Victorias Secret & Co. Common Stock

Good morning. My name is Cedric, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria's Secret and Company's fourth quarter 2021 earnings conference call. Please be advised that today's conference is being recorded. All parties will remain in the listen-only mode until the question-and-answer session of today's call. At that time, if you'd like to ask a question, please press star then 1. I would now like to turn today's call over to Mr. Jason Weir, Vice President, Investor Relations at Victoria's Secret and Company. Jason, you may begin.

Thanks, Cedric. Good morning and welcome to Victoria's Secret & Co's fourth quarter and full year earnings conference call for the period ending January 29, 2022. As a matter of formality, I need 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 are CEO Martin Waters, CFO Tim Johnson, and EVP Finance, Brad Kramer. 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 special 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 also included in our press release and our SEC filings. Thanks, and now I'll turn the call over to Martin.

Thanks, Jason. Good morning, everybody. 2021 was certainly a milestone year for BS&Co, and I want to thank all of our associates and partners for their hard work, commitment, and resilience. In our first year as an independent public company, our teams focused on execution throughout, and we delivered on our major objectives, even in a challenging environment for retailers. Turning to the fourth quarter performance, we delivered results across all the major metrics that were either at or above the high end of our previously communicated guidance. We navigated significant supply chain headwinds and successfully lapped the start of federal stimulus benefits in the prior year. For the quarter, sales growth of 4% was led by strong performance in our intimates and beauty categories, along with broad-based strength in our international businesses. Our sales growth combined with solid merchandise margins and disciplined expense management drove operating income of $333 million, which was at the high end of our previously communicated guidance of 295 to 335 million. We reported fourth quarter earnings of 270 per diluted share above the high end of the previous guidance of 235 to 265 per diluted share. And that was driven by operating income gains along with a 4% benefit from our accelerated share repurchase program that we announced in December. As we look forward to 2022, we expect the full year to be broadly comparable to 2021. But there are some key differences between the first and the second half of the year. We expect first-half earnings to be challenged and below last year as a direct reflection of supply chain cost pressures continuing through Q1 and Q2 of this year. And at the same time, we'll be copying the federal stimulus benefits from last year, as you know. In contrast, we expect earnings in the second half of the year to be up to last year and for our operating margin rate to revert back closer to our longer-range target of mid-teens. Our optimism for the second half is based on an expectation of more normal sales and margin growth rates as we anniversary last year's significant supply chain disruptions and costs. And additionally, our team has been intensely focused on several profit improvement initiatives to increase margin dollars and lower our expenses and the run rate of the business. We expect these initiatives will start to deliver during the second half of the year. From a strategic viewpoint, we're focused on delivering every quarter and season, while we're also planning and investing for the long-term sustainability of the business. And we're thinking about sustainability in the broadest sense of the world, which is ensuring that we're a company of loved friends. This links back to our vision, mission, and purpose. It's connected to what we know from our customers, namely, brands they love play an important role, not just in their lives, but in society and in the world at large. Today, our customers expect us to take responsibility for where we've been, for where we are, and for where we're going. They're living in a world that's become increasingly virtual and they demand authenticity and choose brands that are socially and ecologically responsible. Our focus as leaders and as a company is ensuring that we're a future-facing business. That means having a business model, and again, I use that in the broader sense of the term, that increases in relevance and supports and reinforces our purpose. We're investing in women-led businesses using the power of our platform to support, encourage, and partner with brands that promote advocacy for women, like Amplify Her Ventures, which we announced earlier this week. We've made meaningful progress on sustainability and social responsibility, and our ongoing commitments in these areas are foundational to who we are. This year, we will release VS&Co ESG reports first in April and then again later in the fall season, transparently outlining our goals, measures, and our progress. We'll launch a new digital-first brand called Happy Nation. This optimistic, inclusive brand will fill a void in the tween market, bringing undies, first bras, comfy clothing, and body care that parents and tweens can feel good about. You should expect to hear more about that from us during April. And our newly formed emerging businesses team is finding alternative sources of revenue and customer goodwill. For example, later this year, we'll launch a partnership with Elomi, a pioneer in the plus-size intimate space. We continue to focus on maximizing our performance and leveraging the strength of our brand and connection with our customers. And we're confident in our opportunities and remain committed to delivering long-term sustainable value for shareholders. Thank you, and that concludes our prepared remarks, and we'd be more than happy to take any questions that you might have at this time.

