Earnings Call Transcript - VSCO Q1 2022

Operator, Operator

Good morning. My name is Madison, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria's Secret & Company’s First Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Mr. Jason Ware, Vice President, Investor Relations at Victoria's Secret & Company. Jason, you may begin.

Jason Ware, Vice President, Investor Relations

Thanks, Madison. Good morning, and welcome to Victoria's Secret & Co.'s First Quarter Earnings Conference Call for the period ending April 30, 2022. As a matter of formality, I need 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 are CEO, Martin Waters, CFO, Tim Johnson; and EVP, Finance, Brad Kramer. 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 special items described in our press release and in our SEC filings. Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release and our SEC filings. Thanks. And now I'll turn the call over to Martin.

Martin Waters, CEO

Thanks, Jason, and good morning, everyone. When we last talked with you 3 months ago, we said first quarter was going to be challenging. Notwithstanding the current operating environment, I'm pleased to report that we delivered on our major initiatives during the quarter. Before we dive in, I want to thank all of our associates and partners for their hard work, commitment, and resilience. Our teams have remained focused on execution, enabling us to generate sales at the high end of our guidance and stronger-than-expected adjusted earnings per diluted share. And that's even as we navigated significant supply chain headwinds and lost the federal stimulus benefits from the prior year. This was our third consecutive quarter since the separation, but we've delivered adjusted operating income results in line or above our guidance, which reflects our work to stabilize the business. As a reminder, for the trailing 12-month period, we delivered over $1 billion in EBITDA. Turning to the first quarter performance. Sales declined 4.5%. Adjusted for the stimulus benefit last year of approximately $75 million, sales were flat compared to last year. We saw momentum in our bra business and in our beauty business, and also in international as it recovered from prior year COVID-related restrictions. Our adjusted operating income of $116 million was above the high end of our previously communicated guidance range of $80 million to $110 million. We delivered first quarter adjusted earnings of $1.11 per diluted share, which is above our guidance of $0.70 to $0.95 per diluted share, and that's primarily driven by disciplined expense management. We made progress against our profit improvement plan goals to help offset the macroeconomic pressures that we all know about. As we look to Q2 and the balance of the year, we expect the environment will continue to be challenging, and there could be some volatility in our results due to the aforementioned macroeconomic pressures. We're projecting second quarter sales to be up low single digits to down low single digits, with the midpoint about flat and in line with where the first quarter results adjusted for stimulus turned out. We expect second quarter operating income to be in the range of $125 million to $155 million, which is below last year's second quarter results of $203 million with the high end about flat to last year when adjusted for supply chain costs. For the full year, we remain focused on delivering sales that are flat to up low single digits compared to last year. And we have plans in place that we believe will enable us to manage through this dynamic environment to deliver operating income directionally in line with where it was last year. We see a number of factors and opportunities in the back half of the year that are projected to improve trends, including lapping inventory disruptions that we experienced in the back half of last year which should result in improved stock levels and inventory positioning. We have new launches, including bras of both PINK and Victoria's Secret. We have size expansions, and we have Beauty. We have new initiatives, including our store of the future. We have expanded Beauty distribution, the launch of the VS&Co Lab and our planned loyalty program is nicely on track, I'm happy to say. We're also seeing recovery in international from COVID-related restrictions last year. Additionally, we've been developing a profit improvement plan to increase margin dollars and lower the expense run rate of the business. And we expect these initiatives will become more meaningful throughout the year and will help offset headwinds. In short, we've proactively anticipated and are managing supply chain and inflationary pressures. However, we obviously understand that there could be volatility in our results this year. So if the first quarter sales trends adjusted for stimulus were to continue for the balance of the year, it could challenge our ability to deliver full year operating income that's in line with last year. Although importantly, we do believe we could maintain an operating income rate in the low double digits as a percentage of sales and remain on track to achieve our mid-teens operating income rate target over time. We've stabilized the business and remain committed to optimizing our performance in the current challenging environment by focusing on the things that we control, our brand transformation, being best at bras, enhancing customer experience, et cetera, et cetera. We remain steadfast in our vision to become the world's leading advocate for women and create positive change through the power of our products and our platform. It started with putting our associates and customers at the heart of all we do. It's embedded in our culture and our commitment to representing the interest, perspectives, desires, and aspirations of women across every part of our organization. It shows up in how we apply care, craft, ingenuity, and skill to deliver beauty, performance, comfort, and value in our products. It's reflected in every creative decision we make as we push the boundaries of how women are represented and celebrated, and it's in each interaction with our customers and how we listen to and connect with and care for them. We're confident in our opportunities and remain committed to developing long-term sustainable value for shareholders. Thank you for listening, and that concludes our prepared remarks. I think at this time, we'd be delighted to take your questions.

