VICTORIA'S SECRET & CO. The following discussion and analysis of financial condition and results of operations are based upon our Consolidated and Combined Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.
Executive Overview
Victoria's Secret is an iconic global brand of women's intimate and other apparel, personal care and beauty products. We sell our products primarily through two brands,Victoria's Secret and PINK.Victoria's Secret is a category-defining global lingerie brand with a leading market position and a rich, 40-year history of serving women across the globe. PINK is a lifestyle brand for the college-oriented customer, built around a strong intimates core. We also sell beauty products under both theVictoria's Secret and PINK brands. Together,Victoria's Secret , PINK and Victoria's Secret Beauty support, inspire and celebrate women through every phase of their life.
In the third quarter of 2022, our operating income was$43 million compared to$108 million in the third quarter of 2021, and our operating income rate (expressed as a percentage of net sales) was 3.2% compared to 7.5% last year. The operating income decrease in the third quarter of 2022 compared to the third quarter of 2021 was primarily driven by a decrease in net sales and merchandise margin. Net sales decreased$123 million , or 9%, to$1.318 billion compared to$1.441 billion in the third quarter of 2021. Our North American store sales decreased$107 million , to$813 million compared to$920 million in the third quarter of 2021. The increase in average unit retail (which we define as the average price per unit purchased) and customer traffic compared to the third quarter of 2021 was more than offset by lower conversion rates (which we define as the percentage of customers who visit our stores and make a purchase) and units per transaction as our customers and the broader retail environment were impacted by persistent inflationary pressures. Our direct channel sales decreased by 16%, or$64 million , to$342 million compared to$406 million in the third quarter of 2021, as an increase in average unit retail was more than offset by a decrease in conversion, units per transaction and traffic. We are committed to optimizing our performance by focusing on our brand transformation, being best at bras, enhancing the customer experience and our relentless focus on costs and inventory management. We are confident in our opportunities and remain committed to delivering long-term sustainable value for our shareholders.
For additional information related to our third quarter of 2022 financial performance, see "Results of Operations."
Information Technology Impacts of the Separation
Subsequent to the completion of the Separation, we have provided technology services and systems to the Former Parent under the transition services agreements while two independent information technology platforms are being created in support of two independent companies. We have incurred, and expect to continue to incur, costs consisting of internal and external labor, software licensing, networking, security and infrastructure required to separate the current information technology capabilities (systems and infrastructure) in support of two independent companies. We currently estimate that our total incremental expenditures could be$100 million to$150 million over the transition period, with the majority of costs being incurred by the end of 2023, which is when the separation of our technology systems is expected to be predominately completed. Such estimates are subject to change as our work continues. 22 -------------------------------------------------------------------------------- Table of Contents Basis of Presentation Our financial statements for periods through the Separation date ofAugust 2, 2021 are combined financial statements prepared on a "carve-out" basis, which reflects the business as historically managed within the Former Parent. The balance sheets and cash flows for the periods prior to the Separation include only those assets and liabilities directly related to theVictoria's Secret business, and the statements of income include the historically reported results of theVictoria's Secret business along with allocations of a portion of the Former Parent's total corporate expenses. Our financial statements for the period fromAugust 3, 2021 throughOctober 29, 2022 are consolidated financial statements based on our reported results as a standalone company. For additional information on the "carve-out" basis of accounting, see Note 1, "Description of Business, Basis of Presentation and Summary of Significant Accounting Policies."
Non-GAAP Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided below are non-GAAP financial measures that present operating income, net income attributable toVictoria's Secret & Co. and net income per diluted share attributable toVictoria's Secret & Co. on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures. Third Quarter Year-to-Date (in millions, except per share amounts) 2022 2021 2022 2021
Reconciliation of Reported to Adjusted Operating Income Reported Operating Income - GAAP
$
43
- - 22 -
Restructuring Charge (b) - - 29 -
Adjusted Operating Income $
43
Reconciliation of Reported to Adjusted Net Income Attributable to
$
24
- - 22 - Restructuring Charge (b) - - 29 - Tax Effect of Adjusted Items - - (13) -
Adjusted Net Income Attributable to
Reconciliation of Reported to Adjusted Net Income Per Diluted Share Attributable to
$
0.29
- - 0.19 -
Restructuring Charge (b) - - 0.26 -
Adjusted Net Income Per Diluted Share Attributable to
Victoria's Secret & Co. $ 0.29 $ 0.81 $ 2.52 $ 4.46
________________
(a)In the first quarter of 2022, we recognized a pre-tax charge of $22 million
($16 million after-tax), included in buying and occupancy expense, related to a
legal matter with a landlord regarding a high-profile store that we surrendered
to the landlord prior to the Separation. For additional information see Note 14,
"Commitments and Contingencies" included in Item 1. Financial Statements.
