The past six months have been a windfall for Victoria's Secret’s shareholders. The company’s stock price has jumped 48.9%, setting a new 52-week high of $80.10 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Victoria's Secret, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Victoria's Secret Not Exciting?
We’re happy investors have made money, but we don’t have much confidence in Victoria's Secret. Here are three reasons why VSXY doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Victoria's Secret’s 2.6% annualized revenue growth over the last three years was sluggish. This was below our standards.
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Victoria's Secret’s operating margin has more or less stayed the same over the last 12 months , averaging 4.8% over the last two years. This profitability was paltry for a consumer retail business and caused by its suboptimal cost structureand low gross margin.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Victoria's Secret, its EPS declined by 6% annually over the last three years while its revenue grew by 2.6%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Victoria's Secret isn’t a terrible business, but it doesn’t pass our bar. After the recent rally, the stock trades at 16.4× forward P/E (or $80.10 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re fairly confident there are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Victoria's Secret
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