Recently, on Black Friday weekend, I did something I haven’t done on a Black Friday weekend in literally decades… I realized as I was packing for a little trip that I was missing a critical piece of luggage.
I needed to have a garment bag to transport some shirts and other stuff from my hotel to my destination. So, I had to go to Target, which I thought would be terrifying on a Black Friday weekend.
While it was busy, it was nothing like I expected. I think there were more people in the Total Wine & More store I stopped in at during the week.
Anyway, I looked around and didn’t find what I needed, so now the nightmare scenario came into play… I had to go to Walmart on what was supposed to be the biggest shopping weekend of the entire year.
I drove up the street to Walmart, pulled in and again it was not nearly as crowded as I thought. There were no obnoxious people, no one was fighting over discounted items… It was relatively calm and measured.
So, you have to ask… What’s going on here? Is everything happening online now? Is it the new coronavirus variant that’s keeping people home?
Or maybe we’ve finally given up the crass commercialism of Christmas? Well, no. We invented crass commercialism in this country, and we’re not going to give it up that easily.
I think a lot of it is that shopping has moved online and after a tough couple of years, retailers have simply decided not to discount so heavily. After all, when you do the math of Black Friday, you don’t create new customers… retailers just bring demand forward and give away their margins.
I think a lot of them are starting to figure that out, and a lot of retailer stocks have not done well over the past few weeks in the run up to the holidays. But there is one that is an exception to that rule.
Victoria’s Secret & Co.
This is a national company, and its stock is up over the last month and the last week. Earnings are starting to improve, and the stock has been down quite a bit this year, but I think investors are starting to realize this company is undergoing a real turnaround.
Victoria’s Secret & Co. (VSCO) is a well-known retailer, but the stock has been a disaster since it was spun off from L Brands earlier this year. Institutions wanted to own L Brands, that great collection of brands, but did not necessarily want to own VSCO as a standalone company.
Retail investors got a few shares for every 100 shares of L Brands they owned, which meant they had a tiny position in VSCO and had to make the choice to either buy more or just sell it. In most cases, retail investors sold it, so there was just a ton of selling pressure in this stock since the day of the spinoff.
But now, earnings have been much better than expected. They’ve beaten analyst estimates both of the two quarters they’ve been on their own as a standalone company. We’re getting quarter over quarter and year over year sales growth as well as double-digit growth in operating income on a year over year basis.
We’re not quite back to 2019 levels of revenue and operating cash flow, but we’re on the way. The stock is only trading at seven times earnings. This is a strong business with a huge, devoted customer base.
They are growing and will continue to grow. I think we’ll see a double-digit growth rate going forward, so it should trade for a lot more than seven times earnings. So, this is a cheap earnings play on a well-known company that I sincerely doubt is going to go out of business anytime soon.
In fact, I think business will continue to improve and the stock price will get back up towards the earlier highs, which would be a dramatic gain from current levels. Over the next year, it’s really hard for me to see how investors don’t make 50% on their money in shares of VSCO.
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