VICTORIAS SECRET AND CO VSCO S
May 25, 2022 - 1:56pm EST by
bluewater12
2022 2023
Price: 42.00 EPS 6.80 7.6
Shares Out. (in M): 88 P/E 6.2 5.5
Market Cap (in $M): 3,700 P/FCF 0 0
Net Debt (in $M): 490 EBIT 0 0
TEV (in $M): 4,190 TEV/EBIT 0 0
Borrow Cost: General Collateral

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Description

This is a fast moving market so I’m going to post a high-level idea vs. the usual deep dive. I think VSCO is currently a top short in retail as covid beneficiaries mean revert. Why?

  • Sycamore partners valued VSCO at $1.1b just prior to covid, it now sports an EV over $4b.
  • Stock flat/barely down vs retail index which peaked last summer.

 

  • Alt data is bad and getting worse.

Keybanc data shows large YoY declines in sales and sales are down vs. 2019 (store closures a factor with 2019 comp).

Consumer edge sales data is down double digits and getting worse.

Website traffic is down ~25% YoY and getting worse. 31% of sales were online in 2021.

  • Inflation and cost issues will hit VSCO just as hard as other retailers.

Lots of retailers are hitting sales estimates but missing on earnings because of cost inflation. VSCO already guided down 1Q (EPS of $0.70-$0.95 vs. consensus of $1.32) and yet they maintained full year operating income guide of flat with 2021. 

  • Numbers too high given trends.

 

  • Valuation currently inline with other better retailers that have already lowered numbers.

The bet is that VSCO's E is wrong. Very wrong. 

  • Structural short thesis of brand deterioration still in play.

Potential missteps in brand management (https://www.cnbc.com/2021/06/17/5-things-l-brands-is-doing-to-accelerate-victorias-secrets-turnaround.html) that alienated core customers, similar to BBBY and other failed retail turnarounds.

 

 

  • Opportunity exists because:

No historical stock chart to rely upon.

VSCO has not been a controversial retail name. Short interest is just 5% and basically flat with last fall levels.

Consensus long with 7of 9 analysts with Buy ratings. Bulls appear to be long onlys that believe the turnaround narrative, a similar narrative that has blown apart for almost all other covid beneficiary retailers. Bulls are confusing a stimulus driven boost in sales and fixed cost leverage boost in earnings as evidence of a brand revival/turnaround. Sales declines and fixed cost deleveraging will end this narrative.

 

At a $1.1b EV, VSCO is a $7 stock. Down 85%.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Earnings on 5/31

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