Victoria's Secret & Co. (VSXY) Earnings Call Transcript & Summary

My name is Amanda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria's Secret & Company's Fourth Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]. 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 Secret & Company. Kevin, you may begin.

Thank you, Amanda. Good morning, and welcome to Victoria's Secret & Company's Fourth Quarter Earnings Conference Call for the period ended February 1, 2025. 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, Hillary Super; CFO, Scott Sekella; and retiring and former 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 Scott.

Thanks, Kevin. Good morning, everyone. Before we turn the call over to Hillary, I wanted to take a moment to say hello and how excited I am to be here. I joined VS & Co. about a month ago, and I want to thank the team for the warm welcome. Joining during the year-end financial close cycle certainly makes the first days on the job exciting. I'm grateful for the opportunity to work alongside Hillary, our leadership team and our passionate associates and for the opportunity to support our customers, our brands and our company. I'm excited about our future, and I look forward to meeting and working with you all. That's all for now. I'll go ahead and turn the call over to Hillary.

Thanks, Scott. Good morning, everyone, and thank you for joining us. During the last call, I shared insights from my first 90 days as well as my excitement and optimism for our future. I'm happy to be back together today to continue that conversation. First, I want to talk about our Q4 results and outlook for 2025. Then I'll share details on our strategies for growth that we believe will unlock the full potential of our brands. But before I discuss Q4, I want to take a moment to thank TJ for his support during my first several months and for staying on with us to ensure a smooth transition with Scott. Thank you for your partnership, TJ, and the role you played in helping drive the results we'll talk about today. Speaking of results, I'm pleased to say they were strong in Q4, with sales up to last year across VS, PINK and our powerhouse beauty business. We won in the big moment and with a focus on execution, our teams drove healthy margins, controlled costs and managed inventory very well, leading to Q4 operating income and EPS that exceeded our expectations. Sales growth was driven by broad-based strength across our business with sales up in all 3 brands in all channels and all markets. In North America, VS and PINK both had positive year-over-year sales growth in stores and digital. We were able to achieve this growth with fewer promotional days and offerings than last year, which is especially encouraging as we continue to test and learn our way to lower promotional activity in the business. From a merchandise perspective for VS, our giftable holiday product assortments driven by sleep and beauty across both brands were big winners with casual sleep as our top-performing category. We were excited to see that products that are Quint essentially VS, heritage, Stripe and logo, all performed well, which I view as an indication of strong brand health. We also had success with Shimmer and Shine products. PINK apparel had a significant trend change at the beginning of the fall season and its strong performance continued in Q4. Along with sleep, apparel drove the business during holiday. As you know, we've been working to evolve PINK product positioning, and we're starting to see some positive signs of customer acceptance. Both our modern reinventions of iconic heritage pieces and our most feminine styles featuring sparkle and shine were top performers this holiday. As I mentioned, our beauty business was a standout in the fourth quarter as we pushed the boundaries of accessible luxury with higher AUR items that were must-have gifts of the season. With compelling products and strategic promotional activity, our basket sizes and traffic were up to last year with traffic outperforming the mall. Supported by our best-in-mall store experience and dozens of digital enhancements, we had solid conversion on those increased traffic levels with strong product acceptance. Third-party data shows that North American intimates market declined slightly this quarter. However, for the second quarter in a row, we outperformed the market, an encouraging sign of our growing strength and momentum. Our studies again this quarter show that Gen Z is feeling much more positively about our brands, a testament to our focused efforts to engage her. It's exciting to see that she's not only noticing us but connecting with what we stand for. Outside of North America, our international business continued its strong performance with retail sales up double digits in the