LB L Brands Inc

CEO also bets smartphones will fade; meanwhile, his sales are down

By Khadeeja Safdar 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 6, 2018).

COLUMBUS, Ohio -- Leslie Wexner strode into the Victoria's Secret store in his favorite mall here, a man in his element. Music pulsed, and around him were the fruits of a two-year revamp.

Sports bras had crowded out swimsuits. Comfy pajamas jockeyed with lacy lingerie for prime display space. A wall-size TV screen displayed strutting supermodels, a signal to the investors gathered there that the chain hadn't lost its taste for sexy theatrics.

Then the questions started: What about declining mall traffic? Where do you see online sales? Why aren't you investing more in digital?

"I get that," retorted the chief executive, 80 years old. "Now explain to me Sephora and Apple," two companies that have opened successful physical stores recently.

Mr. Wexner, an icon of 20th-century retailing, is the last man standing from a generation of merchants who brought fashion to the masses through hundreds of chain stores in thousands of malls. Most retailers say the internet has forever changed shopping. Mr. Wexner doesn't.

The internet won't kill stores, the Columbus-based billionaire says. Moreover, the fascination with smartphones will fade. "We're in the process of bouncing back from that," he says in an interview. "I don't think this is a new norm."

People crave social interaction and will seek it at places like malls. "There are times when that gets interrupted, but people want to be with other people," he says. "I've got 5,000 years of history on my side," pointing to the ancient shopping bazaars in Rome and Istanbul.

Other certainties have been proven wrong, he argues. Frozen food didn't wipe out restaurants. Landline phones didn't end face-to-face conversations.

American retailers just finished one of their toughest years on record. More than 6,000 closures were announced, surpassing the number during the 2008 recession. At least 50 retailers filed for bankruptcy, including Gymboree Corp., Payless ShoeSource Inc. and Toys 'R' Us Inc.

Mr. Wexner's company, L Brands Inc., has struggled with falling sales, too. The company, which also owns the teen brand Pink and the Bath & Body Works chain, recently disappointed investors when it revealed weak holiday results. Same-store sales are expected to fall for 2017, snapping a streak of seven years of growth. After peaking near $100 in late 2015, L Brands' share price has fallen 50%, erasing about $14 billion in investors' wealth.

"The struggle that they have is a cultural one," says William McComb, former CEO of Liz Claiborne and an investor in online lingerie rival ThirdLove. "Their entire culture is to be a slave to the physical store."

Mr. Wexner, who has been CEO of Victoria's Secret's parent company since 1963 and has no plans to retire, has been revamping the brand over the past two years, slashing the $500 million swim business, jobs and its famous catalog. Missing from the chopping block: brick-and-mortar stores.

L Brands has actually increased its store count over the past two years, leaving it with about 3,000 locations in North America, nearly half in second- and third-tier malls that are struggling to attract shoppers. It has more stores on the continent than Gap Inc., which has closed hundreds of Gap and Banana Republic stores, and almost 10 times as many as Lululemon Athletica Inc., which has about 350.

Mickey Drexler, chairman of J. Crew Group Inc. who stepped down as its CEO last summer, once shared Mr. Wexner's perspective. "I used to call shopping centers the local villages," he said at a media conference in November. That's no longer the case. "You don't have to go to the village to see other people if you are on your device, because that's the new way of meeting and seeing and having relationships."

Mr. Wexner says women want to come to Victoria's Secret stores to experience the environment and feel the products, because lingerie and beauty items, such as fragrances and lotions, are more personal to them than clothing.

Roughly 20% of sales for Victoria's Secret and Bath & Body Works are online, and Mr. Wexner says he expects that level to remain stable, even in another 10 years. "If the store environment is exciting," he says, "I'm convinced people want to go to the store."

The company has been putting more than 70% of its investments into opening and remodeling stores. Mr. Wexner stays involved in the minutiae, such as the placement of a flat-screen TV to broadcast fashion shows in the bathroom and the choice of wallpaper in the dressing room stalls. "It's about creating an atmosphere," he says.

Lingerie has been protected somewhat from online sales because fit and comfort can be hard to assess on a phone or computer screen. But fashion's shift toward garments with simpler sizing -- such as sports bras and bralettes -- plus lenient return policies have made it more viable for online sellers. With no costs for physical stores, rivals can offer lower prices.

There have been 34 funding rounds for U.S. lingerie startups from venture capitalists in the past five years, compared with seven deals in the preceding five years, according to Dow Jones VentureSource. Last year, Amazon.com Inc. launched its own line of bras priced under $10.

"With social media, we brought together a community of women very quickly," says Michelle Grant, a former Victoria's Secret employee, who launched New York-based online lingerie startup Lively in 2016. "It wouldn't have been possible 10 years ago."

Some of the online entrants are even more specialized than Mr. Wexner's stores. Lively, for example, focuses on just athleisure-inspired lingerie.

For a man who runs a company known for its eye-catching marketing, Mr. Wexner avoids the spotlight. A tastemaker for decades, he can be seen dressed in a simple dress shirt, tie and zippered vest. He may think smartphones have peaked, but he carries two and wears an Apple Watch with an Hermès wristband.

