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's 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 until question-and-answer session of today's call. I now would like to turn the call over to Mr. Kevin Wynk, 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 Investors 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 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 remained 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 thru 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 of Victoria's Secret and…

Thank you, sir, very much. [Operator Instructions] And our first request is from Matthew Boss with JPMorgan. Thank you, sir. Your line is open.

Great. Thanks. So, Martin, two-part question. Could you speak to the Victoria's Secret brand image today and the rationale behind the strategic shift in marketing with the World Tour? And then secondly, could you just elaborate on the three pillars, and more specifically the initiatives to strengthen the core, as you outlined at the Analyst Day last -- just given the market share that you cited in intimates this quarter?

Yeah, thank you for the question, Matt. I'm happy to take that. We are feeling good about where we are on the repositioning journey of the brand. As you know when this management team took over, we defined the challenges being a complete repositioning of the brand. And we've been dedicated to that and dedicated to the cause of championing and uplifting women on their journey through life. I don't see this next evolution of our marketing strategy as a change, I see it as the reinvention and re-imagination of what was probably the most important retail marketing device of the last decade in the Victoria's Secret Fashion Show. So, the World Tour and the announcement that we made around that is really a celebratory moment, representing the ultimate expression of our brand transformation. It kind of brings to life our commitment that I just talked about and it's already had a massive media impact. So, we feel kind of really good about where that is. I think it gives us an opportunity, Matt, to talk about cultural relevance and to kind of reclaim our position at the center of cultural relevance, whether that's fashion, art, music or popular culture. And we're super excited about partnering with Amazon in that endeavor. So, I see it as a natural extension of the work that we've been doing, and the early signs are certainly that the customer is noticing and the media around the world is noticing. In terms of the three pillars of our strategy, if I kind of take them in reverse order, in transforming the foundation of the company, I feel really, really good about where we are. The progress that T.J. and Dean and the team have made on our cost base and on our supply base is…

It's great color. Best of luck.

Thank you. Our next question is from Lorraine Hutchinson with Bank of America. Your line is open.

Thank you. Good morning. Martin, can you talk about the factors that caused the accelerating August trend and if you expect them to hold or continue to improve as the year goes on?

Sure can. Thanks, Lorraine, for the question. Yes, August was definitely better than July and it was better than Q2 and better than the entirety of the spring season. So, we feel good about that. What's driving the change? Well, we've had some really good green shoots of recovery. The Icon bra was good news for us, kind of a 2-for-1 deal, one that went to our number one digital brand had a 4.4 rating and a very high matchback ratio. So that was terrific. But also it got us back into the conversation with very high media ratings. So that helped. We also had strength in Featherweight Max sports bra, where we've cased into that, ordered another 160,000 units in the last couple of weeks. The PINK early arrival of merchandise, the Seamless Air Sports Bra was good, but also some of the new merchandise that set at the very, very end of the month is starting to look good. Within beauty, we had some strong performance. EDPs were up 5%, driven by the Heavenly restage and Bear Rose launch. So kind of all across the business, there were just some nice green shoots that are encouraging for us. And we've got a lot less carryover as we go into this season than we had in the previous year. So,, I don't know that the trends from August will definitely continue, but we're optimistic that they will. And thanks for asking, Lorraine.

Thank you.

Our next question is from Adrienne Yih with Barclays. Ma'am, your line is open.

Great. Thank you very much. Martin, can you talk about the promotionality of the environment? What the expectations are for the fall season as you launch these new kind of full price initiatives? And then T.J., can you remind us, last year, I know you did a ton of air to ocean, the modal mix was more weighted toward air. Can you remind us sort of what was the percent on air relative to normal? And then, in the guidance, what do you have in there in terms of basis points for recapture? Thank you very much.

