Motley Fool Hidden Gems Investing - The Rise and Fall of Victoria’s Secret

Episode Date: October 20, 2024

When a retailer falls, it falls quickly.  Lauren Sherman and Chantal Fernandez are co-authors of “Selling Sexy: Victoria’s Secret and the Unraveling of an American Icon.” - What Les Wexner understood about American consumers. - The new competition for Victoria’s Secret. - Lessons for retailers from Abercrombie & Fitch. Companies discussed: VSCO, ANF Host: Mary Long Guests: Lauren Sherman, Chantal Fernandez Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. The thing about Wexner is he himself is not creative. He wasn't a creative visionary. He understood how to co-opt creativity and scale it. And every idea he had was based in the practical. i'm ricky mulvey and that's lauren sherman a fashion correspondent at puck and the co-author of selling sexy victoria's secret and the unraveling of an american icon sherman and her co-author chantal fernandez caught up with my colleague mary long for a conversation about why retail companies have a tough time staying at the top the turning point for victoria's secret and why abercrombie and fitch is thriving in 2024

forth. Before we get to the book, you both are coming off like a whirlwind couple of months, in part because of the book, for sure, but also because there's been one fashion week after another. Any business takeaways from those trips? Like what are the high-powered people of fashion talking about? They're real worried about their striking money. Nobody's buying anything. I mean, people are buying billions of dollars a year of clothing but it feels like they're not and so everybody's real worried yeah there's like a luxury slowdown right now that's giving everyone a lot of stress and they're like firing all their creative directors as a result trying to mix things up i just wrote about like vic's the

the top spenders in luxury and how these brands are now desperate to get them to spend more and more because more kind of aspirational quote-unquote regular luxury shoppers are are cutting back. So it's a really kind of stressful, interesting time in fashion. And I actually think that there is, you know, okay, a trend of the past several years could arguably be like, or not arguably would be e-commerce and almost like the democratization of fashion in some ways, just because of like heightened accessibility. And Victoria's Secret is a great case study in like that tension between trying to have an elite brand, not a luxury brand, but an elite brand, but also something that's accessible. And there are moments where they arguably do that well,

and moments when they arguably don't do that as well. So we can kind of use that as a segue to talk about the book itself. So much of the Victoria's Secret story centers around this character, Les Wexner. So he's the man who purchases Victoria's Secret in 1982 and arguably becomes one of, if not the dominant player in American retail. He opens his first store, limited in Ohio when he's 25 years old. And you all point out in the book, a stat that Wexner himself loved to put out there, $1,000 investment in the company at that time, 1963, I think it would have been, would become $45 million 50 years later. What does Les Wexner understand about the American consumer, especially at his height? So much, man. He really cracked us.

I think he understood sort of the signals of value in our brains and what would get us excited to spend a little bit more than we would spend at a Walmart or a Target. Like what would feel like a cheap thrill? What would signal enough sort of a trend that we may recognize from somewhere but also be accessible, delivered in good enough quality at the right price or the combination of all of these things? And I think he understood, you know, he didn't invent specialty retail, this idea of concentrating on a category or an aesthetic, a style in his stores, the Limited Express, Bath & Body Works, Victoria's Secret. it. But he really perfected that model and used it to his advantage on an inventory supply chain side to maximize that kind of value per price and create that special in-store experience that felt unlike anything else in the mall. We call it retail theater. He was doing that before a lot of other people. I mean, he wasn't doing that in the 60s. It took him a while to

get there. But once he understood the value of that, I think he, he really leveraged that to create these moments where you were excited, just going to the store itself was fun. And almost like the body spray was a souvenir from that experience. And that's an idea that extends so much across fashion and luxury today. Yeah. I think in, in business schools, they teach this idea of price value equation. And it sounds like kind of schlocky marketing talk, but MBA talk. But the reality is it's like, are you getting your money's worth? And he realized when his parents had a store called Leslie's in Columbus where they sold women's clothing and it was really high quality stuff. And he was working at the store when they

were on vacation one, I think over like a holiday break or something. And he realized, oh, you know what? Like this stuff is really expensive for what it is. And if you sold stuff that was a bit cheaper and maybe the quality wasn't as good, but it felt like you were getting more for your, for your dollar then. And as Chantal said, cheap thrills. So like a fun, good thing that was also not crazy expensive. And he just totally nailed that equation on so many times over his career. And it's something that I think every brand is chasing, no matter how much you actually charge for, for what you buy. And he really understood that. And he was one of the first, uh, U S retailers to produce in Asia and Hong Kong specifically, but then all over Asia and to