(b)In the second quarter of 2022, we recognized a pre-tax charge of $29 million
($22 million after-tax), $16 million included in general, administrative and
store operating expense and $13 million included in buying and occupancy
expense, related to restructuring activities to reorganize our leadership
structure. For additional information see Note 4, "Restructuring Activities"
included in Item 1. Financial Statements.
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Store Data
The following table compares the third quarter of 2022 U.S. company-operated
store data to the third quarter of 2021 and year-to-date 2022 to year-to-date
2021:
Third Quarter Year-to-Date
2022 2021 % Change 2022 2021 % Change
Sales per Average Selling Square
Foot (a) $ 136 $ 151 (10 %) $ 456 $ 476 (4 %)
Sales per Average Store (in
thousands) (a) $ 945 $ 1,040 (9 %) $ 3,158 $ 3,291 (4 %)
Average Store Size (selling square
feet) 6,919 6,897 0 %
Total Selling Square Feet (in
thousands) 5,618 5,725 (2 %)
________________
(a)Sales per average selling square foot and sales per average store, which are
indicators of store productivity, are calculated based on store sales for the
period divided by the average, including the beginning and end of period, of
total square footage and store count, respectively.
The following table represents store data for year-to-date 2022:
Stores at Reclassed to Stores at
January 29, 2022 Opened Closed Joint Venture October 29, 2022
Company-Operated:
U.S. 808 11 (7) - 812
Canada 26 - - - 26
Subtotal Company-Operated 834 11 (7) - 838
China Joint Venture:
Beauty & Accessories (a) 35 2 (6) 8 39
Full Assortment 30 2 (1) - 31
Subtotal China Joint Venture 65 4 (7) 8 70
Partner-Operated:
Beauty & Accessories 335 10 (30) (8) 307
Full Assortment 128 16 (8) - 136
Subtotal Partner-Operated 463 26 (38) (8) 443
Total 1,362 41 (52) - 1,351
________________(a)Includes nine partner-operated stores.
The following table represents store data for year-to-date 2021:
Stores at Stores at
January 30, 2021 Opened Closed October 30, 2021
Company-Operated:
U.S. 846 - (16) 830
Canada 25 1 - 26
China - Beauty & Accessories 36 2 (2) 36
China - Full Assortment 26 1 - 27
Subtotal Company-Operated 933 4 (18) 919
Partner-Operated:
Beauty & Accessories 338 10 (13) 335
Full Assortment 120 4 - 124
Subtotal Partner-Operated 458 14 (13) 459
Total 1,391 18 (31) 1,378
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Results of Operations
Third Quarter of 2022 Compared to Third Quarter of 2021
Operating Income
For the third quarter of 2022, operating income decreased$65 million , to$43 million , compared to operating income of$108 million in the third quarter of 2021, and the operating income rate (expressed as a percentage of net sales) decreased to 3.2% from 7.5%. The drivers of the operating income results are discussed in the following sections.
The following table provides net sales for the third quarter of 2022 in comparison to the third quarter of 2021:
2022 2021 % Change
Third Quarter (in millions)
Stores - North America $ 813 $ 920 (12 %)
Direct 342 406 (16 %)
International (a) 163 115 43 %
Total Net Sales $ 1,318 $ 1,441 (9 %)
_______________
(a)Results include consolidated joint venture sales in
The following table provides a reconciliation of net sales from the third quarter of 2021 to the third quarter of 2022:
(in millions)
2021 Net Sales $ 1,441
Comparable Store Sales (86)Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
(21)
Direct Channels (56)
Credit Card Programs (1)
International Wholesale, Royalty and Other 45
Foreign Currency Translation (4)
2022 Net Sales $ 1,318 The following table compares the third quarter of 2022 comparable sales to the third quarter of 2021:
2022 2021
Comparable Sales (Stores and Direct) (a) (11 %) 0 % Comparable Store Sales (a)
(10 %) 7 %
_______________
(a)The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Therefore, comparable sales results exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis. Net sales in the third quarter of 2022 decreased$123 million , or 9%, to$1.318 billion compared to$1.441 billion in the third quarter of 2021. Our average unit retail increased in our stores and direct channel and customer traffic increased in our stores as compared to the third quarter of 2021. These increases were more than offset by lower conversion rates and units per transaction as our customers and the broader retail environment were impacted by persistent inflationary pressures. 25
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In the stores channel, ourNorth America net sales decreased$107 million , or 12%, to$813 million compared to the third quarter of 2021. The increase in traffic and average unit retail in the quarter compared to last year was more than offset by a decrease in conversion and units per transaction. Net sales in stores outside ofNorth America increased in the third quarter of 2022 compared to the third quarter of 2021 driven by fewer COVID-19-related store restrictions this year.
