Mall Dependence And Tariffs Will Erode Retail Viability

Key Takeaways

• Dependence on mall-based retail and weak digital engagement leave the company exposed to shifting consumer habits and stagnating demand in key markets.
  
• Rising competition and cost pressures are reducing pricing power, squeezing margins, and threatening future earnings growth and brand relevance.
  
• Expanding international presence, high-margin category growth, digital innovation, and leadership changes are positioning the company for improved margins, revenue growth, and stronger brand equity.

Catalysts

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

• Victoria's Secret's heavy reliance on extensive mall-based retail networks is likely to become a long-term liability as consumers increasingly shift to online channels, leading to lower foot traffic, ongoing store closures, and a forecasted 2% to 3% reduction in North America store square footage, all of which will negatively impact revenue growth and operating leverage.
  
• Despite efforts to reposition the brand toward inclusivity and modernity, ongoing shifts in societal attitudes may continue to erode customer engagement, as consumers favor more authentic and diverse upstart brands, putting Victoria's Secret's future market share and brand loyalty at risk, and therefore threatening top-line revenue and customer retention.
  
• Intensifying competition from agile, digitally native intimates and activewear brands is expected to diminish Victoria's Secret's pricing power and market share, forcing the legacy retailer to rely more on promotional activity and lower-margin traffic drivers like gifts-with-purchase, which is expected to compress gross margins and limit the company's ability to grow net earnings.
  
• Persistent cost pressures-stemming from rising tariffs and global supply chain disruptions-are expected to outpace the company's mitigation strategies, resulting in over a hundred basis points of gross margin headwinds for the year, and ultimately, lower operating income than in prior years even as sales remain flat.
  
• Slowdown and underperformance in international expansion, coupled with underwhelming digital customer acquisition among younger demographics, limits Victoria's Secret's capacity to diversify its revenue streams and leaves it overexposed to stagnating demand in North America, raising the risk of future revenue declines and earnings volatility.

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 2.7% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach $159.7 million (and earnings per share of $2.45) by about August 2028, down from $167.0 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 10.3x on those 2028 earnings, up from 10.1x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to grow by 1.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Victoria's Secret Future Earnings Per Share Growth

Risks

• Victoria's Secret is demonstrating sustained international growth, with first quarter international sales up 9 percent and system-wide retail sales growing by low double digits, indicating that revenues and earnings could benefit from an expanding global footprint and increased diversification.
  
• The company is showing notable success in growing high-margin categories such as Beauty, which now represents about 25 percent of total business and continues to deliver year-over-year growth, supporting potential gross margin expansion and stronger earnings over time.
  
• Ongoing digital transformation and innovation, including strong digital performance in PINK and aggressive investment in omnichannel experiences, could drive improvement in direct-to-consumer sales and net margins through higher AURs and streamlined cost structures.
  
• The PINK brand is rebounding with consecutive quarters of positive comps in apparel, leading to higher basket size and AURs, along with an incredible amount of runway for category and customer expansion, which could drive top-line revenue growth and boost earnings.
  
• Strategic leadership appointments and enhanced marketing sophistication, including new brand presidents and a data-driven Chief Marketing Officer, may improve customer acquisition, brand differentiation, and conversion, which can positively impact revenue, brand equity, and long-term profitability.

Valuation

• The assumed bearish price target for Victoria's Secret is $14.0, 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 $28.0, and the most bearish reporting a price target of just $14.0.
• 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 $159.7 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 12.3%.
• Given the current share price of $21.12, the bearish analyst price target of $14.0 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.