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The Ratings Game: Victoria’s Secret plans to spend $150 million to manage supply chain problems that could suppress sales growth

Victoria’s Secret & Co. warns that the cost of managing supply chain challenges could reach $150 million for the combined third and fourth quarters, and even with the extra spend, sales could suffer.

Victoria’s Secret

shares soared more than 14% in Thursday trading after the underwear and apparel seller reported third-quarter profit that beat expectations, though revenue fell just short.

Like other retailers, the company is spending big to manage unprecedented supply chain challenges.

See: Target says measures to manage the supply-chain bottleneck has pressured margins, but analysts say it’s worth it

“We estimate the COVID-19 related disruption to our base of supply will increase our freight and product costs by as much as an incremental $100 million in Q4 (or $150 million in total for Q3/Q4 combined vs. our previous guidance of a total $100 million),” the company said in commentary released alongside the earnings numbers.

“In addition to higher costs, we know these challenges will minimize our flexibility to chase winners and deliver increased sales versus our forecast, which in turn may inhibit our ability to accelerate sales growth year-over-year beyond what we are forecasting for the quarter.”

Victoria’s Secret is guiding for fourth-quarter sales in a range of flat to up 3% compared with $2.10 billion last year. The FactSet consensus is for sales of $2.02 billion.

Wells Fargo analysts note that the supply chain and inflation pressures on Victoria’s Secret will worsen through the holidays. But the business is looking up overall.

“[The] recovery story remains undervalued, [and there’s] a lot to like in a tough retail environment,” analysts said. “Victoria’s Secret has shown us the brand momentum remains on track, but cost pressures are building – and the Street needs to appreciate that margins will likely come down next fiscal year.”

Wells Fargo rates Victoria’s Secret shares overweight, and moved its price target to $85 from $90.

“We continue to believe investors grew too concerned over broad retail performance following 2Q results, succumbing to government fears of ‘supply chain constraints’ and ‘inflation,’ which are just the scary way of saying ‘tight
inventory’ and ‘higher price points,’” wrote BMO Capital Markets analysts led by Simeon Siegel.

Also: Walmart faces labor, supply-chain pressures on margins despite earnings beat and holiday optimism, analysts say

“Selling less and charging more continues to drive upside, and we expect Victoria’s Secret to continue benefiting.”

BMO rates Victoria’s Secret stock outperform with an $89 price target.

“What’s clear is there’s a lot of energy in the organization to evolve product, marketing, and culture, and management has demonstrated meaningful progress already in an early stage,” wrote MKM Partners Managing Director Roxanne Meyer in a note.

“That said, 2022 is likely not an inflection year given the overhang of transient costs weighing on the model, and the [year-over-year comparison with the government] stimulus, particularly in 1H.”

MKM rates Victoria’s Secret stock buy with an $85 price target.

Victoria’s Secret separated from Bath & Body Works Inc.

in the summer. Shares have rallied more than 10% over the past month, but have tumbled 19.2% over the past three months.

The S&P 500 index

has gained 7% over the last three months.

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