Jason Ware, Vice President, Investor Relations

We can take questions now, Madison.

Operator, Operator

Our first question comes from Ike Boruchow from Wells Fargo.

Ike Boruchow, Analyst

Just kind of hoping you could talk about the inventory levels ending the quarter, the activity you saw during the quarter. Was there volatility in the sales trend? Did you have to kind of pull the promotional lever? So kind of trying to understand what happened in Q1, how you're feeling about exiting into Q2 and what we should be expecting to see from you guys, maybe semi-annual sale plan and pricing initiatives in the second quarter and beyond?

Martin Waters, CEO

Great. Thanks, Ike. We'll go to Brad for that question.

Brad Kramer, EVP, Finance

I'll start with the inventory part, and then we can try to unpack the sales after that. So total inventory ended the quarter up 37% compared to last year. About two-thirds of that increase is driven by longer transit times as we've shifted modal mix back to ocean and higher costs from our transportation rate inflationary pressures. The next largest driver of that year-over-year change is related to strategic assortment decisions that the business is making to drive future growth, things like supporting Happy Nation and Amazon, things like size expansion and sustainability. A very small portion is related to carryover inventory that doesn't represent a significant impact on a year-over-year basis, less than 10%. Overall, I'd say we're confident with our ability to manage the inventory levels throughout the year. It's the topic we're paying close attention to, and we have adjusted plans for the back half of the year to better reflect the recent run rates. We expect growth rates from an inventory perspective to moderate in the back end of the year as well. We should see more normalized inventory levels in the fourth quarter.

Martin Waters, CEO

Yes. And I think I'll jump in here, Ike, also underlining the inventory perspective, I think coming out of the first quarter and as we move through the spring season, we believe the teams did a very good job of managing flow. We believe the teams did a very good job of positioning us for fall from the perspective of our mix of ocean versus air is very favorable compared to the prior year. So it gives us more flexibility. Additionally, the teams have also focused on prioritizing East Coast ports so that we feel a little more comfortable on delivery and timing of delivery and assuredness of delivery. So from an inventory perspective, I think the teams have done a very good job managing difficult situations. How that relates to Q1 in terms of sales, and I think the other parts of your question, on the last call, we mentioned February was probably the more difficult month or a difficult start to the quarter, I should say. As we got closer to Valentine's Day and the Love Cloud launch, our business picked up and improved and March was actually the best month of the quarter. April was a challenge for us and across most of retail. I don't think we were unique in that aspect, whether it's macro challenges. I think one of the stats we read was it was the most challenging weather month in the last 20-plus years across the country. Clearly, there was some shift going on at retail as to where the customer was focused on her spending. So we were not going to be immune to that. So April was a challenging month. But overall, across the quarter to be able to be relatively flat to last year with all the choppiness on an adjusted basis for stimulus, we felt very good about that. From a promotional standpoint, you'll notice we came in roughly in line with our margin forecast. So things were directionally in line with what we anticipated. We did run in the middle part of the first quarter, a little bit of sale activity around the mid-season sale, but that was really to make sure that we maintained our inventory glide path more than anything else. So we were able to manage the margin for the quarter pretty much in line with our expectations.

