VICTORIA'S SECRET & CO. The following discussion and analysis of financial condition and results of operations are based upon our 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 OverviewVictoria's Secret is an iconic global brand of women's intimate and other apparel, personal care and beauty products. We sell our products 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.Victoria's Secret and PINK merchandise is sold online through our e-commerce platform, through company-operated retail stores located in theU.S. ,Canada andGreater China , and through international stores and websites operated by partners under franchise, license, wholesale and joint venture arrangements. We have a presence in over 70 countries and we believe we benefit from global brand awareness, a wide and compelling product assortment and a powerful, deep connection with our customers. 21 -------------------------------------------------------------------------------- Table of Contents In the second quarter of 2021, our operating income increased to$203 million as compared to a loss of$243 million in 2020, and our operating income (loss) rate increased to 12.6% from (22.8%). These results were primarily driven by an increase in net sales, the increase in merchandise margin rate and$117 million of store asset impairment charges in the prior year. Net sales increased$548 million , or 51%, to$1.614 billion compared to$1.066 billion in the second quarter of 2020. Our North American store sales increased 185%, or$673 million , to$1.037 billion compared to$364 million in the second quarter of 2020, primarily due to the COVID-19-related store closures in the second quarter of 2020. Our direct channel sales decreased by 24%, or$145 million , to$469 million compared to$614 million in the second quarter of 2020, primarily due to the entirety of our store fleet being open for business in the second quarter of fiscal 2021, as compared to the prior year when stores were closed which drove an increase in sales in the direct channel. Sales and merchandise margin results were strong throughout the second quarter of 2021 as customers responded positively to our merchandise assortments. The merchandise margin rate improvement was driven by the improved response to our merchandise assortments, disciplined inventory management, as well as strong selling execution in stores and online, which enabled us to reduce promotional activity during the quarter. Second quarter of 2020 sales and operating results were negatively impacted by the COVID-19-related store closures for approximately 70% of the quarter. We continue to focus on opportunities for improved performance, driven by the brand repositioning work, improved merchandise assortments, and disciplined inventory management focused on the quality, quantity and timing of merchandise receipts. Risks related to COVID-19 persist, and we plan to continue to operate both of our channels in a safe manner for our customers and associates. While we believe our improvements in merchandise assortment and our brand repositioning strategies are attracting and re-attracting customers, we are also mindful of the uncertainty around COVID-19-related challenges in our supply base and the potential impact on our ability to receive merchandise in a timely manner. For additional information related to our second quarter 2021 financial performance, see "Results of Operations." Impacts of Victoria's Secret Spin-Off The spin-off ofVictoria's Secret & Co. into an independent, public company was completed subsequent to the end of the second quarter onAugust 2, 2021 . We believe the spin-off will enable us to maximize management focus and financial flexibility to thrive in an evolving retail environment and deliver long-term profitable growth. In connection with the Separation, we expect incremental, future capital and expense related to the implementation of new information technology platforms. Although our work is in the early stages and our estimates are preliminary, we currently estimate that our total incremental expenditures could be$100 million to$150 million over the next several years. These estimated costs will consist of internal and external labor, software licensing, networking, security and physical infrastructure required to separate the current information technology capabilities (systems & infrastructure) in support of two independent companies. Such estimates are subject to change as our work continues. We will