Dream Bra And VS Sport Set To Propel Sales And Enhance Brand Visibility

Key Takeaways

• Introduction of innovative products and the modernized Victoria's Secret Fashion Show could significantly boost customer engagement and sales.
  
• Strategic international expansion and digital market growth, coupled with cost reduction initiatives, are expected to enhance overall sales growth and profitability.
  
• High reliance on promotions and the uncertain transition to a less promotional strategy, alongside rising transport costs and competitive pressures, may impact margins and growth.

Catalysts

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

• Introduction of new product lines and a focus on innovation, particularly in the Victoria's Secret Dream Bra collection and the VS Sport improvements, could significantly impact future sales growth by attracting both new and returning customers seeking updated and innovative products.
  
• The return of the Victoria's Secret Fashion Show with a modern lens reflecting the current brand identity is expected to enhance brand visibility and appeal, potentially increasing customer engagement and sales during the critical holiday season.
  
• Strategic expansion and strong performance in international markets, especially with franchise and travel retail partners, are anticipated to contribute to overall sales growth, mitigating softer sales trends in the North American market.
  
• Continued improvement in digital market share and effective utilization of the loyalty program, which boasts 32 million members driving about 80% of weekly sales, could lead to increased sales through enhanced customer insights and engagement.
  
• Focused efforts on cost reduction and expense management initiatives, aiming to exceed the $250 million 3-year goal, are likely to have a positive impact on net margins and earnings by improving operational efficiency and reducing the cost structure of the business.

Assumptions

• Analysts are assuming Victoria's Secret's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $175.0 million (and earnings per share of $2.67) by about October 2027, up from $138.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2027 earnings, down from 15.0x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.0x.
• Analysts expect the number of shares outstanding to decline by 5.9% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

Risks

• The reliance on promotional strategies to drive traffic and sales might lead to reduced profit margins if discount levels remain high or increase further.
  
• Transitioning from promotional activities towards a long-term, less promotional strategy may not be as smooth or successful as anticipated, potentially impacting customer retention and sales growth.
  
• Transportation costs have started to increase after a period of being historically low, presenting a risk to gross margins if rates continue to rise.
  
• The performance and growth expectations for Adore Me and international segments, while positive now, could face challenges due to market fluctuations, impacting overall revenue growth.
  
• The competitive retail environment, especially in the North America Intimates market, remains challenging, which may pressure sales and market share, affecting overall revenue and profitability.

Valuation

• The analysts have a consensus price target of $23.88 for Victoria's Secret based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.3 billion, earnings will come to $175.0 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 9.8%.
• Given the current share price of $26.43, the analyst's price target of $23.88 is 10.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.