Victoria's Secret & Co. Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2024

There are 9 speakers on the call.

Operator

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 and Company's 2nd Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mr.

Operator

Kevin Wink, Vice President of External Financial Reporting and Investor Relations of Victoria's Secret and Company. Kevin, you may begin.

Speaker 1

Thank you, Amanda. Good morning, and welcome to Victoria's Secret and Company's 2nd 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.

Speaker 1

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 Investors section of our website. Thanks. And now I'll turn the call over to T. J.

Speaker 1

J.

Speaker 2

Haley:] Thanks, Kevin, and good morning, everyone. I'm pleased to report that 2nd 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 4th 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 Versus Sport as we introduce the Featherweight Max front closed bra and a broader assortment of merchandise flow to stores and digital. Sales for the Q2 2024 were $1,400,000,000 a decrease of 1% to last year and at the better end of our expectations for the quarter.

Speaker 2

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 Q1 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 Versus 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.

Speaker 2

In terms of our digital business, traffic levels improved in the quarter and were up compared to the Q2 last year, while conversion was down in the quarter, in particular during the semi annual sale period when year over year we had fewer units on sale in our digital channels. From a market perspective, 3rd party market data indicates the sales trend in the overall intimates market in North America got a little bit softer in the Q2 than what was reported in the Q1. 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 2nd 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.

Speaker 2

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 4th consecutive quarter, followed by strong acceptance of Versus 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 Q3 as the back to campus event continued in stores and online.

Speaker 2

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 Q2 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 U. K. And we grew profitability in China where our top line trends were challenged by the overall market and economic softness in the country.

Speaker 2

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 and A dollars were down in the quarter, leveraging 20 basis points compared to last year and coming in better than our guidance due to disciplined 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 $250,000,000 3 year goal and we are on track to exceed that goal.

Speaker 2

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 closed where maximum support meets maximum comfort now with an easy zip front closure. Additionally, within the Versus 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.

Speaker 2

You may have heard the Victoria's Secret Fashion Show is returning on October 15 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 32,000,000 members who drive about 80% of our sales on a weekly basis.

Speaker 2

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 Q3. 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 Q3 including a major VSX sport launch and the return of our Victoria's Secret Fashion Show to kick off the all important holiday season.

Speaker 2

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.

Speaker 2

At this forecasted level of sales, we expect our adjusted operating income in 2024 to be about $275,000,000 to $300,000,000 compared to prior guidance of $250,000,000 to $275,000,000 We also now forecast our adjusted free cash flow in 2024 to be approximately $200,000,000 to 225,000,000 dollars compared to prior guidance of $175,000,000 to $200,000,000 For the Q3 of 2024, we're forecasting sales to increase low single digits compared to sales in the Q3 last year. And at this level of sales, we are forecasting a 3rd quarter adjusted operating loss in the range of $40,000,000 to $60,000,000 And finally, we're sure you will also our recent announcement regarding the appointment of Hillary 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.

Speaker 2

And at this time, we'd be happy to take any questions.

Operator

Thank you. Our first question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

Speaker 3

Hey, good morning, TJ. Congrats on the results. 2 from me. Just first real quick on the model. You talked about international up high singles.

Speaker 3

It sounds like you're confident there. Can you just tell us what you're expecting from the international segment in the back half of the year? And then could you just elaborate further on the promo environment that you're seeing and what you're basically baking into your plan? I'm most curious what kind of promogross margin outlook you can maybe share with us for the Q4 specifically? Thanks.

Speaker 2

Yes. Thanks for the question Ike. First off, we continue to be very, very excited about our international business really all around the world. As I mentioned in our prepared remarks, both the travel retail as well as franchise businesses were the strongest in 2nd quarter. We continue to do very well with our partners in the U.

Speaker 2

K. And the one area of the international business that softened a bit is in China, which is I don't think unique to our business. There does appear to be a more pressured consumer there in that country at the moment. As we look forward, I would expect more of the same from our travel retail and franchise partners in the Q3 as well as our partners in the U. K.