provide technology services to L Brands under a Transition Services Agreement while independent systems environments are created, which we believe will help to minimize dis-synergies. The above estimates are preliminary in nature, are based solely on information available to us as of the date of this quarterly report and are inherently uncertain and subject to change. Impacts of COVID-19 The coronavirus pandemic has created significant public health concerns as well as economic disruption, uncertainty and volatility. Our operations and financial performance have been materially impacted by the COVID-19 pandemic. In the first quarter of 2020, all of our stores inNorth America were closed onMarch 17, 2020 , but we were able to re-open the majority of our stores as of the end of the second quarter of 2020. Additionally, operations for our direct channel were temporarily suspended for approximately one week in lateMarch 2020 . We adopted new operating models focused on providing a safe store environment for our customers and associates, while also delivering an engaging shopping experience. We remain focused on the safe operations of our distribution, fulfillment and call centers while maximizing our direct businesses. There remains the potential for COVID-19-related risks of closure or operating restrictions, which could materially impact our operations and financial performance in future periods. Basis of Presentation Our financial statements for periods through the Separation are combined financial statements prepared on a "carve-out" basis, which reflects the business as historically managed within L Brands. The balance sheets and cash flows include only those assets and liabilities directly related to theVictoria's Secret business, and the statements of income (loss) include the historically reported results of theVictoria's Secret business along with allocations of a portion of L Brands' total corporate expenses. 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." 22 -------------------------------------------------------------------------------- Table of Contents Adjusted 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 (loss), net income (loss), and net income (loss) per diluted share in 2021 and 2020 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. Second Quarter Year-to-Date (in millions, except per share amounts) 2021 2020 2021 2020 Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income (Loss) Reported Operating Income (Loss) - GAAP$ 203 $ (243) $ 428 $ (617) Asset Impairments (a) - 117 - 214 Restructuring Charges (b) - 51 - 51 Hong Kong Store Closure and Lease Termination (c) - (36) - (36) Adjusted Operating Income (Loss)$ 203 $
(111)
Reconciliation of Reported Net Income (Loss) to Adjusted Net Income (Loss) Reported Net Income (Loss) - GAAP
$ 151 $ (200) $ 325 $ (498) Asset Impairments (a) - 117 - 214 Restructuring Charges (b) - 51 - 51 Hong Kong Store Closure and Lease Termination (c) - (36) - (36) Tax Effect - (18) - (43) Adjusted Net Income (Loss)$ 151 $ (86) $ 325 $ (312) Reconciliation of Reported Net Income (Loss) Per Diluted Share to Adjusted Net Income (Loss) Per Diluted Share Reported Net Income (Loss) Per Diluted Share - GAAP$ 1.71 $ (2.26) $ 3.68 $ (5.64) Asset Impairments (a) - 1.12 - 1.93 Restructuring Charges (b) - 0.46 - 0.46 Hong Kong Store Closure and Lease Termination (c) - (0.28) - (0.28)
Adjusted Net Income (Loss) Per Diluted Share
________________
(a)We recognized pre-tax impairment charges of$97 million ($72 million after tax) and$117 million ($99 million after tax) related to certain store and lease assets in the first and second quarter of 2020, respectively. For additional information see Note 6, "Long-Lived Assets" included in Item 1. Financial Statements. (b)In the second quarter of 2020, we recognized pre-tax severance charges of$51 million ($40 million after tax) related to headcount reductions as a result of restructuring activities. For additional information, see Note 4, "Restructuring Activities" included in Item 1. Financial Statements. (c)In the second quarter of 2020, we recognized a net pre-tax gain of$36 million ($25 million after tax) related to the closure and termination of our lease for theHong Kong flagship store. For additional information see Note 6, "Long-Lived Assets" included in Item 1. Financial Statements. 