Yes, thanks for the question, Adrienne. So in the second quarter, the levels of promotionality in our business were slightly up year-over-year, slightly up year-over-year. I think that is about a reflection of the market as a whole. So, as we look around our competitor base, we saw that promotions were slightly up year-over-year. So, I think we were in line with the market. In terms of the guidance that we're planning for Q3 and Q4, we expect promotionality to be about the same year-over-year. As always, we're optimistic that if our full price initiatives really cut through than they were that we can pull back on that promotionality and that could provide some upside. But the guidance we're giving is about flat on promotionality. In terms of -- I'll just answer for T.J. on the air mix. So, it was about 35% air during the second quarter, and we're expecting that to be in the order of 25% for the back half of the full season. So substantially normalized from where it's been historically, right, T.J.?

Absolutely. And in addition to that, Adrienne, as you might imagine, the -- both air and ocean rates have certainly moderated as the year has gone on. And we're hopeful during the holiday season, we'll see continued moderation levels relative to last year. So, it's a good environment for us right now, both from a rate perspective and a capacity perspective.

Fantastic. Thank you very much. Best of luck.

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

Perfect. Hi, Martin. Thanks for taking the question. Maybe two from me. First, just on the second quarter, international was clearly a bright spot. So, maybe how do you think about the divergence in sales performance there versus North America? Is there something different about your positioning there? Or is it just a function of a small base internationally? And then, secondly, just thinking through the guidance and then the look forward, it seems to include a bit of a step-up in profitability in the fourth quarter, perhaps bigger than usual. So maybe what gives you conviction there? Thanks a lot.

Yes. Thanks, Alex. Thanks for highlighting the international business. We are really pleased with the progress that we've been making in that business really over the last two years. The quarter was strong for sure, but it's a consistent picture over the last eight quarters of really solid progress. There are a couple of maybe three important changes that we made to the international strategy that are paying off. One is working with our partners to open smaller stores than we had previously imagined. Secondly, having a Store of the Future format that's more modern and more shoppable, more accessible at a significantly lower capital expense, enables partners to open more stores and better stores. And thirdly, we've embraced the digital area of international with supporting our partners with digital sales and progressing with digital sales ourselves. So, those three changes over the course of the last two years are really paying off in a very positive way for us. That's really what's driving the change. It's true to say that our store fleet in international is much younger than it is here. It's also true to say that we're executing extremely well. But the fundamental strategy and positioning is the same as it is here in North America. I'm optimistic that the great results we're seeing in international will be encouraging for our domestic business. The other thing I should mention on international is China, where we had a very difficult business going back pre-pandemic. Our partnership with Regina Miracle has been a real win for us. Regina is a fantastic partner. And for the second consecutive quarter, we're actually making money in China. And China is a difficult environment right now. So, for our business to be strong, and when I say strong, we doubled our digital sales in China in the quarter, we're really seeing some terrific momentum. So, all in all, pleased with how things are going. As it relates to the fourth quarter in the domestic business, all the stuff we've been talking about earlier in the year sort of really matures during the fall season. So, it's our reason to be confident and cheerful, as it were, relate to the fact that we've been working hard tirelessly all year on a whole series of initiatives. And I've listed some of them already, the launch of new bra collections; the World Tour coming in; there is fashion merchandise associated with the World Tour that will impact the full season; there's the loyalty program, which starts to give us confidence for the back half. So, all across the business, the things that we've been working on will be delivering in the back half. And so, we're just optimistic that we'll get our fair share of the upside. T.J., anything to add to that?

No, I think you hit on the -- there's major marketing initiatives, Alex, as Martin mentioned, major customer initiatives, major brand initiatives and good early receptivity to some of the fall merchandise, particularly on the VS side, and a growing assortment of new PINK merchandise that we're excited about. So, all of those factors contribute to what we think will be an improving sales trend as we move through month-to-month through the fall season. I think additionally, just understanding that two of our largest marketing investments in our short period as a public company are all coming together here in the third quarter. It does put some expense pressure on the third quarter. But as we look to fourth quarter and the halo of those marketing events and a more normal expense structure, growing sales really shows the margin opportunity early in the holiday season going into next year. So, we feel good about the way that the back half of the year is laid out from an initiative perspective, a cost structure perspective and our ability to chase winners and cut losers in the inventory assortment.

