Victoria’s Secret & Co. (NYSE:VSCO) Q2 2023 Earnings Call Transcript

Victoria’s Secret & Co. (NYSE:VSCO) Q2 2023 Earnings Call Transcript August 31, 2023

Operator: Good morning. My name is Fran, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Victoria’s Secret & Company’s Second Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. All parties will remain in a listen-only until question-and-answer session of today’s call. I now would like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria’s Secret & Company. Thank you, sir. You may begin.

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Kevin Wynk: Thank you, Fran. Good morning, and welcome to Victoria’s Secret & Company’s second quarter earnings conference call for the period ending July 29, 2023. As a matter of formality, I would like to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings and in our press releases. Joining me on the call today is CEO, Martin Waters, and CFO, Tim Johnson. We are available today for up to 45 minutes to answer any questions. Certain results we discuss on the call today are adjusted results and exclude the impact of certain items described in our press release and our SEC filings. Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are included in our press release, our SEC filings and the investor presentation posted on the Investors section of our website. Thanks. And now I’ll turn the call over to Martin.

Martin Waters: Thanks, Kevin, and good morning, everyone. As we’ve shared consistently inside and outside the business, we’re laser focused on the three pillars of our long-term strategy: number one, to strengthen the core; number two, to ignite growth; and number three, to transform the foundation of our company. We’ve defined and are delivering initiatives in each pillar, and we believe these will steadily provide profitable growth into the future. Now, before we dive into the details of the quarter, I want to first share my appreciation for the hard work and dedication of our associates and partners all around the world. I’m especially thankful for the team’s continued commitment and for all they’re doing as we push forward with our strategy.

In the second quarter, we delivered sales, adjusted operating income and adjusted diluted earnings per share within our guidance range while the macro environment continues to put pressure on our customer base and on our core intimates categories. As anticipated, and what was a continuation of first quarter trends, sales performance in the second quarter was particularly challenging in the overall stores and digital intimates market in North America. and this impacted both Victoria’s Secret and PINK businesses. External market data indicates that overall stores and digital intimates market in North America remained challenged and was down mid-single digits in the quarter compared to last year. We continue to be pleased with our international business, which experienced growth in excess of 25% and strong profit flow thru in the quarter, and our recently acquired Adore Me brand also grew sales during the quarter, highlighting the strength of their business model and unique digital strategies.

Additionally, our teams were resiliently focused on what was within our control, managing selling margins, diligently controlling costs, and delivering inventory levels of Victoria’s Secret and PINK that were down low-double digits compared to last year, allowing us to enter the fall season with relatively lean inventory levels. Now turning to the numbers. In the second quarter, our adjusted operating income was $49 million, and adjusted earnings per diluted share was $0.24, both near the midpoint of our guidance range. Overall, sales declined 6% in the quarter compared to last year, which was near the low end of our guidance range and down mid-single digits. Sales trends from the first quarter in North America continued throughout the second quarter in both stores and digital channels, driven by a decline in traffic and average basket size compared to the second quarter last year.

While conversion rates and average unit retail in both channels were lower than last year, each of these key metrics continues to trend above pre-pandemic levels. Adore Me sales were up year-over-year again this quarter and represented about 4 percentage points of total sales growth for VS&Co in the quarter. From a merchandising perspective, sales trends for the intimates market in North America remain challenged, as I said, and decreased in the mid-single digits compared to last year. We remain the leader in market share for the intimates category in North America, including both bras and panties. On a rolling 12-month basis, our intimates market share declined slightly with our digital share up slightly and stores share down slightly. From a merchandise category perspective, starting with Victoria’s Secret, our beauty business continues to be our best-performing category, followed by bars, sleepwear and panties.

Within PINK, intimates and sleepwear outperformed apparel, which had another difficult quarter. We estimate that the previously identified apparel challenges in PINK negatively impacted the second quarter sales results by approximately 2 to 3 points. Our new reimagined PINK merchandising assortment has begun to set and sell both online and in stores, and we’re encouraged by early positive response from our customers. Back to our international business, which continued its stellar performance with sales up 26% in the quarter compared to last year. And total international system-wide sales up in the low teens as well. The business continues to experience momentum and provide profitable growth across stores and digital. The second quarter results were driven by significant year-over-year growth in China through our joint venture with Regina Miracle and globally with partners in our franchise and travel retail networks.

