Traditional metrics make Victoria's Secret ( or "VS" ) flat out undervalued. Price / Sales sits at 6, Per at 5.94, Market cap at $4.4 Billion and annual revenue at 6.62 Billion. Why is this the case? Is something fundamentally wrong with the business or is this a great deal in the stock market?
VS has been a declining business during the past decade. The constant decline in revenues is already priced in the company's valuation. However we, at Unflagged Research, think the business is at an inflection point for the following reasons.
Overspending stopped. VS' Angels and VS' fashion show no longer exist or take place. This dramatic cut on expenses has allowed the company to have flexible expenses that follow their fluctuating income. However, everybody already knows Victoria's secret. The company will now start to reap the rewards of those past expenditures on marketing. We can see this clearly reflected on their revenues from the past 2 quarters. These have grown substantially, just like if the company continued spending crazy amounts of money on marketing, when currently the company barely spends anything on marketing at all.
In the past, VS was part of Limited Brands, a holding composed of VS and Bath and Body Works. It was very unattractive to invest on the holding before, because both businesses were declining pre pandemic and only partial exposure could be achieved from the VS business. The holding was hyper indebted before the pandemic.
When Covid hit, B&BW business surged like never before. Given that their whole business revolves around scented portable antibacterial gel, scented soap and scented candles, you can easily imagine the outcome of this situation. Revenues at B&BW skyrocketed. On the other hand, VS closed most of its stores and revenues decreased significantly. Many investors bought LB seeking exposure to B&BW expecting it to benefit from pandemic measures and increased hand sanitizing product's consumption.
Under those circumstances, LB's management saw a once in a life time opportunity to split the holding. LB or Limited Brands was split on August 3, 2021 between VS and B&BW. Now both trade under the "VSCO" and "BBWI" tickers.
Given the financial results at the moment of the split, VS could not leave highly indebted, because it was expected to have negative performance and not be able to repay high amounts of debt. The whole situation resulted in VS leaving in an amazing and easily sustainable financial condition, whereas B&BW left with a ton of debt and high hopes for the future. B&BW left with $12 Billion in debt and VS with only $3.3 Billion. Part of the debt B&BW has was incurred in the past by the VS business. Market cap. of B&BW is $18.26 Billion and Victoria's Secret market cap only $4.46 Billion.
VS is now in a perfect financial situation and the only thing needed to mark the inflection point is a change of trend for their revenues. We at Unflagged Research, think demand for underwear will increase strongly in the short term. Overuse of old clothes, weight change among customers and many clothes becoming old after being unused and stored in a closet during lockdown are some of the reasons for our forecasted trend.
On the other hand we think B&BW's revenues increased inorganically and are now unsustainable. The valuation of their business is already pricing in higher revenues that we see as unachievable.
Our 3-Year price target for VSCO is 200$. The stock is at 50.75$ .
Our 3-Year price target for BBWI is 8.64$ and the stock is now at 69.09$. We ultimately think Bath & Body works will go bankrupt.
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