The past six months have been a windfall for Victoria's Secret’s shareholders. The company’s stock price has jumped 112%, hitting $38.60 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Victoria's Secret, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
We’re happy investors have made money, but we're cautious about Victoria's Secret. Here are three reasons why you should be careful with VSCO and a stock we'd rather own.
Why Do We Think Victoria's Secret Will Underperform?
Spun off from L Brands in 2020, Victoria’s Secret (NYSE:VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
1. Shrinking Same-Store Sales Indicate Waning 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 has been shrinking over the last two years as its same-store sales have averaged 5.7% annual declines.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Victoria's Secret’s revenue to stall. Although this projection indicates its newer products will catalyze better top-line performance, it is still below the sector average.
3. Weak Operating Margin Could Cause Trouble
Operating margin is a key profitability metric because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
Victoria's Secret was profitable over the last two years but held back by its large cost base. Its average operating margin of 4.3% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.
Final Judgment
Victoria's Secret falls short of our quality standards. After the recent rally, the stock trades at 17.7× forward price-to-earnings (or $38.60 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Victoria's Secret
With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.
Put yourself in the driver’s seat by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
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