In the past 12 months, we have entered four new countries and opened nine new digital sites to increase our global footprint, and we have 25 to 35 net new stores planned to open in the fall season. We continue to be optimistic about sales and profit and store growth opportunities for all of our partners around the world. Aside from the financials, over the last 90 days, we’ve executed several key actions in support of our strategy and brand positioning for the long term, which include: we announced the premiere of the Victoria’s Secret World Tour, streaming on 26th of September on Amazon Prime Video. Part spectacular fashion events, part documentary, this one-of-a-kind show promises an unrivaled viewing experience that celebrates the mission of Victoria’s Secret to uplift and champion women on a global scale.

The tour will be headlined by GRAMMY award winning artist, Doja Cat. With relentless focus on Best at Bras strategy and delivering newness, innovation and fashion to our customers, we debuted the Icon by Victoria’s Secret, a new collection of bras, panties and lingerie centered around the new Icon by Victoria’s Secret Push-Up Demi Bra, and featured an all-star cast of talent, including the return of Gisele Bundchen, Naomi Campbell, Adriana Lima and Candice Swanepoel to the VS family. We also introduced the Featherweight Max sports bra, featuring a revolutionary super light shape design for both gym and everyday wear. We expanded our channels of distribution with the launch of Victoria’s Secret lingerie and apparel in the official Victoria’s Secret Amazon Fashion storefront.

In June, we enhanced Victoria’s Secret and PINK customer experience and rolled out our new multi-tender loyalty program to all customers. In just three months, we already have over 16 million members who are currently accounting for over 70% of our weekly sales and that’s trending higher. We launched Adore Me merchandise available for sale on www.victoriassecret.com during the quarter, and we continue to leverage Adore Me’s expertise and technology to improve the customer experience by further developing our launch plans for Try-on at Home and VIP membership services for the Victoria’s Secret and PINK customer. And, we evolved our leadership structure to advance our strategic priorities with the appointment of Greg Unis as Brand President, along with welcoming back to the brand Anne Stephenson as our new Chief Merchandising Officer.

Looking forward, we’re focused on changing the trajectory of our sales trends, and our teams have been working tirelessly on multiple growth initiatives designed to impact the third quarter and the all-important holiday season. We’re encouraged by August sales trends, which were better than July, the second quarter and the entirety of the spring season, and believe there are early signs that our growth initiatives are beginning to be noticed by customers. For the third quarter, expect sales to decrease in the low- to mid-single digit range compared to last year, and we’re forecasting an adjusted operating loss in the range of $45 million to $75 million. We expect inventory levels in our core Victoria’s Secret and PINK business at the end of the third quarter to be down mid- to high-single digits compared to last year.

Our guidance for the third quarter reflects an improvement in our sales trend in North America based on August results, as I just mentioned, the phased rollout of the new digital technology capabilities, Victoria’s Secret World Tour and our reimagined PINK merchandise, which, as I said, is beginning deliver at the end of August. For the full year 2023, we’re forecasting sales to decrease in the low-single digit range compared to last year, and we expect the adjusted operating income rates to be in the range of 5% to 6% compared to current analysts’ consensus estimate, which reflects sales down approximately 2% compared to last year and an adjusted operating income rate of approximately 5.5%. We remain focused and continue to take important steps to evolve and innovate our business, focused on our three core pillars: strengthen the core, ignite growth, transform the foundation.

We continue to believe executing against our strategies in each of the pillars will improve business trends beginning in third quarter and accelerating into the holiday season. Strengthening the core: We have growth strategies and new customer experiences that we believe are opportunities, including new bra launches and innovation, reimagining merchandise positioning for PINK, our multi-tender loyalty program, new customer experience initiatives in digital, and further expansion of our successful store of the future format as well as the Victoria’s Secret World Tour, which will be our largest marketing investment in over five years. Ignite growth: Our international business has momentum with partner expansion plans for more than 100 new stores and several new markets planned throughout the next two years.

