Victoria’s Secret beats on Q1 earnings but margins shrink

Yahoo Finance Live anchors discuss first-quarter earnings for Victoria's Secret.

Video Transcript

BRAD SMITH: Well, one stock that we're going to take a look at-- we're going to get our wings here-- is clothing and beauty retailer Victoria's Secret.

- I [INAUDIBLE] you there.

BRAD SMITH: [LAUGHS] They are moving higher by about 8 and 1/2% here. As we've just begun trading here on the day, shares of VSCO are in the green. And this is after reporting earnings. And despite beating out expectations, the company warned of sales challenges for the remainder of the year due to supply-chain disruptions. The company had a drop in both store sales and sales overall year over year, pointing to last year's stimulus checks as the reason for the early loss here.

And particularly on VSCO, one of the things that kind of jumped out to me as I was reading through the results, the net sales that they reported at $1.48 billion, or $1.5 billion essentially, for the first quarter, that was actually lower by about 4 and 1/2%. So year-over-year decline there. And also, the total comp sales, they decreased 8% for the first quarter.

And so all of that considered, you wonder as they were citing the government stimulus payments, net sales essentially flat year over year, where some of-- in a time where we know this is when marketing dollars typically get pulled back, where Victoria's Secret will lean into some of the existing customer base in order to try and upsell them or where they're going to pass prices, quite frankly, more through to the consumer at this point.

- Yeah. It looks like they passed those price increases, Brad, to the new Love Cloud All-Day Comfort Bra Collection. Victoria's Secret saying that is the largest bra collection launch they have had in six years. And you go on the site. And really, these are almost $50 to $65 bras. Now, I'm not a bra shopper. But to me, that speaks to potential inflation well underway inside the likes of Victoria's Secrets.

But I will note this. I like nothing about this quarter. I'd-- I'd be-- I'd be curious if you're out there buying shares of Victoria's Secrets here in the early going, what clue-- what are you looking at? Because margins were down significantly. Gross margins down 660 basis points on the most recent quarter. Inventory-- something you and I have been talking about, retail earnings-- for the past three weeks, inventory up 37% against a sales decline of 5%. Chopped their full-year outlook. Don't like anything in here. Don't like-- I didn't even like the earn-- prerecorded earnings call.

BRAD SMITH: It's purely relief right now. It's not as bad as it could have been for Victoria's Secret. And that's exactly why you're seeing this rally, at least on the day-- on a day where the markets are higher for Victoria's Secret. But you bring up a great point, in that you've got to look at the broader part of this equation-- where inventory is going to start to come down. Where are they also going to not have to pass on every single cost through to the consumer and perhaps not have to lean so heavily into-- what? Love Cloud, you said?

- Love Cloud Bra Collection.

BRAD SMITH: Maybe they'll make tanks in the future for us. Gym tanks.

- I'm not going to comment on that. Don't want those tweets coming in to me.