Consumer Shift To Value Hits Premium Brands: Analyst On Victoria Secret's Sales Decline And Market Position

Telsey Advisory Group analyst Dana Telsey reiterated a Market Perform rating on Victoria's Secret & Co. VSCO with a price target of $21.

VSCO will report 2Q23 earnings on Wednesday, August 30, after the market close.

The analyst expects Q2 EPS of $0.25 vs. $1.09 last year, as compared to the consensus of $0.26. The Y/Y decline is because VSCO has struggled with lower traffic, conversion, and AUR in North America and increased promotional activity pressuring margins. 

With the overall category coming under pressure in the quarter, the analyst notes that there has been a consumer shift to lower price points and value, disproportionately impacting more premium-positioned brands such as VSCO.

Telsey forecasts total sales to decline 5.2% Y/Y to $1.443 billion on the top line, slightly above the consensus estimate of $1.438 billion. 

Given the reduced annual outlook last quarter, the analyst expects macro pressure to continue through the second quarter and likely beyond. 

Driving the decline, the analyst estimates comps to be down 10%, below the consensus of down 8.4% and on top of the 8.0% decline last year.

The gross margin is expected to contract 190 bps Y/Y to 34.2%, broadly in line with the market's expectation of 34.3% and within the guided range for 34%-35% for the quarter.

In addition, Telsey forecasts 310 bps of SG&A deleverage to 30.8%, in line with the consensus and guidance of 30%-31%. 

The analyst's operating income forecast equates to a margin of 3.3%, down 500 bps, as compared to the consensus of 3.5% and last year's margin of 8.3%.

On the positive side, the analyst highlights the management's latest strategies to drive growth that includes the implementation of a loyalty program, investing in a more efficient "store-of-the-future" format, increasing newness across the offering, and taking advantage of a normalized supply chain to chase demand across a revamped PINK apparel offering.

Price Action: VSCO shares are trading higher by 3.98% to $18.04 on the last check Friday.