Victoria’s Secret & Co. (NYSE:VSCO) Q4 2022 Earnings Call Transcript

Victoria’s Secret & Co. (NYSE:VSCO) Q4 2022 Earnings Call Transcript March 3, 2023

Operator: Good morning. My name is Amanda, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Victoria’s Secret & Co. Fourth Quarter 2022 Earnings Conference Call. Please be advised that today’s conference is being recorded. 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 Secret & Co. Kevin, you may begin.

Kevin Wynk: Thank you, Amanda. Good morning, and welcome to Victoria’s Secret & Co.’s fourth quarter earnings conference call for the period ending January 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, TJ 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. Before we dive right into the quarter, I want to first share my deepest 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 to the revolution of our brand and for all they’re doing as we push forward our strategic growth plans. I’m delighted by the connections we’re making and deepening with our customers as we aspire to become a Victoria Secret where everyone feels seen respective and valued. And of course, I’m delighted to welcome Adore Me associates to our family for the first time this quarter. Welcome, welcome. And as we look back on 2022, our first full year as an independent public company, I wanted to spend a few minutes reflecting on the key actions that we’ve taken over this past year in support of our strategy and positioning for the long term.

It’s been a year filled with innovation and many firsts for our customers and our brands. To name a few, we debuted Love Cloud, both a proof point in our best of bras story and our most inclusive marketing campaign ever. We shared our first bilingual campaign for Victoria’s Secret Beauty featuring Camilla Cabello. We launched pear, our first fine fragrance pillar in five years and a one-of-a-kind center that is personal to each individual. We introduced our inaugural brand — global brand campaign, Undefinable, that celebrates individuality and diversity. We extended our channel distribution and now offer an edited assortment Victoria’s Secret’s and PINK on Amazon and natural extension to continue to grow our business. We deployed a new digital bra-fit technology and have begun to make meaningful improvements to our digital experience to improve the customer journey.

We expanded our store of the future fleet to 52 stores worldwide, and we released our first ever ESG summary report in the spring, our ESG materiality report in the fall, and we look forward to publishing our first full ESG report next month. This past year, we also made acquisitions and developed partnerships and organized ourselves to fuel our future growth. Importantly, we inquired the digitally native intimate brand Adore Me to further enhance our market leadership in intimates and strengthen our ability to put technology at the forefront of everything we do. Internationally, we accelerated our growth as we entered new markets like India and Israel and completed the joint venture agreement with Regina Miracle in our China business. We invested in women owned and run businesses, including a minority stake in Frankie’s Bikini to help us reclaim our leadership position in swim and enhance the partnership with inclusive lingerie brand Elomi.

We announced a new corporate leadership structure uniting the Victoria’s Secret and PINK brands into a single collaborative organization centered around our focus on the customer and built to capitalize on efficiencies to yield stronger growth. And as part of that new structure, we welcomed a Chief Customer Officer, a Chief Supply Chain Officer and also named a Chief Growth Officer, giving us focused leadership expertise to steer us to the next stage of our transformational journey. Additionally, in 2022, we continued our commitment to women, our associates, our partners and our communities. A few examples include: we brought on more models and ambassadors of diverse sizes, ages abilities and identities. This past year, we achieved third-party pay equity certification for all genders, races, ethnicities and intersections of those identities.

Photo by Susie Burleson on Unsplash

We’re committed to maintaining our status as a leader in pay equity. We’re especially proud of our associate satisfaction metrics with 87% of our associates reporting that they feel proud to work at VS & Co. We welcomed a new Independent Director and seven of our eight Board members are women, mirroring our customer base. We launched VS & Co. Essentials and we’ll supply more than 1 million young women and young adults with undergarments by 2025. And we maintained our partnership with Pelotonia and administered the first grants to researchers as part of the Victoria’s Secret Global Fund for women’s cancers. And we’re certainly not stopping there. Already in fiscal ’23, we launched the new Victoria’s Secret x Naomi Osaka Collection, a first design collaboration with Victoria’s Secret Collective partner, Naomi Osaka.