23 -------------------------------------------------------------------------------- Table of Contents Company-Operated Store Data The following table compares the second quarter of 2021 U.S. company-operated store data to the second quarter of 2020 and year-to-date 2021 store data to year-to-date 2020: Second Quarter Year-to-Date 2021 2020 % Change 2021 2020 % Change Sales perAverage Selling Square Foot (a)$ 172 $ 54 219 %$ 325 $ 129 152 % Sales perAverage Store (in thousands) (a)$ 1,183 $ 364 225 %$ 2,245 $ 867 159 % Average Store Size (selling square feet) 6,888 6,937 (1 %) Total Selling Square Feet (in thousands) 5,772 5,952 (3 %) ________________ (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. As a result of the COVID-19 pandemic, all our stores in theU.S. were closed onMarch 17, 2020 and almost all remained closed as of the beginning of the second quarter of 2020. The COVID-19-related store closures impacted our store operations for approximately 70% of the second quarter of 2020. As a result, comparisons of year-over-year trends are not a meaningful way to discuss our operating results this quarter. The following table represents company-operated store data for year-to-date 2021: Stores at Stores at January 30, 2021 Opened Closed July 31, 2021 U.S. 846 - (8) 838 Canada 25 1 - 26 Greater China - Beauty & Accessories 36 1 (1) 36 Greater China - Full Assortment 26 - - 26 Total 933 2 (9) 926 The following table represents company-operated store data for year-to-date 2020: Stores at Stores at February 1, 2020 Opened Closed August 1, 2020 U.S. 1,053 3 (198) 858 Canada 38 - (12) 26 U.K. / Ireland 26 - - 26 Greater China - Beauty & Accessories 41 1 (3) 39 Greater China - Full Assortment 23 3 (1) 25 Total 1,181 7 (214) 974 24
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Partner-Operated Store Data
The following table represents partner-operated store data for year-to-date
2021:
Stores at Stores at
January 30, 2021 Opened Closed July 31, 2021
Beauty & Accessories 338 7 (6) 339
Full Assortment 120 3 - 123
Total 458 10 (6) 462
The following table represents partner-operated store data for year-to-date
2020:
Stores at Stores at
February 1, 2020 Opened Closed August 1, 2020
Beauty & Accessories 360 2 (13) 349
Full Assortment 84 4 - 88
Total 444 6 (13) 437
Results of Operations
Second Quarter of 2021 Compared to Second Quarter of 2020
Operating Income (Loss)
For the second quarter of 2021, operating income increased $446 million , to $203
million , from a loss of $243 million in the second quarter of 2020, and the
operating income (loss) rate (expressed as a percentage of net sales) increased
to 12.6% from (22.8%). The drivers of the operating income results are discussed
in the following sections.
Net Sales
The following table provides net sales for the second quarter of 2021 in
comparison to the second quarter of 2020:
2021 2020 % Change
Second Quarter (in millions)
Stores - North America $ 1,037 $ 364 185 %
Direct 469 614 (24 %)
International (a) 108 88 22 %
Total Net Sales $ 1,614 $ 1,066 51 %
_______________
(a)Results include
The following table provides a reconciliation of net sales for the second quarter of 2021 to the second quarter of 2020:
(in millions)
2020 Net Sales $ 1,066
Comparable Store Sales 58
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
(a) 593
Direct Channel (142)
Private Label Credit Card 3
International Wholesale, Royalty and Other 31
Foreign Currency Translation 5
2021 Net Sales $ 1,614
_______________(a)Includes the increased sales from period over period due to the 2020 COVID-19-related stores closures.
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The following table compares the second quarter of 2021 comparable sales to the
second quarter of 2020:
2021 2020
Comparable Sales (Stores and Direct) (a) (9 %) 24 % Comparable Store Sales (a)
16 % (12 %)
________
(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 for the second quarter of 2021 and 2020 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. In the stores channel in the second quarter of 2021, ourNorth America net sales increased$673 million , or 185%, to$1.037 billion , primarily due to comparisons to the COVID-19-related store closures in the second quarter of 2020, partially offset by the impact of the permanent closure of 241 stores inNorth America in 2020. The increase in comparable store sales was driven by an increase in store traffic and average unit retail (which we define as the average price per unit purchased). Sales related to our partner-operated stores outside ofNorth America also increased compared to the second