take that leap because at the time it was still A, seen as like not good for the U.S. economy to do that, but B, seen as like poor quality to produce overseas. And he took that risk and it really paid off. So while Wexner is building this retail company in Columbus, Ohio, if you go to the West Coast, it's around 1977 and you have two married entrepreneurs, Roy and Gay Raymond. They're in San Francisco. They already have a sex toy catalog called Zandria. And they come to realize in part because of this catalog that there aren't too many places for women to buy lingerie. You can kind of get boring basic stuff at the department store or you can go into a racier, more high-end place, but there's not really an in-between option.

So they opened the first Victoria's Secret store. Take us inside that first store. What was it like and why did it work? yeah lauren talk about the decoration which is like my favorite part of this but it just the idea it's so fun to think about what it must have been like to walk into a store like that which was unlike anything else and especially compared to the department stores which were so kind of clinical and stayed and but yeah lauren knows more about this part so the the founders gay and roy roy in particular had very expensive taste and so they would buy

like antique victorian furniture to fill these things they actually were spending a million dollars per store to outfit them so this is like the early eight the the late 70s early 80s and it was very much like supposed to look like sort of Victorian boudoir, whatever that looks like, but just like really beautiful furniture, really beautiful rugs, furnished like the fanciest home you could ever imagine. And also this was the era of like late seventies. There was a lot of references to the forties, which would reference the early turn of the century. So it was the first time that vintage was a real thing like women in the 70s started wearing clothes from the 40s sometimes things like that and so they kind of really downs came back into style like there

had been a period where women weren't wearing bras as much but now lingerie that had this kind of like victorian you know british designers all of that stuff was coming back into style so they rode that too which was super interesting so then you know you mentioned within four years Victoria's Secret, this early iteration of Victoria's Secret, has generated around $6 million in sales, and that's with just four stores and a mail order catalog. A year later, the store's on the brink of bankruptcy, and that's in large part because of Roy's spending habits. So then you have Les Wexner, who enters the picture, and he comes knocking. He offers the Raymonds $1 million in limited stock, no cash, but no one in Wexner's

inner circle really wants him to do this. We know how the story ends. Wexner buys Victoria's Secret, it. But why do that rather than just replicate what the Raymonds already have going on? I think he understood the value of what they had built. And also, I mean, it's a great deal for him. But there was the catalog, which already had this national reputation and aesthetic, the mailing list, you know, a theme around Wexner is he's interested in scale and speed. And I think he understood the value of the time he could save by acquiring this business and then certainly, you know, revolutionizing it. But there was, he was always interested in growth and speed. And I think he recognized there was a value there in what had been built in the reputation already,

which it had only been, you know, less than a decade, but there was, there was a recognition there, especially with the catalogs that went beyond the Bay area. Yeah, I would second that. I think the list that they had was really valuable. We see people acquiring companies just for their list of emails all the time. And I think it was a similar thing. And also thing about Wexner is he himself is not creative. He wasn't a creative visionary. He understood how to co-opt creativity and scale it and every idea he had was based in the practical even the way he approached trends and merchandising and things he himself he wasn't making those decisions he was using sort of tactics to make those decisions so in the case

of this, like the product that was in the stores at Victoria's Secret prior to Wexner acquiring it was actually quite expensive. There was like a set, again, this is like 1982 or whatever. There was $2,000 at the time. So there was, it was sort of like the Barney's New York of lingerie. It was really high end stuff. And he immediately started producing cheaper product, $20. I won one um executive said remembered a 20 red teddy that just like horrified all the old old guard so he was quickly replaced the product itself but that sort of idea and when he replicated and scaled the the interiors of the store so much of what he did with them came was inspired by those original interiors, but he wasn't buying antiques to put in them. It was all about how to do it in

a cheap, cheerful way. And so that was one of the most interesting things about him when you look at him as a merchant. And we mentioned in the book, he wasn't a typical merchant. He was a merchant for sure, but it wasn't about his gut instinct about whether or not something like a piece of clothing was good or bad. It was about his gut instinct of how to find that piece of clothing, if that makes sense. Like it was about the process, not about the thing for him. And that is the key to his success throughout his career. When do we hit peak Victoria? Depends on your metrics for that. I think, you know, revenue and profit wise, it wasn't until like 2015, 2016. I think for a lot of people my age, like millennials, that early 2000s Michael

