Victoria’s Secret & Co. (NYSE:VSCO) Q4 2023 Earnings Call Transcript March 7, 2024
Victoria’s Secret & Co. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Fran and I will be your conference operator today. At this time, I’d like to welcome everybody to the Victoria’s Secret & Company Fourth Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. All parties will remain in a listen-only mode until the question-and-answer session of today’s call. I would now like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria’s Secrets & Company. Kevin, you may begin.
Kevin Wynk: Thanks Fran. Good morning and welcome to Victoria’s Secret & Company’s fourth quarter earnings conference call for the period ending February 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 CEO, Martin Waters; and CFO, Tim Johnson. We are available today for up to 45 minutes to answer any questions. Certain results we discussed on the call today are adjusted results and exclude the impact of certain items described in our press release and our SEC filings. Reconciliation of these and other non-GAAP measures to the most comparable GAAP measures are included in our press release, our SEC filings, and the investor presentation posted on the investor section of our website. Thanks. And now I’ll turn the call over to Martin.
Martin Waters: Thanks, Kevin, and good morning, everyone. I want to first share my appreciation and gratitude for the hard work and dedication of our associates and partners around the world who executed our strategies, delighted our customers and delivered solid financial results in the all important holiday quarter. I’m pleased to report that fourth quarter adjusted operating income and EPS came in at the high end of our guidance. Sales in the quarter were up 3% compared to last year and were at the midpoint of our guidance. Our fourth quarter gross margin rate increased significantly compared to last year, exceeding our expectations, driven by disciplined inventory management and cost reductions related to our Transform the Foundation initiative to modernize our supply chain.
Sales trends during the quarter were volatile by week, but we were encouraged by the improving quarterly sales trend in North America, driven by a sequential improvement in traffic and average unit retail in both our stores and digital channels, with traffic in our stores increasing in the fourth quarter as compared to last year. We were particularly pleased with our early holiday sales in November and during the peak days and weekends leading up to Christmas, both in stores and through our digital channels, led by strong response to our giftable merchandise assortment, improving customer experiences and marketing messages. The team strategically managed promotional activities to amplify key moments through the days weeks leading up to Christmas, and we entered the semi-annual sale period with lower inventory levels than last year, which allowed us to maximize margins during the sale period and enter the spring season with healthy inventories.
Our international business continued its strong performance with system wide retail sales up more than 20% in the fourth quarter compared to last year, driven by significant growth in China and globally with our franchise and travel retail partners. We continue to experience profitable growth across stores and digital, and we’re excited about our aggressive growth plans to expand our footprint in both stores and digital around the world. From a market perspective, sales for the intimate market in North America as a whole decreased mid-single digits in the quarter compared to last year, which was the fourth consecutive quarterly year-over-year decline. We remain the leader in market share for the intimates category, including both bras and panties.
Our share in the intimates category remains at about 20% with our digital share up slightly and our store share down slightly. We were encouraged by our market share gain in digital increase in both bras and panties. From a merchandise category perspective, starting with Victoria’s Secret, our beauty business continued to be our best performing category with year-over-year growth for the second consecutive quarter and was followed by performance in casual sleepwear, panties and bras. Within PINK, sleepwear outperformed intimates and apparel. We continue to roll out our reimagined PINK apparel merchandising assortment in the fourth quarter. The sales trend improved and while still down compared to last year, we continue to buy the category cautiously.
The impact of the PINK apparel challenges in the fourth quarter was approximately 1 to 2 points compared to last year. Over the last 90 days, we’ve executed several key actions in support of our strategy and brand positioning for the long term. For example, we continue to further develop our understanding of our Victoria’s Secret and PINK customer through our multi tender loyalty program, which now has more than 26 million members, who drive more than 75% of our sales on a weekly basis. Through insights and data, we’re focused on turning our understanding of her into world class customer experiences. In February, we relaunched our number one bra collection Body by Victoria, with all new styles and our latest innovation. The popularity for online bras continues to increase, and our newest invisible lift technology offers lightweight design that smooths, shapes and supports without an ounce of padding.
