Victoria’s Secret mixed earnings is a ‘recalibration’ for the business after spin-off: analyst

Simeon Siegel, BMO Managing Director, joins Yahoo Finance Live to break down Victoria’s Secret and Bath & Body Works' Q2 financial results.

Video transcript

- We've been watching a lot of earnings reports including those from retailers and one of the themes that seems to be emerging is a return of cash to shareholders. Want to bring in Simeon Siegel now, he's BMO Managing Director joining us on the phone this morning. And Simeon, I do want to delve into some specifics in just a minute, but firstly we had a lot of companies from Tapestry to Kohl's, Target, Macy's this morning, saying they're reinstating dividends. They're returning cash in the form of buybacks as well. Do you think that they're jumping the gun here or is this, maybe on the contrary, overdue? What do you think of this move?

SIMEON SIEGEL: I love it and we are back to retail, right? It's like all the sudden people are comfortable again and making certain plans and that means buying inventory, but it also means giving cash back. And so my team and I have actually been doing work on this. We've been rushing our reports for the past couple of quarters we call "follow the money" and we're seeing an increasingly loud return of cash to shareholders now, but it's not the beginning so we've been seeing over the past few quarters.

I think it's a really good sign, right? You guys know me well. You know I'm very much of the view of don't listen to what I say, watch what I do, watch how I spend. And taking your cash and getting it back to shareholders is probably the best way of saying we have visibility. And it doesn't mean we're all of a sudden going to be on a new plane of health, but it means we can actually know what we need to do. We don't need to hoard cash for the sake of preservation.

- Simeon, just staying on that point, but do you think if you're a Macy's-- I'm just going to look at Macy's right now. And they raised billions of during the height of the pandemic and their balance sheet was in tatters going into the pandemic. If you're in their case, wouldn't you want to hoard some cash for a rainy day?

SIMEON SIEGEL: So yeah. Hey Brian, remember we were talking at the beginning-- you and I have talked about this where there was more cash borrowed this cycle than the Great Recession and the global recession. And so what was fascinating was although more companies borrowed more cash and drastically so, the net cash position actually is better than it was in '08. And the reason is because all these companies borrowed so much money thinking we were going to have a 2008 type of recession, but instead it became a "no one's coming to the store so our business stopped."

Because all this borrowed cash wasn't spent and then not only that, think about all the conversations we had last year about inventory and furloughing employees and not paying rent. So you actually were able to continue to spend and even grow that cash. So I think that to your point, I wouldn't say that anyone returning cash are all the sudden better off than they were before. But I think they're realizing that they did a good job, they put as much cash as they possibly could under the mattress. At some point that becomes an uncomfortable sleeping position.

So you take it out, you get some back, you figure out what you want to be, and you kind of reset your course. I think that's what we're looking at and that's why I wouldn't say that anyone issuing, reinstating dividends, or buying back stock means they're all of a sudden better than 2019. But what I think what it does say is they finally are acknowledging that we're out of the COVID clear and you can start saying "OK, how do I want to run this business in the future?" So that's how I look at it. I think there was just so much cash borrowed and there wasn't as much cash spent that now, there's actually a cost of sitting on your capital.

- All right, Simeon. Let's get into a couple of results here. We saw, in the last 24 hours, we've seen results out of Bath & Bodyworks, also Victoria's Secret. Recently separated former corporate partners, Victoria's Secret shares under a little pressure this morning, Bath & Bodyworks up almost 10%. Talk us through how you saw the two quarters and kind of where you see the two businesses heading given you have outperformed ratings on both?

SIMEON SIEGEL: Yes, and you know this is one of my favorite topics with you guys. So this is going to be really interesting because we're still going to talk about both, we're going to start talking about them having nothing to do with each other because increasingly they are going to have nothing to do with each other so two different stories. Victoria's Secret's story of a company that has meaningful earnings upside, still continuing its turnaround, not at a high multiple but also, I think not fully appreciated for its margin opportunity.

They came out, they beat really strong gross margin feat, but then after a massive run in the shares since the IPO, the guide I think its going to prove conservative, proved saying that's another way of saying the guide was below what people were expecting. I think you're giving back a little bit of that tremendous rally since this company went public or spun-off and I think that's just a recalibration. I think we're going to look back and find that this is a really compelling opportunity.

Bath & Bodyworks, different business. I mean this is a business that is one of the best growers in all of retail, but because of Victoria's Secret's earnings upside was being masked, Bath & Bodyworks' multiple or valuation was being masked by being a combined entity. All of the sudden here, you had this really big third quarter and I'm pretty sure when we talked about it last year, where soaps and sanitizers and kind of every part of their business was on fire, you had to get through a guide for Q3. Because for the best business in retail they weren't going to have revenues guided down for the third quarter, you just didn't know how much it was going to be.

So Bath & Bodyworks came out, I think post-split people were worried about stepping in front of the expectation for how bad is the third quarter going to be. They came out, good Q2, and gave you a third quarter guide that gives you an ability to just breathe out. Third quarter revenues were down but not down nearly as much as people were afraid of. And this, I think, sets in motion the ability to say this is a very compelling growth story as trading at a big discount to other retail growth stocks.

- Well, that does seem to be what people are doing this morning because the stock has been up about 11% although we are seeing Victoria's Secret going the opposite direction. Perhaps the expectations were set to point differently for that part of the business. Simeon, we're going to leave it there. Let you get back to it. Simeon Siegel, BMO Managing Director, always good to catch up with you. We'll talk to you soon.