Victoria’s Secret & Co. (NYSE:VSCO) Q3 2023 Earnings Call Transcript November 30, 2023
Operator: Good morning. My name is Ivy and I will be your conference operator today. At this time, I’d like to welcome everybody to the Victoria’s Secret & Company Third Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded and all parties will remain in a listen-only mode until the question-and-answer session of today’s call. I would now like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria’s Secrets & Company. Kevin, you may begin.
Kevin Wynk: Thank you, Ivy. Good morning and welcome to Victoria’s Secret & Company’s third quarter earnings conference call for the period ending October 28, 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 statements 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 discussed on the call today are adjusted results and exclude the impact of certain items described in our press release and our SEC filings. Reconciliation 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 investor section of our website. Thanks. And now I’ll turn the call over to Martin.
Martin Waters: Thanks, Kevin. And good morning, everyone. Before we dive right in, I want to first share my appreciation and gratitude for the hard work and dedication of our associates and partners around the world. I’m especially thankful for the team’s continued commitment and for all they’re doing as we move forward throughout the holiday season. I speak to you today very energized with our holiday season now in full swing and with excitement about our sales performance in November to start the fourth quarter. In North America, both in-stores and online, the November sales and margin result was our best monthly performance in nearly two years, which we believe is evidence our initiatives are working and is led by strong response to holiday, giftable merchandise assortment, improving customer experiences, a powerful marketing message with Mariah Carey.
Our international business has great momentum, our footprint is growing both in-stores and online, our partners are performing very well and we continue to be excited about performance in China. As I have consistently talked about, our teams have been working tirelessly on multiple growth initiatives designed to create momentum as we enter the second half of the year and into the holiday season. And we’re delivering on those key initiatives. Initiatives such as new multi-tender loyalty program, new customer experience enhancements in our digital business, product improvements and launches to enhance Victoria’s Secret brand and accelerate our beauty business, a reimagined merchandise strategy for our PINK brand, and of course the return of the iconic fashion show with the Victoria’s Secret 2023 World Tour.
Now turning to the third quarter for a moment, we delivered results within our guidance range and our sales trend in North America continued to improve as planned each month throughout the quarter, with October being the strongest month of the year, now happily exceeded by November of course. Outside of North America, our business continues to provide profitable growth across stores and digital with international system-wide retail sales of high-teens in the quarter, driven by growth in China and globally with our franchise partners. Our teams are doing an excellent job of managing selling margins, diligently controlling costs and delivered inventory levels at Victoria’s Secret and PINK down 9% to last year, and we have agility heading into the holiday season and into the new year.
Overall, sales declined 4% in the quarter, compared to last year, which was at the midpoint of our guidance. In North America, sales trends improved in the quarter in both stores and digital, driven by sequential improvement from last year in average basket size and in traffic. Conversion in our digital channel also improved as compared to second quarter, and it was roughly the same in our stores business. Adore Me sales were up year-over-year again this quarter and represented about 5 percentage points of total sales growth for VS&CO in the quarter. From a merchandising perspective, external market data indicates that sales for the intimate market in North America as a whole decreased mid-single-digits in the quarter compared to last year.
Importantly, we remain the leader in market share for the intimates category, including both bras and panties. Our share remained essentially flat, with 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. We also saw significant trend improvement in panties, bras, and sleepwear in the quarter. Within PINK, intimates and sleepwear outperformed apparel. Our new reimagined PINK Apparel assortment began delivering to our stores and digital customers during the quarter. We acknowledge that it will take time to turn around that business and believe we’re on a path towards improvement with some definite green shoots of recovery.
We estimate that the apparel challenges in PINK negatively impacted the third quarter sales result by approximately 3 to 4 points. 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. For example, our loyalty program now has more than 22 million members, who drive approximately 75% of our sales on a weekly basis. We kicked off the holiday season with new product arrivals and a powerful marketing message featuring Mariah. From a technology perspective, we launched over 50 new releases impacting the overall customer experience on our digital platforms and apps. And we expanded our store of the future fleet to 71 stores, or approximately 8% of the fleet in North America, and we’ll be at 85 stores by the end of the year.
Looking forward, our outlook for the fourth quarter embeds results from November and overall for the quarter we expect sales to increase in the range of 2% to 4%, compared to last year. Quarter-to-date through Cyber Monday, we estimate we have generated roughly one-third of our fourth quarter sales, and obviously we have many very large days and weeks to come in December. We’re forecasting an adjusted operating income in the range of $245 million to $285 million for the fourth quarter. And for the full-year 2023, we’re forecasting sales to decrease in the range of 2% to 3%, compared to last year, and we expect adjusted operating income to be in the range of $290 million to $330 million. At our Investor Day in October, we discussed three strategic priorities.
One, accelerate the core. Two, ignite growth. Three, transform the foundation. And in particular, spent lots of time on our plans for our key area of focus, which is obviously the North American business. With the long-term health of business in mind, we’re energized by the start of the holiday season and the positive signs in the business, and remain committed to our initiatives designed to leverage our market leadership position and unlock our opportunity to convert significant cultural influence into long-term financial growth. Thank you, and that concludes our prepared remarks. At this time, we’d be more than happy to take whatever questions you might have.
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Q&A Session
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Operator: Thank you. We would now like to open the phone lines for questions. [Operator Instructions] Our first question is coming from Simeon Siegel. Please go ahead.
