Victoria's Secret & Co. (NYSE:VSCO) likely had a challenging first quarter due to decelerating trends across Specialty Retail, UBS said as it maintained its 'Sell' rating on the stock.
In a note ahead of its 1Q earnings release after the market close on Wednesday, May 31, the broker forecast an $0.11 earnings per share (EPS) miss and said it expects the company to lower its full-year EPS guidance, which could lead to downward revisions to sell-side estimates.
Victoria’s Secret said 1Q net sales were likely to decrease in the mid-single digit range compared to last year’s 1Q net sales of $1.484 billion when it released its fourth-quarter and full-year 2022 results in March. Adjusted net income is estimated to be in the range of $0.30 to $0.60 per diluted share, it said.
“While sentiment around VSCO is low, we think a weak report could cause it to fall further,” the UBS analysts wrote. “We thus see an unfavorable upside/downside skew over the event.”
The analysts noted that VSCO's stock has underperformed the S&P 500 by 3,900 basis points in the year to date and its FY1 price-earnings (P/E) ratio has declined to 5.3x from 7.5x since its last report.
“These stats indicate sentiment around VSCO is bearish. Our conversations with investors suggest some see VSCO's low P/E as an attractive entry point,” the analysts said.
“Our view is the market responds to ‘rate-of-change' more than valuation. We, therefore, don't think VSCO's P/E will provide much support if its fundamentals continue deteriorating.
“Lastly, we believe the ‘bar’ for the event is VSCO could lower its FY23 EPS outlook by $0.10 to $0.20. The upside risk is the market sees VSCO's updated guide as de-risked and this boosts sentiment around the stock.”
Given the tough macro and slower recovery, UBS said it has lowered its EPS expectations. It also cut its 12-month price target for the stock to $21 from $27.
The shares were down 3.4% at $24.23 in early afternoon trade in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com