Fading Inclusivity And Costly Stores Will Hurt Profits

Key Takeaways

• Struggles adapting to shifting consumer preferences, brand controversies, and weak digital transformation threaten market share, brand loyalty, and revenue growth.
  
• Reliance on physical retail, escalating costs, and supply chain challenges are likely to keep margins under pressure and constrain long-term profitability.
  
• Strong international growth, digital investments, and brand repositioning are driving customer acquisition, higher sales, and improved margins despite economic and industry headwinds.

Catalysts

Operates as a specialty retailer of women’s intimate, and other apparel and beauty products worldwide.

• Victoria's Secret remains highly exposed to permanent changes in consumer preferences away from its traditional branding rooted in narrow beauty ideals, and its attempts at rebranding toward inclusivity have thus far yielded only modest gains, risking future revenue declines and continued erosion of its core customer base.
  
• The accelerating rise of digital-native competitors leveraging more advanced e-commerce, AI-driven personalization, and social selling is expected to intensify price competition and undermine Victoria's Secret's market share, putting consistent pressure on both revenue growth and gross margins over the long term.
  
• Past brand controversies and the slow pace of cultural realignment could keep Victoria's Secret vulnerable to reputational fallout and increasingly punitive ESG-driven consumer activism or boycotts, raising SG&A expenses related to corrective marketing and further jeopardizing long-term brand loyalty and top line growth.
  
• Heavy reliance on a physical store footprint-especially in declining malls-combined with incremental investments in store remodels and slow progress in digital transformation is likely to result in structurally higher SG&A and occupancy costs, limiting scalability, pressuring net margins, and making meaningful earnings expansion unlikely.
  
• Ongoing supply chain complexity, intensifying tariff impacts, and the inability to pass through higher material and freight costs due to intense promotional pricing in the sector will likely depress gross margins, drive up SG&A as mitigation becomes harder, and ultimately reduce sustainable free cash flow and earnings growth potential.

Victoria's Secret Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Victoria's Secret compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Victoria's Secret's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.4% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach $137.3 million (and earnings per share of $2.63) by about September 2028, down from $151.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 13.6x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.7x.
• Analysts expect the number of shares outstanding to grow by 2.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.96%, as per the Simply Wall St company report.

Victoria's Secret Future Earnings Per Share Growth

Risks

• The company is experiencing strong international growth, with net sales growing 22% year-over-year internationally and high single-digit retail comps, suggesting that successful expansion into new markets could drive significant long-term revenue upside.
  
• Strategic investments in digital transformation, innovative product pipelines, and store-of-the-future remodels are yielding results such as double-digit sales lifts in remodeled stores and faster production cycles, which are likely to enhance customer experience and improve net margins.
  
• Brand repositioning efforts focused on inclusivity, cultural connection, and frequent innovation are resonating with younger demographics, evidenced by double-digit new customer growth in key segments and increased regular-priced sales, supporting higher revenues and earnings potential.
  
• The Beauty category, now representing nearly 2 billion dollars at retail globally and delivering its eighth consecutive quarter of growth, offers a clear runway for further expansion and category diversification, which can drive top-line growth and improve profitability.
  
• The company has demonstrated disciplined execution in managing inventory, shortening lead times, and optimizing its promotional strategies by relying less on discounting, which has already led to gross margin improvement and could support sustained earnings growth despite macroeconomic and tariff headwinds.

Valuation

• The assumed bearish price target for Victoria's Secret is $17.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Victoria's Secret's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.3 billion, earnings will come to $137.3 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 12.0%.
• Given the current share price of $25.66, the bearish analyst price target of $17.0 is 50.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.