Bay era is really frozen in people's minds as sort of peak Victoria's Secret when the show first started. For younger people, maybe it's the years that Taylor Swift was so closely aligned with the brand, which is funny to think of now because she doesn't do that kind of thing at all with fashion brands. So it's interesting how there's different generations of it. And there's some women who were like, oh, I remember the British years in the 90s. And that was what I loved. So it's part of what is so fascinating about this brand. It's been connected to the zeitgeist in all these different ways through so many different eras. And that's really unprecedented in like a fashion retail business. One of the things that stuck out to me in reading this is like, it feels as though

for so long. Victoria's Secret is growing, growing, growing, building. And then the downfall just kind of happens like this. Chantel, you mentioned this. In 2015, Victoria's Secret and Pink kind of hit their peak profit and revenue. They're responsible for more than 40% of intimate apparel sales in the US. They're doing $8 billion in revenue each year. And then it all kind of comes crashing down. And there's a lot culturally that contributes to that. You have Wexner's associations with Epstein. You have changing ideas, like the same kind of sociocultural ideas that kind of catapulted Victoria's Secret. Then that's kind of starts to change to include body positivity. I don't want to undercut the cultural aspects that led to the unraveling of this brand,

but from a business perspective, what went wrong? I think part of an important thing to remember is this is something that is unique or not necessarily unique, but is inherent to retail. If you think about the overhead costs of having 1,000 stores, $8 billion worth of sales, you know, when things start to go wrong, the numbers show it quickly because this is an expensive business to run and inventory piles up quickly. So you can very, very quickly go from success to a problem that is just growing every day. And I think it's really interesting thinking about when did the problems really start to show themselves. Lauren and I feel like it began even before the company peaked and this bralette trend emerged that was sort of an existential threat to the idea of underwear of bras that Victoria's Secret had sold us for so long underwire you know lined molded cup bras that was their bread and butter

and for many women the idea that you would go to work without one of those bras on was crazy and then that started to really shift when women were saying I want more comfortable bras you know almost like t-shirt kind of camisole type things. It started as sort of like a Coachella type trend. And then I think it really began to change the way women thought about their underwear drawers. And that was a really tricky idea for Victoria's Secret to manage, both from an inventory perspective. The push-up underwire bra is a high margin product. They don't want to sacrifice that business. And then from a marketing perspective, what does that mean about this sort of sexy idea that they've been pushing for so long. So they sort of ignored it

or underplayed it, didn't embrace it. And I think they were so dominant in the market that they felt that they could sort of control that trend and, and, uh, soften it. Yeah. The, the, like not paying the sort of ignoring the rise of the bralette is like a symptom of the greater disease within the company. And it's a great, everybody during this journey that we've been on with this book has asked, what was the turning point? And we always mentioned the bralette because it just foreshadowed so much else. It showed the weaknesses in the business, a business that looked really strong from the outside. It showed a lack of understanding of what was happening in the culture. It showed a lack of understanding of what had happened in

the culture. It was, it's sort of the perfect example of where they started to not be with the program. And so, yeah, it's, it's fascinating to think it comes down to this, this little piece of fabric, but it really does. It represents so much. But then you think, you know, could they have weathered that if they had made more investment in their e-commerce business earlier, or if they had worked to modernize their marketing earlier, or if their active wear, athletic wear business was stronger? It's like, you know, would it have been so consequential if not for these other things? You know, when Sharon Jester Turney, who had been the CEO for nearly a decade left in 2016, then Wexner took over and was managing the business day to day

for the first time in many years. And he shut down the catalog. You know, he cut swimwear to sort of, again, things that don't seem so significant, but it came at a really bad time. It weakened a business that was already struggling. So all of these things sort of combined together. And that was even before we get to the Jeffrey Epstein of it all and these other reputational hits that just added on to these problems that were already brewing. But I don't think that any of those sort of media narratives would have been as damaging if the brand wasn't already financially struggling. For all the trouble that Victoria's Secret has faced in more recent memory, this is still

a company that is still the largest seller of women's underwear in the U.S. So sales have plummeted. they went from $8 billion at that peak that we mentioned in 2015 and 2018 to closer to $6 billion in the past 12 months. What brands stand out as Victoria's Secret's chief competition today? I think Lauren and I both agree that it's Skims, even though there's a lot of really interesting challengers. Aerie has been, you know, Aerie is much bigger than Skims and has been growing for many years. But Skims, the Kim Kardashian brand, is the biggest threat, I think in terms of cultural cachet and influence and ability to kind of create these buzzy

