Victoria's Secret (VSCO): Buy, Sell, or Hold Post Q1 Earnings?

Victoria's Secret’s stock price has taken a beating over the past six months, shedding 49.5% of its value and falling to $18.35 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Victoria's Secret, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Victoria's Secret Will Underperform?

Even with the cheaper entry price, we don't have much confidence in Victoria's Secret. Here are three reasons why VSCO doesn't excite us and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Victoria's Secret’s demand has been shrinking over the last two years as its same-store sales have averaged 3.1% annual declines.

2. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Victoria's Secret’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 4.4% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structure.

3. EPS Trending Down

We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Victoria's Secret’s full-year EPS dropped 98.9%, or 25.8% annually, over the last three years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, Victoria's Secret’s low margin of safety could leave its stock price susceptible to large downswings.

Final Judgment

Victoria's Secret falls short of our quality standards. Following the recent decline, the stock trades at 8.5× forward P/E (or $18.35 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.

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