Speaker 2

I do think there's some timing on promotional events in China and some events that are more national in nature from an e commerce perspective that will likely get pulled into Q3 because of the calendar shift. So Q3 for our international business might be a little bit better than 4th, but I think that's largely due to calendar shifts in and around the China business. From a promo perspective, as we look at Q3 and Q4, our guidance assumes much of the same that we've incurred here in the front half of the year. We do think it will continue to be promotional. We're prepared to be more promotional if need be in the 3rd Q4 to drive our outcomes.

Speaker 2

I think what the business has gotten much, much sharper with is utilizing key areas of the business. I mentioned the beauty business as a traffic driver. You've seen us be very successful leveraging our panty business as a traffic driver. Clearly, the size and growth of our loyalty program is also supporting level of traffic growth. We're seeing that customers inside our loyalty program now when they have some annual data are actually shopping more year over year and spending more year over year.

Speaker 2

That's a really good sign for us in terms of product acceptance and how we're reaching them. So I do think each of the 3 of those items I mentioned have the opportunity to drive traffic in our business and might lead to a little bit more promotion here in the fall season. But coming back up to a high level, I think the most exciting part about our business is really the early merchandise acceptance to newness, particularly in the Versus and Pink brands. You'll recall that if you go all the way back to almost a year ago now when we were in New York for our Investor Day and the team laid out some of the strategy from a merchandising perspective and the newness that would be coming and some of the adjacent category expansion work that would be coming, it's now starting to show up in stores here in July August and clearly something is working. So we're excited about that.

Speaker 2

We think we're very early in that process. And again, merchandise product and newness, ultimately, we think will win the day in the back half of the year. Thanks for the question.

Speaker 3

Could you say gross margins will be up or down in the 4th quarter?

Speaker 2

Gross margins are guided to be up in the Q3. I'd say embedded in the model is the rate might be down a little bit in Q4 principally because you'll recall we had an extra week in our results last year and obviously an extra week of selling and leveraging B and O has a pretty meaningful impact on margin rates. But I would suggest from a merchandise margin rate when we think about the Q4 compared to last year, it might be down a little bit, but the gross margin rate being down is more about the B and O rate than anything else.

Speaker 3

Perfect. Thank you.

Speaker 2

Yes. Thank

Operator

you. Our next question comes from Alex Straton with Morgan Stanley. Your line is open.

Speaker 4

Great. Thanks so much. I just have a couple for you both. So just on the sales guidance raised for the year, I know you said you did that embed the back half outlook being slightly better than previous. Can you just talk to us about where you've grown more optimistic either by banner or geography or category just so we understand that a little bit more?

Speaker 4

And then just a quick follow-up on your promo color that you just gave, which was super helpful. I'm just wondering bigger picture, do you feel like you guys are at the right promotional levels? Or is it still too elevated compared to what you think of as like a steady state level for the brand? Thanks a lot.

Speaker 2

Yes. Thanks for the question, Alex. I think raising the sales guide for the year was predominantly this spring outperform coming in at the better end of the range 2 quarters in a row, obviously pushed the year up a little bit in terms of dollars. I'd say generally speaking that the sales estimates for the balance of the year are largely unchanged. Where the model probably got a little bit stronger would be below the sales line and some of the margin elements or particularly from an expense standpoint.

Speaker 2

The teams continue to do a great job managing costs and managing inventory and cash. I think from a what am I kind of most encouraged by, I'll just reiterate what I mentioned that product acceptance early in both the Victoria's Secret and PINK brands has been very encouraging. As I mentioned, we've been waiting for this inflection moment here in July August for a long period of time and the newness that we were expecting both in intimates and adjacent categories to intimates has shown up and is doing well. I think that's the single most encouraging part of what we're seeing in the business. And the team that has been working on that tirelessly has done a really, really good job.

Speaker 2

I think from a promo color and kind of back half of the year or just general discounting levels, it is true our discount rate is up a little bit year on year. I think it's also true that we don't believe that we should be at this discount rate forever and ever. I think this is a reflection of the environment. It's a reflection of where we are in terms of the evolution of the merchandising assortments and making sure that we're getting enough customers across the lease line or to our site for trial of the newness that the teams have delivered. Coming out of the holiday season and going into next year, I think we would all like to believe that we could be a little less promotional as a brand and I'm sure we'll be working towards that.