To ask a question, if you'd like to ask a question, please press star one. Please remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw your question, you may press star two. Our first question comes from Lorraine Hutchinson with Bank of America. Your line is open.

Good morning. Can you talk, expand a little bit on the new bra launches and other new product initiatives, how these have gone over the past several months, and then how these factors affect the pace of your sales growth as the year progresses?

Thanks, Lorraine. Thanks for the question. Yeah, happy to. So you'll remember me saying that when this business was at its peak, we had at least two bra launches per year. And we got out of that cadence during the dark years of 2016, 2019. And we're now back on that form. We had the Bear Infinity Flex launch, which was very successful in the fall season. And then most recently, not within the fourth quarter, but within the first quarter, we launched the Love Cloud, which was the biggest bra launch in six years for our company, exceeded our expectations, and was met with delight from our customers old and new. We found a younger customer coming into this bra franchise. And with the number of frames and the breadth of choice that we have on offer, it's really been our most popular bra and our most talked about bra. And you may have seen the campaign that went along with it that featured 18 incredible women and was just another milestone along the way in the repositioning of our brand. Being best at bras is the most important thing that we do in the business. It's the foundation of everything that we're about, and I'm really happy to say that what we've done in the last year has worked and is working, and I can see a pipeline going forward for the next two years of more innovation and some really, really interesting developments in this space. So lots more to come from us. But it's not just about bras. We have great development in the pink business. We have great development in the beauty business. And so, you know, the lifeblood of the business comes from innovation and from new product development, and I'm delighted with what I'm seeing in the business. So thanks for asking, Maureen.

Thank you.

Thank you. Our next question comes from Ike Borja with Wells Fargo. Your line is open.

Hey, thanks, guys. TJ, two quick ones for you, I think. Number one, I think Martin alluded to some profit improvement drivers you guys have for the back half. Could you just give us some specifics around what those are and is that going to lie in COGS or SG&A? And then just when we think about Q4 and what we're lapping next holiday, I know you can't determine inflation and what that will look like at that time. this year, but just on the mix of air and ocean, what's a typical holiday for you, air-ocean split? What was it this year? How inflated was it in terms of mix? And then what are you kind of like planning for this year, just so we kind of understand what's embedded in the guide? Thanks.

Yeah, thanks for the question. I'll take the second part and ask Brad to speak to the profit improvement initiatives. Specifically, as it relates to fourth quarter, as we discussed in our prepared remarks, we had about $110 million of headwind from cost pressures related to supply chain, both rates, mix of ocean and air, as you mentioned, that impacted results. It is difficult to look all the way out to fourth quarter of next year sitting here today. We are encouraged that we're starting to see a little bit of positive movement from a rate perspective here in spring. We are encouraged that our merchant and planning teams have made progress in starting to move more back towards ocean and less towards air. But it's a fluid, it's a gradual process. As we look into the fall season, I think our hope and goal would be to try to get more back to historical rates. And maybe it's 50 or 60% ocean and the balance being air to give us some level of flexibility or some level of relief on the cost side of the business. Again, this is heavily dependent on how fluid will the supply chain be at that time. Although we've seen progress, it's still challenging. We're certainly mindful of the fact that there's some West Coast challenges that could creep into the equation as we move through the year. So we'll be very fluid in trying to understand that and make the best decision to make sure we continue to make progress on improving the in-stock inventory levels in our business. As we look to holiday next year, again, difficult forecast, but our hope would be we'll be a good mix of ocean and air going into the fall season, have some level of flexibility to chase as we go into fourth quarter, but I'm confident that our merchant teams will make good decisions when we get there. On the profit improvement, Brad, do you want to speak to that?

Yeah, Ike, with respect to the profit improvement plan, as Merton mentioned, the business is pursuing actions more focused on the back half of the year. The action plan is focused predominantly on two areas. One is on product price ups. We've done a lot of work in the business action testing and targeted strategic roll ups in terms of pricing. We anticipate more go forward action related to that in the back half. And then the second part is discrete cost takeout action plans that are underway currently in the business. As an example, one of those is focused on indirect sourcing leverage and looking at our non-merchandise spend. We would anticipate that those have more of a SG&A benefit to them, again, more focused on the back half of the year as they become more meaningful throughout the year. Thanks. Very helpful.

Thank you. Our next question comes from Matthew Boss with J.P. Morgan. Your line is open.