In February, we also released our PINK apparel Spring campaign Going Places, featuring Natalia Bryant with new PINK styles and comfy fits. As part of our commitment to expand our categories, we debuted swim product under our new swim collaborative label PINK by Frankies Bikinis which celebrates the iconic PINK brand reimagined through the lens of founder and creative director of Frankies Bikinis, Francesca Aiello. From a technology perspective, we entered a multi-year partnership with Google Cloud to embark on VS&Co’s AI journey to focus on improving customer experience online and on our mobile apps, improving the associate experience and improving operational efficiency across the enterprise. As we expanded our Store of the Future fleet to 83 stores or approximately 10% of the fleet in North America and continue to expand our footprint internationally.
From a liquidity and capital allocation perspective, we ended the year with a strong balance sheet and ample liquidity to execute our strategic plans. We generated significant cash flow in the fourth quarter and ended the year with a cash balance of $270 million and debt down over $150 million year-over-year. Additionally, our Board has approved a new share repurchase program, authorizing the repurchase of up to $250 million of the company’s common stock. As we look into the New Year, we recognize the broader intimates market in North America has been down for four consecutive quarters and the macro environment remains challenging, putting pressure on the consumer. As such, we are planning the business conservatively in the near term and maintaining open-to-buy to capitalize on any changes in trend.
At the same time, we remain focused on delivering on multiple initiatives to drive growth in our business over the longer term. For fiscal 2024, our forecast assumes the broader intimates market in North America will remain pressured throughout the first and second quarters, with sales trends improving through the back half of 2024 as we continue to roll out growth strategies and new customer experiences. For the 52-week fiscal year 2024, we’re forecasting sales to be about $6 billion or down low single digits to a comparative 52 weeks from fiscal 2023. At this level of sales, we expect adjusted operating income for the year to be about $250 million to $275 million. For the first quarter of 2024, we’re forecasting sales to decrease in the mid-single-digit range compared to sales of $1.407 billion in the first quarter of 2023.
This forecast reflects our expectation that the domestic intimates market will remain challenged and that our core customer will be cautious in this environment. These challenges will be partially offset by the continued strength in our international business. At this level of sales, we’re forecasting first quarter adjusted operating income to be in the range of $10 million to $35 million. The team continues to manage inventories with discipline, and we expect to end the first quarter with inventory levels in our core Victoria Secret and PINK businesses down mid-single digits compared to last year. At our Investor Day in October 2023, we discussed the opportunity to drive operating margin expansion through our initiatives to transform the foundation of the company by modernizing the operating model.
We remain on track and committed to a total of $250 million, three-year goal that we established at our Investor Day in October 2022. We realized about $90 million of savings in 2023 and expect to realize approximately $120 million of savings in 2024, primarily in gross margin. Lastly, as we have shared consistently inside and outside the business, with the long-term health of the business in mind, we remain committed to our strategic priorities. Firstly, to accelerate the core; second, to ignite growth; and thirdly to transform the foundation. As we look into the New Year, we are committed to our initiatives designed to leverage our market leadership position and unlock the opportunity to convert our significant cultural influence into long-term financial growth.
We believe our evolving strategies will position our business to deliver the potential of our category defining brands, and we remain confident and are committed to delivering long-term financial targets and returning value to shareholders. Thank you. That concludes our prepared remarks, and at this time we’d be more than happy to take whatever questions you might have.
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Q&A Session
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Operator: Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question now is from Alex Straton with Morgan Stanley. And your line is open, ma’am.
Alex Straton: Great. Thanks a lot for taking the question. Just on the full year revenue guidance, it looks like there is an acceleration embedded after the first quarter despite compares getting harder. So can you just talk about what enables that acceleration? It sounds like it’s particularly back half-weighted. And then I just have one quick follow-up.