Speaker 2

I do think it's important to highlight and I've mentioned this on previous calls that we do have a fair amount of testing rigor around, promotionality. And what I mean by that is we do have, testing control groups or holdout groups where we are less promotional. And in the current environment, what we're seeing is the promotions matter. Promotions matter to the customer. They're accretive to sales and accretive to margin dollars.

Speaker 2

So again, for the moment and where we are in the evolution of merchandising and where we are with the customer, we think the promotions make sense. Longer term, I think we would all like to be a little less promotional than we are today.

Speaker 4

Great. Good luck.

Speaker 2

Thanks, Alex.

Operator

Thank you. Our next question comes from Cory Tarlow with Jefferies. Your line is open.

Speaker 5

Great. Thanks and good morning. So T. J, I wanted to ask about PINK because you highlighted an improvement there and I know that you've infused a fair amount of newness in that segment. Could you talk a little bit about what you feel is working with that segment and what you think the trajectory might look like into the back half?

Speaker 5

Thanks so much.

Speaker 2

Yes. Thanks for the question, Cory. And it's we've been looking forward to talking about the pink business in a positive light because there's been a tremendous amount of work to get us here. I think in summary, tees, tanks, dresses continue to start off well for the business in July, in August around the Pink Friday event. And as we deliver more and more newness in capsules to the front of the store, we're seeing good customer response.

Speaker 2

If you think about what you see on the front table, particularly end of July early August, a fair amount of stores had sell out activity. But tees, tanks and dresses were some of the early good winners for the business. You might have seen some denim shorts on the front table here in the Q3, different types of pant inventory available for sale. And I'd be remiss if I didn't mention the Wink bra that delivered early in the season that has continued to sell through well. So I think there are a number of different category examples, Corey, that give us optimism as we move into the back half of the year that there's more opportunity to come with PINK.

Speaker 2

For back to school, I'd be remiss if I didn't mention that we actually had backpacks this year to drive customers to the store and to get that basket started and use it as a promotional item. So backpacks for back to school is a pretty novel idea and the teams have done a good job executing against that and it's been very well received. I think maybe, one of the most encouraging parts if you were and I know you're in stores almost every day, if not every day, but for those who are in store, particularly end of July and for back to school, seeing a younger customer return to the pink side of the store was very encouraging for our stores team and our merchant team. So getting back to that younger customer in that 18 to 22 year old age demographic, you saw significantly more of that type of foot traffic in our stores in late July August than maybe you have in prior seasons. So a lot to like about what's happening so far in PINK, but more to come.

Speaker 5

Great. Thanks so much and best of luck.

Speaker 2

Yes. Thanks.

Operator

Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. Your line is open. Simeon, your line is open. You may need to unmute yourself.

Operator

All right. We'll go to the next question. Our next question comes from Brooke Roach with Goldman Sachs. Your line is open.

Speaker 6

Good morning and thank you for taking our question. I was hoping you could speak to the drivers of the better SG and A cost control that you saw in the quarter. Could you provide a few examples of where you're finding those efficiencies? And then as you look ahead, how are you thinking about the cadence of SG and A dollar growth in the back half of the year And any additional levers that you might be pulling there?

Speaker 2

Yes. It was a little soft, but I think you were asking about cost opportunities and kind of what drove the outcome in Q2 and our outlook for the balance of the year. I think that's what the question was. Brooke, there were a number of different areas within the business. I wouldn't want you to think that it was any one big thing that drove the cost outperformance in Q2.

Speaker 2

I think the best way to think about it is the teams have rallied around keeping costs under control as we've kind of come into this inflection point. They understand that driving profitability is important while we're in this inflection moment and keeping costs under control is one thing that we can do to help in that regard. So there are a number of different areas throughout the business, whether it's closely monitoring travel and headcount or whether it's really looking at our ship commitments and promise dates and how we deliver to the customer differently from a digital and distribution standpoint, or whether how we're managing our store payroll or what we're expecting of our stores in terms of changes and frequency of change and kind of monitoring that closely. There are a number of different areas throughout the business where we were able to keep costs in check here in the Q2. I have every expectation that will continue on into the Q3.

