Victoria's Secret & Co.

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 & Company's second quarter 2024 earnings conference call. Please be advised that today's conference is being recorded. All parties will remain in a listen-only mode. I would now like to turn the conference 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, Amanda. Good morning, and welcome to Victoria's Secret and Company's second quarter earnings conference call for the period ended August 3, 2024. 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 CFO and Interim CEO 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 releases 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 TJ.

Thanks, Kevin, and good morning, everyone. I'm pleased to report that second quarter results exceeded or met our expectations for the quarter on all key financial metrics, and we delivered year-over-year quarterly operating income growth for the first time since 2021. we were encouraged by the continued sequential improvement in quarterly sales results in North America for the fourth consecutive quarter, as sales trends improved in both our stores and our digital channels. Our customers responded to new merchandise deliveries and events with particular success in the launch of our Victoria's Secret Dream Bra Collection, in apparel with our Pink Friday Back to Campus event in late July, and through consistent, steady improvement of VS Sport as we introduced the Featherweight Max front-close bra and a broader assortment of merchandise flowed to stores and digital. Sales for the second quarter of 2024 were $1.4 billion, a decrease of 1% to last year and at the better end of our expectations for the quarter. In North America, the improvement in sales trends was evident in both our stores and in our digital businesses. Momentum experienced at the end of first quarter in April continued into the month of May. As anticipated, sales performance during our semiannual sale period in the June timeframe was lower than last year, driven by fewer units on sale, particularly in pink apparel. We saw strength in July, driven by the introduction of product newness with Victoria's Secret Dream Bra Collection in apparel with our Pink Friday Back to Campus event and consistent, steady growth of VS Sport. From a store's perspective, we experienced improvement in traffic, which outperformed the balance of the mall for the quarter, and with meaningful outperformance in late July during Pink Friday. In terms of our digital business, traffic levels improved in the quarter and were up compared to the second quarter last year, while conversion was down in the quarter, in particular during the semiannual sale period when year over year we had fewer units on sale in our digital channels. From a market perspective, third-party market data indicates the sales trend in the overall intimates market in North America got a little bit softer in the second quarter than what was reported in the first quarter. Our combined Victoria's Secret and Pink market share in the intimates category remained at 20%. We were encouraged to see our digital market share increase in both bras and panties, along with an overall increase in our sports bra market share for the second consecutive quarter. This was partially offset by a slight decrease in market share in the stores channel, where value or low price points appear to be gaining share. From a merchandise category perspective for Victoria's Secret, our beauty business continues to be our best performing category with year-over-year growth for the fourth consecutive quarter, followed by strong acceptance of VS Sport as merchandise available for sale grew throughout the quarter in anticipation of an important event in Q3. In bras and panties, newness and innovation sold well, and several older legacy styles were exited or downtrended during the spring season. Pink's sales trend overall improved in the quarter, both in total and in most major categories. Specifically in apparel, we were encouraged by the improving customer response to product newness during our Pink Friday back to campus event in late July as we ended the quarter. This strength continued into August to start the third quarter as the back to campus event continued in stores and online. In addition to improving trends for Victoria's Secret and Pink, we experienced sales growth in the high single digits for both our international business and Adore Me. International sales in the second quarter were driven by year-over-year growth with our franchise and travel retail partners. Our performance with our partner Next was also strong in the UK, and we grew profitability in China. where our top-line trends were challenged by the overall market and economic softness in the country. We're optimistic about sales, profit, and growth opportunities for all of our partners around the world. The retail environment in North America was challenging, and the promotional environment remains competitive. But improving product acceptance and disciplined inventory management led to adjusted gross margin dollar growth and 80 basis points of adjusted gross margin rate expansion year over year in the quarter. Adjusted SG&A dollars were down in the quarter, leveraging 20 basis points compared to last year and coming in better than our guidance due to discipline and proactive expense management initiatives to drive incremental efficiency within our operating model. You may recall at our investor day, we committed to transforming the foundation of our company and established a $250 million three-year goal, and we're on track to exceed that goal. I believe we have demonstrated our commitment to focusing on efficiencies within our model and improving the cost structure of our business. 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, including In July, we introduced newness with the launch of the Victoria's Secret Dream Collection, a collection of bras, panties, and sexy sleep that combines the ultimate experience in beauty and everyday comfort. Also in July, we added a new style to our top-selling sports bra with the launch of the Featherweight Max Front Clothes, where maximum support meets maximum comfort, now with an easy zip front closure. Additionally, within the VS brand, we launched the Tees Sugar Fleur Beauty Collection, a limited edition version of our fan favorite, Tees. We continue to create meaningful and memorable connections with our customers, including the return of Pink Friday, the last weekend of July, as our collegiate customers get ready to head back to campus, and with the celebration of National Underwear Day in early August. You may have heard the Victoria's Secret Fashion Show is returning on October 15th in New York City with an amazing cast of talented women. The show's return will deliver precisely what our customers have been asking for. Glamour, runway, fashion, fun, wings, entertainment, all through a powerful modern lens reflecting who we are today. And we continue to further develop our understanding of our Victoria's Secret and Pink customer through our multi-tender loyalty program, which has now been active for just over a year. We have 32 million members who drive about 80% of our sales on a weekly basis. Through insights and data, we are focused on turning our understanding of our customers into world-class seamless customer experiences. As we look forward, we're encouraged our North America business trends have continued to improve as we've moved through August and the start of the third quarter. Early customer feedback on fall assortments is encouraging for both the Victoria's Secret and Pink brands. And our beauty business has continued solid performance and is driving traffic to our stores. Strategically, we have several exciting events planned for the balance of third quarter. including a major VSX sport launch and the return of our Victoria's Secret fashion show to kick off the all-important holiday season. While we're optimistic about the positive signs we're seeing in our business, we recognize the consumer environment remains challenging and our customer is pressured economically. We remain focused on what we can control, which is leveraging our market position in Intimates, and delivering on multiple initiatives to drive growth in our business over the longer term. Today, for fiscal 2024, we are raising our financial forecast to reflect Q2 and spring outperformance to our original expectations and also some level of modest improvement in our fall assumptions. For the year, we now expect sales to be down approximately 1% to a comparative 52 weeks from fiscal 2023 compared to prior guidance of down low single digits. This forecast reflects sequential improvement in North America along with continued strength in our international business and tracks in line with the positive trajectory we've been discussing throughout 2024. At this forecasted level of sales, we expect our adjusted operating income in 2024 to be about $275 to $300 million compared to prior guidance of $250 to $275 million. We also now forecast our adjusted free cash flow in 2024 to be approximately $200 to $225 million compared to prior guidance of $175 to $200 million. For the third quarter of 2024, we're forecasting sales to increase low single digits compared to sales in the third quarter last year. And at this level of sales, we are forecasting a third quarter adjusted operating loss in the range of $40 to $60 million. And finally, we're sure you also our recent announcement regarding the appointment of Hilary Super as our next CEO, effective September 9. Once again, we want to thank Martin for his time with the company and his support, and we're excited for Hillary to take us into our next chapter. Thank you. That concludes our prepared comments, and at this time, we'd be happy to take any questions.