Great, thanks. Martin, so could you speak to recent drivers of business acceleration, how you feel about inventory flow, newness, and innovation setting up as the year progresses? And then, TJ, as we parse through some of the moving margin pieces, how best to think about the back half EBIT margin profile, maybe relative to the mid-teens long-term target? So if we think about the back half of the year and moving forward, any delta or differences to consider relative to the mid-teens operating margins are at long-term?

Yeah, thanks for that, Matt. Good morning. Thanks for the question. So, yeah, as you know, January was a little slower than we would have liked, and that continued into early February, but the back half of February has been strong. And the key driver of that was really the LoveCloud Bra launch that I mentioned earlier. So we've seen strong momentum in the Bra business and good increases year over year. So that's really the foundation of the increase. We've also seen good benefits from stores coming back. We've seen the stores channel performing very strongly, higher traffic levels. We've been in a good position in terms of staffing those stores and really seeing good customer experience there. And we've made significant improvements in our digital channel, so improving the experience there with thinking about personalization and generally improving the customer experience and our fulfillment capability. So it's kind of broad-based in terms of where the improvements are. You know, if I look at the beauty business, we've had great success with natural beauty, and also our core fragrances have performed extremely well, particularly the new fragrances. And in the core of the business, the logo business in pink and in Victoria continues to be strong. So there's kind of strength everywhere that we feel really good about. As you know, we're in a good inventory position. Inventories were up about 35% at the end of year, principally driven by AUR increases from the supply chain pressures, but also as getting in front of the supply chain delays and bringing merchandise forward so that we're in a good position to enter spring. So feel good about where we are. It's not perfect by any stretch of the imagination. But we're in a much better inventory position than we were six months ago, and I feel like we're getting on top of the supply chain pressures that have been out there for the last year or so.

DJ? Yeah, I think, Matt, to the last part of your question, as we think about the cadence throughout the year, coming into the back half, we do feel as if third quarter and fourth quarter are inflection points in the business. where our belief is that we'll have a more normalized environment from a sales and a really supply chain or cost pressure perspective. So when I think about the P&L in the back half of the year, as Martin just mentioned, several different sales drivers coming online as we go through the year that should help shore up the top line. along with the fact that we do expect hopefully a more normalized selling environment. I think we've commented consistently throughout the fall season this past year that we probably lost a point or two in comp around supply chain challenges and in-stock levels and having the inventories in place for holiday selling season, et cetera. So I think that's certainly an opportunity in the back half of the year. You heard Brad mention some pricing opportunities. Again, in some categories it's gone better than others, but it's still a focus in the business to try to offset some of the costs as we move forward. I think from a supply chain perspective in the back half of the year, again, we're hoping for a more normalized environment or maybe some relief as we go into the third and fourth quarter. I think a little bit of a wild card is where does some of the inflationary costs on raw materials go, but our teams are very focused on working through that. And new to the business in the back half of the year will be some profit improvement initiatives that impact both the margin line and the expense side of the business. So I think on multiple different layers, multiple different levers to try to improve the leverage in the back half of the year and improve the operating margin rate. That was really the backbone for why we feel good about delivering, you know, an up scenario in the fall season. Best of luck.

Thanks, Matt. Next question.

Thank you. The next question comes from Roxanne Meyer with MKM Partners. Your line is open.

Great. Thanks and congrats on a strong fourth quarter. I first wanted to follow up on the back half of the year and gross margin improvement. What are you assuming in terms of promotional levels and markdowns, knowing that your back half of 2021, you had really strong full-price selling?

TJ, do you want to take that? I think the answer is broadly flat, but if you want to expand on that. Thanks for the question, Roxanne.

Sounds like it's broadly flat, Roxanne. No, I think from a... From a margin perspective, and really I think what the teams are doing a better, better job about month to month, quarter to quarter, is really balancing that pendulum of kind of swinging back and forth on promotion. I think we've found kind of a good place in terms of balancing driving both sales and traffic, whether it's traffic to stores or traffic to digital, and the need for promotion in that equation. Obviously, we were very encouraged by some of the full price selling which speaks to, we think, the health of the brand, the health of the merchandise offering that we have in stores. But we do recognize and expect that in the back half of the year, in particular, as other retailers are improving on their in-stock levels and being more and more competitive, we do think that we need to be prepared to be promotional, but we don't think necessarily that it has to be the single biggest thing we're doing. So finding that right balance is what we're focused on, Roxanne, both on the brick and mortar side as well as online.