Speaker 2

You've probably worked through your model at this point and the leverage that we're guiding to on the sales we're guiding to has SG and A dollars relatively flat year over year. And I'd expect there will probably be a little bit of growth in SG and A dollars potentially as we move into the Q4 when you account for the extra week last year. That growth in Q4 candidly is probably as much about the good start to the season and the expectation that we will be providing for more incentive compensation in the back half of the year than last year than anything else. We're not doing anything differently or adding cost to the business, in the Q4 differently than we have in any prior year. So I feel very good about the cost outlook.

Speaker 2

And maybe again, most importantly, I just want to underline that this is something that the teams have rallied around. It's not always the most fun part of what we do, but it's necessary in the environment that we're in. And this has been a multi year journey. This isn't something that's been new to Versus and Co in just the last quarter or 2. This has really been something we've been after for a while.

Speaker 2

So feel very good about how the teams are managing cost and managing inventory. You didn't necessarily mention, but I'll mention it anyway. We do have costs that sit inside of the gross margin component in the business, buying and occupancy costs and those costs were down year over year and I expect they would be flat to down as we move through the balance of year. So again, much the same disciplines around all areas of the business plus some pretty meaningful positive movement from, I'll call, occupancy costs, meaning lower rents, working on locations and getting better terms on a go forward basis, looking at things like co tenancies as anchors have gone out and things like that. So really there's no stone unturned right now from a cost perspective to keep things heading in the right direction.

Speaker 6

Great. Thanks so much. I'll pass it on.

Speaker 7

Yes. Thank you.

Operator

Thank you. Our next question comes from Mauricio Serna with UBS. Your line is open.

Speaker 7

Great. Good morning. Thanks for taking my questions. I wanted to ask about the Q3 guidance. It calls for a sequential improvement.

Speaker 7

I just want to understand like from a business, from a segment standpoint, what segments are driving that improvement? Is it like across the board or anything in particular? And then like as you think about that improvement, just focus on the North America intimates market, you were mentioning that it got softer kind of slightly softer in the Q2. What are your expectations for like the industry growth of the intimate North America intimate industry growth for the second half of the year?

Speaker 8

Thank you.

Speaker 2

Yes. Thanks for the question, Mauricio. When we think about Q3, if I could just maybe stay at a high level for a moment and use big round numbers. We were down 1% in Q2 as a business on the top line. We've guided to low single digit growth in the 3rd quarter.

Speaker 2

So 1% to 3% is how we define low single digits. So if I just take the midpoint of that at plus 2%, so really what we're talking about is going from down 1% to plus 2% in the 3rd quarter. In our prepared remarks, we talked about the retail calendar shift that is happening for us in all retailers this year. And as it relates to the Q3, that's about 2 points of positive impact. So really that plus 2, percent in my example without the retail calendar shift would be more like flat.

Speaker 2

So on an apples to apples basis, you might be talking about going from down 1% to flat. Again on a reported basis, it will be from going from down 1% to plus 2 because of the calendar shift. And again, to be clear, the calendar shift is really about we move a week of the 1st week of November last year into the Q3 this year. 1st week of November, as you know is a big holiday week or holiday volume starts to ramp in our business. So you can kind of hopefully visualize the positive impact there.

Speaker 2

To the heart of your question, what's going to drive that? From our view, we're already seeing some of that in our business in the month of August. I would expect the month of August will be positive in the low single digits, if not a little bit better based on the strength of Pink Friday and National Underwear Day to start off the month and then just better core business here as we're finishing the month. So feel good about August. And what's driving that and what we anticipate will drive the Q3 is all about newness and product, product acceptance, major VSX launch coming in September, kickoff at the fashion show, which will be commercialized this year, live and commercialized this year to drive hopefully positive results from a sales perspective and really kick off the holiday season for us in a major, major way.

