Victoria’s Secret Stock Up 10% Today – Time to Buy VSCO Stock?

The price of Victoria’s Secret stock is surging nearly 10% so far this morning in pre-market stock trading action after the company announced an accelerated share buyback program while it reaffirmed its outlook for the business for the fourth quarter of 2021.

In a press release published today, the company announced that it seeks to buy up to $250 million of the company’s stock as part of an agreement with Goldman Sachs. The company will receive approximately 4.1 million shares as a result of the transaction. The entire amount is expected to be deployed before the end of the first quarter of 2022.

The transaction values Victoria’s Secret stock at a volume-weighted average price of around $61 per share or 25.5% higher than yesterday’s closing price. This partially explains why the price of VSCO stock is surging this morning.

Meanwhile, the management reaffirmed its guidance for the fourth quarter of the 2021 fiscal year, with sales being expected to land at $2.1 billion while its diluted earnings per share are forecasted to land in a range between $2.35 and $2.65 per share.

The consensus estimate among analysts surveyed by Capital IQ for revenues and earnings for the fourth quarter stands at $2.14 billion and $2.6 per share respectively.

“I am very pleased with our fourth quarter performance to date and believe we have solid plans in place for the balance of this holiday selling season.”, stated Martin Waters, the Chief Executive Officer of Victoria’s Secret.

He added: “I was particularly encouraged by our sales growth during the peak shopping days over the Thanksgiving weekend and the large rush of business as we approached December 25th.”

This reaffirmed fourth-quarter outlook along with the announcement of the accelerated share repurchase and these upbeat comments from the senior management are catalyzing today’s uptick in VSCO stock.

What could be expected from this retail stock following today’s news? In this article, I’ll be assessing the price action and fundamentals of Victoria’s Secret stock to outline plausible scenarios for the future.

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Victoria’s Secret Stock – Technical Analysis

The price of VSCO stock has been on a downtrend since the company released its second quarterly report after it was spun off from its former parent L Brands. Even though shares surged nearly 15% on the day that the report came out, they shed all of those gains over the next 30 days or so as they declined from a post-earnings closing price of $58 per share to $47.8 per share only a few days ago.

In the past few days, the stock has bounced off that low and today’s pre-market uptick is pushing the price to break both the falling wedge formation shown in the chart and the 50-day simple moving average.

Momentum indicators could be favoring a bullish outlook as well as the MACD seems poised to move above the signal line. Negative histogram readings have been steadily decreasing and that increases the odds of a breakout as well.

Moving forward, as long as the price remains above the 50-day SMA, chances are that the stock will keep rising until it hits the $56 level. If the price climbs above that threshold, the downtrend would be fully reversed and the rally could move to the $60 mark shortly afterward.

Victoria’s Secret Stock – Fundamental Analysis

As a standalone company, Victoria’s Secret’s sales have been steadily decreasing in the past few years from $8.1 billion in 2019 to $5.4 billion last year.

This year, the company seems poised to turn things around as sales will be increasing at least 24% compared to a year ago if the management’s fourth-quarter guidance turns out to be accurate.

Meanwhile, the company’s operating margins appear to be improving and so are its net margins.

The company’s solvency situation is quite positive with nearly $1 billion in long-term debt on assets of $4.37 billion including over $300 million in cash. Moreover, the firm produced around $860 million in free cash flows in the past twelve months resulting in an FCF margin of 13%.

For 2022, the market is expecting another positive year as sales are forecasted to grow to $7 billion. If that target is hit, the firm’s free cash flows could land at around $910 million. Based on that forecast, the company is being valued at around 5 times its forecasted FCFs.

This is quite a conservative trading multiple for a company with such a strong brand and whose spin-off seems to be working quite well.

From a fundamental standpoint, as long as Victoria’s Secret can continue to deliver some sort of top-line growth while maintaining these positive profit and cash-flow margins, chances are that the stock could rise significantly in 2022 as trading multiples may expand.

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