Okay, great. That's helpful. And then, you know, your international sales, as you mentioned, were up really nicely and definitely stronger than we were expecting. I'm just wondering what we should attribute the improvement to and how we should think about the trajectory of international in 2022.

Yeah, I'm happy to say that, Roxanne. So in international, we had our best operating income in six years, so a very strong bounce back. Of course, much of the increase in sales is coming from the fact that businesses were closed last year, and our penetration of digital in international is lower than it is in our domestic business. So with stores reopening this year, we have a relatively easy compare to last year. But beyond that, you know, there are five parts to the international business. First, the franchise business run by our partners around the world is in very, very healthy growth. Our travel retail business is the second part. That was substantially closed in the last two years and is now bouncing back with over 90% of our travel retail locations opening. And having traveled myself in the last few weeks, I can tell you airports are starting to get busy again, so that's great. In China, we announced on January 25 a really exciting partnership with Regina Miracle, our great friends and partners for over two decades. The upside that we see for that business is more in the future than in the past quarter, but very excited about where China is going. And we continue to see strength in the fourth part of the business, which is the UK, where our partnership with Next is really starting to take hold, and we're enjoying benefits from their direct-to-consumer capability, and they're really broad-based marketing experience in the UK. So all four of those areas are good. And, of course, the fifth, which is the direct-to-consumer business, continues to be strong as we improve our user experience broadly in North America and all around the world. So all five areas of the business are strong. Looking forward over a three-year period, we expect to open over 100 stores. So there should be double-digit growth in the international business in retail sales for, you know, some years to come. And we feel very optimistic about the structure and the health of the business and the leadership of the business, too.

Great. Thanks for all the color and best of luck.

Thanks, Roxanne. Next question.

Thank you. Our next question comes from Simeon Siegel with BMO Capital Market. Your line is open.

Thanks. Hey, good morning, everyone. So, Mario and Ortiz, I was hoping you could talk about your view on AUR opportunity a little more. I guess through the pandemic, you were probably the most successful example of someone who sold less, charged more, and you really got more profit dollars out of lower revenues. I think this quarter you had the reverse. You had higher revenues, lower profits. The next quarter you're expecting both to be down. So I get the increased supply chain cost pressures, but if you're expecting an ongoing revenue decline in Q1, you're still below pre-COVID levels by choice. Should you be charging even more, even if it means selling less? I guess it just seems like you have a nice pricing power ahead if you want to take it. So I was curious your views on that you are.

Yeah, it's a great question. And, you know, AUR, I think when we've spoken on previous calls, I mean, we've said we've still got room in AUR because we haven't yet hit our peak. Just to update you on that, you know, our bra business within VSL, our AURs are kind of nudging towards 40 and higher than, about 10% higher than they were at our peak in 2015. So we're seeing some help there. To your point, there is pricing power. Similarly, in panties, we're nudging towards $7 AUR, which is the highest that we've had in our history. So You know, there are areas of the business where we have been moving price and we've been doing it successfully. However, I don't think we have carte blanche to just put prices up across the board. And Brad mentioned it. We test our prices and we look very carefully at where the impact is. And in some cases, the price ups have been sticky and they work very nicely and the customer hasn't noticed in terms of volume. But in other areas, we see that there's some volume decline. and even if the profit rate turns out better it might be more healthy for us in the long run to maintain a competitive position and not allow room for competitors to get in so you know what's the answer to all of that it's a balance you know and it's a very very precise science that we're an art and a science that we're working with on a day-to-day basis you know a couple of examples where we've moved that you may have seen In our Wear Everywhere bra franchise, the biggest bra franchise in the business, we moved from two for 54 to two for 56. That seemed to stick. Relatively small increase in our panty businesses. We moved from five for 30 to five for 32. Again, that seems to have stuck pretty well. So where we can, we're getting price ups. I think the real answer is in product development and newness. So rather than thinking about, oh, you put the price upon the same merchandise, how about we just launch an incredibly superior product? And she doesn't have a reference on what that price is. The price is whatever the price is. And LoveCloud is a good example of that. And there will be others as we move through the year as we develop better and better products that command superior pricing. But thanks for your question. I'm happy to demonstrate that we're all over it and that it's a very, very sensitive part of our retail engineering. Great. Thanks a lot. Best of luck for the year.

Thanks, Simeon. Next question?

Our next question comes from Susan Anderson with B. Riley Financial. Your line is open.