Speaker 2

So that's what we anticipate will drive from a product perspective. We do think that North America, PINK, Victoria's Secret and PINK, the brands in North America, again, business gets sequentially better from 2nd to 3rd quarter. Again, that would be the 5th quarter in a row. I do think North America in total will get closer to flat in the quarter or maybe down slightly, but again sequential improvement year over or quarter over quarter for the 5th quarter. And then we have every expectation the international business and our partners at Adorme will continue to grow in the high single digits or better.

Speaker 2

So those are kind of the building blocks of 3rd quarter, but I think it's important to understand the calendar shift does need to be accounted for there. On the last part of your question as it relates to the domestic market share, coming into the year, we had to make some assumptions on the domestic intimates market and performance. We said at that time, we expected the market to be softer here in the front half of the year and then stabilize in the back half of the year. I guess that's as good of an assumption as any still. Maybe it continues to be a little bit softer in the back half of the year.

Speaker 2

I'm not quite sure. But what I am confident in is here in the Q2 where the market was tougher, our business has still got better in North America. And even if in the Q3, the domestic intimates market is difficult, I'm seeing our business get better in the month of August and we have every expectation and it will get better in September October. So while all of all of the newness innovation and initiatives that we're launching in our business. So, feel comfortable with where we are to start the Q3 timeframe and we'll see how we do in September October.

Speaker 7

Got it. And just a quick follow-up on gross margin. One of the things I noted in the commentary provided for Q3, as you call out transportation costs on ocean air, Maybe you could elaborate a little bit more like what kind of impact that you're expecting in Q3 gross margin? And if that's only like a one time thing or is this something that we should be maybe considering for Q4 and maybe going into fiscal year 2025? Thank you.

Speaker 2

Yes. I wish my crystal ball was that clear on forecasting transportation rates. I can only see for sure a month or a few weeks out Mauricio. But what we really saw was that transportation rates were down significantly as we exited 2023 and then the front part of 2024. And those transportation rates being down are what rolled through our margin and was a tailwind in the spring season.

Speaker 2

As we started to work through Q2 in the June, July timeframe and even here in August, what we've seen is that transportation rates whether it's ocean or air, start to spike in the spot market, for a number of different reasons, some capacity related, some movement between East Coast and West Coast related. But regardless, we're seeing overall rate environment pick up here over the last few weeks and the last couple of months. Our expectation in our guidance is that likely continues through the balance of the year. So what was a tailwind will likely be a little bit of a headwind as we move into the fall season and potentially even a little bit more than that as we move into Q4. Where it goes next year, your estimate might be as good as mine.

Speaker 2

But here in the near term in our guidance, we've assumed that transportation rates are a bit of a headwind in the back half of the year.

Speaker 7

Got it. Very helpful. And that's also why you think like merchandise margins in Q4 might be down a little bit?

Speaker 2

It's certainly an element that is new and different. I mean last year transportation rates were probably close to a historical low level. And as I mentioned since they've been spiking here late, we do think it likely continues we do think it likely continues through the Q4. So that's probably one change from maybe our beginning of year expectation to where we are currently. I think the other piece that I'd be remiss if I didn't mention and you'll recall Q4 last year is when we started seeing meaningful cost of goods sales cost of goods sold reduction or reduction in average unit costs.

Speaker 2

And that's something that the teams had been working on production sourcing, merchant teams and others had been working on. It's something that's part of our transform the foundation goal. You may recall us talking about an annual opportunity of probably $130,000,000 to $140,000,000 or more in the form of lower unit cost. That kicked off last year in Q4. And obviously, we'll have our full 12 months here wrap up in Q3 of this year.

Speaker 2

So we will start to go up against that. But in terms of year over year change, the transportation rates is probably the one piece, Mauricio, that's certainly different. So going from historic lows last year in Q4 to a spiky market here in the fall season, we've tried our best to reflect that in the Q4 guide.

Speaker 7

Got it. Understood. Very helpful. Best of luck. Thank

Speaker 2

you. Thanks.

Operator

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

Speaker 8

Thanks. Hey, guys. Good morning. Hope you had a nice summer and congrats on some really nice improvement. I apologize, I got disconnected.

