Victoria’s Secret & Co.: What Does The Adore Me Takeover Mean?

The famous company behind sexy lingerie and beauty products Victoria’s Secret & Co. (NYSE:VSCO) recently announced the definitive agreement to acquire 100% of the digital lingerie brand Adore Me for around 400 million dollars (with further cash consideration depending on Adore Me’s performance), what does this say about the controversial brand and how it is trying to reposition its business?

Adore Me is a company that has grown significantly in recent years, thanks to its strong following and strong brand identity. The company has an affordable, inclusive and fashionable brand image. VSCO on the other hand, is a household name in the market and has been a giant for decades now. However, VSCO has been struggling to find a strong identity, and thus the question remains: will VSCO use Adore Me the right way? And what does this takeover mean for its core Victoria’s Secret brand? And most importantly: will this takeover be good for investors in VSCO? In today’s article, we try to answer some of these questions.

What’s so interesting about Adore Me?

First, Adore Me is a US direct-to-customer digital brand founded by Morgan Hermand-Waiche in 2010 and was officially launched in 2012. After only 2 years, they were listed as the Second Fastest-growing private retail company on the Inc 5000 list because of their impressive revenue growth. In 2013 Adore Me had only 5.6 million dollar in sales but in 2016, revenue already reached 83.9 million dollar, which allowed them to be ranked number 9 on the Crain’s list of New York’s 50 Fastest-Growing companies.

And it looks like growth isn’t slowing down. Sales are expected to reach 240 million dollar this year.

However, no figures of profitability are available, so we’re not sure if the company makes any profit. Also important to note: Adore Me is being described as a Leading Digital Native Growth Brand in intimates by The NPD Group. This is mostly due to Adore Me’s subscription model, where it charges a monthly fee for a monthly lingerie box. Consumers can fit the lingerie for 7 days and then return what they don’t like. This gives the company a unique profile, as few lingerie brands have such a service. However, it’s unclear how many subscribers actually use this service.

What could the acquisition mean for Victoria’s Secret & Co.?

According to the CEO of VSCO, the takeover will lead to synergies between the two brands, more growth opportunities for the combined company, and it will allow VSCO to reach a new target audience. And while I believe this is true, I have doubts if VSCO will use the potential benefits of this acquisition fully.

The differences in target audiences could be very interesting. Adore Me is known for its body-positive message (offering a wide variety of sizes), while Victoria’s Secret has received a lot of criticisms in the past for its traditional beauty standards and lack of inclusivity. Adore Me is more popular with teens and younger people, while Victoria’s Secret traditionally attracts adults and older generations.

The Angels lingerie company has been known for multiples scandals and controversy for degrading women’s bodies and for the use of “soft porn” in marketing photos. But the biggest and most recent scandal of the brand was in 2014 when their new collection was called “The perfect body” at a time when more and more brands started to be inclusive.

Victoria’s Secret has since then tried to do a more inclusive rebranding and at least partially successfully re-entered the heart of consumers. But, by doing so, it has also lost a huge part of its traditional fan base. So VSCO is a company and brand with a deep identity crisis.

Trying to please all consumers with one brand seems difficult, and this might not have been the right strategy.

We can say that the move to buy the online brand Adore Me, is part of VSCO’s renaissance and attempt to become popular again with younger people, and to diversify the group.

Market positioning unclear?

Ironically, when visiting Adore Me’s website, we actually find very traditionally sexy lingerie with very traditionally beauty standards being displayed. And when we visited Victoria’s Secret, we saw the opposite.

So what’s going on here? Is VSCO going to position Adore Me as the inclusive brand, or as the hot, trendy, fun and sexy brand?

It might be best for VSCO to clearly split the company in two strong brands with their own identity that speak to two different consumer groups, instead of trying to please everyone with each brand.

Victoria’s Secret could be used to speak more to traditional beauty consumers who know the brand from its flashy fashion shows, while Adore Me could be used to speak to young consumers that might care more about inclusivity and different body types. However, it might be too late for Victoria’s Secret to return to its old roots, as this might create a shock with activists.

Anyhow: right now, it seems like both brands are trying to please everyone and we really don’t see much difference in the offering and in the target audience.

Q3 earnings overview

Before ending this article, I would like to include the latest earnings report.

During Q3 2022 VSCO beat earnings, although expectations were really low. The company reported 24 million net income, while it was hoping for a breakeven result. Operating profit also beat expectations, but still declined more than 50% y-o-y. Sales also went down -9% y-oy.

These are hardly results to get warm from. The Adore Me acquisition shall close at the end of January 2023, so this won’t impact Q4 results. The guidance for Q4 has stayed the same: a high single digit sales decline.

So should you go long on VSCO?

While the acquisition of Adore Me could be a growth engine for VSCO in the long term, I’m still a bit unsure how different Adore Me is from the current Victoria’s Secret branding and positioning. The two brands seem to overlap quite a lot.

Furthermore: underwear and lingerie are becoming more and more of a commodity, with many brands offering more or less the same thing. So even if you have a well known brand with some pricing power like Adore Me, the pricing power seems to erode over time, as consumers jump from one hot brand to the next “hot brand”. We believe there are better stocks out there for investors looking to invest in the retail discretionary space.

This takeover can also be seen as quite a desperate move of a company struggling to find growth. And with the current macroeconomic backdrop, I don’t see why VSCO would outperform other, stronger brands with more momentum in the retail discretionary space.

As the CEO mentioned in the latest earnings call, Victoria’s Secret is currently seeing the negative impact of lower consumer spending, with the average purchase size going down in recent months.

“In both our stores and direct channels, average basket size and conversion rates were down in the quarter compared to last year” – CEO VSCO

VSCO’s margins are also not impressive at all (36% gross margin), its balance sheet has quite some debt (net debt of 2.6 billion) and its P/E of 9x for the next twelve months seems more than fair. Therefore, I’m not convinced VSCO is a Buy, and I’m yet to see if the Adore Me acquisition will really be accretive.