The collection features the forever bra with our first-ever bra pad that can be recycled in a closed loop system. Our first-ever Frankie’s Bikini Victoria Secret Swim Collection, is now available exclusively at Victoria’s Secret and inspired by founder, Francesca’s beloved early memories of shopping at Victoria’s Secret. We announced the rollout of our new Victoria’s Secret and PINK customer loyalty program, which is our first rewards program to allow customers to earn points regardless of payment method. And we were recently named by Newsweek as one of America’s Greatest Places Workplaces for Diversity. So, as you see, we’ve been busy. And at our Investor Day in October, we announced our intent to become the world’s leading fashion retailer of intimate apparel, guided by our three key pillars: number one, strengthening our core; number two, igniting growth; number three, transforming the foundation of the company.

We believe we are two years into a five-year journey in the turnaround of our business, and we have a clear road map to be the world’s leading fashion retailer of intimate apparel. And now I’ll dive into the results for a few moments — for a few minutes. For the fourth quarter, despite a macroeconomic environment that remains challenging for our customers, we controlled what we could control while navigating a highly promotional retail landscape. We delivered adjusted operating income and adjusted earnings per diluted share results for the quarter above our most recent guidance. This represents the sixth consecutive quarter since the separation that we’ve delivered adjusted operating income and adjusted earnings per share results within or above our guidance.

And importantly, we exited the year with Victoria Secret and PINK inventory levels down double digits on an adjusted basis, prudently positioning us as we begin the new year. We believe this performance in a challenging environment continues to demonstrate our position of strength and highlights our dominant domestic market lead market share leadership position and the stability of the financial platform that we’ve created. We remain steadfast in our belief that we’ve stabilized our business model to weather difficult times and are positioned for significant operating leverage in more normal economic times. In the fourth quarter, our adjusted operating income of $280 million and adjusted earnings per diluted share of $2.47 were both above our most recent guidance.

Sales declined 7% in the quarter compared to last year, which was in line with our expectations. Traffic was up in our stores and online in the quarter and we were encouraged by our sales performance during peak periods of time during the quarter as customers responded positively both in stores and online to our marketing messages and targeted promotional activity. Our conversion rates were down in the quarter compared to the fourth quarter last year but remained above pre-pandemic levels. As a result of the positive response to our aggressive promotional position and the strength of peak selling periods, our average unit retail was down in the quarter as compared to fourth quarter last year, but again, remained healthy and at or near record highs in most categories, highlighting a customer who is very cautious and cost-conscious in this current environment.

From a merchandising perspective, we remain the leader in domestic market share for the intimate’s category. And on a rolling 12-month basis, we experienced slight growth compared to last year. From a category perspective, starting with Victoria’s Secret, Beauty was our best-performing business followed by sleepwear and bras. Within PINK, intimates outperformed sleepwear and apparel, which had a difficult quarter. While PINK apparel has been a consistent challenge during the last couple of quarters, the underperformance gap widened during the holiday season, and we’ve already begun to urgently reimagine the PINK apparel strategy, assortment and positioning with our customer, and we will see that impact in late Q2. The PINK apparel impact alone was a drag of more than four points on the fourth quarter for the company.

So, it’s a very high priority for me going forward. Our international business continues to perform very well. Total international system-wide sales were up double digit in 2022. And the business has been profitable in each of the last 4 quarters. Business continues to experience momentum with most countries performing very well, and we continue to be optimistic about growth plans to expand our international footprint both in numbers of stores and numbers of countries around the world. As we begin the new year, we’re mindful of domestic economic environment continues to be challenging and continues to put pressure on our customers. However, we are evolving and innovating our business focused on our three key pillars, and we have organic growth strategies and new customer experiences well identified for 2023, including the recent launch of the Victoria’s Secret and PINK customer loyalty program and a pipeline of bra launches.

We recently acquired Adore Me, as you know, a technology-led growth vehicle. We plan to leverage some of their technology on our scale platform, starting in the second quarter and continuing through the fall season. Our international business has momentum with partner expansion plans for new stores and new countries planned throughout the next two years. And most importantly, we are a broad company and the market leader in the intimates category positioned for future growth, both in our core and with Adore Me now and the family. So, while the macroeconomic environment remains uncertain, we’re assuming sales trends and comparisons will improve through 2023 as we anniversary softer sales trends which began in the second quarter of 2022. And as we begin to benefit from our new growth strategies and new customer experiences being rolled out through the year.

