Victoria's Secret & Co.

Good morning. My name is Fran, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria Secret & Company's second quarter 2023 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 now would like to turn the call over to Mr. Kevin Wink. Vice President of External Financial Reporting and Investor Relations at Victoria's Secret & Company. Thank you, sir. You may begin.

Thank you, Fran. Good morning, and welcome to Victoria's Secret & Company's second quarter earnings conference call for the period ending July 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 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. We've defined and are delivering initiatives in each pillar, and we believe that these will steadily provide profitable growth into the future. Now, before we dive into the details of the quarter, I want to first share my 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 and for all they're doing as we push forward with our strategy. In the second quarter, we delivered sales, adjusted operating income, and adjusted diluted earnings per share within our guidance range, while the macro environment continues to put pressure on our customer base and on our core Intimates categories. As anticipated, and what was a continuation of first quarter trends, sales performance in the second quarter was particularly challenging in the overall stores and digital Intimates market in North America, and this impacted both Victoria's Secret and Pink Businesses. External market data indicates that overall stores and digital intimates market in North America remain challenged and was down mid-single digits in the quarter compared to last year. We continue to be pleased with our international business, which experienced growth in excess of 25% and strong profit flow-through in the quarter. And our recently acquired Adore Me brand also grew sales during the quarter, highlighting the strength of their business model and unique digital strategies. Additionally, our teams were resiliently focused on what was within our control, managing selling margins, diligently controlling costs, and delivering inventory levels at Victoria's Secret and Pink that were down low double digits compared to last year, allowing us to enter the fall season with relatively lean inventory levels. Now, turning to the numbers, in the second quarter, our adjusted operating income was $49 million, and adjusted earnings per diluted share was $0.24, both near the midpoint of our guidance range. Overall, sales declined 6% in the quarter compared to last year, which was near the low end of our guidance range and down mid-single digits. Sales trends for the first quarter in North America continued throughout the second quarter in both stores and digital channels, driven by a decline in traffic and average basket size compared to the second quarter last year. While conversion rates and average unit retail in both channels were lower than last year, each of these key metrics continues to trend above pre-pandemic levels. Adormi sales were up year over year against the quarter and represented about four percentage points of total sales growth for the S&Co in the quarter. From a merchandising perspective, sales trends for the Intimates market in North America remain challenged, as I said, and decreased in the mid-single digits compared to last year. We remain the leader in market share for the Intimates category in North America, including both bras and panties. On a rolling 12-month basis, our Intimates market share declined slightly, with our digital share up slightly and stores share down slightly. From a merchandise category perspective, starting with Victoria's Secrets, Our beauty business continues to be our best performing category, followed by bras, sleepwear, and panties. Within pink, intimates and sleepwear outperformed apparel, which had another difficult quarter. We estimate that the previously identified apparel challenges in pink negatively impacted the second quarter sales results by approximately two to three points. Our new reimagined pink merchandising assortment has begun to set and sell both online and in stores, and we're encouraged by early positive response from our customers. Back to our international business, which continued its stellar performance with sales up 26% in the quarter compared to last year, and total international system-wide sales up in the low teens as well. The business continues to experience momentum and provide profitable growth across stores and digital. The second quarter results were driven by significant year-over-year growth in China through our joint venture with Regina Miracle and globally with partners in our franchise and travel retail networks. In the past 12 months, we have entered four new countries and opened nine new digital sites to increase our global footprint. And we have 25 to 35 net new stores planned to open in the fall season. We continue to be optimistic about sales and profits 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 brand positioning for the long term, which include we announced the premiere of the Victoria's Secret World Tour streaming on the 26th of September on Amazon Prime Video. Part spectacular fashion event, part documentary, this one-of-a-kind show promises an unrivaled viewing experience that celebrates the mission of Victoria's Secret to uplift and champion women on a global scale. The tour will be headlined by a Grammy award-winning