Stock Analysis

Little Excitement Around Victoria's Secret & Co.'s (NYSE:VSCO) Earnings As Shares Take 26% Pounding

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The Victoria's Secret & Co. (NYSE:VSCO) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

Following the heavy fall in price, Victoria's Secret may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.2x, since almost half of all companies in the United States have P/E ratios greater than 15x and even P/E's higher than 30x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Victoria's Secret hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Victoria's Secret

NYSE:VSCO Price Based on Past Earnings March 15th 2023
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Victoria's Secret.

Is There Any Growth For Victoria's Secret?

The only time you'd be truly comfortable seeing a P/E as depressed as Victoria's Secret's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 1.7% each year over the next three years. That's shaping up to be materially lower than the 9.6% each year growth forecast for the broader market.

With this information, we can see why Victoria's Secret is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Having almost fallen off a cliff, Victoria's Secret's share price has pulled its P/E way down as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Victoria's Secret maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Victoria's Secret (1 is potentially serious!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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Find out whether Victoria's Secret is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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