What happened
Shares of lingerie-maker Victoria's Secret (NYSE: VSCO) tumbled 9.3% through 11:30 a.m. ET Thursday after reporting a big earnings miss in the first quarter of fiscal 2023 -- and a potentially even bigger miss next quarter.
Heading into Q1, analysts had forecast Victoria's Secret would earn $0.54 per share, non-GAAP, on sales of $1.42 billion. Victoria's Secret came close to hitting the sales target, delivering sales of $1.41 billion, but earnings fell woefully short of projections -- just $0.28 per share.
So what
It gets worse.
The "$0.28" profit Victoria's Secret reported, it turns out, was also a non-GAAP figure. When calculated according to generally accepted accounting principles (GAAP), earnings for this retailer were a single, solitary $0.01 per share -- down 99% from one year ago.
CEO Martin Waters noted that Q1 was "challenging" for Victoria's Secret, with sales shaping up more or less as expected, but the company needing to be "more promotional than planned," i.e., having to put more items on sale in order to sell what it wanted to.
Now what
Now, the good news is that after all the discounting, inventory levels at Victoria's Secret and its PINK subsidiary have been whittled down by "low-double digits" compared to last year, such that the company is now "prudently positioned as we move forward." The bad news is that "the challenging environment is likely to continue for the balance of 2023." Hence, business is not going to get better for Victoria's Secret anytime soon.
Management is forecasting a mid-single-digit decline in sales in Q2, so probably somewhere around $1.4 billion. Non-GAAP earnings are expected to range from $0.10 to $0.40 per share. Not only is that worse than the $0.88 per share that Wall Street is looking for, but given the vast difference between non-GAAP and GAAP earnings in Q1, I suspect it could mean that Victoria's Secret will end up losing money in Q2.
Longer term, Victoria's Secret seems to be betting on a rebound in the year's second half, forecasting only flat-to-low single-digit sales declines for 2023 as a whole, and (non-GAAP) operating profit margins that are positive 5% to 6%. I'm not sure how that jibes, though, with the warning about "the balance of 2023" remaining challenging.
Seems to me, investors should fully expect bad numbers out of Victoria's Secret in Q2 -- and begin preparing to see that bad news continue through Q3 and Q4 as well.
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