Hi. Good morning. Thanks for taking my question. I think you mentioned intimates and beauty categories drove the strength in fourth quarter. I'm curious how lounge did and active wear in the quarter, and then also if you can give some color on pink and how that business performed and maybe some of the strength you saw there. Thanks.

Yeah, so within lounge, let's take sleep first. So sleep, you might recall, if you've been tracking with us, that sleep was challenged because PJs had been very delayed. And so we did not have the volume of PJs to sell early in the fourth quarter that we would have had in the prior year. And so as we headed into Thanksgiving, we were in a tough inventory position. And that really is the main part of the lounge business. You know, sleep is the key part of the lounge and apparel wear business. The great news is that we caught up. We had a terrific December, largely driven by sleep and other categories, and so we ended ahead in the sleepwear business overall, and it was a very healthy mix of what we call sexy sleep and also casual sleep. The sport business and the sort of the regular apparel was kind of okay in the middle, nothing particularly outstanding there. Within the pink business, our intimates continue to drive forward. Intimates is over 50% of the pink business, and that's the closest to our core. That's the most important part of the pink business to grow, and so seeing healthy growth in that area is frankly the most important part. Am I missing anything, Jason, TJ, any other category highlights we might call out, Brad? No. I think swim was the other one that maybe we don't talk about so much. We had a good first season in swim, first year back in the swim business, very successful. We cleared our inventories and set ourselves up nicely going into spring with clean assortment. So, yeah, we feel pretty good about where we are.

Great, that sounds good. If I could just ask about, it looks like you guys are going to launch a new brand, Happy Nation, next year focused on tweens. Is there any more color you could give on that? Do you expect to at some point have stores? It looks like it's going to be a digital first brand, but do you think there will be stores around that brand at some point also?

Well, never say never, but, you know, we are deliberately just teasing you with Happy Nations and saying, coming soon. We're going to say more about it in April. We will open our digital doors in April. And once we get early indications of the brand, we'll be delighted at our next call to tell you, you know, what we think it might look like and what the opportunity would be. But, you know, we see it as a very optimistic, inclusive brand. It fills a void in the tween market. It builds on our core capability in undies and first bras and comfy clothing, real expertise in young people in the pink business, marketing expertise in that space. So it's a natural adjacency for us. And we're also leveraging our knowledge in beauty to create a really young beauty business in Happy Nation that we think could be incredibly exciting for If you want to go on to happynation.com, you can see our splash page that went up yesterday, and you can register, and that will make you amongst the first people to see what comes during April. But we're excited about it, and we'll tell you more when we know more. Initially, it will be digitally only, but we'll tell you more when we know more.

Great. Thanks so much. Good luck this year.

Thank you.

Thanks, Susan.

Next question?

Yes, the next question comes from Dana Telsey with the Telsey Group. Your line is open.

Hi. As you think about raw materials and raw material costs, are any raw materials being adjusted for you in terms of categories, whether at Pink or at the core Victoria's Beaker brand, and how that plays into price for 2022? Thank you. Hmm.

Raw materials being adjusted for us. I don't think so. I mean, for us, we would not go to an adjustment in raw materials in order to save price. That's not where we go. We'd go to an adjustment in raw materials in order to drive superior comfort or superior fashion or superior look or smoothness or a better product. So, no, we're not value engineering our fabrics and our raw materials for cost. That's not really part of our DNA. Are we being smart about sourcing materials efficiently and effectively? Yeah, I think so. And we're moving production around the world in a dynamic sense. We're moving sourcing of raw materials where it makes sense to do so. But the reality is that the whole world is facing the same pressures on inflation in raw materials, in transport, in people, in freight. So I don't think there's much for a retailer like us to do in terms of engineering that. It's about buying forward, taking a good position on raw materials so we don't get exposed, and continuing to focus on our best at, which is developing superior merchandise. So I hope I'm not dodging your question, Dana, there. If you have ideas for how we can save money, we'd happily listen to them, but it's not really where our focus is.

And then just on the new brand messaging with inclusivity and the new things that you've done, like the collective, any data points on new customer additions that you've gotten, whether digitally or in-store?

