VSX Sports Line And Global Digital Expansion Poised To Accelerate Revenue And Profitability

Key Takeaways

• Strong international growth through partnerships, especially in China, enhances revenue, while product launches and digital focus boost customer engagement and conversions.
  
• Store optimization through consolidating and closing underperforming locations aims to increase profitability and operational efficiency, strengthening net margins.
  
• Challenges in core markets, rising costs, and competitive pressures could impact Victoria's Secret's margins, growth prospects, and overall profitability.

Catalysts

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

• Victoria's Secret is seeing strong sales growth driven by new product launches and brand storytelling that resonates with existing and new customers, including younger demographics. This is expected to positively impact future revenue.
  
• The international business is growing at a fast pace, with over 20% growth, particularly through partnerships and joint ventures in markets like China. Continued expansion is likely to increase international revenue and earnings.
  
• The company's focus on digital enhancements and a successful loyalty program has driven increased customer engagement and traffic, contributing to higher conversions and larger basket sizes. This enhancement is anticipated to improve revenue and earnings margins.
  
• The successful launch of innovative products like the VSX sports line and expansion into new categories could increase shopping frequency and customer engagement, thereby potentially boosting net margins.
  
• Victoria's Secret plans to optimize store operations by consolidating stores and closing underperforming locations, which is expected to enhance productivity and profitability, leading to better operational efficiency and higher net earnings.

Victoria's Secret Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Victoria's Secret's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $173.5 million (and earnings per share of $3.15) by about December 2027, up from $153.0 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 18.1x on those 2027 earnings, down from 23.0x today. This future PE is greater than the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 11.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

Victoria's Secret Future Earnings Per Share Growth

Risks

• The intimates market is currently experiencing softness, which may impact Victoria's Secret's ability to drive growth in its core product categories, affecting revenue and margins.
  
• Victoria's Secret's ambitious expansion and enhancements in physical store formats could lead to increased capital expenditures and operational risks, potentially impacting net margins and profitability.
  
• High transportation costs, increased incentive compensation expenses, and the negative impact of an extra selling week in the prior year pose challenges to maintaining or growing gross margins, which may affect earnings.
  
• The macroeconomic environment in China remains challenging, and investment in growth there might face headwinds, impacting international revenue contributions and overall earnings.
  
• Competitive pressures in the beauty and sports apparel segments could affect Victoria's Secret's ability to maintain or grow its market share, potentially impacting future revenues and profitability.

Valuation

• The analysts have a consensus price target of $44.7 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 $55.0, and the most bearish reporting a price target of just $28.43.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.5 billion, earnings will come to $173.5 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 8.6%.
• Given the current share price of $44.75, the analyst's price target of $44.7 is 0.1% 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.