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Victoria's Secret's Risk-Reward Profile Likely More Balanced Now, UBS Says in Downgrade

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Victoria's Secret's Risk-Reward Profile Likely More Balanced Now, UBS Says in Downgrade

Victoria's Secret's (VSXY) risk-reward profile now looks more balanced, while the lingerie retailer's turnaround thesis has played out, UBS Securities said Wednesday.

On Tuesday, the company raised its full-year sales and earnings outlook. "We are increasingly confident in the trajectory of the business," Chief Executive Hillary Super said. The company's shares closed 47% higher Tuesday.

UBS said its turnaround call for Victoria's Secret has played out, with the company having posted strong comparable sales growth for four quarters in a row amid improved execution. The retailer's initiatives are expected to drive comparable sales growth inflection, UBS analysts Mauricio Serna and Jay Sole said in a note to clients Wednesday.

"We believe (the company's) fundamentals have improved, supported by recent execution and momentum," the analysts said. "However, we are stepping to the sidelines given a more balanced risk/reward, with both continued operational progress and potential offsets from valuation and industry dynamics."

The brokerage downgraded its rating on the Victoria's Secret stock to neutral from buy and raised its price target to $90 from $81. UBS attributed the new price target to its expectations for an upgraded earnings outlook for the company for fiscal 2028, according to the note.

Victoria's Secret's shares were down 4.4% in Wednesday late-afternoon trade.

The company's initiatives have effectively repositioned the Victoria's Secret and PINK brands to deliver sustained comparable sales growth following several years of decreases, UBS said.

"We think improved sales growth, discipline around promotions, and fixed cost leverage should lead to a multiyear EPS recovery," Serna and Sole said. The brokerage projects a 14% four-year EPS compound annual growth rate post-2026, saying the guidance is "fairly priced."

"We believe the market has similar expectations," the analysts said. "We see limited (price target) upside and see a 1.2:1 upside/downside skew."

The women's intimate apparel industry in North America is expected to grow at a 2% annual rate, which UBS said was in line with overall apparel.

"The category lacks significant growth drivers to outperform," Serna and Sole wrote. "We remain positive on other categories like athleisure."

Price: $75.30, Change: $-4.76, Percent Change: -5.95%

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