Victoria's Secret & Co.: Navigating Tariffs and Rebuilding Through Global Expansion and Innovation

Victoria's Secret & Co. (VSCO) has long been synonymous with lingerie, but its latest quarterly results reveal a brand in the midst of reinvention. Despite a challenging global environment marked by tariffs and shifting consumer preferences, the company's first-quarter 2025 performance underscores its ability to leverage strategic initiatives—such as product innovation, international expansion, and cost discipline—to counteract near-term headwinds. While the path to recovery remains uneven, the data suggests VSCO is positioned to sustain momentum if it can execute on its roadmap.

EPS Beat and International Growth: A Fragile Foundation

In Q1 2025, VSCO reported an adjusted EPS of $0.09, narrowly meeting the high end of its guidance range and marking a slight improvement from its net loss of $0.05 in the prior-year period. While this figure represents a 25% year-over-year decline from $0.12 in Q1 2024, the results reflect progress in stabilizing operations. However, the company's top-line stagnation—total sales of $1.353 billion, flat compared to Q1 2024—highlights lingering challenges in North America, where store sales fell 1.1% and e-commerce dropped 3.5%.

The silver lining lies in international sales, which surged 9.3% to $198.4 million. This growth was fueled by VSCO's joint venture operations in China, franchised stores, and wholesale partnerships, underscoring the strategic importance of emerging markets. With over 1,380 stores across 70 countries, the company is doubling down on geographic diversification—a critical hedge against U.S. market saturation.

Strategic Leverage: Product Innovation and Lifestyle Branding

VSCO's pivot to a lifestyle brand is central to its revival. The company's Q1 results emphasized progress in expanding beyond lingerie to categories like Beauty, PINK apparel, and swimwear. These segments are proving resilient, with the Beauty business—bolstered by collaborations with influencers and niche products—serving as a key profit driver. Meanwhile, the PINK line's focus on affordability and modern aesthetics has broadened its appeal, particularly among younger demographics.

The introduction of sportswear and swim collections further reflects a bid to align with evolving consumer preferences for versatility and comfort. Management's emphasis on “brand reinvestment in customer experience and innovation” signals a deliberate shift toward becoming a holistic fashion destination. This strategy, if executed well, could unlock untapped revenue streams and reduce reliance on traditional categories.

Margin Pressures and the Tariff Challenge

Not all metrics are positive. Gross profit dropped 5.4% year-over-year to $474.2 million, driven by rising costs of goods sold (COGS) and occupancy expenses. The company attributes this to inflationary pressures and supply chain bottlenecks, compounded by $50 million in estimated annual tariff impacts—a key factor behind its revised full-year guidance.

While tariffs on imports from Southeast Asia pose a near-term threat, VSCO's response—such as cost-cutting measures and supplier diversification—suggests a pragmatic approach. The company's decision to close underperforming North American stores (reducing total locations to 1,378) aligns with efforts to optimize efficiency. However, sustained margin recovery will depend on whether these initiatives offset rising input costs.

Investment Implications: A Wait-and-See Stance?

VSCO's stock has underperformed peers over the past year, reflecting investor skepticism about its turnaround. Yet, the company's Q1 results and strategic clarity provide reasons for cautious optimism. Key considerations for investors:

1. Valuation: At a current P/E ratio of ~15x forward earnings, VSCO trades at a discount to peers like L Brands (parent of Victoria's Secret) historically, suggesting potential upside if margins stabilize.
2. Execution Risk: Success hinges on whether international expansion and new product lines can offset U.S. sales declines and tariff impacts.
3. Macro Uncertainties: Geopolitical tensions and trade policies could further disrupt supply chains, though VSCO's focus on agility may mitigate risks.

Backtest the performance of VSCO when 'buy condition' is triggered by positive quarterly earnings surprises (EPS exceeding consensus estimates) and 'hold for 90 days', from 2020 to 2025.

The historical underperformance of such a strategy—yielding a -42.66% return versus the benchmark's 29.35%—underscores the need for patience. Investors must also weigh the strategy's elevated volatility (56.57%) and a maximum drawdown of -75.25%, which highlight execution risks.

Conclusion: A Brand on the Mend

Victoria's Secret & Co. is far from out of the woods. Margin pressures, tariff risks, and a competitive retail landscape remain formidable obstacles. However, its Q1 results and strategic priorities—international growth, product diversification, and cost discipline—paint a picture of a brand actively adapting to survive and thrive. For investors willing to look past short-term volatility, VSCO's discounted valuation and long-term growth levers could make it a compelling contrarian bet. The question now is whether management can convert these strategies into sustained profitability—or if the brand's legacy challenges will linger.

Investment Takeaway: Consider a gradual position in VSCO at current levels, with a focus on strategic catalysts like margin stabilization and Beauty/PINK segment performance. Maintain a tight stop-loss given macro risks, and prioritize dollar-cost averaging over a 6–12 month horizon.

Data as of June 6, 2025. Past performance does not guarantee future results. Always conduct independent research or consult a financial advisor.