marketing moments that Victoria's Secret was once an expert at and kind of speak to these cultural ideas about what is sexy now, you know, throughout the book, there's executives at different eras who are, you know, usually women thinking, what is sexy now? How do we speak to that? How do we reflect that? And I think Skims is sort of nailing that with their color palette, with their visual language. They have a really strong visual language, which Victoria's Secret once had and was one of the assets of the brand identity. And yeah, I think Skims punches above its weight in

terms of cultural influence. And Skims is, there's been rumors that they're looking to IPO in 2025. You also have Rihanna's lingerie brand, Savage Fenty, which was talking about an IPO. And then I guess that kind of disappeared and didn't happen. When does or doesn't it make sense for these smaller than Victoria's Secret, smaller fashion brand lingerie companies to go public or to not go public? Well, so the big reason to go public is to raise capital, as you know. And the thing about retail and this type of retail in particular is you really, way to become bigger is to have more distribution, to open more stores. Stores are extremely expensive to open. So right now Skims has raised tons of money. They only have four stores. They're never

going to have 600 stores the way Victoria's Secret does, but they need many more stores to be able to scale to, you know, though I think they're crossing the billion dollar in sales line this year, or they have already crossed it to get to two or $3 billion, which is probably like the right size for a lingerie business at this point in, in retail, you, they have to open more stores. So the IPO would help with that from every, all the reporting we've done, they have a pretty healthy EBITDA margin. They don't have crazy discounting like a lot of their competitors at skims. So IPO-ing would be really helpful. The challenge with it is that the market doesn't respond well to retail IPOs for the most part. They might be interested in it for a bit

and then they sort of fall off. But retail is very cyclical and that doesn't really work with Wall Street. So especially now, if you look at the last couple of years, there were some crazy IPOs during the pandemic. Many of those stocks are now penny stocks. Allbirds is worth $85 million. Four years ago, it was worth $4 billion or something like that. It's crazy. So the challenge is, yes, you can raise some money and it's not institutional or at least it's public. So it's a little bit, you can become more liquid, but the problem is keeping up with it is very, very hard because the street expects increases in sales and like a certain level of profitability every single quarter. And that can be really challenging in retail. So we'll see. I mean, I know that

Skims was originally planning on IPO-ing in 2024. And then in the background, they sort of whispered to people, oh, we're not doing it because of the election, et cetera, et cetera. But we'll see if it happens in 2025. It might be unnecessary given how much money they've raised and how big they want to be. But on the other hand, it will bring with it new challenges. As fickle and cyclical as consumer tastes are, retail turnarounds do happen. Abercrombie & Fitch is a great example of that. So, okay, about a month ago, Victoria's Secret brings on a new CEO, Hillary Super, who previously had been at Rihanna's lingerie brand. She also led Anthropologie,

which is owned by Urban Outfitters. What do you think Hilary Super needs to do to make an Abercrombie-esque turnaround out of Victoria's Secret, if that's the goal? Well, I think the lesson from Abercrombie, which again is a much smaller business and has a more flexible category options. It's not so focused in intimates.

I think the lesson from Abercrombie is really focusing on the product quality. There's this frustration across the market for consumers, for non-luxury consumers who feel like everything's gotten so expensive. And I think Abercrombie has succeeded because it's, again, it's hitting that price to value like sweet spot for people who don't want to shop from Shein, but also are confused as to why everything, you know, on Saks Fifth Avenue.com is so expensive and wanting something in between there that is trendy enough, sort of understated. I think the other lesson from Abercrombie is that they chose a very specific target customer, someone early in their career or young parents with disposable income, but still wanting to feel youthful and went after

that customer with a very specific strategy about long weekends and how they go to weddings and concerts. Like when do they actually dress up? And Victoria's Secret, what I would want to see is a focus on product. They have so much stuff in that store. I think a lot of customers don't even know that they've expanded their size range. And comfort is such a huge motivating factor for buying bras and underwear these days more than it was before. So why not kind of create a reputation around that? There's no word of mouth around Victoria's Secret. And that's something that brands can help spur through TikTok and influencers and all these things. So I'd be interested to see to see that strategy. But that's not historically been something Victoria's Secret did. It was,

we sell hope, not help. It was never about the nitty gritty of the products. But I think that's a cultural shift that they can embrace and use to their advantage. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.