Victoria's Secret & Co.

Good morning. My name is Madison, 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 second 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. At that time, you may press star and then the number one to join the queue. Please make sure to unmute your phone and record your name at the prompt. I would now like to turn the call over to Mr. Timothy Johnson, Chief Financial and Administrative Officer at Victoria's Secret & Company. TJ, you may begin.

Thanks, Madison, and good morning, everyone. Welcome to Victoria's Secret & Co.' 's second quarter earnings conference call for the period ended July 30, 2022. As a matter of formality, I would like to remind you that any forward-looking statements we make today are subject to our Safe Harbor Commission's statement found in our SEC filings and in our press releases. Joining me on the call today are CEO Martin Waters and EVP of Finance Brad Kramer. Also with me today is Kevin Wink, VP of External Financial Reporting and IR. Kevin will be working with me to lead our investor relation efforts go forward. We're available today for up to 45 minutes to answer any questions after our prepared remarks. 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. Reconciliation of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release, our SEC filings, and the investor presentation posted on the investor section of our website. Thanks, and I'll now turn it over to Martin.

Thanks, TJ, and good morning, everyone. Before we dive right into the quarter, as we celebrate our first year as an independent public company, I want to thank all of our associates and partners around the world for their hard work and dedication. After several years of missteps, we collectively undertook and committed to a revolution of our brand and our strategy, aspiring to become the Victoria's Secret our customers deserve, a Victoria's Secret where everyone feels seen, respected, and valued. We've made meaningful progress in a short period of time, and I'm proud of the company we are today. We continue to enjoy our leading market share position atop the domestic intimates category and are energized by our customers' response to our brand repositioning. In fact, we've seen growth in our domestic market share for the intimates category for the past two quarters. Now, of course, we recognize this transformation is a journey, and there's still much more to do. When we last talked with you three months ago, we were all aware of the challenging macroeconomic environment, and we expected to face significant headwinds in the second quarter. We were not wrong. However, as a result of our relentless focus on execution and costs, we were able to deliver second quarter adjusted operating income and adjusted earnings per share within our guidance range. This was our fourth consecutive quarter since the separation, that we delivered adjusted operating income and adjusted earnings per share results within or above our guidance. And for the trailing 12-month period, we delivered nearly a billion dollars in adjusted EBITDA. We believe this type of performance demonstrates the strength of our brand repositioning, our domestic share leadership, and growth in our share of the intimates category, and our team's relentless focus on execution in a difficult supply chain, inflationary, and consumer spending environment. We've stabilized our business model to weather difficult times and are positioned for significant operating leverage in more normal economic times. Turning to our second quarter performance, our adjusted operating income of $127 million was within our previously communicated guidance range. Sales declined 6% in the quarter compared to last year, which was below our expectations. as customer traffic slowed noticeably in our stores and across the retail landscape as the quarter progressed. Sales in our digital channel performed generally as expected. From a merchandise category perspective, bras was our best-performing business, followed by other intimates. Our beauty business was solid, despite headwinds in the quarter related to lower semi-annual sales driven by materially lower redline inventory this year versus last year. Our most challenged category continues to be the apparel business, which represents about 25% of our sales, and it was down in the high teens for the quarter. Our international business continues to be a bright spot, with sales up nearly 30% compared to last year, and we returned the business to profitability in the last two quarters. We continue to be optimistic about growth for all of our partners around the world. We delivered second quarter adjusted earnings of $1.09 per diluted share, which was near the midpoint of our guidance range of $0.95 to $1.25 per diluted share. Aside from the financials, over the last 90 days, we've executed several key actions in support of our strategy and positioning for the long term, including we simplified our corporate leadership structure to unite our brands to better align our teams with a shifting consumer landscape to become more efficient as an organization and to enable more nimble and agile execution of our strategy in support of long-term growth. We continue to deliver newness and innovation, for example, with the launch of our So Obsessed for our campaign, evidence of our commitment to continued quality and fashion in our best stat for our category. We elevated our commitment to diversity and inclusivity with our launch of the latest Pink Wear Everywhere bra franchise in collaboration with TikTok star Remy Bader. Newness and innovation were also evident in the quarter as we launched Bare, our largest fragrance launched in five years. Bare is a new scent designed to complement and adapt to each person's unique body chemistry. Also, we improved our customer experience, expanding channels of distribution We launched our Amazon storefront at the end of April, featuring a portion of our beauty assortment for both Victoria's and Pink, and recently expanded that partnership to include Happy Nation. We anticipate increasing our Amazon exposure as we move through the fall season. We expanded our VS and CoLab platform and commitment to size inclusivity with a new partnership with Elomi. The partnership with Elomi Lingerie will now expand the overall size offering available on victoriasecret.com to over 100 sizes. And we published our first ESG report earlier this spring, documenting our progress and commitment to conduct our business in a more environmentally, socially, and ethically responsible way. And we plan to release our ESG materiality assessment and strategy this fall. Looking to the balance of the year, we anticipate inflationary headwinds and pressure on the consumer will persist. and our business will continue to experience sales and margin volatility. We are confident in our ability to navigate this shifting consumer landscape by aggressively pursuing our share of traffic and being extremely diligent on cost and inventory management. With this in mind, for the full year, we expect sales to decrease in the mid- to high-single-digit range and forecasted adjusted operating income to be in the range of $525 million to $575 million, or approximately 8% to 9% of retail sales. Given today's challenging macroeconomic environment and cost inflation, we believe an adjusted operating income rate in the high single digits demonstrates stabilization of our business and represents a solid base to generate leverage from when more and more normal macro trends return. we remain committed to our long-term range of mid-teens operating income rate. For the third quarter, we're forecasting sales to decrease in the high single-digit range compared to last year, which assumes second-quarter trends and the challenging broader retail environment will continue. We expect operating income for the third quarter to be in the range of $10 million to $40 million. We're committed to optimizing our performance in the current challenging environment 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. We also continue to mine for growth vehicles to help us attract new customers and better meet the needs of existing customers, including developing new brands as well as pursuing partnerships with other brands. 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 consumer environment. We are confident in our opportunities and remain committed to delivering long-term sustainable value for our shareholders. And we're looking forward to our investor day in Chicago on October the 13th, where we plan to provide an update on our longer-term strategy. Thank you. That concludes our prepared remarks. So at this time, we'd be more than happy to take any questions you might have. Thank you.