Victoria's Secret (VSCO)

Intimatewear and beauty retailer Victoria’s Secret (NYSE:VSCO) reported Q1 CY2025 results beating Wall Street’s revenue expectations, but sales were flat year on year at $1.35 billion. On the other hand, next quarter’s revenue guidance of $1.40 billion was less impressive, coming in 1.1% below analysts’ estimates. Its non-GAAP profit of $0.09 per share was significantly above analysts’ consensus estimates.

Company Overview

Spun off from L Brands in 2020, Victoria’s Secret (NYSE:VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering intimates, undergarments, and sleepwear for women include American Eagle’s (NYSE:AEO) Aerie brand and LVMH’s (ENXTPA:MC) La Perla brand as well as private companies ThirdLove and Adore Me.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $6.22 billion in revenue over the past 12 months, Victoria's Secret is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Victoria's Secret struggled to generate demand over the last five years (we compare to 2019 to normalize for COVID-19 impacts). Its sales dropped by 1.6% annually despite opening new stores. This implies its underperformance was driven by lower sales at existing, established locations.

This quarter, Victoria's Secret’s $1.35 billion of revenue was flat year on year but beat Wall Street’s estimates by 0.8%. Company management is currently guiding for a 1.6% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection indicates its newer products will spur better top-line performance, it is still below average for the sector.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Victoria's Secret sported 1,378 locations in the latest quarter. Over the last two years, it has generally opened new stores, averaging 1.1% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Victoria's Secret’s demand has been shrinking over the last two years as its same-store sales have averaged 3.1% annual declines. This performance is concerning - it shows Victoria's Secret artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

In the latest quarter, Victoria's Secret’s same-store sales fell by 1% year on year. This decrease was an improvement from its historical levels. It’s always great to see a business’s demand trends improve.

Victoria's Secret’s unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 36.5% gross margin over the last two years. That means for every $100 in revenue, $63.48 went towards paying for inventory, transportation, and distribution.

Victoria's Secret produced a 35.1% gross profit margin in Q1, down 1.8 percentage points year on year and missing analysts’ estimates by 4.1%. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Victoria's Secret’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 4.4% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structure.

Analyzing the trend in its profitability, Victoria's Secret’s operating margin might fluctuated slightly but has generally stayed the same over the last year, which doesn’t help its cause.

In Q1, Victoria's Secret generated an operating margin profit margin of 1.5%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Victoria's Secret’s full-year EPS dropped 98.9%, or 25.8% annually, over the last three years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, Victoria's Secret’s low margin of safety could leave its stock price susceptible to large downswings.

In Q1, Victoria's Secret reported EPS at $0.09, down from $0.12 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Victoria's Secret’s full-year EPS of $2.59 to shrink by 17%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Victoria's Secret has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 4.9% over the last two years, better than the broader consumer retail sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Victoria's Secret hasn’t been the highest-quality company lately because of its poor revenue and EPS performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 68.6%, splendid for a consumer retail business.

Victoria's Secret reported $0 of cash and $0 of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $619.8 million of EBITDA over the last 12 months, we view Victoria's Secret’s 0.0× net-debt-to-EBITDA ratio as safe. We also see its $63.02 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Victoria's Secret blew past analysts’ adjusted operating income and EPS expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its gross margin missed and its EPS guidance for next quarter fell short. Overall, this was a weaker quarter. The stock traded down 2% to $21.75 immediately following the results.

Updated: June 12, 2025 at 10:34 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Victoria's Secret.

Victoria's Secret falls short of our quality standards. To begin with, its revenue has declined over the last five years. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Victoria's Secret’s P/E ratio based on the next 12 months is 9.2x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $22.36 on the company (compared to the current share price of $19.75).