Thanks a lot. Good luck.

Our next question is from Ike Boruchow with Wells Fargo. And your line is open.

Hey, good morning, everyone. Two questions for me. I was going to ask about gross margin. Is there a way to kind of talk about expectations for 4Q or what's embedded in the full year in the 5% to 6% margin? And then just a follow-up is kind of on the direct business, so if you [ex out] (ph) Adore Me, direct is trending down high singles, low doubles, something in that range. In your back half improvement that you guys are hoping for, do you expect to see more improvement on the e-com side, more improvement on the store side, similar, as a rationale? Just kind of curious how to think about both channels. Thanks.

T.J., do you want to take the gross margin and then I'll pick up the digital question.

Yes, absolutely. So from a margin perspective, Ike, as we've moved through the year here in the second quarter, our selling margin was relatively flat and the gross margin decline of 150 basis points was about the B&O deleverage on the lower sales. As we look forward to Q3 and Q4, we actually see selling margin -- or merchandise margins up year-over-year for two reasons. First off, as you'll recall, we have a 'transform the foundation' initiative in place, and we've mentioned for a number of months now that we will start to see some of the cost of goods sold benefit of lower cost hitting the fourth quarter. So that's one item positively impacting merchandise margins. And then, the second item was the question that was asked earlier around air and ocean. We continue to see positive news there from a rate perspective. And I think I'll throw in a third thing in that the raw material costs that the teams are working on are starting to -- those price increases are starting to abate also. So from a merchandise margin perspective, we feel good about how things are trending and we feel good about the inventory levels we came into the quarter and the fall season with. I think also as we move through the fall season and start to see some of our strategic initiatives take hold and improve the North America business, we'd expect the B&O deleverage to start to abate as we move through third and into fourth quarter as well. So that's what gets us to our guidance for third quarter, Ike, of a gross margin rate that approximates last year and embedded in our guidance is an improving gross margin rate in the fourth quarter.

Yes. On the difference between the digital and store channels as we look at the back half of the year, we're expecting performance improvement from both of those channels. However, if I sort of step back from the immediacy and say, what do we think is happening? Well, right now, our share of digital is in the low 30%s of our total system. The industry expectation is that, that will grow over time and likely will get to, say, 40% over the next three years. So we're prepared for that, and we would expect that our share of digital from our total system will increase. So it's important that we get to world-class Icon on digital. So what Chris Rupp and her team have been working on is building tons -- just loads and loads of capability, like fewer clicks to product removal of category landing pages, visual search being added, shoppable videos embedded within the site, barcode scanning moving from non- crawlable text to fully crawlable text, and enhancing our linking capabilities, all that kind of stuff, as well as personalized e-mail through Da Vinci. So there's a lot of activity that we've been investing in that should mature in the back half of the year. And so, the likelihood is that digital will increase in its participation for us. And happily, the profitability of the channels is pretty much the same for us. So we don't really mind where the customer shops with us, we're prepared for her in both arenas. I think the other thing to note about digital is we talked about the synergies from Adore Me. And a very important one is the launch of Try-on at Home, which will be launched on a test basis in the fall season. That, of course, points at the digital business rather than the stores business. So that's another benefit to that side of -- to that channel. I hope that helps though. Thanks.

Thank you.

Our next question from Marni Shapiro with Retail Tracker. Your line is open.

Good morning, everyone. Martin, I was hoping you could dig in a little bit to your loyalty program. I think impressive, you had 16 million people sign up in a matter of three months. Can you -- or do you have any insight into: are these new or existing shoppers? Are these lapsed shoppers? Are you seeing activity change once they sign up? And I guess what is the look forward to that as we get into the holiday season? How do you expect to use the loyalty program?