quarter, driven by growth with our franchise and travel retail partners, along with strong performance in our joint ventures in China and the U.K. Our brand is strong around the world, and our global partners and vendors are not only partners but incredible advocates. After my first holiday season with the business, I remain optimistic about what's ahead for VS & Co., including what we're focused on for Q1. Across every brand within our business, spring is anchored by our icons. We're inspiring our loyal customers with modern takes on all of her favorites and introducing them to a new generation of customers. In February, we reimagined our very sexy collection, expanding the iconic franchise to connect with more women. With a broadened range of lift levels, we're offering a more personalized fit, delivering sexy for everybody. Our teams are always listening and responding to customer feedback as evidenced by the new lightly lined Demi, which was designed for women who love glamor, but prefer a more natural lift. And we continue to have momentum in sport and swim, both categories in which our authority and expertise in bra fit and innovation give us the competitive edge. In what is a highly competitive market, we have leveraged our best at bras positioning to be the authority for on-trend sexy swim that she feels incredible wearing. We are excited about the newness in swim this spring, which includes styles from PINK by Frankie, one of our strategic collaborations that has over-indexed with the Gen Z customer. In our most recent drop, the collaboration also drove almost triple the average acquisition rate versus the core PINK business, a promising indicator as we build our go-forward collab strategy. Doubling down on PINK apparel, we are excited about the ongoing improvement in product execution. We continue to build on the momentum with modern takes on PINK icons, plus we've added a new layer of lifestyle outfitting that is resonating with customers. As we are seeing with early spring, our fashion content is becoming more compelling with every floor set, and I'm looking forward to the continued progress within the PINK business. Turning to beauty. Our icon is Bombshell, America's #1 fragrance. In March, we will be celebrating Bombshells 15th anniversary by unveiling a bottle redesign and delivering activations we know will engage and excite our loyalists. I'm pleased by our movement back into major cultural moments alongside global stars. We are focused on driving relevance with today's consumer by meeting her in the moments and spaces that matter. Victoria's Secret product played a prominent role in Charlie XCX's performance that closed out the Grammys, Tate McRae wore our products in her newest music video, and we recently partnered with Teyana Taylor on an exclusive product edit. All of these moments resonated deeply with consumers and drove significant social media engagement. As we transition from holiday season to spring '25, we recognize there are challenges, shifting consumer confidence, a volatile economy and unseasonal weather impacting mall traffic. While we're actively managing today's headwinds, we're also building for the future. With a strong foundation and globally recognized brands, we're positioned to navigate the present while unlocking the full potential of VS & Co. for the long-term. And now I'd like to talk about how we plan to realize that potential. First, I think it's important to acknowledge that we are building from a position of strength as the largest intimate apparel company in the world. In North America, we have approximately 20% market share, 25 million active customers and 38 million loyalty members. We have the second largest brand following in the world on social media with 88 million followers on Instagram alone. Our growth plan, which we are calling Path to potential, will ensure we put the best of who we are back at the center of how we work. We are playing offense, leaning into our core strengths and unlocking new opportunities. Our objective is clear: drive value for all stakeholders by supercharging our 2 distinct compelling growth brands, Victoria's Secret and PINK, complemented by a powerhouse beauty business and a strong digital-first Adore brand. Our path to potential is built around 4 key strategies that will allow us to accelerate growth, differentiate our brands and reinforce our authority in the market. First, we are recommitting to PINK and winning the next generation of consumers. PINK has long been a brand with deep emotional connections to young women. Today, we are focused on reestablishing the brand's magic and market position. We will deepen our relationship with the customer, understanding her like never before and meeting her where she is in the way she wants. We are working to reclaim our