Tim Johnson: Yes. Thanks for the question, Alex. So when we thought about the full year in relationship to first quarter and the trends that we’ve been seeing in the business, we made some assumptions around kind of where the domestic market share might go or the intimates market domestically might go. So as Martin mentioned in his prepared comments, the market for intimates has been down four quarters in a row now. As we look at the beginning parts of Q1 and 2024, it appears to us it’s going to continue to be a challenge. We’ve assumed in our guidance that the domestic market for intimates will continue to be down through the spring season and will start to stabilize, not grow, but stabilize as we move into the back half of the year.
So we’ve tried to align our forecast with that. We’ve tried to align our inventory and cost structure with that in mind. Additionally, as we move through the year, we recognize that many of the merchandising strategies that were articulated at the Investor Day in October will be in full flight as we move into the fall season. So things like category adjacencies that Greg spoke to, the relaunch of sport which Greg spoke to at the Investor Day. So those high-level merchandising initiatives that will put out different products and present differently in the store really are in full flight in the back half of the year. So the combination of an assumption around the stabilizing intimates market and newness in category and presentation and expansion of category, particularly as it relates to intimates and bras and sport are part of our assumptions for an improving trend, ever so slightly quarter-to-quarter as we move throughout the year.
So down mid-singles, down low-singles for the year. You kind of get to flat to down low-singles the balance of year.
Alex Straton: Great, that’s super helpful. And maybe just one quick follow up, just with the headlines recently on the credit card late fee proposal or a ruling going through. Have you contemplated that in the guidance or how should we think about what that means for Victoria? Thanks a lot.
Martin Waters: Yeah, good question. Obviously, that’s very topical at the moment, but It’s not a new topic. It’s been out there for several months and several quarters, but does seem to be picking up a little bit of momentum lately. First, I think it’s important to understand that we do not necessarily recognize any revenue on some of the fees that are being discussed or debated, but certainly our provider does, and that impacts their model. So we’ve got a long-standing relationship with our partner, and we’ll continue to try to work with them, but I think it’s important to understand that some of the fees that are being discussed do not directly go into our P&L. It’s certainly something that our partner relationship will need to work on now.
Alex Straton: Thanks a lot…
Tim Johnson: I think additionally, Alex, you might recall or others might recall, too. The launch of the non-tender or multi-tender loyalty program in the middle part of last year, obviously, was a big, big move for the company and a big opportunity to communicate and incent customers differently than maybe in the past. So we do have a couple of different ways to be working with our customers to incent traffic and encourage them to continue to shop in our stores, not just one dimension like in years gone by.
Alex Straton: Great, thanks a lot.
Operator: Thank you. Our next question now is from Ike Boruchow with Wells Fargo. Sir, your line is open.
Irwin Boruchow: Hey guys, good morning. Two questions for me, maybe both for TJ. Just on the guidance, can you talk to us about the flow through on the lower sales outlook? I think when we look at the guidance, it’s about low single digits, 3% below street for revenue for next fiscal year, but it’s 20%, 25% below on EBIT. How should we think about that? Are there things you can look at in the cost structure? It just seems like a lot of lost EBIT on not as — not that much lost revenue, honestly. And then the second follow-up is just on the share buyback. How opportunistic do you plan to be with that as you kind of look out for the rest of the year? Thank you.
Tim Johnson: Yes, thanks for the question, Ike. In terms of the full year guide, it’s difficult for me to speak to what others might have in their model, so I’ll speak to how we’re thinking about it and how it compares back to the Investor Day in October. So back in October, we talked to you about a number of things that needed to happen in our business in order for the operating margin to expand and the flow through to be significant to operating income. We talked about North America sales needed to improve and needed to move into the low single digit range. That has not happened yet. We’re not forecasting that to happen in the current year. So that’s a bit of a headwind. We talked about the international business needed to continue to grow and it will become a larger part of our business growth in the mid-teens or higher.