Yes. Thanks, Marni. Good morning. Yes, we're pleased with over 16 million members in three months. I think that's a very strong adoption rate. And I think as I look back over the last couple of weeks in the sort of low 70%-s, 72%, 73% of sales coming through that device, so that gives us great data, and data is our friend when it comes to marketing and personalization. So, how much of the file is new? About 50% is new. So, of those 16 million, about 15 -- about 5-0, 50% would be new. And new, we define as we've not seen this customer in the last, I think, 24 months. So that's pretty strong adoption rate, I would say. In terms of the -- what we know about that customer, it's broadly consistent with the customer that we've seen previously in terms of demographics, in terms of age, in terms of other segmentation. The real win for us, as I said, is enabling us to move from a one-size-fits-all marketing campaign to campaigns that reflect the needs and preferences of the individual. And we're kind of at page one of that. We just started it, but we'll gain capability as the system learns more from the data and as we get more comfortable with personalization. So that's the big win. Now of course, from an external point of view, when you're looking in, you will be receiving marketing that we and our systems and our capability and artificial intelligence think are most suited to you. You will no longer be able to see all of the marketing that's pointing at all of the people. So, you just kind of have to trust us that there are multiple campaigns in place pointing at different people at different times.

Great. Thank you so much.

Thank you. Now our next question is from Jonna Kim with TD Cowen. Ma'am, your line is open.

Thank you for taking my questions. Just curious on the beauty side, it seems like it's really growing nicely. What is sort of the growth driver behind the beauty? And how big do you think the segment could grow over time? Thank you.

Yes, thanks for the question. Beauty has always been a really important part of our business. It's a natural adjacency to lingerie. It's a really, really beautiful partner, both in store and in digital to our lingerie business. What's been driving the strength in performance recently, let's say, this year is a couple of things. One, the EDP strength of performance, particularly the Heavenly restage was very good. The Bare Rose launch was terrific for us. But also Body Fragrance Mist, I think, was up in the mid- to high-single digits in the second quarter. And that's at a very accessible price point, it's a good entry into the brand. And we do, on occasion, see a different customer coming into the brand through beauty. And that gives us an opportunity to talk to her about other things that we sell. So, beauty is a terrific business for us. We're excited about what's coming in the back half of the year and it's a very important strategic business for us. Thanks for asking.

Thank you.

And now our next question from Corey Tarlowe with Jefferies. Your line is open.

Great. Thanks. I was wondering if you could talk a little bit about some of the newer initiatives at PINK. How that business is trending? And then maybe just an update on how PINK is doing into back-to-school? Thanks.

Yes. Thanks for asking. PINK is -- if I say early days, I literally mean early days. We launched the first of the new PINK merchandise on August 29. So, it's kind of two days in. So it is very, very early days. I do know, though, from some tests of early merchandise that we put out to a certain number of stores and some customers online, the response has been favorable. We're seeing good pickup on our new merchandise. What I will tell you is, though, we've not built a big impact from the turnaround of PINK into half two. Our goal is to watch and learn and chase like crazy into the winners. We've already started to see some chase opportunities, particularly in the Seamless Air Bra. We expect that there will be others that will emerge in the coming days and we'll chase hard into them. For us, it's about redefining the PINK brand to be more declarative with the brand narrative and appeal to Gen Zs specifically. And that won't happen overnight. So, early signs -- very, very early signs are positive. We have not baked in a big U-turn for the back half, and we'll keep you posted as we go. I think by the time we get to our investor meeting, October 12, we'll have some reasonable indications, and we'll certainly show you and anybody else that comes to that meeting or watches that meeting the merchandise that's trending.

Yes, I think on the second part of the question, Corey, around back-to-school, given the transition we're in, in PINK, it's more difficult to kind of isolate into PINK-only back-to-school. So I'll pivot back to Martin's earlier commentary around the month of August. And that's really about merchandise green shoots, particularly on the VS side, strong beauty, significant marketing launch with Icon, significantly more marketing dollars, visual online, all in relative to the launch last year of So Obsessed. And then also, you're seeing good early signs of us utilizing the strength of our new loyalty program with the successful Beat the Clock event in August. So, if August is a proxy for back-to-school, it was our best month of the year really driven by some of the merchandising green shoots and marketing efforts on the part of the team.