Oh, is that my opportunity to talk about if the brand repositioning is working? Is that it? Yes, I think so. Yeah, I think we may see one or two points. You know, the proof points for the new brand positioning, and it's not new anymore, is it? We've been at this for a year now, are all around us. Firstly, inside the business where our associate engagement is higher than it's ever been. Pride in employment is higher than it's ever been. We have incredibly low turnover. We have higher rates of people wanting to join the business than we've seen before. In applications in stores, in interns, in head office, all around the business, there is good news there. In our sales, we see our bra business bouncing back after years and years of decline. I talked about that earlier. We also see health in our logo businesses, which speaks to the heritage and the appeal that there is in the brand. On Valentine's Day, we were sold out of Valentine's Day merchandise a week before the event. Wherever I look in the business around sales, there is good news. On social media, there's good news. We have our highest ever organic approval ratings, meaning earned approvals rather than paid approvals. Our media impressions are ridiculously high. The recent campaign with LoveCloud and amazing superstars like Sophia going all around the world and supporting the fact that we're the second largest Most followed brand on Instagram, over 71 million followers, 7% of all Instagram followers follow Victoria's Secret. So incredible power in social media. And our customer file has been growing, too, in 2021. So after years of decline, we added to the file. We're seeing a younger customer with a higher average spend, a higher margin. And we're also seeing third parties wanting to work with us. So we didn't get many third parties knocking on our door during 2016, 2019. Now some of the best brands in the world are coming to us and talking to us about collaborations. And we know that when we have successful third parties in our business that we get incredibly high frequency of shopping, and we also get high crossover with the core business. There are proof points everywhere, not least people that we know and love are proud of us again. So, yeah, we feel really good about the new brand positioning, and it's here to stay. It's part of our DNA, and it's forever. Thanks for asking. Thank you. Even if you didn't ask.

Thank you. Thanks, Dana. Next question.

Yes, our next question comes from Omar Shah with Evercore, your line is open.

Morning. Thanks for taking my question. Great year. I wanted to ask for maybe you could give us some more detail around the LoveCloud bra launch. Talk about some of the technical features, target customers, traction you're seeing, especially if you're seeing traction with new customers, and then maybe more generally talk about how we should think about your approach to newness. It's really nice to see the broad category strength again. Are you looking for certain number of launches on an annual basis? Do you have a pipeline of new launches like this? Or do you want to build these types of platforms out? Maybe help us understand the product line strategy around fraud. Thanks.

Thanks, Elmar. I really appreciate the question, and I should be better prepared to answer this question than I am. I feel like we need one of our lead merchants to come and talk to you about this. In all honesty, I'd be more than happy to take it offline and explain the detailed benefits of the LoveCloud and why it's a superior product. But I don't have that at my fingertips, so we'll take that away. What I will tell you is that it exceeded our expectations, that in having five or six different frames with different functions across the business, we've been able to hit this very, very hard indeed. It speaks to our core in push-up, but it also speaks to comfort. The matchback panties that are associated with the bra arrived on time in the right colors, in the right distribution, and have been very successful. So we've seen a high rate of matchback. with the bra. We've seen a young customer. About 50% of sales have come to new customers, which is pretty consistent with what we see across the file just now. Pricing power has been good. We haven't discounted the product. We offered a good $5 panty with the bra, which was a very good promotion. That saw very high linkage to panties, as I mentioned earlier. You asked about product development. I think I mentioned earlier that In our best years, we had at least two big bra frames per year, and we're committed to that. So I can tell you that in the fall season, we will come back with another new bra launch that will be very exciting, and we can see at least two bra frames looking forward over the next two years. I was in Sri Lanka with two of our best vendors about three weeks ago. We had a team, a cross-functional team in Sri Lanka last week from Pink and from Victoria traveling together, working on newness, And we just see an incredible pipeline that speaks to some interesting innovation in sustainability, which we'll say more about when we're ready to go to market. But whether it be in fashion, in raw materials, in sustainability, in fit, in comfort, wherever it is, we have ideas, we have collaborations, we have people who want to work with us, and I see great things coming. Should the level of newness overall in the business be more or less? I'd say about the same. It's about the quality of the newness and the quality of the launch and our ability to speak to newness with relevant, you know, culturally relevant marketing campaigns and people representing for the brand who speak to young consumers in the way that they want to be spoken to. So, you know, it's the combination of all of those things, I think, Omar, that will drive success for our business.

Thanks, Martin.

Thanks for asking. No worries. Thanks for asking.

Thank you. The next question comes from Paul Carney with Barclays. Your line's open.

Hi, everyone. Thanks for taking my question. My question is on some of the store investments you're making. So on the Omnichannel front, expanding both business and ship from store, can you give us a sense of what percent of the business this is today and where do you expect to expand to this year? And then my second question is on the store of the future openings. How are you thinking about where to open these and any metrics you can provide on how these perform, whether it's productivity or payback? That would be great. Thanks.