In the direct channel, net sales decreased
Gross Profit
For the third quarter of 2022, our gross profit decreased
The gross profit decrease was due to the decrease in merchandise margin dollars related to the decrease in net sales, increased promotional activity and an increase in inventory shrink expense in our stores. Partially offsetting these decreases were lower buying and occupancy expenses during the third quarter of 2022 compared to the third quarter of 2021 driven primarily by lower depreciation expense due to store closures. The gross profit rate decrease was driven by a decrease in the merchandise margin rate reflecting increased promotional activity, deleverage in buying and occupancy expenses in the quarter as a result of the decrease in sales compared to the third quarter last year and the increase in inventory shrink expense in our stores during the third quarter of 2022.
General, Administrative and Store Operating Expenses
For the third quarter of 2022, our general, administrative and store operating expenses decreased$43 million , or 9%, compared to the third quarter of 2021 to$414 million . The decrease in general, administrative and store operating expenses compared to the third quarter of 2021 was due to lower store selling expenses driven by improvement in our labor model and our ongoing disciplined expense management initiatives and lower marketing expenses. The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased slightly to 31.5% from 31.7% due to the lower selling and marketing expenses.
Interest Expense
For the third quarter of 2022, our interest expense increased$3 million to$15 million compared to the third quarter of 2021, driven by a higher average borrowing rate for our Term Loan Facility and the increase in our outstanding debt due to the borrowings from the ABL Facility during the third quarter of 2022. Provision for Income Taxes For the third quarter of 2022, the Company's effective tax rate was 25.0% compared to 22.2% in the third quarter of 2021. The third quarter of 2022 rate was consistent with the Company's combined estimated federal and state statutory rate. The third quarter of 2021 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the quarter. Results of Operations
Year-to-Date 2022 Compared to Year-to-Date 2021
Operating Income
For year-to-date 2022, operating income decreased$302 million , to$234 million , from$536 million year-to-date 2021, and the operating income rate (expressed as a percentage of net sales) decreased to 5.4% from 11.6%. The drivers of the operating income results are discussed in the following sections.
The following table provides net sales for year-to-date 2022 in comparison to
year-to-date 2021:
2022 2021 % Change
Year-to-Date (in millions)
Stores - North America $ 2,712 $ 2,890 (6 %)
Direct 1,176 1,396 (16 %)
International (a) 435 323 35 %
Total Net Sales $ 4,323 $ 4,609 (6 %)
_______________
(a)Results include consolidated joint venture sales in
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The following table provides a reconciliation of net sales from year-to-date 2021 to year-to-date 2022:
(in millions)
2021 Net Sales $ 4,609
Comparable Store Sales (185)Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
(6)
Direct Channels (196)
Credit Card Programs (4)
International Wholesale, Royalty and Other 111
Foreign Currency Translation (6)
2022 Net Sales $ 4,323 The following table compares year-to-date 2022 comparable sales to year-to-date 2021:
2022 2021
Comparable Sales (Stores and Direct) (a) (9 %) 3 % Comparable Store Sales (a)
(7 %) 8 %
________
(a)The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Therefore, comparable sales results exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
Net sales year-to-date 2022 decreased
In the stores channel year-to-date 2022, ourNorth America net sales decreased$178 million , or 6%, to$2.712 billion , compared to year-to-date 2021 as an increase in traffic was more than offset by a decrease in conversion and average unit retail. Net sales in stores outside ofNorth America increased year-to-date 2022 compared to year-to-date 2021 driven by fewer COVID-19-related store restrictions this year.
In the direct channel, net sales decreased
Additionally, net sales year-to-date 2022 as compared to year-to-date 2021 were impacted by incremental net sales recognized in the first quarter of 2021 as a result of federal stimulus benefits.
Gross Profit
For year-to-date 2022, our gross profit decreased
The gross profit decrease was primarily due to the decrease in merchandise margin dollars related to the decrease in net sales, incremental supply chain and inflationary cost pressures in the first and second quarter of 2022 compared to last year of approximately$140 million and increased promotional activity this year. Additionally, the decrease in net sales and merchandise margin was due to incremental net sales and merchandise margin recognized in the first quarter last year as a result of federal stimulus benefits. Partially offsetting these decreases was lower buying and occupancy expenses this year compared to last year driven by lower landlord-related expenses, lower management compensation expense and lower depreciation expense due to store closures. The gross profit rate decrease was primarily driven by a decrease in the merchandise margin rate reflecting the increased supply chain and inflationary cost pressures and increased promotional activity, partially offset by buying and occupancy leverage driven by the lower landlord-related expenses, lower management compensation expense and lower depreciation expense. 27 -------------------------------------------------------------------------------- Table of Contents General, Administrative and Store Operating Expenses For year-to-date 2022, our general, administrative and store operating expenses decreased$91 million , or 7%, to$1.280 billion primarily due to lower store selling expenses driven by improvement in our labor model and our ongoing disciplined expense management initiatives, as well as lower management compensation expense. The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased slightly to 29.6% from 29.7% due to the lower selling and management compensation expenses.
