- Victoria’s Secret accounted for 20% of Lankan apparel exports in 2019
- To affect country’s apparel exports and margins of top apparel exporters
- Victoria’s Secret accounts for a considerable portion of sale portfolios of Brandix and MAS
- Analysts say it would be difficult to find an alternate buyer as lucrative as Victoria’s Secret
By Nishel Fernando
A potential bankruptcy filing by the US-based premium lingerie brand Victoria’s Secret (VS), which accounts for around 20 percent of Sri Lanka’s apparel exports, is threatening the country’s overall apparel export performance and the bottom lines of top apparel exporters.
Earlier this month, retail-focused private equity firm Sycamore Partners pulled out from a deal to purchase the majority stake of VS for US $ 525 million, from VS parent L Brands, amid the COVID-19 pandemic taking a massive toll on the retail sales.
Speaking to Mirror Business, Capital Alliance (CAL) Group Senior Vice President – Research Head Udeeshan Jonas said that Sycamore’s withdrawal from the takeover deal would escalate the bankruptcy worries on VS, which would impact Sri Lanka’s apparel exports and margins of top apparel exporters in the country.
L Brands recently announced that a quarter or about 250 Victoria’s Secret locations would be closed down in the United States and Canada, as part of its strategy to stay afloat during the pandemic, amid the plunging sales.
VS last year estimated to have accounted for US $ 1-1.1 billion of Sri Lanka’s overall US $ 5.3 billion apparel exports.
VS accounts for a considerable portion of sale portfolios of Brandix and MAS, while it also remains a key customer of Hirdaramani and Hela Clothing.
Amidst controversies, VS has been experiencing low sale volumes over the last one-and-half years.
The company’s total sales tumbled by 46 percent to US $ 821.5 million in the first quarter of the year.
“The order component from VS has been reducing last 12-16 months. However, if they go bankrupt, there could be complete stoppage of that component coming in,” Jonas added.
In particular, he highlighted that VS remains the most profitable brand for the apparel manufactures in Sri Lanka, due to the volume and premium pricing.
“Even if it’s 20 percent of the total revenue, it’s a large part of their bottom line. So, that component could be eroded if VS goes through bankruptcy or even some other party takes it over,” he said.
For example, the average selling price of a VA brazier is around US $ 35 under the VS brand while it’s priced at US $ 26 under Calvin Klein and US $ 18 under Target brands.
Consequently, Jonas expects that the apparel industry is likely to look at cost-cutting strategies, amid the expected impact on its margin.
Sri Lanka’s apparel industry is already lobbying to lay off 30 percent or 100,000 employees due to the sharp slowdown of orders, due to the COVID-19-induced economic malaise.
Speaking to Mirror Business, a top MAS official noted that the firm is already rolling out strategies to limit the impact from a potential fall of VS.
“VS has been having certain challenges in the market for a long time now. We have been working on strategies to counter that. We are looking at alternate customers and other means,” he said.
However, Jonas opined that it is unlikely that the Sri Lankan apparel exporters would be able to find an alternative premium brand to replace VS.
“My guess is that you are not going to find someone as lucrative as VS. They might be able to fill in the volumes but the same kind of pricing they won’t be able to get,” he added.
VS has already halted its supply orders from Sri Lankan manufactures and has initiated negotiations to bring the prices down. Sri Lanka’s apparel exports are estimated to decline by US $ 1.5 billion this year to reach US $ 3.5 billion in the best-case scenario, due to the COVID-19 pandemic impact, compared to US $ 5.3 billion earnings last year.
However, the country has secured around US $ 500 million worth of PPE orders so far and the orders are expected to rise to US $ 1 billion.
“The sector is currently not doing so bad, due to the PPE orders. Hence, the volume wise, it might be almost at the pre-COVID-19 levels. However, the product value and margins are way lower. It might be half the margin that they get on an average piece of a garment. Having said that, the amount of effort need to be put on is quite low,” Jonas said.
Despite a surge in PPE orders, there’s uncertainly on the PPE orders beyond August, mainly due to the oversupply concerns, according to apparel exporters.