Victoria's Dirty Little Secret
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What is the connection between legal briefs and fishnet stockings? Sounds risqué but Victoria’s Secret is being sued by its fishnet stockings designer and supplier, New Jersey company Zephyrs, for $15 million and charged with false advertising, unfair trade practices, consumer fraud, deceptive trade practices, breach of contract and unfair competition.
The Secret Revealed
The 28 page verified complaint filed in Ohio where parent company Limited Brands (NYSE: LTD) is headquartered summarized that Zephyrs, which designs high quality lingerie, hosiery and women’s accessories, supplied Victoria’s Secret for ten years with Italian made fishnets and thigh hi stockings. The parties had a Master Sourcing Agreement (MSA) in place and Zephyrs alleges Victoria’s Secret violated it by contacting Zephyrs’ suppliers directly and making the stockings in Canada and selling the lower quality knockoffs with photos of the Zephyrs products on the packaging. Another more serious charge is that Victoria’s Secret attempted to pressure Zephyrs into ceding its patents, proprietary technology and intellectual property by delaying processing Zephyrs' orders until it signed an amended MSA.
In a little hyberbole Zephyrs’ lawyers charged in the document that, “the public have been, and are likely to continue to be damaged and harmed by the Defendants literally false and/or misleading conduct.” Are they speaking of a fishnet failure to perform or a thigh hi malfunction?
But seriously, while a settlement or payout would be a drop in the bucket for Limited Brands, the equivalent of selling half a million brassieres, if true why would Victoria’s Secret feel it necessary to pursue this kind of business practice in the first place?
So far, since the filing on August 8, there has been little to no mention of the suit in the business press except for Huffington Post, Women’s Wear Daily and fashion blogs. But they are abuzz especially with the opportunity to display the complaints’ exhibit photos. I have to say the difference in the quality of the stockings is apparent even on the blog photos.
The more worrisome implication would be the rationale behind Victoria’s Secret alleged attempt to have Zephyrs give away its intellectually property and patents and risk an Apple vs Samsung type suit from a supplier with which it had good relations for ten years and enjoyed sales of $120 million of the Zephyrs products. I see chinks now in Victoria’s Secret armored corset. The complaint explains why Zephyrs thinks Victoria's Secret would strong arm a company a fraction of its size (page 2 section 5.) ” However, the Defendants, (VS) are apparently now facing flat or declining profits, significantly higher operating costs, increased debt and are closing and/or consolidating some Victoria’s Secret’s stores. See selections from Defendant Limited Brands, Inc. First Quarter Earnings Presentation, May 16, 2012, attached hereto as Exhibit 2.”
Limited Brands reported 2Q earnings on August 15 and beat analyst’ estimates by $0.02 raised guidance and also reported that same store sales in July were up 12% for Victoria’s Secret and 17% for their Bath and Body Works stores. But, of note 2Q net profit was down $89 million from 2Q 2011. And it’s true the company has closed 373 Victoria’s Secret stores in the last five years for being unprofitable.
Limited Brands has five main brands, Victoria’s Secret, Victoria’s Secret Pink (more trendy intimates for younger shoppers, La Senza (Canadian version of Victoria’s Secret), Bath and Body Works and Henri Bendel for a total of 2639 stores in the US and Canada as well as reaching 390 million customers through the much treasured catalogs and its websites.
Limited Brands has several competitors in its intimates space: VF Corporation (NYSE: VFC), Warnaco Group Inc (NYSE: WRC), Maidenform Brands Inc and Hanesbrands Inc. None of these however has the sizzling appeal for its customers that Victoria’s Secret has. It basically owns this niche. Limited Brands is number two behind VF Corporation in market cap at 14.03 billion. VF Corporation’s P/E is 18.42 compared to Limited’s at 20.33. It only competes with VFC on yield with 2.10% from Limited and 1.90% from VF Corporation.
Speaking of yield, Limited Brands has paid out for 151 consecutive quarters and a special dividend of $1.00 went ex-dividend on August 23. In total it has paid out over $13 billion to shareholders over 12 years. With these dividends and share repurchases the company has long been considered shareholder friendly.
What’s the Takeaway
Short shares have been increasing by 55% in the period from July 31 to August 15. The company has also been having problems with the La Senza stores in Canada taking off. The quarterly revenues growth year over year is at -2.40% and the quarterly earnings growth is at -37.80%. The company holds 4.60 billion in debt compared to 1.29 billion in total cash.
Although the suit may be ‘small potatoes’ to Limited Brands a trusted supplier’s business is in trouble and if the charges prove true and at least the false advertising charge seems to have a foundation (no pun intended) I would hold off on Limited and see what shakes out. Limited has run almost 25% in the last year and with the debt and loss in 2Q net profits versus a year ago, no matter how red hot the styles, this is not cool.
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