Yeah, thanks, Paul. It's kind of a lot to unpack there. Let me start and maybe keep me honest, guys, on the bits that I missed. So I'll go in reverse order. Store of the future. Three store of the future openings. three store of the future open right now. Only been open for a short amount of time, but we've seen very, very positive responses. Customer response and sales response, traffic response, all have been very encouraging. We have some good technology in those stores that doesn't need to wait for store of the future to be rolled out. So there may be elements of that store concept that we want to push broadly through the chain during 22 and 23. More about that when we know more. As it relates to expanding the concept, we have 15 new stores in the pipeline for this year. Those will all be off-mall locations. We have a very high penetration of our store portfolio in malls. Right now, we have a low penetration off-mall, and that gives us opportunity. So we'll be testing that with some smaller format stores. So think more like 5,000 square feet than our traditional 8,000 to 10,000 square feet stores. with much lower capex than we've had historically. So we're aiming for capex that's less than $400 a foot. So we should be opening stores at less than $2 million of capex. That's an exciting opportunity for us. We also have refreshes in, I think, 20 stores, and about half of those refreshes will see a reduction in square footage, which is good. We don't need as much square footage as we've had historically in some of our bigger malls. So those are very healthy additions to the store portfolio. The big question, I think, is how quickly we get after renovating the entire fleet. And it's too early to say. And how much we'd want to spend on that, it's too early to say. But I would think by the time we get to our investor update later in the year, I think it's October, we'd be very clear about what it is that we want to do there. You know, it would be rare that in developing a new store format that you get it absolutely perfect first time. And I wouldn't suggest that we have, but I think we're really close. And there are some very, very exciting elements of what we've built that feel good. Where specifically we put them, I'll answer it by saying just off-mall is the focus rather than on-mall. It's less about geography, honestly, and that we're pretty broadly distributed already. where opportunities arise, where we're under-penetrated, of course we'd go there. There are some markets around the U.S. where we closed in 2020 because we had the opportunity to close, and that's because that location and that store wasn't good. But the market might still be good, and that may create some opportunity for us to go back. As it relates to digital, as you know, we were late to the party with BOPIS. No point saying it any other way. We only really got into the business during the latter part of 2021 with, I think, 450 stores with BOPIS capability. This spring, we will roll that to all stores. So all stores in the fleet will have BOPIS capability. The take-up of it has been relatively light. I don't know if that's because people in our category don't want to buy online and pick up in-store or if it's because we only had half of the fleet. I don't know. We'll continue to work it. And even if it's only relatively small take-up, it's an important part of our omni-channel, of our multi-channel, of our go-to-market strategy, so we're committed to it. We're also committed to ship-from-store, where it makes sense to do so. And so a reminder on ship-from-store, that's the idea of using our 800 points of distribution of mini-warehouses in order to efficiently distribute merchandise to customers. A customer doesn't get to know that the merchandise was shipped from a store rather than a warehouse, but, boy, we get to know because it's a much more efficient way or can be a more efficient margin play. That capability is in about 200 stores right now, and we'll increase that as we go through the year in markets where it makes sense to do so. So I hope that gives you enough detail, Paul. Did I miss anything? Guys, anything else you would add?

I think you got it all. Certainly very helpful. Thank you, and best of luck.

Welcome, welcome.

Thanks, Paul. Next question?

Yes, our next question comes from Corey Tarlow with Jefferies. Your line is open.

Good morning and thank you for taking my question. My first question has to do with a follow-up on the AUR opportunity. Are there any specific categories that you identified that you believe will be an enhanced area of focus when it comes to raising prices?

Back on the raising prices thing, I think for us it's less about increasing the prices of stuff that we already have and more about developing merchandise that's better than anybody else's and therefore commands a higher price. Where should we be focused on doing that? Our core, lingerie, bras, developing better bras than anybody else. This brand, Victoria's Secret, should have the best bras in the universe. And that's our mission. That's what we're going after. And with that will come superior pricing power and innovation. But, you know, similarly, if you look at just pick a random category, pick swim, for example, you know, do we think that we could get higher prices by having superior merchandise in better fashion than our competitive base? Probably. So there isn't any one area where I say, well, that's an underweight category we should move. I think it's broad based. You know, I was applauding Greg and the beauty team yesterday for the movement that we've made in our mist and lotion business. You know, not too very long ago, that was a $5 unit price, a very, very big business with enormous global appeal, but going out at $5. That's more like $8 now. So, you know, really terrific movement. And it's not driven by just cheekily putting the prices up. It's delivered by enhancing the formulations and creating a better product and and being more modern in our go-to-market strategy, particularly on natural beauty. That's what drives the ability to increase AUR, I think.

