The Ratings Game: Victoria’s Secret’s customers are ‘broadly reflective of middle America,’ analyst says in downgrade

Victoria’s Secret & Co.’s core customers are “broadly reflective” of a middle America battered by inflation, and the lingerie maker is facing greater competition from off-price offerings, JPMorgan analysts said Thursday in downgrading the stock.

Analysts downgraded Victoria’s Secret

to the equivalent of “hold” from the equivalent of “buy,” and lowered their price target on the stock to $43 from $46. Shares fell 5.6% on Thursday to 43.48.

JPMorgan downgraded Victoria’s Secret a day after the company reported third-quarter earnings. Chief Executive Martin Waters at that time said he expected customers “to be challenged by inflationary and other financial pressures for the balance of 2022.” Waters said the company had adjusted its costs and stockpiles of unsold goods accordingly.

The analysts cited an “increasingly more difficult macroeconomic backdrop notably for VSCO’s core customer demographic broadly reflective of middle America, or the low/middle-income demographic with today’s savings rate at 3.1% (below 8.8% pre-pandemic), persistent inflationary pressures, and increasing middle income employment concerns constraining discretionary spending.”

The backdrop, they said, would likely force the company to cut prices for longer in an effort to propel demand. Retailers in general have found themselves stuck with clothing that’s been tougher to sell this year, after rising costs of living forced many customers to prioritize basics, forcing stores to discount more aggressively.

JPMorgan also said that Victoria’s Secret faced “greater competition as intimates (namely panties) became increasingly available in the off-price channel throughout the quarter.”

During the company’s earnings conference call, Waters said shoppers bought less on average during the quarter, with basket sizes shrinking. He said that trend reflected “a customer who’s very cautious and cost conscious in this current environment.”

The company’s beauty segment, which includes its fragrances, was the strongest performer during the quarter, Waters said. Demand for bras, he said, was “in-line with the overall business.”

Retail forecasts for the fourth quarter, which includes the key holiday season, have been a mixed bag. Among other clothing retailers, discounter Ross Stores Inc.

raised its full-year forecast, and cited “improved holiday assortments.” Gap Inc.

also said it expected to better align inventories with demand by the spring. However, Target Corp.

noted “rapidly softening demand” and Williams-Sonoma Inc.

warned of “inconsistent” demand.

Of the nine analyst ratings on Victoria’s Secret stock tracked by FactSet, four were ‘hold’ ratings. The others were either ‘buy’ or ‘overweight.’

Victoria’s Secret stock is down 22% so far this year. By comparison, the S&P 500 Index

has fallen 15% over that time.

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