The Victoria's Secret & Co. (NYSE:VSCO) share price has fared very poorly over the last month, falling by a substantial 38%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 43% share price drop.
In spite of the heavy fall in price, Victoria's Secret may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.8x, since almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings that are retreating more than the market's of late, Victoria's Secret has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Victoria's Secret's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 67%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.
With this information, we find it odd that Victoria's Secret is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Bottom Line On Victoria's Secret's P/E
The softening of Victoria's Secret's shares means its P/E is now sitting at a pretty low level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Victoria's Secret currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Victoria's Secret (of which 1 is a bit unpleasant!) you should know about.
If you're unsure about the strength of Victoria's Secret's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.