Interest Expense
For year-to-date 2022, our interest expense increased
Provision for Income Taxes
For year-to-date 2022, the Company's effective tax rate was 13.2% compared to 23.0% year-to-date 2021. The effective tax rate for both years was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the respective periods.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our
financial stability. We are committed to maintaining adequate liquidity. Cash
generated from our operating activities provides the primary resources to
support current operations, growth initiatives, seasonal funding requirements
and capital expenditures. Our cash provided from operations is impacted by our
net income and working capital changes. Our net income is impacted by, among
other things, sales volume, seasonal sales patterns, success of new product
introductions, profit margins and income taxes. Historically, sales are higher
during the fourth quarter of the fiscal year due to seasonal and holiday-related
sales patterns. Generally, our need for working capital peaks during the summer
and fall months as inventory builds in anticipation of the holiday period.
Prior to the Separation, we generated annual cash flow from operating
activities. However, we were operating within the Former Parent's cash
management structure, which used a centralized approach to cash management and
financing of our operations. As a result, a substantial portion of our cash was
transferred to the Former Parent. This arrangement was not reflective of the
manner in which we would have financed our operations had we been an
independent, publicly traded company during the periods prior to the Separation.
The cash and cash equivalents held by the Former Parent at the corporate level
prior to the Separation were not specifically identifiable to us and, therefore,
were not reflected in the Consolidated Balance Sheets. The Former Parent's
third-party long-term debt and the related interest expense were not allocated
to us for any of the periods presented prior to the Separation as we were not
the legal obligor of such debt.
Following the Separation from the Former Parent, our capital structure and
sources of liquidity changed from the historical capital structure because we no
longer participate in the Former Parent's centralized cash management program.
Our ability to fund our operating needs is primarily dependent upon our ability
to continue to generate positive cash flow from operations, as well as borrowing
capacity under our ABL Facility, which we rely on to supplement cash generated
by our operating activities, particularly when our need for working capital
peaks in the summer and fall months as discussed above. Management believes that
our cash balances and funds provided by operating activities, along with the
borrowing capacity under our ABL Facility, taken as a whole, provide (i)
adequate liquidity to meet all of our current and long-term obligations when
due, including third-party debt that we incurred in connection with the
Separation, (ii) adequate liquidity to fund capital expenditures, and (iii)
flexibility to consider investment opportunities that may arise. However,
certain investment opportunities may require us to seek additional debt or
equity financing, and there can be no assurances that we will be able to obtain
additional debt or equity financing on acceptable terms, if at all, in the
future.
We expect to utilize our cash flows to continue to invest in our brands, talent
and capabilities, and growth strategies as well as to repay our indebtedness
over time. We also plan to finance the Adore Me transaction at closing with cash
on hand. We believe that our available short-term and long-term capital
resources are sufficient to fund requirements over the next 12 months.
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Working Capital and Capitalization
Prior to the Separation, we generated annual cash flow from operating activities to support our working capital needs. However, we were operating within the Former Parent's cash management structure, which used a centralized approach to cash management and financing of our operations. As a result, a substantial portion of our cash was transferred to the Former Parent. This arrangement was not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods presented prior to the Separation. Based upon our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, we believe we will be able to continue to meet our working capital needs. The following table provides a summary of our working capital position and capitalization as ofOctober 29, 2022 ,January 29, 2022 andOctober 30, 2021 : October 29, January 29, October 30, 2022 2022 2021 (in millions) Net Cash Provided by (Used for) Operating Activities (a)$ (279) $ 851 $ 378 Capital Expenditures (a) 125 169 117 Working Capital 377 (7) 11 Capitalization: Long-term Debt 1,244 978 978 Victoria's Secret & Co. Shareholders' Equity 235 257 252 Total Capitalization$ 1,479 $ 1,235 $ 1,230 Amounts Available Under the ABL Facility (b)$ 441
_______________
(a)TheOctober 29, 2022 andOctober 30, 2021 amounts represent thirty-nine-week periods and theJanuary 29, 2022 amounts represent a fifty-two-week period. (b)For the reporting period endedOctober 29, 2022 , the availability under the ABL Facility was limited to the maximum aggregate commitment amount of$750 million , less outstanding borrowings of$267 million and letters of credit of$42 million . For the reporting periods endedJanuary 29, 2022 andOctober 30, 2021 , the availability was limited by our borrowing base of$564 million and$742 million , respectively. We had outstanding letters of credit, which further reduced our availability under the ABL Facility, of$41 million as of bothJanuary 29, 2022 andOctober 30, 2021 . There were no borrowings outstanding under the ABL Facility as ofJanuary 29, 2022 andOctober 30, 2021 .
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