position as a full lifestyle brand anchored in intimates, but extending into more apparel, accessories and beauty. We must clarify and elevate the brand by sharpening our identity, thinking and operating as a social-first brand and treating PINK as a high potential growth engine that it is. Our second strategy is supercharging bras and reasserting our authority. We will lean on our industry-leading bra experience to drive innovation-first product development, ensuring we lead the industry in fit, function and fashion. We will also expand our bra assortment to serve a wider range of customer needs, and we will strengthen our marketing voice and channel experience to serve her better. Our third strategy is fueling growth in lifestyle categories, beauty, sport and swim. We have a powerhouse beauty business and strong lifestyle brands that customers love, and we will accelerate these categories by leaning into our beauty authority, building on our industry-leading fragrance business and expanding into new opportunities, which include beauty and PINK. We will reclaim key adjacencies by applying our expertise in bra innovation, quality and fit to revitalize our sport and swim businesses. Our fourth focus is on evolving our brand projection and go-to-market strategy. As culture, technology and shopping behaviors shift, so must our go-to-market strategy. By staying true to our brand DNA while adapting how we engage, inspire and serve, we will deepen connections with existing customers and attract new customers while strengthening loyalty and driving long-term growth. One of the ways we will do that is by creating stronger differentiation between Victoria's Secret and PINK in everything from product to marketing to experience. Today, the lines between the 2 brands are blurred. Moving forward, we will ensure that each brand is distinct but that they complement one another in a single ecosystem. We will elevate Victoria's Secret as sexy, glamorous, accessible luxury while modernizing PINK's brand identity and evolving the way we communicate with the customer. By becoming more agile and culturally connected, we will create real-time moments that resonate with our customers and keep us at the center of the conversation. Finally, we will leverage the full funnel and build a brand-centric best-in-class omnichannel experience to engage with her on her terms. And as I've emphasized, we see significant growth potential internationally, and these strategies transcend our global footprint. To ensure that our strategy is not just aspirational, it's actionable, sustainable and built to drive results, we are focused on 3 critical enablers. First, a customer-centric performance culture. By deeply understanding our customers, how they shop, what they value and what inspires their loyalty, we create stronger connections, drive repeat engagement and fuel sustainable growth. A culture centered on the customer empowers associates to innovate and to deliver experiences that not only meet expectations, but exceed them, turning transactions into lasting relationships. To accelerate the customer impact, drive results and gain share, we are moving to a leadership structure with brand presidents leading product-facing functions for Victoria's Secret, PINK and Beauty. This change will ensure we have the leadership focus, clarity and expertise needed to accelerate growth. We are also currently searching for a CMO to evolve our global go-to-market strategy, help build deeper customer connections, elevate storytelling and drive more data-driven marketing optimized across the full funnel. The second enabler is an evolved product development process. We are moving beyond a broad-centric approach, implementing multiple tracks tailored to each category, making our teams faster, more agile and more innovative, not just in bra development but in apparel as well. Our third enabler is an efficient operating model. We are focused on doing fewer things better, investing where it matters most to our customers and streamlining costs in noncustomer-facing areas. In closing, we face some near-term headwinds and ongoing uncertainty in the macro environment, which we will manage aggressively as we also do the work, I just outlined to unlock the full potential of our brands and business. I'm confident and energized because we have clear strategies for growth. We are moving swiftly to a leadership structure to execute with focus and impact and positioning ourselves for long-term sustainable growth. This is our moment to build the future for VS & Co., stronger, more innovative, and more connected to the customer than ever, and I'm confident in our plan, our team and the opportunities ahead. Thank you. That concludes our prepared comments. And at this time, we'd be happy to take any questions you might have.

