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JPMorgan downgrades Victoria’s Secret, cites trouble for lingerie company’s core business

It’s time to move to the sidelines on Victoria’s Secret after its latest earnings results, according to JPMorgan. Analyst Matthew Boss downgraded the stock to neutral from overweight, citing continued pressure ahead for the lingerie company’s core business given a tough macro backdrop. “While VSCO is the leading market share player in US lingerie (~20% share) and women’s mass fragrance (~30% share) categories, and has outlined structural cost reductions of ~$250M over the next 3-yrs – top-line growth & gross profit dollars have declined sequentially tied to an increasingly cautious macro-economic backdrop, hindering the brand’s growth & profitability profile,” Boss wrote in a Thursday note. Shares of Victoria’s Secret declined more than 2% in Thursday premarket trading after the company reported a mixed third quarter. The lingerie company reported earnings of 29 cents per share on revenue of $1.32 billion. Analysts polled by Refinitiv were expecting earnings of 23 cents per share on revenue of $1.33 billion. A deeper look showed that lower average basket sizes in both physical stores and online retail channels pointed to a “more cautious and cost conscious consumer” that weighed on third-quarter results, according to the note. Other notable signs showed that sales of intimates and apparel “lagged the balance of the business” amid a highly promotional environment, while beauty “significantly outperformed.” “Looking at this another way, backing out of 3Q’s 350bps merchandise margin rate decline in the quarter – our math points to ‘core’ full-price sales dollars down 17% Y/Y in 3Q or a 900bps sequential softening relative to 2Q full-price ‘core’ sales down 8% on our math with mgmt’s negative high-single-digit sales forecast for 4Q translating into a similar negative high-teens full price ‘core’ adjusting for incremental promotional actions (down 425bps Y/Y by our estimates) to drive consumer traffic & conversion,” Boss wrote. Shares of Victoria’s Secret are off about 17% in 2022. The analyst’s $43 price target, down from $51, indicates about 6% downside from Wednesday’s closing price. The stock is down more than 2% in Thursday premarket trading. –CNBC’s Michael Bloom contributed to this report.

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