Victoria's Secret (VSCO 11.46%) is a staple in malls around the country and world, but it has only recently become a stand-alone company. The reason for this is less than desirable in some ways, but it has allowed management to focus all of its energy on returning this iconic brand to growth.
Things could be going better.
Good company/bad company
Victoria's Secret used to be a part of L Brands, a retail conglomerate that also owned Bath & Body Works. (L Brands renamed itself Bath & Body Works (BBWI 6.50%) after the spinoff.) Or at least that was what was owned just before these two nameplates were split apart.
The truth is that L Brands has owned a fairly large number of different brands over the years, including Abercrombie & Fitch, Express, The Limited, Henri Bendel, and Lane Bryant. Some of these nameplates are still in the public sphere; others have been shuttered.
Image source: Getty Images.
The Victoria's Secret break from Bath & Body Works was the final evolution, in some ways. However, it was really just a way to separate a struggling brand (Victoria's Secret) from one that had been growing relatively strongly (Bath & Body Works).
That's a common move on Wall Street, with the logic always being that the struggling brand, once on its own, will be able to put all of its effort into improving its financial results. Sometimes that actually works; sometimes it doesn't. These types of break-ups are probably best viewed as special situations, a type of investing that only more aggressive investors should be considering.
The spinoff was completed in August 2021. The timing of the move was complicated by the 2020 coronavirus pandemic, which left nonessential businesses shut for a material period of time and depressed sales at many retailers.
So, the second quarter of 2021's 50% year-over-year sales increase wasn't really a reliable number to use when considering the future. The next two quarters of 2021 witnessed sales growth of 7% and 4%, respectively, far more realistic figures even if the numbers were heading lower.
The big takeaway, however, was that it seemed like management had at least stemmed the bleeding, even if it hadn't exactly made Victoria's Secret a growth machine. It entered 2022 projecting sales to be flat to up in the low single digits.
A tough new year
Sales in the first quarter of 2022 came in lower by 4.5%, but that was actually within management's guidance range. In fact, it was at the "high end" of the down 4% to down 8% range provided.
But this is where things start to get a little more complicated. Management guided to a range from a low-single-digit second-quarter sales gain to a low-single-digit sales decline.
When the final tally was in, second-quarter 2022 sales fell 6%, a bit worse than expected. The outlook for the top line of the earnings statement for the third quarter was pegged at a high-single-digit sales drop.
The trend has clearly been going in the wrong direction. That was highlighted in the third quarter of 2022, with an actual sales decline of 9%. Sure, that was within the range of guidance, but it was now at the "low end" of the range. The 2022 fourth-quarter guidance was again for a high-single-digit sales decline.
NYSE: VSCO
Key Data Points
The worst part of the quarterly update, however, was that Victoria's Secret, having entered the year expecting flat to slightly higher sales, is now calling for a full-year 2022 sales decline of 6% to 7%.
The low end of the earnings guidance range is for earnings per share to be roughly $4.50, so the retailer is still quite profitable. That's the good news, since sales trends suggest that Victoria's Secret is still trying to gain traction with consumers that have shifted to other lingerie retailers.
More time
Despite some early indications of success following its spinoff, results in 2022 suggest that Victoria's Secret has yet to right its business. It is making a lot of changes, including partnerships with new designers and buying competitors, including the recent acquisition of an online lingerie retailer.
Still, most investors will likely want to see a more lasting improvement before investing here. Good management intentions alone aren't enough to make this struggling retailer a good investment.