The Dayton, Ohio, native got his start in retail working at his parents' clothing shop. He opened his first store, The Limited, in 1963, with a $5,000 loan from his aunt. Upending the department-store model, he sold a limited selection of styles under his own label. He expanded quickly, and by the 1970s, he was on his way to building a national chain.

Over the next few years, he added other brands, including Abercrombie, Lane Bryant and Express, transforming many of them into mega-chains. He later sold off the clothing brands -- "Conventional apparel just wasn't nearly as exciting as it used to be," he says.

He kept Victoria's Secret, originally consisting of six stores and a catalog, which he purchased in 1982 for about $1 million. Today, Victoria's Secret is the leader with over 30% of the U.S. market for women's underwear, nearly six times the share of the next closest rival.

Mr. Wexner's forte has been to develop tightly focused product lines and carefully designed stores, and then to replicate the concept in malls across America.

"He could open 50 to 100 stores in a year and blow out a concept fast," says Rick Amari, founder of retail consultancy Columbus Consulting, who previously worked at Victoria's Secret. "He had these visions and could execute on them with laser focus."

According to Mr. Wexner, fashion brands become obsolete because the products they sell aren't compelling, or the atmosphere of the store isn't enticing. He believes clothing chains are hurting because they haven't fundamentally changed what they sell, not because of Amazon or declining mall traffic. "It's the merchandise, stupid," he often tells people.

L Brands' same-store sales grew between 2009 and 2016, but Mr. Wexner was concerned that the company had become increasingly dependent on promotions to draw shoppers to stores. Victoria's Secret's beauty and lingerie businesses were losing steam, and its customers were getting older.

In 2016, he parted ways with Sharen Turney, who had served as CEO of Victoria's Secret for 10 years, and assumed control of the business. The company warned that sales would drop as Mr. Wexner made changes. Quarterly same-store sales and profit started falling.

Shortly after Victoria's Secret aired its annual swimsuit special on TV that year, with dozens of supermodels on the island of St. Barts, he eliminated the entire category. Swimwear generated revenue, but Mr. Wexner thought he could drive more traffic to his stores with sports bras and yoga pants, which are sold year-round. Ads started running with supermodels showing off their exercise routines.

He admits he didn't anticipate the athleisure trend, one of the most popular since the heyday of denim. "I didn't see Nike and Under Armour," he says, "and I didn't see Lululemon."

Later in 2016, he hired Jan Singer, a former Nike Inc. executive, to lead the Victoria's Secret lingerie division. He had her work at a Victoria's Secret store for the first two months, sizing women who were looking for undergarments, and then report observations back to Mr. Wexner and her staff. "As Les always says, the answer is in the store," says Ms. Singer.

These days, Ms. Singer and other executives are in a jet at least once a week visiting stores. They are encouraged to drop in to other retailers like Lululemon and Apple and learn about their products and stores. Mr. Wexner himself is a big product tester. His conference room in Columbus has hundreds of bottles of lotions and fragrances, many of them from competitors.

In September, Mr. Wexner told investors at a private meeting that he is more optimistic about Victoria's Secret than he has been in years. He had the same message for investors and analysts gathered at the event in Columbus two months later, stating: "It's never been better in retail."

He says problems in the industry are largely limited to clothing chains and department stores -- which he predicted would decline years ago. "Everybody laughed," he recalls when in 1989 at a shopping center conference he pronounced the demise of the department-store model. Mall developers told him, "you're completely crazy."

Efforts in the store are lost on shoppers like Miku Konsolas, who says she has no way of knowing if Victoria's Secret is getting better because she rarely visits stores. The only reason the 28-year-old, a sales engineer in San Francisco, set foot inside a mall in recent memory was to process a quick exchange for an online order. On a website, she can "see all the inventory at once," she says.

In December, store-only sales at Victoria's Secret dropped 6%. Executives say the company's profits were hurt by heavy promotions.

"They likely need to close more of their stores over time," says David Berman, founder of Durban Capital, a hedge fund focused on retailers that is avoiding L Brands. "It is one of the best run retailers, but they are fighting against the tide."

Some investors are trying to profit by betting against Mr. Wexner, believing that his commitment to stores and malls is starting to hurt the business -- 6.9% of shares outstanding are sold short, held by investors betting they will decline in value.

Others are keeping faith in Mr. Wexner, the longest serving CEO of an S&P 500 company. "He's the straw that stirs the drink," says Michael Goody, a senior analyst at Scharf Investments, which owns about 3.8 million shares of L Brands. "This is in his blood."

Late on a Tuesday night, Mr. Wexner looped his Chevy Volt around the fountain in the middle of Easton Town Center, the open-air shopping center he helped design nearly 20 years ago.

The mall is just five minutes from his office, and he comes here often, parking in front of Victoria's Secret. "Humans are fundamentally pack animals," he says. "It hasn't changed for thousands of years."

Write to Khadeeja Safdar at khadeeja.safdar@wsj.com

(END) Dow Jones Newswires

February 06, 2018 02:47 ET (07:47 GMT)

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