Simeon Siegel: Thanks. Hey guys, good morning and congrats on the progress quarter to-date. So Martin, the quick growth in the loyalty program is really great to see. Can you elaborate on what you’re seeing in terms of the revenue impacts from that multi-tender loyalty program? Maybe just speaking to any changes or just early learnings you’re seeing? And then congrats on the ongoing success in beauty. Just what is the beauty margin versus the other categories? Thanks, guys.
Martin Waters: So, thank you for the question, Simeon. Not much extra that we can give you, I’m afraid, at this point. I’ll go to TJ on the margin question. But loyalty, as I said, we’re over 22 million customers now. It’s 75% of our revenue. It’s kind of the bedrock of the business. The most important aspect of that program is the data that it gives us and our ability to match data about sales with data about customers, which enables us to personalize experiences and personalize marketing. The upside for that will really be in 2024 rather than in December of this year. But it’s laying the foundation for the future and that program was a long time in the build, so we’re super excited to have it launched and so well received.
It also will be the basis for many new customer experiences that will come in 2024. The first one being leverage from the Adore Me acquisition, Try On at Home. But there will be other member services that will be linked to the loyalty program that we’ll be excited to launch in 2024. TJ, do you want to take the margin question?
Tim Johnson: Yes, I think on the second part, Simeon, the beauty business tends to be favorable margin rate relative to the company average. I think it’s important to note that as we move through the third quarter and on into the fourth quarter, we expect Beauty to be a leading category in the store. It is one of several contributors to why we believe Q3 was a bit of an inflection point for us and seeing merchandise margin rates go higher year-over-year. So we’re excited about the Beauty business. We’ve got big plans for it for the holiday season. Margin accretive and based on everything we’ve seen and read, was very top of mind during the Black Friday week with customers.
Martin Waters: I might also say, agree with all that TJ, that the strength in the Beauty business is coming across all areas. It’s in fragrance, it’s in mist, it’s in all areas really pulling forward. So very pleased about that.
Kevin Wynk: Next question please, Ivy.
Operator: Next we’ll go to the line of Dana Telsey from Telsey Group. Please go ahead.
Dana Telsey: Nice to see the progress. As you think about PINK and Apparel, any update on the progress there, timing of some of the newness, I think some of it was coming in the third quarter and what you’re seeing. And then just on the store of the future, how did those stores perform relative to the base even during the weekend? Thank you.
Martin Waters: Yes, thanks for the call, Dana. As you know, we identified a year ago that the PINK business had some challenges, had some difficulties, and we recommitted to the role and purpose of the PINK brand being the on-ramp for Victoria’s Secret. And we talked about that at our investor conference. We also clarified the market that we’re serving and the market that we’re not serving. And both of those two statements require a significant adjustment in the merchandise that we were offering. We identified four chapters that we’ll focus on, the player, the code, the base, and wink, and we’ve had some really good hits in our first run at merchandising to that new agenda. You know, some of the green shoots that we’ve seen have been in bras and bralettes, in basics, in skin tones and nudes.
Some of the fun and whimsical product we put out for Halloween just blew out, was gone by the end of September. The Chloe and Halle merchandise is a very clear hit. Specifically the fold over cotton flare pen has been a very big hit and sold out straight away. So we know we’re going in the right direction, but as I said at investor conference, we decided to buy PINK very cautiously. It didn’t make sense to me, to us as a leadership team, to swing for the fences and assume recovery straight away. So we’ve been very cautious in our buys and we look forward to chasing into what’s working for spring 2024. So don’t expect an enormous amount of recovery in the balance of this quarter. Do expect us to continue to make progress into 2024. I hope that helps.
We also made progress in reducing the size of the inventory in PINK, which had got away from us a little bit. So significantly higher productivity coming out of a smaller number of choice counts. TJ, do you want to take the store of the future?
Tim Johnson: Yes, on store of the future, Dana, we haven’t necessarily broken things out, I’ll say, by quarterly performance. I would just suggest to you that the overall trends of store of the Future that we called out at Investor Day and particularly around store remodels, getting a low-double-digit lift, that is holding and actually building as we move through the third quarter. So I would take that as a good early indicator from a holiday perspective. And then the teams have done a very nice job of keeping us on track for 2023 in terms of both new store openings and store remodels. So I feel very confident by the time we get to the end of the quarter, we’ll have about 10% of the fleet for about 85 stores, as Martin mentioned, in the new store of the future format.
So, yes and point Martin’s whispering to me here. International, I would be remiss if I didn’t mention that store of the future it has been equally well received around the world from our international partners and also our customers as we continue to grow out the store fleet there. And as you know, we have plans for upwards of 100 stores a year over the next two to three years to build out the international fleet. So all signs pointing green on store of the future performance and opportunity.
Dana Telsey: Thank you.
Operator: Thank you. Next, we’ll go to the line of Alex Straton from Morgan Stanley. Please go ahead.
Alex Straton: Great. Thanks a lot for taking my question and congrats on the acceleration you’re seeing. I wanted to focus in on that. Like how do you think of it in aggregate? Is it a function of just the initiative flowing through? Is the category at all improving? And did you change your promotional strategy at all? Like I’m just wondering if that’s factoring in? Thanks a lot.
