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The Hidden Problems With Victoria's Secret's First Quarter

Motley Fool - Fri Jun 9, 9:07AM CDT

Victoria's Secret(NYSE: VSCO) is something of a cultural icon, with an industry-leading position in lingerie. That said, it has been facing stiff competition from upstart brands like American Eagle's (NYSE: AEO) Aerie concept. In response, Victoria's Secret has been repositioning its business. Progress has been slow, but the retailer managed to hit its sales targets in the first quarter of 2023. That's actually a mixture of good news and bad news.

A tough backdrop

Increased competition has been a major headwind for Victoria's Secret for a number of years. While the company has been closing stores, peers like Aerie have been opening them. To put a number on that, Victoria's Secret closed 20 stores in the first quarter of its fiscal 2023. Aerie, meanwhile, opened two stores in Q1.

Two people shopping in a store.

Image source: Getty Images.

While two stores may not sound like a huge change, Aerie's total store count is 297 compared to Victoria's Secret's 1,347. So, in percentage terms, Aerie's store count increased by around half a percent in the quarter, while Victoria's Secret's count fell by roughly 1.5%.

That has to be examined against the bigger backdrop in Q1. Victoria's Secret described the period as continuing "to be a volatile macro environment for our customer," and that "as the quarter progressed business became more challenging." In other words, Victoria's Secret is working to deal with challenging internal and external headwinds.

That makes the company's ability to hit its internal sales target for the fiscal first quarter a rather comforting outcome. But that doesn't mean the results were actually good.

Two facts to consider

Given the reduction in store count, it was almost a given that Victoria's Secret's sales would fall year over year. And that's exactly what happened, with the top line down 5% to $1.4 billion. That was roughly what was expected, so it is hard to suggest this was a terrible outcome. However, along with that drop, management reported an 11% same-store sales decline.

The lingering effects of the coronavirus pandemic are a complication. Stores were closed for a spell early in the pandemic and then reopened, with people seemingly playing catch-up with a burst of spending. So there's some noise here.

However, investors should probably keep a close eye on the same-store sales trends. If this key metric continues to be weak, it could hint that customers are, indeed, shifting to other lingerie options or just simply spending less because of economic concerns. Either would lead to ongoing top-line troubles.

That brings up the next bit of news. While Victoria's Secret hit its sales target, it did so by leaning heavily on promotional activity. Basically, it needed to hold sales to lure customers into its stores. That is not a great sign for the business.

Victoria's Secret is working on some product launches through the rest of the fiscal year that it hopes will help spur demand. But at the same time, it also sells some products, like underwear, that aren't as easy to differentiate as, say, bras. And given the fact that people seem increasingly focused on value, the benefit from new, likely more expensive, products is hard to predict. Same-store sales will give some indication of how well its new fare is resonating with customers.

An iconic brand, but more work to be done

Stepping back from the quarter, it appears that the turnaround efforts at Victoria's Secret aren't having as dramatic an effect as hoped. That doesn't mean the retailer can't get back into growth mode, just that it is likely to take longer than some investors might have hoped. Notably, the stock price has declined 45% this year alone.

It appears that there is still a lot of work to be done. For example, management highlighted the need to revamp its Pink brand and the fact that it has to rebuild its sportswear business (this time focused first around sports bras). These are longer-term changes that won't likely lead to improvements in quarterly results over the near term.

The end of the story is that most investors will probably want to keep Victoria's Secret on the watch list until the turnaround is further along.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.

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