Yes. One other thing on PINK that I forgot to mention, which we're really pleased about is the collaboration with Chloe and Halle, which has had fabulous media pickup, particularly in social media. The product looks amazing. And early indications on that are that it's going to sell out and sell out quickly. So that's a good indication of a green shoot on PINK that I should have mentioned earlier. Well, next?

Great. Thank you.

Welcome.

Now our next question from Carla Casella with JPMorgan. Your line is open.

Hi. My question is around the heavy marketing spend you talked about for third quarter and the tour. Is that completely additive or some of that pull forward from the spend you would normally spend in 4Q?

Yes. Good question. Thanks, Carla. I think we took the approach of really leaning into the investment here from a marketing perspective with two of our largest marketing spend since we've become a public company with the World Tour and the launch of the Icon Bra all happening in the same quarter and our lowest volume quarter of the year. So, we really are taking the longer-term view here and expect that the halo of both Icon and World Tour will carry on with customers through the holiday season and will also present for us a lot of marketing collateral to utilize in our stores and on our digital sites for a number of weeks to come. So, while the expense, Carla, hits largely in the third quarter, we do see benefits of the marketing spend for stores and digital all the way through the fourth quarter season. But to answer your question specifically, we did not go out to fourth quarter and make significant reductions to fund the third quarter. This is really additive to the fall season and was in our original plans and guidance for the year. So, we are helping you calendarize the season better. But the marketing spend here in the third quarter is not a surprise to us, it's been planned all year. The teams have been working on it for months and months, and we're excited about the reception that we're seeing from customers and the media.

Fran, I think we have time for one more question.

Thank you so much. So, our last question of the day is from William Reuter with Bank of America. Sir, your line is now open.

Hi. I have two questions. The first is with the loss in market share, do you think this is to lower priced options as consumers are just having constrained budgets? Or do you think that there have been competition that's been introduced near your price points? And then secondarily, any comments from a dollar or margin basis point standpoint in terms of what the tailwind of lower [freight] (ph) is in the second half of the year? Thank you.

Yes. I'll take the first part, and then we'll go to T.J. on the second part. So just to be clear on the market share, very -- it's a small change in market share position, and that reflects a few moving parts that I'll just unpack for everybody. One is digital share is up. So if you think about new competitors that have come into the market in recent years, they tend to be digitally-native players. We're doing okay in digital. Our share is up. Down slightly in stores. Up slightly in constructed bras, non-sports bras. Down more meaningfully in panties, which is a harder category to defend a lower price point category, a category with lower barriers to entry. Specifically, where are we -- who's gaining share? Walmart, Amazon and off-price are the places that are picking up the share. Is that a surprise in this difficult economic environment? Probably not. That isn't an excuse. We need to find ways to extract more cash from our consumers. We need to develop better merchandise that's more innovative and commands higher price points so that she is prepared to invest in this category rather than just default to generics and low-price generics. So, it's on us to be able to respond to it, but the specific answer to your question is that it is lower price and off-price that's picking up our share. T.J.?

And I think, William, to the second part of your question around supply chain and big round numbers in both the third and the fourth quarter, we're probably seeing a tailwind and our forecasting of about $15 million to $20 million, but I think more importantly than the tailwind, accentuating the good work the teams are doing around the cost of goods sold initiatives as part of the transformative foundation will be equally important, if not more important, in the fourth quarter in particular. So yes, there are some favorable trends in the marketplace we're benefiting from like many others. But there's also a number of good initiatives underway on cost of goods starting in the fourth quarter that will have a benefit going on into 2024. And that's work our teams are doing, specifically on our product and in our business.

Okay. Thank you, everyone. That concludes our call this morning. We appreciate your continuing interest in Victoria's Secret & Company. Thank you.

Thanks, everybody.

As we are concluded, please go ahead and disconnect. Have a wonderful day. Thank you.