Operator, Operator

Our next question comes from Lorraine Hutchinson from Bank of America.

Lorraine Hutchinson, Analyst

I wanted to focus on the EBIT margin outlook for low double digits this year. How much of that is dependent on a decline in freight expense in the back half? What's included for the promotional environment? And then can you expand a bit on the specific initiatives under your profit improvement program?

Martin Waters, CEO

Yes, Lorraine, I'll start there, and then maybe Brad will kick in on some of the profit improvement initiatives, the back half of your question. I think what we were trying to communicate in our guidance, Lorraine, was that first off, we're not stepping back from our goal for the year, a goal to match last year's operating income. We do understand that that means there's an expectation for the back half of the year that sales trends improve and the operating income performance improves more meaningfully than in spring. I think what we're looking at is really a couple of things, Lorraine. First off, from a margin perspective, we would expect that the back half of the year, the margin rate would be slightly better than the prior year versus spring where it's down for all the freight challenges that we've mentioned. So as we move into the back half of the year, we would expect some relief from a freight perspective, but we're also aware that from a raw materials perspective, and what we're trying to focus on from a sustainability aspect in our product, those are going to put some pressures on the margin. But on balance, we would expect the margins to be improved in the back half of the year. Additionally, as Brad will touch on, some of our profit improvement initiatives touch on margin. From an expense standpoint, we would expect the back half of the year, dollars and rate to be flat or down to the prior year. I think we talked about on our prior call, some of the good work that's going on in the business. If you think about your costs in kind of 3 big buckets, what we do in stores and store-related payroll, our investment in people and organization, and then our investment in the indirect cost in our business, we have initiatives going on in each of those 3 areas to try to control costs or take costs lower. So I feel very good after 3 quarters as a public company delivering on our expense plans at rates at similar or below the prior year at dollars similar or below the prior year that the business is very focused on the cost side of the equation. Brad, do you want to touch on the profit improvement plan a little bit?

Brad Kramer, EVP, Finance

Yes. Lorraine, the business kind of middle of last year began to execute profit improvement actions to help offset some of the inflationary headwinds that we were experiencing. Those actions initially kind of in the middle of last year were focused on very targeted price actions and price ups to look to extract more AUR in those areas where we had newness and innovation. We had a lot of testing that was done late last year to try to find those pockets of opportunity from a price elasticity perspective. At the end of last year, we complemented those actions by putting additional plans in place to go after the expense side of the business. And in late '21, we put more focus on those initiatives that TJ referenced, in direct sourcing, the co-brand launch of the credit card program as well as looking at human capital on our stores, efficiency opportunities. We're pleased with the progress we've made against that profit improvement plan and the impact of those actions we would anticipate to build meaningfully throughout the year, and we are expecting more opportunity in the back half of the year from that profit improvement plan.

Operator, Operator

Our next question comes from Matthew Boss from JP Morgan.

Matthew Boss, Analyst

So Martin, on the product assortment and these consumer shifts that you cited, what categories are you seeing best resonate with your consumer today? Can you elaborate on some of the softer areas in April and May and maybe just rank the drivers of improvement as the year progresses? And then just quick for TJ. What inning overall would you say the SG&A efficiencies in today? And how much flexibility do you have on this line item in the back half of the year if sales improvement does not play out?

Martin Waters, CEO

Yes. Great. Thanks, Matt. Thanks for the question. So we're in the merchandise business. So our results are fundamentally based on how good we are generating new products that resonate well with the consumer. And I think we have done a very good job in the category that's most important to us, and that is bras. So we say around here just about every day, we're best at bras. And I'm delighted to say that, that's showing up in our latest market share data where from consistent periods of decline, we have arrested the decline in market share and actually built market share within the last period MPD data. So that's really good. So good strength in bras, strong panty business, less strength in our apparel business. Sleep has been softer. And to some extent, I think categories like lounge and sleep are lapping good performance during COVID times and are now competing with outerwear and workwear and celebration wear and that kind of stuff. So less strength in those categories. Swim has been mixed, very strong swim performance in PINK, with near 20% comp but less strong in Victoria's where we feel less good about fit and fashion year-over-year. So it's a mixed bag. And as always, it's a reflection of our ability to listen to the consumer and give her exactly what it is that she wants. In beauty, we've seen some terrific responses to our best fragrance, Bombshell. We had an incredible time with Bombshell and some of our other launches have been very strong as well. So overall, more positives than negatives and about in line with what we would expect from an industry perspective.

