On Tuesday, Victoria's Secret (NYSE:VSCO) received an improved outlook from UBS, with the firm upgrading the stock's rating from Sell to Neutral and significantly raising the price target to $47.00 from the previous $18.00.
The stock has shown remarkable momentum, delivering a 157% return over the past six months according to InvestingPro data. The change in perspective comes after a reassessment of the company's long-term prospects and reduced perceived risks.
The analyst at UBS noted four primary reasons for the improved stance on Victoria's Secret. Firstly, the company has shown signs of fundamental improvement, as reflected in the recent positive shift in North America's Q3 comparable sales, which turned around to a +3% year-over-year from a -3% in Q2. This performance suggests a rebound in the company's operations.
Additionally, the analyst pointed out that market share pressures appear to be easing. Victoria's Secret's sales growth in North America during Q3 outpaced the intimate apparel industry, which saw a low single-digit percentage decline.
This indicates that Victoria's Secret is gaining ground in its market segment, with InvestingPro data showing the company maintains a healthy gross profit margin of 45% and generates annual revenue exceeding $6.2 billion.
The firm's more optimistic macroeconomic view also plays a role in the upgraded rating. The current robust consumer spending environment is expected to benefit mall-based retailers, including Victoria's Secret. This environment, paired with the company's recent performance, provides a conducive backdrop for growth.
Finally, UBS expressed increased confidence in Victoria's Secret's new CEO's turnaround plan. The plan is believed to have the potential to drive sustainable growth for the company. Supporting this optimism, InvestingPro reveals that 10 analysts have revised their earnings upward for the upcoming period.
As a result of these factors, UBS has raised its FY24-26 earnings per share estimates by 15-20% and applied a higher price-to-earnings ratio, reflecting the reduced risk to Victoria's Secret's long-term outlook.
This comprehensive reassessment led to the decision to lift the price target and adjust the stock's rating. InvestingPro's analysis suggests the stock is currently trading above its Fair Value, with 12 additional ProTips available for subscribers.
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