that the concept is nearing saturation," Jefferies analyst Randal Konik said. "As competitors such as Aerie pick up steam, Pink will lose market share."

4. Swim is taking a big chunk out of sales

L Brands CEO Les Wexner discontinued Victoria's Secret's swim line because the category wasn't growing. Yet while the company and several analysts contend that is the right decision for the long term, it nonetheless eliminated roughly $500 million in annual sales.

The missing revenue from swim and apparel will take $160 million away from Victoria's Secret during the first quarter and pressure its comparable sales by 9 percentage points, the company said.

"We believe that the company significantly underestimated the size of the speed bump that the exit out of swim/apparel combined with the lower [promotional] messaging would cause," BMO Capital Markets analyst John Morris said.