We also plan to leverage Adore Me’s technology on our scaled platforms for the fall season and we’re continuing to expand our channels of distribution to meet the customer where she is. Transform the foundation: We continue to take steps to drive operating margin expansion by modernizing the operating model. These initiatives are well underway and we remain committed to the total of $250 million opportunity identified at our October Investor Day. We’ve begun to realize those benefits related to initiatives in 2023, and more than two-thirds of the total savings are expected to be realized in ’24 and ’25. Of course, we recognize that neither our brand revolution nor our strategy will return their full potential overnight. We’re on a journey. We also believe there is a clear path to grow through the current turbulent environment and into the future.

Our focus as leaders and as a company is on ensuring we continue to be a future facing business that becomes more and more culturally relevant in this shifting consumer environment. We remain confident in our repositioning efforts and our strategic plans for growth. We understand there could be volatility in our results this year, however, we remain committed to delivering our long-term financial targets and returning value to shareholders. And lastly, we’re looking forward to our Investor Day in our office in New York City on October 12, and we plan to reflect on the previous year and provide update on our longer-term strategy. Thank you. That concludes our pre-prepared remarks and more than happy to take your questions at this time.

Operator: Thank you, sir, very much. [Operator Instructions] And our first request is from Matthew Boss with JPMorgan. Thank you, sir. Your line is open.

Matthew Boss: Great. Thanks. So, Martin, two-part question. Could you speak to the Victoria’s Secret brand image today and the rationale behind the strategic shift in marketing with the World Tour? And then secondly, could you just elaborate on the three pillars, and more specifically the initiatives to strengthen the core, as you outlined at the Analyst Day last — just given the market share that you cited in intimates this quarter?

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Q&A Session

Martin Waters: Yeah, thank you for the question, Matt. I’m happy to take that. We are feeling good about where we are on the repositioning journey of the brand. As you know when this management team took over, we defined the challenges being a complete repositioning of the brand. And we’ve been dedicated to that and dedicated to the cause of championing and uplifting women on their journey through life. I don’t see this next evolution of our marketing strategy as a change, I see it as the reinvention and re-imagination of what was probably the most important retail marketing device of the last decade in the Victoria’s Secret Fashion Show. So, the World Tour and the announcement that we made around that is really a celebratory moment, representing the ultimate expression of our brand transformation.

It kind of brings to life our commitment that I just talked about and it’s already had a massive media impact. So, we feel kind of really good about where that is. I think it gives us an opportunity, Matt, to talk about cultural relevance and to kind of reclaim our position at the center of cultural relevance, whether that’s fashion, art, music or popular culture. And we’re super excited about partnering with Amazon in that endeavor. So, I see it as a natural extension of the work that we’ve been doing, and the early signs are certainly that the customer is noticing and the media around the world is noticing. In terms of the three pillars of our strategy, if I kind of take them in reverse order, in transforming the foundation of the company, I feel really, really good about where we are.

The progress that T.J. and Dean and the team have made on our cost base and on our supply base is really extraordinary, and we’ll give further details of that at our October meeting. But suffice it to say, I’m very, very pleased with the progress that we’ve made there. In the ignite growth column, the same is true. International sales up 26% in the quarter. Our partnership with Amazon going from strength to strength, the success that we’re seeing in our curated marketplace with exceptional growth year-over-year. So, feeling really good about all of those initiatives. As you rightly indicated, the area where we need to focus more is on the core of our company. We have seen some slight decline in our market share. The good news is that we’ve seen an increase in share in digital.

And the work that Chris Rupp and her team are doing in digital seems to be paying off. We’re definitely delivering a better customer experience there and I think that’s helping us. So, when we get to the October meeting, we’ll talk more about what we intend to do differently in the year ahead. But without giving the game away, I can tell you that it will be a relentless focus on the core of our company, which is innovation in bras and panties, and marketing in a way that’s culturally relevant and getting stronger in some of the categories that we walked away from, particularly around sports bras and sport apparel. I hope that helps, Matt. That was a long answer to a short question. I hope that gave you some more color.

