Wells Fargo downgrades Victoria’s Secret on valuation concerns

Investing.com -- Wells Fargo downgraded the Victoria’s Secret&Co to "equal weight" from "overweight," citing limited upside following a sharp rally this year.

The lingerie retailer’s stock surged 185% in 2023, outperforming the S&P 500’s 12% gain, and is now trading at about 16 times Wells Fargo’s fiscal 2025 earnings estimate, the highest multiple since the company’s spin-off.

While Wells Fargo (NYSE:WFC) acknowledged the progress under new CEO Hillary Super, including product revamps and rebranding efforts, it flagged challenges in sustaining margin improvements and achieving bullish earnings estimates of $3.50-$4.00 per share.

“With retailers widely noting value-seeking activities from consumers, VSCO has highlighted customer response to promos above expectations,” Wells analyst wrote.

Victoria’s Secret posted its first comparable sales growth in 10 quarters in the third quarter, driven by strong performance in North America and successful product launches. However, promotional activity continues would weigh on margins, the note added.

Wells Fargo said it remains positive on the company’s long-term turnaround story but sees better opportunities elsewhere in the near term, advising investors to revisit the stock on pullbacks.

Shares of Victoria’s Secret were down 1% at $47.55.

“We continue to look for opportunities to buy the stock on pullbacks — as we believe the business itself still has runway and a compelling story into 2025 and beyond”