Speaker 8

So if you already answered any of these, just disregard and I'll get it from the transcript. Sorry about that. All right. So could you quantify the puts and takes behind the gross margin improvement this quarter and how you're thinking about those drivers going forward? What do you expect buying and obviously dollars to look like going forward recognizing the comment from this past quarter?

Speaker 8

And then with the fashion show returning, how are you thinking about marketing dollars this year? So have you said any of those before, I'll again, and then just higher level or I'll get them from the script, you don't have to say them again. And then just higher level, the EBITDA growth was great. So that was really encouraging. Could you speak to your comfort in continuing that inflection going forward?

Speaker 8

Is this the beginning of that turn? Thank you.

Speaker 2

You made up for lost time there, Simeon. I think I got 3 or 4 things. I'll try to address all of them. But the puts and takes here in the 2nd quarter from a margin perspective, As I just mentioned with Mauricio, significantly up to last year from a rate perspective up about 80 basis points gross margin dollar growth in excess of sales activities. So good performance in the quarter.

Speaker 2

The teams manage inventory. Inventories ended down 2% in line with our guidance. So everything seemingly moving in the right direction. The positives here in Q2 were mostly about the cost of goods sold work that I mentioned in lower average unit costs. Because of the lag and how kind of things sell through from a margin perspective and how we recognize cost of goods, we still did have some favorable transportation activity from the front half of the year flowing through in the second quarter.

Speaker 2

Again, it gets more challenging as we move forward. Those were probably the 2 good guys in the quarter from a margin perspective. And then a 3rd good guy would be just overall for the 2nd quarter buying and occupancy dollars were actually down year over year. And again that helped flatten out the B and O impact on a down one sales number. The one item going the other way is it was a promotional quarter across our category and across retail.

Speaker 2

I mentioned earlier our discount rate was up a little bit year over year. We did our best to try to target that discount rate in a couple of key areas namely beauty, namely panties. So this discount was not about liquidating poor performing inventory at all. This was about trying to drive trial and traffic. As we look forward from a margin perspective, guiding the margin rate up year over year in Q3, again, cost of goods sold would be the primary driver there and lower average unit costs.

Speaker 2

We'll start to see transportation rates turn from a tailwind to a bit of a headwind in Q3. And then I'd say from a promotion standpoint, probably pretty similar year over year or maybe slightly more promotional in our guide. So just same sort of elements, just moving slightly one way or the other. From a buying and occupancy standpoint, I would expect dollars to continue to be flat or down here in the Q3 and likely in the Q4 as well. Again to Brook's question earlier, we manage all costs in our business not just the ones that show up in SG and A and the team is doing a great job in that.

Speaker 2

So I feel good that on a low single digit sales increase, we'll leverage B and O with B and O dollars being down. So those are kind of some of the puts and takes from a margin perspective. You might not have picked up on I think Mauricio's last question on Q4. We talked about the margin rate in Q4 likely being down a little bit as we anniversary last year's cost of goods sold work, but probably more importantly just some of the expectation that transportation rates could remain elevated for the balance of the year. Your question on marketing, I'd say we're spending an appropriate level of marketing from our view.

Speaker 2

Yes, our marketing dollars in total were elevated a bit last year with the world tour. This year with the fashion show, the fashion show is not the same cost as the World Tour. It's lower than the World Tour. So overall marketing dollars will likely be down year over year. But again from our view still an appropriate budget.

Speaker 2

When we look to the Q3, we're really excited to see what type of not just positive sentiment. We've already got a pretty good indicator on that based on yesterday's Instagram post of announcing the date and a couple of key people associated with the program. So very positive sentiment. Customers are super excited about it. We're really looking forward to seeing what we can do to generate new customer trial through the fashion show and through the launch of the VSX Sport here in Q3.

Speaker 2

So a lot to like about what's coming from a marketing perspective. And I think I lost the last question.

Speaker 8

Just the idea of EBITDA we're growing, they're inflecting. So just comfort in that continuing this being the beginning of the trend because that's obviously very encouraging.

Speaker 2

Yes. So from an you say EBIT, we speak in operating dollars. Since a lot of our incentive programs are tied to operating profit dollars. Yes, the inflection point for the first time since really Q3 of 2021, I think you caught it right in your note this morning, was the last time operating income dollars were up year over year. Our guide for Q3 suggests that should continue into this quarter.

