23/02/2024 1:03 PM


The Queen Of Beauty

Victoria’s Secret & Co.: Shopping At A Discount (NYSE:VSCO)


kokkai/iStock Unreleased via Getty Images

One of the most well-known fashion brands of the past few decades has been Victoria’s Secret, which happens to be owned by the aptly named Victoria’s Secret & Co. (NYSE:VSCO). This specialty retailer of women’s intimate and other apparel and beauty products is an interesting firm for investors to consider. This is due, in part, to the popular brands the business owns. But it also has to do with the fact that shares of the company look quite cheap right now. Given the volatility the company has experienced over the past couple of years, some of this low price might be justified. But at the end of the day, shares do seem to offer some upside potential moving forward.

An iconic fashion brand

As I mentioned already, Victoria’s Secret & Co. operates in the specialty retail market for women’s intimate products, as well as for other apparel and beauty products. More specifically, under the Victoria’s Secret brand name, the business focuses on items like bras, panties, sleepwear, loungewear, lingerie, sports products, and swim products. Perhaps not surprisingly, bras and panties make up the two largest sales categories for this brand. In addition to this, the company also has another lifestyle brand in its portfolio called PINK. Through this, the company focuses on a collegiate-oriented customer base, with products including bras, panties, activewear, loungewear, accessories, swimwear, and more. On top of this, the company also has its Victoria’s Secret Beauty offering, which focuses on developing and selling fragrance brands throughout America.

Other operations include a couple of different joint venture partnerships the company has. One of these, Victoria’s Secret U.K., entered into restructuring in 2020 due to financial issues. However, the company also has a joint venture partnership called Victoria’s Secret China, which sells many of its key brands to the Chinese market. However, this partnership was just announced in January of this year, with the enterprise waiting for regulatory approval to be made official. If it is approved, Victoria’s Secret & Co. will own a 51% stake in the venture and will receive $45 million in cash from Regina Miracle International, which will own the remaining 49%.

Operationally speaking, Victoria’s Secret & Co. has a rather large footprint. As of the end of the company’s 2021 fiscal year, it operated 899 retail stores worldwide. 808 of these are located in the US. Another 26 are in Canada, while 65 in all can be found in China. It is worth noting that this number is down from the 933 stores the company had just one year earlier. And it compares to the 1,181 stores in operation in 2019. During this three-year window, the company transferred only 26 of its stores to joint ventures. It closed a further 355 locations while opening only 58. On top of these company-operated stores, the company also has 463 stores in international markets that are operated by its partners. 335 of these focus on beauty and accessory products. The other 128 are full assortment outlets.

Historical Financials

Author – SEC EDGAR Data

Between the COVID-19 pandemic and the net closure of retail stores, it should come as no surprise that the financial performance of the company has been rather volatile. Back in 2019, for instance, the business generated revenue of $7.51 billion. This dropped precipitously to $5.41 billion in 2020. But the good news for investors is that sales did rebound nicely and 2021, with revenue for that year totaling $6.79 billion. It is worth dissecting what transpired between 2020 and 2021 to help the company’s top line. For instance, while sales at stores in North America grew by 50% and grew internationally by 21% as the global economy reopened following the worst days of the pandemic, sales for the company’s direct-to-consumer activities dropped by 5%. Comparable store sales increases added $256 million to the company’s top line from 2020 to 2021. However, this was dwarfed by the $1.08 billion in additional revenue caused by new, closed, and non-comparable remodeled stores during the year.

The picture on the company’s bottom line has been far more consistent. In 2019, the firm generated a net loss of $897 million. This narrowed significantly to $72 million in 2020 before turning to a profit of $646 million last year. Other profitability metrics followed suit. Operating cash flow, for instance, grew from $315 million in 2019 to $851 million last year. Meanwhile, if we adjust for changes in working capital, this metric would have grown from $505 million to $983 million. Over that same window of time, EBITDA also improved, climbing from $502 million in 2019 to $1.17 billion last year.

When it comes to the company’s 2022 fiscal year, we have not seen any detailed guidance. However, management did say that sales will range from between being flat and rising at a low single-digit rate. In North America, the company plans to open 15 new stores, but it will close between 10 and 30 locations. Another 20 locations will be renovated. Operating cash flow is forecasted to be about $865 million. No guidance was given when it came to EBITDA, but if it increases at the same rate that operating cash flow should, then investors should expect a reading of about $1.19 billion. On top of this, the company is also working on buying back additional shares. Earlier this year, the firm announced a $250 million share buyback program.

Trading Multiples

Author – SEC EDGAR Data

Using the data provided, we can effectively value the enterprise. On a price to operating cash flow basis, using our 2021 results, we can see that the company is trading at a multiple of 4.8. This remains flat at 4.8 if we assume that the 2022 estimates are accurate. Meanwhile, the EV to EBITDA multiple should be 3.9. The modest increase estimated for 2022 does not change this multiple at all. To put the pricing of the company into perspective, I then decided to compare it to five similar firms. On a price to operating cash flow basis, these firms ranged from a low of 5 to a high of 31.7. Our prospect was the cheapest of the group. If, instead, we use the EV to EBITDA approach, the range would be from 1.8 to 11.1. In this scenario, only two of the five companies were cheaper than Victoria’s Secret & Co.

Company Price/Operating Cash Flow EV/EBITDA
Victoria’s Secret & Co. 4.8 3.9
The Gap (GPS) 6.0 5.3
Aritzia (OTCPK:ATZAF) 13.0 11.1
Foot Locker (FL) 5.0 1.8
Boot Barn Holdings (BOOT) 31.7 9.6
American Eagle Outfitters (AEO) 10.0 3.0


Based on all the data provided, it seems to me as though Victoria’s Secret & Co. has been on something of a wild ride. But from a profitability perspective, things are looking quite positive. Shares of the company are cheap on both an absolute basis and relative to similar players. Yes, the company is still closing more stores than it is opening, a trend that is likely to persist through at least this year. But given all of the other factors, I cannot help but to rate the enterprise a ‘buy’ prospect at this time.