Victoria’s Secret Trade

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Victoria’s Secret owned by parent Limited Brands (LB) has failed to impress and has struggled to grow in sales even with promotions being offered. American Eagle’s (AEO) Aerie brand has attempted to embrace a more “realistic” image of young women and promote body positive imaging rather than a hyper-sexualized VS brand. Millennials seem to favor Aerie as they have experienced much stronger growth in the past several quarters.

Victoria’s Secret offers in-store discounts at a time where mall traffic is suffering. Put simply, their marketing efforts need to shift to where the customers and visiting or they will lose out on a growing segment of the market. Currently, 80% of Victoria’s Secret traffic is coming from physical stores and only 20% from the direct channel. Indirect competition has heated up as competitors Nike (NKE), Under Armour (UA), and Lululemon (LULU) tap into the female athlete market. Our view is that Victoria’s Secret should not have gotten rid of their swimwear brand, should continue to invest in apparel for the female athlete, consider offering half cup sizing, and since they are already too late to the game – seriously consider an acquisition to give them market share to the online shopping Millennial market.

Victoria’s Secret continues to sell the most lingerie, and carries a five year average operating margin of 16% which is very good. The issue is that compared to their longer term average operating margins they have been on a steady decline.

Management appears to believe there is more opportunity for store growth in North America and this carries risk as sales are shifting more towards online and mall traffic is likely to suffer. Given this, 99% of the store fleet is cash flow positive on an afterax cash basis and maybe the market is overly pessimistic. Our view is that VS should focus on international and online opportunities especially where China continues to show promise.

Les Wexner has been CEO and chairman of the board for over 50 years and has a tremendous history of returning capital to shareholders and running the business well. Victoria’s Secret and Bath & Body Works make up the majority of L Brands sales and are both number one brands in their respective categories.

The Trade

This trade idea is simple. Buy some out-of-the-money (OTM) call options in Limited Brands (LB) at 8/24 expiration at a 32.50 strike price. Limited Brands (LB) reports earnings on 8/20 and I actually do not think that earnings will be good. The best trade would be to hope for a slight uptick in price prior to earnings release where you can sell and pocket a small profit without being exposed to their earnings report. If you are feeling “risky” and your options have not gone in-the-money (ITM) prior to earnings release you can hold and see what happens (although as mentioned I am not bullish on this report) so better to sell prior.

You can use the Robinhood platform to trade options with $0 commissions! The current limit price of this option is $1.25 – $1.35.

Trade at your own risk! If new to options trading, start with paper trading before using real money. Thanks for reading!

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