Speaker 2

Q4 is a little bit tough to look at because of the extra week year over year, which we did quantify that drove about $20,000,000 of operating income last year due to the extra week. So we've got some work to do to get Q4 back to last year's Q4 from an operating income perspective. But there's a lot of dollars at play there from a volume perspective. You'll note in squeezing the model a little bit our sales expectation for Q4 is a little bit lower from a growth perspective than Q3. Again, Q3 being aided by the calendar shift.

Speaker 2

Calendar shift kind of works against you in Q4. Again, that November week 1 moves into Q3 and you replace it with a February week and those volumes are not the same. So we've got a little bit of work to do yet on Q4. But I think the biggest opportunity there for us is the such strong early acceptance of new product on both the Versus and Pink's side really is where the opportunity sets to drive better sell through, higher sell through, better margin, lower promotion or all of the above. So, a lot to like about how we're positioned for the balance of this year.

Speaker 1

Hey, Amanda, we're running up on time here. Let's go with one more question, please.

Operator

Thank you. Our last question comes from Jonah Kim with T. B. Cowen. Your line is open.

Operator

Thanks for taking my question. Just quick one for me. You mentioned Adore Me grew high single digit this quarter. Just curious what were the drivers behind it and what you're assuming for the back half for the brand? Thank you.

Speaker 2

Yes. Thanks for the question, Joanna. In the Adorme business, I think most people know there are actually 2 brands which sit inside the Adorme business as we reported. There's the Adorme brand which focuses primarily on intimates, but does present other categories. And then there's a second business called Daily Look which also features a home try on model, but more focused on the apparel side.

Speaker 2

In the last couple of quarters, we've seen outsized growth in the Daily Look business that's driving the growth in total or overall at Adorme. So having 2 different businesses, 2 different brands inside of that business gives the team the opportunity to toggle investment dollars from a marketing perspective into what's trending, what's working best. And I think they're doing a really, really good job of doing that. So putting the investment where the customer is in the near term. So the daily look for apparel side of the business is driving the majority of the growth there.

Speaker 2

Having said all of that, they're managing to the total business to high single digit growth on the top line and pretty meaningful growth here in the Q2 from an operating income perspective. Looking forward, I'm comfortable that they have growth plans here for the Q3. You may recall that they actually are on a 1 month lag to our business, so we report them on a 1 month lag. So we've already seen really the first half of their third quarter and the business is off to a good start and is on forecast to not only grow in the top line, but be profitable in the quarter again. So happy with where we are in the near term in the Indorme business.

Speaker 1

All right. Thank you, everyone. That concludes our call for this morning. We appreciate your interest in Versus Have a great day.

Speaker 8

Thank you.

Speaker 2

Thank you.

Operator

Thank you for participating in the Victoria's Secret and Company's Q2 2024 Earnings Conference Call. That concludes today's conference. Please disconnect at this time.

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Key Takeaways

  • Q2 sales were $1.4 billion (down 1% YoY) but beat expectations and delivered year-over-year operating income growth for the first time since 2021.
  • North America sales trends improved sequentially for the fourth straight quarter, fueled by strong store and digital traffic and new product launches like the Victoria’s Secret Dream bra, Pink Friday back-to-campus and the Featherweight Max Versus Sport bra.
  • International and Adore Me revenues grew in the high single digits, led by travel retail, franchise partnerships (including Next in the U.K.) and improved profitability in China despite broader market softness.
  • Adjusted gross margin rate expanded by 80 basis points and SG&A dollars declined on disciplined cost management, enabling Victoria’s Secret to raise its FY24 outlook to sales down ~1%, adjusted operating income of $275–300 million and free cash flow of $200–225 million.
  • Key strategic initiatives for Q3 include the return of the Victoria’s Secret Fashion Show on October 15, a major VSX sport launch and continued investment in a 32 million-member loyalty program to drive omnichannel growth.
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Earnings Conference Call
Victoria's Secret & Co. Q2 2025
00:00 / 00:00