quarter of 2020 primarily as a result of the COVID-19-related stores closures in the prior year. In the direct channel, net sales decreased$145 million , or 24%, to$469 million primarily due to the reopening of stores this year, as compared to the prior year when stores were closed which drove an increase in sales in the direct channel. The decrease in direct sales was driven by a decline in traffic, given the impact from the store closures last year, partially offset by an increase in average unit retail. Gross Profit For the second quarter of 2021, our gross profit increased$518 million to$670 million , and our gross profit rate (expressed as a percentage of net sales) increased to 41.5% from 14.3%, primarily driven by the following: For the second quarter of 2021, the gross profit increase was due to the increase in merchandise margin dollars related to the increase in net sales, and an increase in the merchandise margin rate driven by improved response to our merchandise assortments, disciplined management of inventory, as well as strong selling execution in stores and online, all of which enabled us to reduce promotional activity during the quarter. Occupancy expenses were below last year levels, driven by store asset impairment charges of$117 million in the prior year and permanent store closures, partially offset by a$39 million gain from the closure of our flagship store inHong Kong in the prior year. The gross profit rate increase was driven by an increase in the merchandise margin rate reflecting a meaningful reduction in promotional activity, buying and occupancy leverage on higher net sales and the store asset impairment charges in the prior year. General, Administrative and Store Operating Expenses For the second quarter of 2021, our general, administrative and store operating expenses increased$72 million to$467 million due to higher store selling expenses and an increase in marketing costs year over year. The increased store selling expense reflects all of our stores being open and operating during the second quarter of 2021, compared to approximately 70% of stores being closed in the prior year. The increased marketing investments represent our brand repositioning initiatives and to drive sales as our stores were fully open for business during the second quarter of 2021. These increases were partially offset by savings realized as a result of cost reductions and the impact of the permanent store closures. For purposes of preparing the combined financial statements on a "carve-out" basis, the Company has been allocated a portion of L Brands' total corporate expenses. These allocations are included in general, administrative and store operating expenses. Corporate allocated expenses increased$5 million to$30 million in the second quarter of 2021 from$25 million in the second quarter of 2020. The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased to 28.9% from 37.1% due to leverage on the significant increase in net sales. 26 -------------------------------------------------------------------------------- Table of Contents Provision (Benefit) for Income Taxes For the second quarter of 2021, our effective tax rate was 24.1% compared to 18.5% in the second quarter of 2020. The second quarter of 2021 rate was lower than our combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits recorded through the income statement on share-based awards that vested in the quarter. The second quarter of 2020 rate was lower than our combined estimated federal and state statutory rate primarily due to losses related to certain foreign subsidiaries, which generated no tax benefit. Results of Operations Year-to-Date 2021 Compared to Year-to-Date 2020 Operating Income (Loss) For year-to-date 2021, operating income increased$1.045 billion , to$428 million , from a loss of$617 million year-to-date 2020, and the operating income (loss) rate (expressed as a percentage of net sales) increased to 13.5% from (31.5)%. The drivers of the operating income results are discussed in the following sections. Net Sales The following table provides net sales for year-to-date 2021 in comparison to year-to-date 2020: 2021 2020 % Change Year-to-Date (in millions) Stores - North America$ 1,970 $ 877 124 % Direct 990 922 7 % International (a) 208 161 30 % Total Net Sales$ 3,168 $ 1,960 62 % _______________
(a)Results include
The following table provides a reconciliation of net sales for year-to-date 2021
to year-to-date 2020:
(in millions)
