Troubled Victoria’s Secret stock could surge by 72%

Victoria’s Secret (VSCO) stock has stabilised in the past few weeks as investors focus on the recent leadership transition and the ongoing turnaround. After bottoming at $13.58 in October last year, the stock has bounced back to $26.05. 

Fallen angel

Victoria’s Secret has become one of the top fallen angels in the retail industry. A company that was once a beloved brand in the past few decades has lost its shine as newer brands have come up. 

Demand for its products has waned over the years. That is partly because of the rising competition in the industry, and the view that the firm had become woke.

Victoria’s Secret’sannual revenue has been in a downward trend in the past few years. It peaked at $7.5 billion in 2020, and then dropped to $6.18 billion in the last financial year.

Its annual profits also narrowed from over $646 million in 2021 to $109 million, a trend that may continue in the coming years. 

Therefore, the company is hoping that Hillary Super, a veteran in the retail industry will help to turn its business. Before VSCO, she was the Savage X Fenty, one of the most popular brands among young people. 

She was also the CEO of Anthropologie Group, a company owned by Urban Outfitters. She is credited to turning around the brand into one of the best performers in the industry.

Super has also had experience in other popular brands like Guess?, American Eagle, Gap, and Ann Taylor. 

Her strategy is to help grow the company’s brands like Victoria’s Secret and PINK. She is also expected to continue focusing on its cost structure to focus on its profitability. Also, the company will continue managing its store count, by closing underperforming stores, and opening new ones.

To be fair: Victoria’s Secret is not the only specialty retailer that is struggling in the United States. In the healthcare industry, companies like CVS Health and Walgreens Boots Alliance are crumbling, with their stocks falling by over 30% this year.

Similarly, Ulta Beauty, a leading player in the beauty industry has also crashed hard. Dollar stores like Dollar Tree and Dollar General are some of the worst-performers in the S&P 500 index this year. 

Victoria’s Secret business is not doing well

The most recent financial results showed that Victoria’s Secret’s business was not doing well as uts sales continued falling.

Revenue in the three weeks to August 3 dropped to $1.41 billion, down from the $1.42 billion in the same period last year. 

On the positive side, its improved cost structure meant that its profitability metrics were relatively good. Its net income soared from $19.4 million to $31.08 million.

Its guidance for the third-quarter was that revenue would rise by low-single digits. Analysts expect that the real figure will be $1.29 billon. 

Its adjusted operating loss will be between $40 million and $60 million, while its annual operating profit will be between $275 million and $300 million.

Valuation and debt issues

A key concern about Victoria’s Secret is that it has substantial debt and a weak credit rating. Moody’s and S&P Global have a negative outlook, which raises its credit risk.

These credit issues are because of its substantial long debt. It has $1.1 billion in long-term debt and $1.4 billion in long-term operating lease liabilities. Some of these maturities will come in 2025 through 2028.

Victoria’s Secret is also facing substantial challenges because of the rising competition in the industry. For example, Rihanna’s Savage x Fenty business has received a valuation of over $1 billion as its sales soared. 

Kim Kardashian’s Skims has received a $4 billion valuation, while American Eagle’s Aerie brand has continued growing. 

On the positive side, there are signs that Victoria’s Secret’s business is not highly overvalued as it has a forward P/E ratio of 14, lower than the industry’s average of 19.

Victoria’s Secret’s forward EV-to-EBITDA of 8.73 is lower than the industry average of 10. This cheap valuation is because of the ongoing concerns about the company’s business in the long term.

Victoria’s Secret stock analysis

The daily chart shows that the VSCO share price bottomed at $13.58 in October last year, and has rebounded to $28. It has crossed the average estimate by analysts at $24.12.

The stock has moved above the 50-day and 100-day moving averages (EMA). There are signs that it has formed a double-bottom chart pattern, a popular reversal sign.

Therefore, the stock’s outlook is neutral with a bullish bias for now. More upside will be confirmed if it moves above the double-bottom’s neckline at $30.8. If this happens, it could climb to the 50% retracement point at $44, which is about 72% from the current level.

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