The big news for Victoria's Secret (VSCO -2.51%) in 2021 was that it became a separate company in August, having been spun off from L Brands, now known as Bath & Body Works. That said, for long-term investors, the bigger story might be a short news release Victoria's Secret issued in December 2021.
The ugly duckling
Victoria's Secret is a women's undergarment retailer, which owns its namesake brand and PINK, which sells similar products but is targeted toward younger women. Historically, Victoria's Secret has been known for its sexualized approach, using fashion models to portray its products in a flashy annual fashion show, among other things.
Image source: Getty Images.
That approach has fallen out of favor. In recent years, comfort has overtaken style, with competitors like Aerie, which is owned by American Eagle Outfitters, rapidly expanding its footprint by selling simple, comfortable fare. Meanwhile, the use of visually stunning models was increasingly viewed as unrealistic and out of touch with Victoria's Secret's actual customer base -- another misstep that led to it taking a back seat to fast-growing Bath & Body Works when the two companies were housed within L Brands.
The spinoff in 2021 was basically a way for Bath & Body Works to get out from under the lagging Victoria's Secret business, which it had originally tried to sell. Still, as is the case in most spinoffs of this type, it was pitched as allowing the two companies to better focus on their respective businesses. Only this time, that actually may be what's happening at Victoria's Secret.
Turning into a swan
On Dec. 29, 2021, Victoria's Secret announced a $250 million accelerated share repurchase program. Investors tend to like stock buybacks, since reducing the number of shares helps to increase earnings per share. (Earnings get spread over fewer shares as shares are bought back.) So it was clearly good news, but the real heart of the update was on the business front.
The company reaffirmed its fourth-quarter guidance, calling for sales to be between flat and up 3% year over year. CEO Martin Waters noted the strength of fourth-quarter sales, highlighting that he was "...particularly encouraged by our sales growth during the peak shopping days over the Thanksgiving weekend and the large rush of business as we approached Dec. 25th."
As a retailer, it's hardly shocking that the holiday season is important to Victoria's Secret's business. However, the fact that the company was expecting to both hit its targets and saw strong sales over key periods suggests that the company hasn't entirely lost its way. In fact, the CEO went on to say that "over the past few months, we have stabilized our business and created a platform for future growth while generating significant cash flow."
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It wouldn't be fair to suggest that the strong financial showing in late 2021 was entirely the result of the spinoff, given that L Brands has been working to turn Victoria's Secret around for quite some time (think years). And while 3% sales growth on the high end isn't huge, you have to start somewhere.
All in, perhaps having a focused management team may have been a net benefit here after all. As the company continues to rightsize its store base and shift its marketing to better align with market conditions, it wouldn't be surprising to see Victoria's Secret's positive progress continue.
Indeed, the stock repurchase announcement that came along with this update kind of looks like a signaling mechanism to Wall Street that Victoria's Secret is starting to see some success in its long-running turnaround effort. And now that it doesn't have to live in the shadow of Bath & Body Works, investors may actually reward Victoria's Secret for that success.
A second chance
Victoria's Secret's share price rose sharply after it came public but has since seen its stock cool off. The shares are trading roughly 25% below their peak levels at this point. If you were intrigued by the story here but put off by the swift price increase following the spinoff, you might want to take a second look.
It would probably pay to wait until fourth-quarter earnings are released on Feb. 16 to get a better picture of how the turnaround is progressing, given that the company has only been public for a short period of time. But if the late December update is any indication, the upcoming earnings announcement could indicate that this once-tired brand has found some new life.
