Victoria’s Secret (VSCO) Makes No Secret It Thinks Its Stock Is Cheap; Large And Quick Buyback

3:20 pm Wednesday, December 29th, 2021

Victoria’s Secret (NYSE:VSCO) is making no secret of its perception that its stock’s price is undervalued. The stock is up nicely today following VSCO’s announcement of a $250 mln accelerated share repurchase agreement. The company also reaffirmed its Q4 (Jan) guidance for sales, operating income, and earnings.

Stepping back, the stock has been a disappointment since it was spun off from L Brands in July 2021. L Brands changed its name to Bath & Body Works (BBWI) and spun off VSCO as a separate entity. After an initial pop took VSCO’s stock price to $76 by early August, it subsequently embarked on a downward slide, recently dipping below $50.

The stock has been sliding because in both of its earnings reports as public company, VSCO missed on revenue while dealing with supply chain issues and reporting underwhelming digital sales. In fairness to VSCO, part of the reason sales have come up short is because the company has been reducing promotions in order to elevate the brand. The strategy has hurt the company’s top line, but it led to better margins and EPS beats in both quarters. That’s not a bad trade-off, in our view.

So, why is the stock up so much today? It’s mostly because this is not your typical share buyback announcement. This buyback is large and quick. Significantly, the $250 mln price tag represents about 5% of shares outstanding.

Also, most buybacks are wishy-washy, signaling an authorization to purchase shares rather than an actual commitment to buy back shares like this one does. Plus, most buybacks extend for a year or two. Here, VSCO will receive an initial delivery of 4.1 mln shares by the end of this week. That amounts to roughly $200 mln of the $250 mln right off the bat. The remaining portion of the ASR is expected to be completed in 1Q22. The reaffirmation of guidance is probably helping the stock as well. Q4 (Jan) sales are expected to be flat to up +3%, and EPS is projected at $2.35-2.65.

This affirmation reduces the likelihood that VSCO will report a third revenue miss. The company was particularly encouraged by its sales growth during the peak shopping days over the Thanksgiving weekend and the large rush of business as it approached December 25. Comments like those are encouraging; we had been nervous about Q4 because it will lap a federal stimulus payment made in January 2021. VSCO also said that over the past few months, it has stabilized its business.

Bottom line, the large size and quick turnaround of this buyback shows that management feels its stock’s price has been unfairly punished by the market. Investors have been reacting to the two revenue misses, but we applaud management for wanting to elevate its brand by reducing promotions. The company has also gotten leaner by closing 260 stores over the past two years. Finally, the stock trades at a very reasonable P/E of 7.5x; we can see why there is frustration with the stock’s performance.