Victoria’s Secret outlook revised to stable by S&P on improved performance

Investing.com -- S&P Global Ratings has revised its outlook on U.S.-based intimates retailer Victoria’s Secret & Co. (VS) to stable from negative, citing improved operating performance and deleveraging. The rating agency affirmed all its ratings, including the ’BB-’ issuer credit rating.

During the fourth quarter of 2024, VS reported better-than-expected operating performance and fully paid down borrowings under its asset-based lending (ABL) facility, which led to improved credit metrics. The company’s net sales increased 1% while its comparable same-store sales increased 3% due to a strong holiday season and improved traffic trends within both its VS and PINK brands. This marks a significant rebound from negative comparable same-store sales of 8% during the fourth quarter of fiscal 2023.

However, S&P Global Ratings anticipates customer discretionary spending levels will remain relatively weak through fiscal 2025, particularly among lower-income consumers. Sales growth for VS is expected to be relatively muted, up roughly 1% for fiscal 2025 as consumers trade down to more affordable options from retailers like Walmart (NYSE:WMT), Target (NYSE:TGT), and Amazon (NASDAQ:AMZN).

VS is expected to sustain adequate inventory levels for fiscal 2025 as it continues to manage its stock-keeping units while introducing new, sought-after products and apparel to meet customer demand. The company’s ongoing efforts to improve operational efficiency are expected to benefit profitability metrics over the next 12 months despite anticipated tariff headwinds.

VS’ trailing-12-month S&P Global Ratings-adjusted EBITDA margin improved 60 basis points year-over-year to 16.4% as of Feb. 3, 2025, reflecting modest top-line growth and higher gross margin from better labor efficiency, lower product costs, and reduced promotional activity across its brands. However, input cost volatility and trade tariffs over the next year are expected to partially offset profit margin expansion, leading to S&P Global Ratings-adjusted EBITDA margins of 16.5% in fiscal 2025.

The company is expected to maintain adequate liquidity over the next 12 months, supported by full availability under its ABL facility, ample balance sheet cash, and positive free operating cash flow generation. At the end of the fourth quarter, VS had roughly $227 million of cash on hand after successfully repaying $440 million of borrowings under its $750 million ABL facility.

The company expects net new consolidated store openings will be between 13 and 53 for fiscal 2025, supported mainly through growth in its partner-operated stores. VS anticipates it will utilize a portion of its cash to opportunistically repurchase shares over the next 12 to 24 months given its board-approved share-repurchase program, allowing management to buy back up to $250 million of its common stock.

S&P Global Ratings could lower its rating if leverage is sustained above 3x, which could happen if sales decline due to higher-price points to offset tariffs or a challenging operating environment or if the company’s competitive standing weakens materially. Conversely, the rating could be raised if the company demonstrates a track record of sales growth, improving margins, and successful positioning for long-term growth.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.