With this in mind, we expect sales for 2023 to increase in the mid-single-digit range compared to 2022. Our forecast assumes our Victoria’s Secret and PINK businesses relatively flat. over the year for 52 weeks and approximately one to two points of growth due to the 53rd week in fiscal 2023. Our forecast also includes Adore Me, which is now in our results in 2023 and forecasted up in the mid-teens compared to their most recently completed fiscal year. At this level of sales, we expect our adjusted operating income rate for 2023 to be similar to 2022. Given today’s challenging environment, we believe an adjusted operating income rate in the high single digits demonstrates stabilization of our business and represents a solid base, we will leverage when more normal macro trends return in North America.

For the first quarter, we expect sales to decrease in the mid-single-digit range compared to the first quarter last year and forecasted adjusted operating income in the range of $55 million to $85 million. As we move forward into the new year, we remain committed to optimizing our performance by focusing on what’s within our control, our brand transformation being best at bras, enhancing the customer experience and a relentless focus on cost and inventory management. Led by our two category defining brands, a merchandise leadership position in intimates and beauty and a global business position to increase our market share, our goal is clear: to be the world’s leading fashion retailer of intimate apparel. Our focus as leaders and as a company is on ensuring we are a future-facing business that becomes more and more culturally relevant in this shifting environment.

We’re confident in our opportunities to remain committed and remain committed to delivering long-term sustainable value for our shareholders. Thank you, and that concludes our prepared remarks. At this time, we’d be more than happy to take any questions you might have.

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Q&A Session

Operator: Our first question comes from Lorraine Hutchinson with Bank of America. Your line is open.

Lorraine Hutchinson: Thanks. Good morning. It sounds like you do expect some sales recovery as the year progresses. Can you just talk through the areas of the business where you see the most opportunity to grow? And then also how much you think you will use the Adore Me platform or technology to try to grow the Victoria’s or PINK businesses? Thank you.

Martin Waters: Yes, I’ll take a crack at that one. So, as it relates to growth, obviously, the most important area for us to focus on past, we’re a bra company. That’s where we put most of our energy. And while we are active in other categories, health in the core of the business is the most important thing we do. So, you heard me say at the time of spend that we would be having at least two bra launches, major bra launches per year. And so, it has been — this year will be no exception. In fact, we’ll probably have more than two big bra launches. I don’t want to say more about that yet for competitive reasons. But we’re very excited about the plans that we have in the core of the business. So that’s one. The second I would call out is PINK where, as I mentioned, we have had a difficult time in the last 12 months.

And it’s time for some urgent reinvention. And I’ve seen that reinvention, and I’m super excited about it. Customers will start to see it towards the end of Q2. It’s a new design direction. It’s much more fresh approach, more and better outfit starts, more modern raw materials and fabrications. It’s a rebuild of the use of our logo, more minimal, less overt logo, an exit from some of our legacy graphics. So, a lot going on in that very important part of the business that I think bodes well for the back half of the year. And you also asked about Adore Me. As I’ve said previously, we’re super, super excited about Adore Me. It’s a fantastic company, which just in and of itself is a great growth vehicle for us. But I think there are three ways that we can leverage their technology going forward.

One is we’re going to test selling an edited assortment of Adore Me merchandise on our site. We’re going to test that, that’s incremental to our system. That will be up towards the end of Q2. We’re excited about that. Secondly, we’re going to leverage the technology and try on at home that Adore Me has perfected, and we’re going to apply that to our much larger scale customer base in Victoria’s and PINK and the same with subscription services that will be applied towards the back half of the year. So, there are many, many ways in which we can leverage Adore Me technology, but we’re focusing on those three initially and then there’ll be more in the out years as time goes by. I hope that helps.

Lorraine Hutchinson: Thank you.

Operator: Our next question comes from Ike Boruchow with Wells Fargo. Your line is open.