What a time it’s been for Victoria's Secret. In the past six months alone, the company’s stock price has increased by a massive 188%, reaching $53.03 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Victoria's Secret, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think Victoria's Secret Will Underperform?
We’re happy investors have made money, but we're swiping left on Victoria's Secret for now. Here are three reasons why VSCO doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Victoria's Secret struggled to consistently increase demand as its $6.39 billion of sales for the trailing 12 months was close to its revenue three years ago. This was below our standards and is a sign of poor business quality.
2. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Victoria's Secret’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
3. EPS Trending Down
Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Victoria's Secret, its EPS declined by 19.1% annually over the last three years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
Victoria's Secret falls short of our quality standards. Following the recent rally, the stock trades at 19.7× forward P/E (or $53.03 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Like More Than Victoria's Secret
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