Victoria’s Secret Anticipates $100 Million in Supply Chain Disruptions, but Investors Don’t Seem to Mind
The retailer is anticipating approximately $100 million in supply chain disruptions in the fourth quarter.
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“So it’s a really big thing,” Martin Water, chief executive officer of Victoria’s Secret Lingerie, told analysts on Thursday morning’s conference call. “To go into the season we ordered around 200 million units of stock and 90 million of those 200 million are delayed. That’s 45 percent of our purchase requirement for the full season delayed. And the delays are between two and nine weeks. In some cases we won’t get the merchandise at all. So all of our plans are being reworked. Ninety percent of our merchandise will come in by air and that doesn’t make it super quick because air in the old days — meaning a year ago — used to be two days. It is now more like nine days. And in addition to that, we have 100 vessels at anchor right now that are not going ashore. And all of that winds up to $150 million of the cost pressure, $50 million of which we recorded in the third quarter, $100 million of which will be in the fourth quarter.”
Pandemic supply chain disruptions and increased demand around the holiday shopping season are not specific to Victoria’s Secret. In fact, everyone from big-box retailers Target Corp. and Walmart Inc., to department stores like Kohl’s and Macy’s, have bemoaned the effects of supply chain headwinds during recent earnings. But the disruptions are not impacting all Wall Street firms the same.
Shares of Victoria’s Secret closed up 14.65 percent Thursday to 57.91 apiece, despite the anticipated $100 million loss.
“We continue to believe investors grew too concerned over broad retail performance following second-quarter 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,” Simeon Siegel, managing director and senior retail analyst at BMO Capital Markets, wrote in a note.
“While spot ocean freight rates remain elevated, [Victoria’s Secret] has actually decreased sequentially from [third-quarter average] levels in the first few weeks of [the fourth quarter], while air freight rates remain near pandemic highs, [upward of] 15 percent sequentially so far in [the fourth quarter],” Siegel continued. “The [year-over-year] percentage increases in rates have also narrowed from [third quarter] into [fourth quarter], with trucking costs telling a similar story. Selling less and charging more continues to drive upside, and we expect [Victoria’s Secret] to continue benefiting.”
Ike Boruchow, senior retail analyst at Wells Fargo, rated Victoria’s Secret stock “overweight,” setting a new, higher price target for shares between $85 and $90 apiece, and writing in a note that the retailer’s recovery story “remains undervalued.”
“While we expect the shares on a better-than-feared [third-quarter] and [fourth-quarter] outlook, we don’t see anything today that changes our bullish stance on the company, particularly with the shares trading in the $50s after-hours [on Wednesday],” Boruchow wrote in the note. “We’re much more focused on the brand’s healthy momentum [than supply chain headwinds] and the stock’s valuation. [There’s] a lot to like in a tough retail environment.
“Importantly, we view this [$100 million disruption] as management’s opportunity to put sell-side expectations in the right place, including messaging [of] a continuation of supply chain and inflationary pressures into at least spring 2022,” the analyst continued.
Aside from increased expenses, Water said the biggest downside to supply chain disruptions was Victoria’s Secret inability to chase new trends midseason.
“Normally we would buy a season [with] 55 percent or 45 percent chase,” he explained on the call. “We can’t do that now. You’ve got to place all of your bets [in advance]. And the same will be true for the spring season. It’s just not safe to leave orders on the table, money on the table and chase it later. So we’re more buying forward, with longer lead times, less agility in our supply chain and more reworking of our plans on a daily basis to respond to what we have.”
The CEO added that lower inventory levels have not led to faster sell-throughs.
“I don’t buy that scarcity equals faster selling. We don’t see that happening at all,” Waters said. “[Supply chain disruptions] impact the customer in that she doesn’t see the array of newness that she’s used to seeing at this time of year. Now that will put pressure on November. We hope that December will be better and we’re expecting that December will be better, and we think that there’s some upside in January, as well.”
Victoria’s Secret also raised its fourth-quarter and full-year guidance, which might have caused the Street to remain bullish on the stock.
The firm is now expecting fourth-quarter revenues to be flat to up 3 percent, compared with 2020’s fourth-quarter revenues of $2.1 billion. The retailer is also anticipating full fiscal-year 2021 revenues to be in the range of $6.7 billion to $6.8 billion, an increase of about 25 percent, compared with 2020’s full-year sales results.
“We have reason to believe we might do better, but we’re not guiding to that,” Waters told analysts.
Meanwhile, Victoria’s Secret continues to execute its comeback strategy, which includes updated storefronts, a new C-suite and board member line-up, a revised assortment and closing unprofitable locations for more lucrative markets, such as Israel, Milan and India.
Waters called out strength in bras, including the lingerie division’s new mastectomy bra — the firm purchased 12,000 units and sold out in five days — and the Pink logo business, and said the first of three Victoria’s Secret’s “stores of the future” will open this weekend in Chicago.
“The repositioning of the brand continues to gain great momentum and that shows up in our sales. It shows up in the help of the file, shows up in our social media likes and follower-ship, 71 million followers on Instagram and some really strong responses,” Water said.
On Wednesday, Victoria’s Secret told WWD exclusively that tennis star Naomi Osaka is joining the VS Collective, an initiative that includes women from diverse backgrounds who share their stories by way of partnerships and collaborations.
Other members of the VS Collective include model and mental health advocate Hailey Bieber; actress and entrepreneur Priyanka Chopra; World Champion freestyle skier Eileen Gu; professional soccer player and LGBTQ activist Megan Rapinoe; plus-size model Paloma Elsesser, and transgender model Valentina Sampaio.
“So we feel really good about the diversity that we have across that mix and we feel really good about working with those partners in different ways,” Waters said. “We have a wide variety of ways in which we can partner with these incredible women and I can tell you that the Collective will grow. There will be more people included and we will grow this family in a really strong and inclusive way.
“Our job is to just make the best out of the assortment that we’ve got and that’s what we’re doing on a day to day basis,” he added.