Great. And then just to follow up, how are you feeling about the current inventory positioning of the business, and how should we expect this to evolve as we move throughout the year? Thanks.

TJ, I mentioned earlier we're about 35% up, but do you want to take it?

Yeah, absolutely. Thanks for the question, Corey. Coming into the season, I believe the business feels very good about the inventory position to start this season, and we believe that it only gets better from here, Corey. And what I mean by that is you can look at the 35% that Martin mentioned earlier and have one take on it. From our perspective, About two-thirds of that increase relates to just average item unit cost increase for some of the freight challenges we've mentioned. And then also bringing in goods earlier than last year, earlier than planned. And some of that is the mix back to ocean from air that has longer in transit times. And then the third element I would add is just the improvement in in-stocks in some of our basic or key categories. Martin kind of mentioned that we're having the matchback panties with the Brawl Launch and Love Cloud, and you would expect us to do that, and that's what we executed against. So making sure that we're in better in-stock position in key intimates categories was a focus coming into the season. So we feel very good about the inventory position and where we are, even though 35% seems like a big number. I think the second piece to mention is we'll continue to focus on in-stocks, and they should even get better as we move through the spring season. And what that means is we likely will be a little heavier than normal in that 35% range for most of the spring season as we work through the shift from air to ocean, as we work through some of the price increases, and then our in-stocks get better and better.

Hey, TJ, we might also just add that in pushing for more size inclusivity, increasing the number of sizes that we offer, Body by Victoria, 33 sizes now, that will push up our inventories a little, and that's a healthy thing to do for the brand long-term. Should we take one more?

Yep. Thank you. Thanks, Corey. We'll do one more question, Cedric.

Okay. Our last question comes from Jay Stoll with UBS. Your line is open.

Great. Thanks so much for taking my question, Martin. I just wanted to follow up on the brand repositioning. Just come at it from a different standpoint. How do you feel about the customers that were with the brand before the brand repositioning started? Do you feel like you've been able to keep those customers, or has the new repositioning turned any of those customers away? Thank you.

Yeah, it's a great question, Jay. Thank you for asking. All customers are welcome. I don't think we have no, well, I know we haven't knowingly waved goodbye to any customers. That's certainly not our intention. We don't know within the business, either anecdotally or systemically, that we've walked groups of customers at all. I do not hear about that either in stores from Becky, our leader of stores, or from Ish, our leader of digital, I don't see it in the file data. So I don't think it's a thing. However, when we first announced our positioning, we got a significant amount of mail from people who said, you know, this is terrible. You're scorching the earth. You know, you're spoiling our brand. We loved the way it was before. Why are you changing it? And when we looked closely, all of those people purported to be big fans of Victoria's and gold card holders and all the rest of it. When we looked closely, we couldn't find that. It was principally from men, and it was from people who don't subscribe to the values that we subscribe to. So I think that initial noise of the repositioning being a dangerous thing to do has gone away. We don't hear about it now. Our social media posts are overwhelmingly positively received. And I think the haters have gone away. But I know your question was more genuine than that and say, you know, are there women who are shopping with us who no longer find the brand attractive? I don't think so. You know, we still sell provocative merchandise. We still embrace very sexy. Some of our best-selling items are in the collections that are most provocative. You know, Valentine's Day is a holiday that we celebrate and we own. and we're unashamedly sexy at that time of year. But we can do other things as well, and I hope you'll see that when we launch Mother's Day in a few weeks' time, which I think is about one of the best campaigns that we've ever launched. So for us, it's about a balance. Rather than the brand Victoria's Secret just being one thing, which is sexy, it's about Victoria's Secret, the brand, being advocating for women in all aspects of their life, be that maternity, be that maternity, date night, be it being comfy at home, be it sport, whatever it is. We want to be there for her in every aspect of her journey through life. So thank you for asking the question. Appreciate it. Got it. Thank you.

Thanks, Jay. That concludes our call this morning. Thank you for your continuing interest in Victoria's Secret.

Thanks, everybody.

Thank you. And that concludes today's conference. You may all disconnect at this time.