artist, Doja Cat, with a relentless focus on best of bras strategy and delivering newness, innovation, and fashion to our customers. We debuted the Icon by Victoria's Secret, a new collection of bras, panties, and lingerie centered around the new Icon by Victoria's Secret push-up demi-bra, and featured an all-star cast of talent, including the return of Giselle Bundchen, Naomi Campbell, Adriana Lima, and Candice Tuanepoel to the VS family. We also introduced the Featherweight Max sports bra featuring a revolutionary super light shape design for both gym and everyday wear. We expanded our channels of distribution with the launch of Victoria's Secret lingerie and apparel in the official Victoria's Secret Amazon fashion storefront. In June, we enhanced Victoria's Secret and Pink customer experience and rolled out our new multi-tender loyalty program to all customers. In just three months, we already have over 16 million members who are currently accounting for over 70% of our weekly sales, and that's trending higher. We launched Adore Me merchandise available for sale on www.victoriasecret.com during the quarter, and we continue to leverage Adore Me's expertise and technology to improve the customer experience by further developing our launch plans for Tryon at Home and VIP membership services for the Victoria's Secret and Pink customer. And we evolved our leadership structure to advance our strategic priorities with the appointment of Greg Yunus as brand president, along with welcoming back to the brand Anne Stevenson as our new chief merchandising officer. Looking forward, we're focused on changing the trajectory of our sales trends, and our teams have been working tirelessly on multiple growth initiatives designed to impact the third quarter and the all-important holiday season. We're encouraged by August sales trends, which were better than July, the second quarter, and the entirety of the spring season, and believe there are early signs that our growth initiatives are beginning to be noticed by customers. For the third quarter, we expect sales to decrease in the low to mid-single-digit range compared to last year, and we are forecasting an adjusted operating loss in the range of $45 to $75 million. We expect inventory levels in our core Victoria's Secret pink business at the end of the third quarter to be down mid to high single digits compared to last year. Our guidance for the third quarter reflects an improvement in our sales trend in North America based on August results as I just mentioned. The phase rollout of the new digital technology capabilities Victoria's Secret World Tour and our reimagined pink merchandise, which, as I said, is beginning to deliver at the end of August. For the fall year 2023, we're forecasting sales to decrease in the low single-digit range compared to last year, and we expect the adjusted operating income rate to be in the range of 5% to 6%, compared to current analyst consensus estimate, which reflects sales down approximately 2% compared to last year, and an adjusted operating income rate of approximately 5.5%. We remain focused and continue to take important steps to evolve and innovate our business, focused on our three core pillars, strengthen the core, ignite growth, transform the foundation. We continue to believe executing against our strategies in each of the pillars will improve business trends beginning in the third quarter and accelerating into the holiday season. Strengthening the core, we have growth strategies and new customer experiences that we believe are opportunities, including new bra launches and innovation, reimagining, merchandise positioning for Pink, our multi-tender loyalty program, new customer experience initiatives in digital, and further expansion of our successful store of the future format, as well as the Victoria's Secret World Tour, which will be our largest marketing investment in over five years. Ignite growth. Our international business has momentum with partner expansion plans for more than 100 new stores and several new markets planned throughout the next two years. We also plan to leverage Adore Me's technology on our scale platforms for the fall season, and we're continuing to expand our channels of distribution to meet the customer where she is. Transform the foundation. We continue to take steps to drive operating margin expansion by modernizing the operating model. These initiatives are well underway, and we remain committed to the total of $250 million opportunity identified at our October Investor Day. We've begun to realize those benefits related to initiatives in 2023, and more than two-thirds of the total savings are expected to be realized in 2024 and 2025. Of course, we recognize that neither our brand revolution nor our strategy will return their full potential overnight. We're on a journey. We also believe there is 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 a future-facing business that becomes more and more culturally relevant in this shifting consumer environment. We remain confident in our repositioning efforts and our strategic plans for growth. 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. And lastly, we're looking forward to our investor day in our office in New York City on October the 12th, and we plan to reflect on the previous year and provide update on our longer-term strategy. Thank you. That concludes our pre-prepared remarks, and more than happy to take your questions at this time.