Our first question we will go to the line of Matthew Boss from JPMorgan.

So Hillary, could you elaborate on drivers of the gradual improvement you embedded through the year? What do you see as transitory within some of your near-term trends? And maybe if you could speak to the product pipeline for the back half of the year at both VS and PINK.

Sure thing. I'm not going to speak too specifically about product launches because we want to keep those under the cover. But I would say embedded in our forecast is, first and foremost, getting teams in place and leaders in place. So, I would say a major driver of the improvement will be through marketing, the full funnel, and the differentiation of the 2 brands. So I would say that is a major driver. The second is incremental improvement in both PINK and the Victoria's Secret brands as we play our learnings forward. Then, the third is a number of tentpole moments that we have planned to begin in the August time frame. So you will see us pace those out across the back half of the year. In the front half of the year, we are a little more quiet in terms of our marketing, building out that muscle, getting ready for the back half, and you'll start to see those types of moments accelerate in the back half as well as product launches and some fun collaborations.

Our next question comes from the line of Adrienne Yih with Barclays.

Hillary, you arrived in September, and you've made some changes very quickly on sort of inventory and kind of new product. Wondering over what horizon you just mentioned in August. Over what horizon do you think you will have your full imprint on the product? Secondarily, I think a couple of things that you said at the October meet and greet was that inventory productivity was being hampered by production lead times. So if you can talk about some efforts on that front. And my last quick one is that you're clearly pulling back on promotions. That sometimes leads to a slowdown or some sluggishness in inventory velocity, but the profitability is better. So, can you talk about that shaping and how you imagine it before you get that acceleration in sales?

Sure. The first question around full imprint. It will be iterative. I don't envision a big curtains-up moment for each brand. You will see incremental improvement each month. I would say the impact on the first half of the year is really on optimization. It's on narrowing focus, maximizing the big ideas, neutralizing some of the things we're more worried about, and focusing a little bit more on the lower funnel in marketing. And then we are buying fall as we speak. So I've had more involvement in that, and we'll have more increasing involvement in future seasons after that. But I would say, based on product development timelines, spring '26 would be the season that I would have been here through the entire process. The second question around production lead times. I would say we're in pretty good shape. There are places where we have incredible agility, underwear being a big area around that. I would say some of the PINK apparel areas we've been able to make real headway with. I would say the new leadership structure is designed to enable us to pull apart those product development processes to cater to a specific customer and into specific categories. So that's a big piece of this work. We have a Tiger team devoted who have stepped out of their roles for a short period of time to engineer this new process. So I would say we have a little bit of one foot in the old world and a little bit of one foot in the new world, but we're making progress in the areas where we see we need to be much more agile. In terms of promotions, we have just started that work and it's a delicate balance; the brand, the product, and the story have to be very strong for us to do that. We were able to start proving that out on holiday. We were able to forgo a full box promo in mid-December that we were up against from last year. We were also able to reduce the number of days for other events across the quarter. Did we give up a little bit of top line? I think we probably gave up a little, but we're pleased that we were able to take that out of our base. We're looking for opportunities going forward to do that as well. I would say the most recent traffic and weather patterns have made that a little bit more difficult to do, but we will continue to be relentless in looking for those opportunities as we move through the year.

Our next question comes from Simeon Siegel with BMO Capital Markets.

Scott, welcome. TJ. It's been great working with you. Best of luck on your next chapter. Hillary, thanks for the path to potential detail. Any way to quantify the top line opportunity within those various pillars? Just maybe thinking about how you're viewing various opportunities across brands, categories and regions, maybe in quantitative detail. And then just given the comment about expanding beyond Bra-centric, could you share how much of the opportunity as you see it to grow is rooted in recapturing lost revenue in each segment versus expecting maybe the go-forward company revenues composition to look different than the past?

There were a lot of questions in there. Let me see if I can take a crack at that. So we have -- we are at the beginning of our LRP work. So this is the beginning of the strategy rollout. So I do not have exact numbers. We will -- we will plan to share that in the back half of the year. But I will say there is a tremendous amount of opportunity in PINK. And that is where my eyes are set right now. That is where I'm spending a lot of time thinking about how we invest in that business, how we resource that business, how we talk about that business and pull it apart from VS. So that would be my first. I would say in the intimates category, knowing that it is a category that has been struggling in the overall market, our goal there is really to defend in the short term as we build our innovation pipeline on a longer-term view. And then the lifestyle categories are -- they're really -- they're just very strong for us. And if you look back to history in these categories, they were a very significant amount of volume in the past, and we feel very confident that we can recapture a lot of that. And I think that will help our customer file. It will help us with acquisition. It will help us with attracting younger customers. And there's a lot to like about the lifestyle piece of this. And I put a lot of focus on that as we move forward.

And then just one quick follow-up. Any meaningful divergence in regions or customer demographic profiles in January and Feb that you guys have seen?