Matthew Boss: It’s great color. Best of luck.

Operator: Thank you. Our next question is from Lorraine Hutchinson with Bank of America. Your line is open.

Lorraine Hutchinson: Thank you. Good morning. Martin, can you talk about the factors that caused the accelerating August trend and if you expect them to hold or continue to improve as the year goes on?

Martin Waters: Sure can. Thanks, Lorraine, for the question. Yes, August was definitely better than July and it was better than Q2 and better than the entirety of the spring season. So, we feel good about that. What’s driving the change? Well, we’ve had some really good green shoots of recovery. The Icon bra was good news for us, kind of a 2-for-1 deal, one that went to our number one digital brand had a 4.4 rating and a very high matchback ratio. So that was terrific. But also it got us back into the conversation with very high media ratings. So that helped. We also had strength in Featherweight Max sports bra, where we’ve cased into that, ordered another 160,000 units in the last couple of weeks. The PINK early arrival of merchandise, the Seamless Air Sports Bra was good, but also some of the new merchandise that set at the very, very end of the month is starting to look good.

Within beauty, we had some strong performance. EDPs were up 5%, driven by the Heavenly restage and Bear Rose launch. So kind of all across the business, there were just some nice green shoots that are encouraging for us. And we’ve got a lot less carryover as we go into this season than we had in the previous year. So,, I don’t know that the trends from August will definitely continue, but we’re optimistic that they will. And thanks for asking, Lorraine.

Lorraine Hutchinson: Thank you.

Operator: Our next question is from Adrienne Yih with Barclays. Ma’am, your line is open.

Adrienne Yih: Great. Thank you very much. Martin, can you talk about the promotionality of the environment? What the expectations are for the fall season as you launch these new kind of full price initiatives? And then T.J., can you remind us, last year, I know you did a ton of air to ocean, the modal mix was more weighted toward air. Can you remind us sort of what was the percent on air relative to normal? And then, in the guidance, what do you have in there in terms of basis points for recapture? Thank you very much.

Martin Waters: Yes, thanks for the question, Adrienne. So in the second quarter, the levels of promotionality in our business were slightly up year-over-year, slightly up year-over-year. I think that is about a reflection of the market as a whole. So, as we look around our competitor base, we saw that promotions were slightly up year-over-year. So, I think we were in line with the market. In terms of the guidance that we’re planning for Q3 and Q4, we expect promotionality to be about the same year-over-year. As always, we’re optimistic that if our full price initiatives really cut through than they were that we can pull back on that promotionality and that could provide some upside. But the guidance we’re giving is about flat on promotionality.

In terms of — I’ll just answer for T.J. on the air mix. So, it was about 35% air during the second quarter, and we’re expecting that to be in the order of 25% for the back half of the full season. So substantially normalized from where it’s been historically, right, T.J.?

Tim Johnson: Absolutely. And in addition to that, Adrienne, as you might imagine, the — both air and ocean rates have certainly moderated as the year has gone on. And we’re hopeful during the holiday season, we’ll see continued moderation levels relative to last year. So, it’s a good environment for us right now, both from a rate perspective and a capacity perspective.

Adrienne Yih: Fantastic. Thank you very much. Best of luck.

Operator: Our next question from Alex Straton with Morgan Stanley. Your line is open.

Alex Straton: Perfect. Hi, Martin. Thanks for taking the question. Maybe two from me. First, just on the second quarter, international was clearly a bright spot. So, maybe how do you think about the divergence in sales performance there versus North America? Is there something different about your positioning there? Or is it just a function of a small base internationally? And then, secondly, just thinking through the guidance and then the look forward, it seems to include a bit of a step-up in profitability in the fourth quarter, perhaps bigger than usual. So maybe what gives you conviction there? Thanks a lot.