Victoria's Secret and Co. (VSCO) moved into the 30th spot on Barchart’s Top 100 Stocks to Buy Monday. That’s up 160% in the past six months. With the specialty retailer making far less, you could argue that it’s too late to buy VSCO stock, given the run it’s been on.
However, the contrarian in me believes it could just be getting started, especially if this market continues to hum as it has for most of 2024.
I must admit that I’d forgotten about the company, given its stock and business woes, but seeing it jump up the chart yesterday suggests that others are reevaluating its long-term potential beyond 2024.
The other day, I went with my wife to the local mall, and they were in the process of revealing the newly finished renovation at Victoria’s Secret. It looked 100% brighter and inviting. Getting people in the store is half the battle. The reno should help spur sales.
There are enough positives to justify taking a small position. Options are always a good way to hedge your bets when a stock has run too fast.
Nonetheless, here are three reasons to consider the possibility that it’s got more gains left in the tank.
Sales Are Positive
On December 5, the retailer reported a 7% Q3 2024 sales increase and a 3% increase in comparable sales if you include company-operated stores in the U.S. and Canada, consolidated joint venture stores in China, and online sales.
Equally important, sales in its international stores increased by 24.2%, and its online sales rose 7.5% during the quarter. These two segments now account for 45.2% of sales, 230 basis points higher than a year ago.
As a result, Victoria’s Secret raised its 2024 full-year and Q4 guidance. It now expects 2024 sales to increase by 1.5% at the midpoint of its guidance. That works out to $6.27 billion.
The company is in the process of recalibrating its retail store footprint to generate higher sales. The renovation I spoke about in the intro is part of that plan. It added 10 net new stores in the third quarter, bringing its fleet to 1,380, with 813 company-operated, 69 China joint-venture stores, 492 partner-operated, and six stores from its December 2022 acquisition of Adore Me, an online-focused brand, which experienced mid- to high single-digit sales growth in the quarter.
From a top-line perspective, there is enough meat on the bone to carry momentum into calendar 2025.
Isn’t It Losing Money?
From a GAAP perspective, it had an operating loss of $46.7 million in the third quarter, down from $67.1 million in Q3 2023. In the 39 weeks ended Nov. 2, it made $41.9 million, up from a $12.8 million loss. In the trailing 12 months ended Nov. 2, its operating income on a GAAP basis was $272 million, down from $326 million a year earlier.
However, on an adjusted basis, its operating income through the first 39 weeks of the year was $73.8 million, more than $30 million higher than a year ago. At the midpoint of its guidance, it expects its adjusted operating income for 2024 to be $330 million, up slightly from $327 million in 2023.
Baby steps, but it’s making progress.
“‘We are absolutely looking for opportunities anywhere we can to be less promotional and more brand forward.’ She also highlighted the success of the beauty segment, noting, ‘Beauty is our strongest business. We just had our largest quarter to date on record for Q3,” Investing.com reported comments in the company’s conference call from newish (three months) CEO Hilary Super.
Healthy retailers do little promotional activity to drive sales. You’ll know it’s back when you stop seeing discount signs in their windows.
Where to Next?
I have always liked to play a game of what if. In this game, I go back to when a company performed at its best. What were sales and profits like at that time? Then, I extrapolate to the share price. It helps provide a best-case and worst-case scenario.
Victoria’s Secret and Bath & Body Works (BBWI) were split off from L Brands in August 2021. In fiscal 2021, according to S&P Global Market Intelligence, it had an operating income of $870 million from $6.79 billion in sales, an operating margin of nearly 13%, more than double its 5.3% projected margin for 2024.
When L Brands spun it off in August 2021, it traded around $75. By the end of fiscal 2021, it was still around $62. It bottomed at around $14 in October 2023. It had a false start in February but has been off to the races since August.
In fiscal 2021, its earnings per share were $7.18. At the end of the fiscal year, its shares traded for 8.6x its trailing EPS. That’s the best-case scenario post-spinoff.
The analyst estimates for the next three years are $2.32 in 2024, $2.65 for 2025, and $3.05 a share in 2026. It’s currently trading at 15.6x its 2026 estimate.
So, either its earnings push much higher, which they will if it keeps focusing on profitable growth and avoiding the promotional trap, or investors accept a higher multiple than is historically typical.
It could be both.
The Bet to Make
Options make sense when you’re uncertain about a stock. It lets you take a position without losing your shirt if you’re wrong.
Right now, the Put/Call OI ratio is 1.21, which suggests a slightly bearish stance. In early February 2023, it was 4.01x, more than three times the ratio today, so investors aren’t nearly as pessimistic as they were two years ago.
Here’s a call from today’s trading.
As I write this, a few days more than a year out, the ask price of $5.20 is 11.5% of the current share price. With a delta of $0.36240, you can double your money by selling before expiration in December 2025 if it appreciates by $14.35 (32%).
That’s more than doable if the news gets better in subsequent quarters. Right now, the ITM (in the money) probability is 23.22%, which isn’t the worst odds you could have.
In some ways, your risk/reward proposition is much better now than in August. However, uncertainty remains with the Trump presidency, which has yet to take office.
Options make sense here.