Yes. In terms of -- it's Scott, Simeon. In terms of regions, yes, I mean, the warmer weather regions were definitely several points above the colder weather regions. So that speaks to the weather impacts from back half of Jan through Feb. And as we did see weeks that were warmer, then all regions were elevating off that trend. So definitely from a region perspective, we saw difference.

Our next question comes from Corey Tarlowe with Jefferies.

So I was wondering if you could talk about the opportunity that you see in creating some of these separate tracks for product lines in terms of your strategy and how these interplays in the opportunity with particular categories that are -- have been historically very important for the company like swim and athletic. And then also, if you could also just comment on Valentine's Day and anything that was working during that time frame, that would also be very helpful, too.

Multiple tracks. I think this is essential. We are currently on a 52-ish week calendar really anchored in the lead times around bras. We have made progress on having chase calendars to really supplement that in key categories, but I fundamentally believe that apparel should not be on a 52-week calendar. And so we're looking to drastically reduce that through a raw material strategy, partnering with our vendors, different ways of working in our product development process. And the goal would be in things like I'll just use PINK apparel as an example, we should be going like 26 weeks for that. And that will be a big shift and a big unlock to bring decision-making closer to customer, and I'm very excited about the potential of what that will add to our business. And you mentioned swim and sport, both very technical, both have nuances in the product development process that are very different from other categories. And so separating that out in swim and sport, maybe a little less about the speed and a little bit more about the technical product engineering piece of it. And so having experts dedicated to that on different tracks should really, one, enable much better product execution; and number 2, should enable agility in the places where we need it the most. Valentine's Day. I'll take that opportunity to just talk a little bit about January into February in general. So definitely saw a macro shift in the environment as it relates to traffic sort of mid-January into mid-February. We know what the macro factors are there. We know it was weather. We know it's consumer confidence. We know that in our business, we see a big uptick in cash and debit purchases coming from tax returns that were delayed this year. We see in our regional selling that the warm weather climates did considerably better than the cold weather climates. That being said, there's an opportunity to really look in the mirror as well and make sure that we are playing forward every single learning possible. And so when I think about that sort of mid-January to mid-February timing, I would say there are a couple of things we could have done better. One is that we pulled marketing spend into Q3 for the fashion show. And I think one of the hindsights coming out of the fashion show is that, that halo in terms of traffic was about 8 to 10 weeks. So in hindsight, I think we pulled back a little too far on marketing, and we should have had some other events, whether it was around sport or Valentine's Day in January to really drive that heat and awareness and traffic. So that would be the first. The second is that we didn't buy the Valentine's Day big enough. So we blew through sleep, which was one of the big drivers of holiday. We blew through it in a couple of weeks and basically sold out by the time we got to the beginning of February. So I think that's a big one. And then the third is really thinking about launch strategies in bras, and that's something we've done for many, many, many years. And I think in the new environment, one of the things we're learning is that when we go hard against one thing, it isn't always necessarily lifting everything. And so we need to find a way to talk about a launch in a powerful way and also talk about all the other bra offerings that we have at the same time. And that will be a new thing for us that we're working to implement very quickly. So that would be my diagnosis for the 3 weeks. And I would just add that 3 weeks doesn't make a quarter, and it doesn't make a year, and we're working tirelessly to make that up as we move forward into the balance of the year.

Our next question comes from Jungwon Kim with TD Cowen.

Just thinking about the guide for the year, what could potentially drive upside or downside to your guide as you look forward? And then just a follow-up on the store of the future format. Sort of what are you seeing at this point with your concepts that have been live? And what are you baking in terms of potential lift from those concepts as you continue to roll them out?

Jungwon, can you repeat the first part? We think we heard something about a guide. We think we caught the Store of the Future the second.

Yes. Sorry, I asked that on the call. So yes, the voice is somewhat gone. But yes, just potential upside and downside to your guide for the full year, like what the key factors that could potentially drive upside or downside to your current year guide?