2020 Net Sales $ 1,960
Comparable Store Sales 70
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
(a) 994
Direct Channel 70
Private Label Credit Card 6
International Wholesale, Royalty and Other 60
Foreign Currency Translation 8
2021 Net Sales $ 3,168
_______________(a)Includes the increased sales from period over period due to the 2020 COVID-19-related stores closures.
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The following table compares year-to-date 2021 comparable sales to year-to-date
2020:
2021 2020
Comparable Sales (Stores and Direct) (a) 6 % 3 % Comparable Store Sales (a)
9 % (16 %)
________
(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 for 2021 and 2020 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. In the stores channel for year-to-date 2021, ourNorth America net sales increased$1.093 billion , or 124%, to$1.970 billion , primarily due to comparisons to the COVID-19-related store closures in 2020, partially offset by the impact of the permanent closure of 241 stores inNorth America in 2020. The increase in comparable store sales was driven by an increase in average unit retail and conversion (which we define as the percentage of customers who visit our stores and make a purchase), partially offset by a decline in traffic. Sales related to our partner-operated stores outside ofNorth America also increased compared to 2020 primarily as a result of the COVID-19-related stores closures in the prior year. In the direct channel, net sales increased$68 million , or 7%, to$990 million due to improved customer response to our merchandise assortment as well as the temporary suspension of operations for approximately one week inMarch 2020 . Direct sales last year were positively impacted by the COVID-19-related store closures. The increase in direct sales was driven by an increase in average unit retail, partially offset by a decline in traffic. Gross Profit For year-to-date 2021, our gross profit increased$1.169 billion to$1.342 billion , and our gross profit rate (expressed as a percentage of net sales) increased to 42.3% from 8.8%, primarily driven by the following: For year-to-date 2021, the gross profit increase was due to the increase in merchandise margin dollars related to the increase in net sales, and an increase in the merchandise margin rate driven by improved response to our merchandise assortments, disciplined management of inventory, as well as strong selling execution in stores and online, all of which enabled us to reduce promotional activity during the year. Occupancy expenses were lower, driven by store asset and lease impairment charges of$214 million in the prior year and permanent store closures, partially offset by a$39 million gain from the closure of our flagship store inHong Kong in the prior year. The gross profit rate increase was driven by an increase in the merchandise margin rate reflecting a meaningful reduction in promotional activity, buying and occupancy leverage on higher net sales and the store asset impairment charges in the prior year. General, Administrative and Store Operating Expenses For year-to-date 2021, our general, administrative and store operating expenses increased$124 million to$914 million due to an increase in store selling expenses as a result of the increase in net sales compared to the prior year, an increase in marketing investments due to brand repositioning and the store closures in the prior year and an increase in incentive compensation given company performance as compared to the prior year. These increases were partially offset by severance and related costs associated with headcount reductions totaling$51 million in the prior year, and savings realized as a result of cost reductions and the impact of the permanent store closures. For purposes of preparing the combined financial statements on a "carve-out" basis, the Company has been allocated a portion of L Brands' total corporate expenses. These allocations are included in general, administrative and store operating expenses. Corporate allocated expenses increased$4 million to$49 million year-to-date 2021 from$45 million year-to-date 2020. The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased to 28.8% from 40.3% due to leverage on the significant increase in net sales. 28 -------------------------------------------------------------------------------- Table of Contents Provision (Benefit) for Income Taxes For year-to-date 2021, our effective tax rate was 23.2% compared to 19.9% year-to-date 2020. The year-to-date 2021 rate was lower than our combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits recorded through the income statement on share-based awards that vested year-to-date. The year-to-date 2020 rate was lower than our combined estimated federal and state statutory rate primarily due to losses related to certain foreign subsidiaries, which generated no tax benefit. 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 (loss) and working capital changes. Our net income (loss) 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. Historically, we have generated annual cash flow from operating activities. However, we have operated within L Brands' 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 L Brands. 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. The cash and cash equivalents held by L Brands at the corporate level are not specifically identifiable to us and, therefore, have not been reflected in the Combined Balance Sheets. L Brands' third-party long-term debt and the related interest expense have not been allocated to the Company for any of the periods presented as the Company was not the legal obligor of such debt. Following the Separation from L Brands, our capital structure and sources of liquidity will change from the historical capital structure because we will no longer participate in L Brands' centralized cash management program. Our ability to fund our operating needs will depend on our future ability to continue to generate positive cash flow from operations, and on our ability to obtain debt financing on acceptable terms. Based upon our history of generating positive cash flows, we believe we will be able to meet our short-term liquidity needs. Management believes that our cash balances and funds provided by operating activities, along with borrowing capacity and access to capital markets, 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 meet investment opportunities that may arise. However, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future. Upon completion of the Separation onAugust 2, 2021 , we have$1.0 billion in principal aggregate amount of indebtedness, consisting of$600 million of senior unsecured notes and$400 million of senior secured loans under the term loan B credit facility, the proceeds, net of issuance costs, which we used to fund a cash payment of approximately$976 million to L Brands as part of the Separation. We also established a$750 million asset-based revolving credit facility, which was undrawn at the Separation. 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 believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements. 29
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