Victoria's Secret & Co.

Good morning. My name is Sue, 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 first quarter 2023 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. I would now like to turn the call over to Mr. Kevin Wink, Vice President of External Financial Reporting and Investor Relations at Victoria's Secret & Company. Kevin, you may begin.

Thank you, Sue. Good morning, and welcome to Victoria's Secret & Company's first quarter earnings conference call for the period ending April 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 investor section of our website. Thanks, and now I'll turn the call over to Martin. Thanks, Kevin, and good morning, everyone.

As we've shared consistently inside and outside of 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. and we have defined and are delivering initiatives in each pillar that we believe will steadily provide profitable growth into the future. And before we dive right into the quarter, I want to share my appreciation 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 push forward with our strategy. We entered the year clear about the pressure customers across the world are feeling and prepared for the challenging macro environment. And as anticipated, the first quarter overall continued to be volatile and difficult for our customer. Sales performance was particularly challenged in our core categories where external market data indicates that the overall stores and digital intimates market as a whole in North America was down mid to high single digits compared to last year. As the quarter progressed, Our business in North America became increasingly more challenging, and while we ended the quarter with sales in line with our original expectations, we were more promotional than planned, and we continued as we continued to pursue our share of consumer spending. As a result, the quarter ended at the lower end of our adjusted operating income guidance. On a positive note for the quarter, inventory levels at Victoria's Secret and Pink ended the quarter down low double digits compared to last year, and we're prudently positioned as we move forward. Our international business continued its stellar growth around the globe, with China a particular bright spot, and Adormi met our expectations during the first quarter as part of VS&Co. Now turning to the numbers for a few minutes. In the first quarter, our adjusted operating income was $55 million, and adjusted earnings per diluted share was $0.28. Overall, sales declined 5% in the quarter compared to last year, which was in line with our expectation. Adormi represented about 5% points of sales growth in the first quarter. After a solid fourth quarter, sales trends softened throughout the first quarter, particularly in North America stores, where traffic finished below last year. In contrast, traffic online was flat compared to the first quarter last year. Conversion rates and average unit retail in both channels were lower than last year, but remained above pre-pandemic levels. From a merchandising perspective, we remain the leader in domestic market share for the Intimates category. On a rolling 12-month basis, our domestic market share in bras was relatively flat to last year, while in contrast, our market share in the panties category was down year over year. Again, from a categories perspective, starting with Victoria's Secrets, Our casual sleep and beauty businesses continue to be our best performing categories, both in stores and online, followed by bras. Within Pink, casual sleep and intimates outperformed apparel, which had another difficult quarter. We estimate that the previously identified apparel challenges in Pink negatively impacted the first quarter sales by approximately two to three points. As I said earlier, our international business continued its stellar performance with reported sales up 19% for the first quarter compared to last year, and total international system-wide retail sales were up in the mid-teens as well. The business continues to experience momentum and provide profitable growth across stores and digital around the globe. In particular, our China business experienced outsized growth in digital and strength in our stores as they lacked COVID-related restrictions last year. We achieved profitability in our China business for the first quarter and continue to leverage the strength and capability of our excellent partner, Regina Miracle. We continue to be optimistic about sales, 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 positioning for the long term, including we're relentlessly focused on best-at-bras strategy and delivering newness, innovation, solutions, and inclusivity to our customers, and recently launched our Solutions Bra campaign focused on a comprehensive collection of product solutions to cover a broad range of outfitting needs. enhancing Victoria's Secret and Pink customer experience with the pilot of our new customer multi-tender loyalty program in February with a full rollout to all of our customers planned for later this week. We launched our newest Heavenly campaign with a new look and feel featuring the return of the beloved brand icon, Adriana Lima. We're about to kick off a test of having a Dormy product on VS.com, and continue to leverage Adore Me's expertise and technology to improve the customer experience by developing our launch plans for try-on at home and membership services for the Victoria's Secret and Pink customer in the third and fourth quarter, respectively. We took actions to advance the transformation of our foundation by further reorganizing and streamlining our organization structure with a focus on efficiencies to yield profitable growth. We continue to make progress on our ESG journey and published our 2022 ESG report in April. I can't overstate how excited we are about the World Tour coming later this fall. It will be an epic reimagining of our iconic fashion show, celebrating women from around the world, an ultimate expression of our brand transformation. Looking forward to the balance of the year, with the difficult environment we experienced in the first quarter now continuing into the second quarter, we've updated our financial outlook for the second quarter and the balance of the year. We expect sales in the second quarter to decrease in the mid-single-digit range compared to last year, consistent with the first quarter results. And we're forecasting adjusted operating income to be in the range of $35 to $65 million. We expect inventory levels in our core Victoria's Secret and Pink business at the end of the second quarter of 2023 to be down mid-teens compared to last year. For the full year, we're now assuming current sales trends in North America will continue throughout the second quarter with moderate improvement in the second half of the year as we anniversary stop the sales trends and as we begin to benefit from our new growth strategies and new customer experience initiatives which are being rolled out this year. Our forecast assumes sales overall will be flat to down mid-single digits compared to last year, with the Victoria's Secret and Pink business down mid to high single digits for 52 weeks, approximately four to five points of growth from Adormi, which is new to our results in 2023, and approximately one to two points of growth due to the 53rd week in fiscal 2023. At this level of sales, we now expect our adjusted operating income rate for the full year 2023 to be approximately 5% to 6%. While we believe our customers will continue to be cautious for the balance of the year, we remain steadfast and focused on the three pillars of our long-term strategy, and we're executing initiatives in each pillar to position us for sustainable growth over the long term. To highlight a few, under Strengthen the Core, New customer experiences include bra launches and innovation, reimagining our merchandise positioning and strategy for pink, a full company rollout of our new loyalty program, new customer experience initiatives in our digital technology, further expansion of the successful store of the future format, and, of course, the world tour coming later this fall. With an igniting growth, our international business has momentum with partner expansion plans for more than 100 new stores and several new markets planned over the next two years. We also plan to leverage Adormi's technology on our scale platforms starting in the third quarter and continuing through the fall season. And we're continuing to expand our channels of distribution, for example, Amazon, to meet customers where they are. And finally, under Transform the Foundation, In the first quarter, we took additional measures to reorganize our home office and organizational structure for efficiency and continue to take steps to drive operating margin expansion by modernizing the operating model. These initiatives with future benefit are well underway, and we remain committed to the total $250 million opportunity identified at our October investor day. We've begun to realize the benefits related to these initiatives in 2023, with more than two-thirds of the total savings expected to be realized in 2024 and 2025. Of course, we recognize that neither our brand evolution nor our strategy will return their full potential overnight. They are a journey. We also believe they are a clear path to growth through the current turbulent environment and into the future. Our focus as leaders and as a company is on ensuring we continue to be future-facing and become more and more culturally relevant in this shifting consumer environment. 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. Thank you, and that concludes our prepared comments. At this time, we'd be more than happy to take any questions that you might have.