Yes. Jungwon, it's Scott. So for the guide for the year, as we've already talked about Q1 and some of the near-term headwinds we're facing, we do see the guide improving throughout the year, especially around a lot of the product and strategy changes that Hillary has already outlined. In terms of cost and whatnot, right now, we're faced with some higher transportation costs, both in ocean and air in the first part of the year. We do expect to start lapping that in the back half of the year. In the back half of the year right now, though, is where we've got the impact of the tariffs plan that we called out. So we've got 10% assumed on China for the balance of the year, and that's going to be worth about $10 million to $20 million. And so those are the sort of bigger inputs influencing the guide for the year. So when you think about that gradual improvement is where we see the year going. In terms of Store of the Future, the early results are quite positive. We are ramping that up throughout the year. We've got more full and partial Store of the Futures in the works this year than last year. By year-end, we should have about 95% of our top 100 doors converted, and we look to continue that into the out years as the early returns have been very positive.

Yes. Jungwon, if I could, just one additional thought on the guide because I think it's important. We've seen some of the sell-side notes this morning. And just to clarify, if you look at our guide for the year at $6.2 billion to $6.3 billion, you're looking at really flattish to maybe up $100 million or up 1 or 2 points for the year. We gave you the guide for Q1, which was essentially down 2% to down 4%. So where I'm going, Jungwon, is the balance of the year in our guide, we're really saying up low single digits, plus 1% to plus 2% or 3%. So not necessarily the same trend that we saw in fall, but definitely an improvement from spring. So we think that's something that's attainable for the business for the reasons that Hillary just mentioned around product and marketing changes that you should expect going forward. And then similarly, from an OI perspective, we're guiding OI essentially flat to down close to $50 million year-over-year. The bulk of that decrease is guided to in the first quarter. So you are seeing OI or Operating Income Improvement in Q2 through Q4. So I want to make sure that, that's well understood. This is not a significant hockey stick in the back half of the year or anything like that. It's really an expectation that over time, we'll return back to that plus 1, plus 2 here in North America, which, again, clearly, we were trending much stronger than that in the fall season.

Our next question comes from Alex Straton with Morgan Stanley.

Maybe first for Hillary, it's clear you're super focused on PINK more so than the other banners and other parts of the business right now. Can you just elaborate on what's telling you that, that's the right banner to focus on compared to Victoria's, and then just a second question either for Scott or Hillary is can you dive into the biggest category pain points at Victoria's and PINK right now and sort of plans to improve those in '25?

Sure, I'll take that. I'll just start by saying I wouldn't categorize that I'm much more focused on PINK than VS. I think they're at 2 different trajectories in their business. So first on the PINK side, when you really dig in and look at the history of PINK, what it used to be, and what it is today, there is just enormous opportunity. When you look at the market landscape, there is enormous opportunity. And when you look at some of the decisions independent of themselves that were made over time, it's a little bit of a death by 1,000 paper cuts. And so when I stand back and look at that, I see opportunity. And I see an opportunity in apparel specifically, and you can get it that faster. And so there's a lot of work to do with PINK. There's a lot of scrubbing of the total brand position. There's a carving out of this brand that needs to happen. There's a reimagining of it to make it as magical to this generation as it once was to a previous generation, and I think that is within our grasp. So I'm passionate about that. At the same time, I am so passionate about Victoria's Secret, and I believe there is tremendous opportunity there. I think Victoria's Secret is farther along in its product development and sort of product resonance path. I think the work in DS is about supercharging the lifestyle piece of the business that I believe will ultimately buoy the core business. And I think it's about sort of brand voice, how we go to market, how we utilize full funnel, a little bit more slanted to marketing where PINK is work across the entire business. So I hope that clarifies that. In terms of categories, what's working and driving the business right now, it is lifestyle categories that is driving the business right now where we're seeing the growth. We're seeing it in sport. We're seeing it in swim. We're seeing it in accessories. We're seeing it in PINK apparel. So that is where we are seeing strength right now. I would say that in bras, as an example, very sexy is good. But as I just mentioned in the last question, I think the unlock for us is making sure that when we launch a bra, it lifts all boats, and that's the work that we have to do in that area.