Tim Johnson, CFO

Yes. And I think the second part of your question, Matt, I would characterize our profit improvement initiatives or expense initiatives as being early innings. Clearly, with 3 quarters under our belt as a public company, and as Brad mentioned, many of those initiatives starting late in the fall season. We're still very early in the process. I don't think it's a stretch to say that the initiatives that we've identified currently probably have runway at least through the early parts of next year, if not 2023. So I think the work of the work is to continue to identify new ones so that we can extend that tail even further. But I do want to make sure that we acknowledge that the expense or margin initiatives to improve the flexibility of the business. There is a portion of that that certainly will go to the bottom line, and I think you're seeing that in our results, but I also believe that over time, there's a portion of that that will be reinvested back into the business. And Martin and I are aligned that we're continuing to reinvest in the business to continue to improve the health of the brand and improve the brand positioning and improve the experience in our stores is very critical. We don't want to take a step back on that. So there's a balancing act here that we'll be working on, but we do see a runway through at least the better part of next year with current initiatives.

Operator, Operator

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

Simeon Siegel, Analyst

Did you guys say what inventory dollars were up ex in transit and then maybe what inventories were up in units? And then TJ, if we can just take a longer-term view on the gross margin, maybe isolating supply chain market, et cetera how are you thinking about the longer-term opportunity there?

Brad Kramer, EVP, Finance

Simeon, from a unit perspective on the inventory in the North America business across stores and digital units, we're up low single digits to last year. And then from an in-transit perspective, there was about a 20 percentage point impact from in transit in the quarter.

Tim Johnson, CFO

Yes. And I think building on your question, Simeon, when you think about margins kind of longer-term, I guess, if we break it up into seasons, that might be more helpful because we are up against some seasonal challenges. So as we move into fall, I think we would expect that the margin profile improves a little bit. I'd say a little bit because we do believe that some of the activity from the prior year from the supply chain based on all of our forecasts will continue to stick and some of it will come back to us in terms of favorability. I think alongside of that, underscoring that we are investing in the margin from a sustainability perspective and other raw material costs where there are pressures. But on balance, we would expect the margins to get slightly better as we move into fall. As we move into 2023, obviously, we'll be up against the supply chain headwinds that we're facing today. And our expectation would be hopefully, those supply chain costs start to abate a little bit. But I think overall, from our perspective, continuing to focus on the things that we can control from a cost perspective and cost of product from a cost perspective in terms of price ups and the opportunities there, something that we're doing kind of a blocking and tackling that would help from a margin perspective. We've been looking at our return policies, things like that, that we've already actioned candidly with very little noise or very little pushback from the customers. So I think we're continuing to look at all aspects of margins, Simeon, not just being totally dependent on supply chain, but looking at overall cost price and then some blocking and tackling initiatives. Additionally, I think the other item that we've mentioned already, the co-branded credit card, the benefits from co-brand credit card likely show up in margin as well. So I think we've got a number of different levers that we're working on.

Operator, Operator

Our next question comes from Dana Telsey from Telsey Group.

Dana Telsey, Analyst

Can you talk a little bit about the store of the future, how it's performing and what you saw this quarter in digital and store sales and how you're planning going forward?

Jason Ware, Vice President, Investor Relations

Thanks, Dana. Over to Martin.

Martin Waters, CEO

Thank you, Dana. It's good to hear from you. We're still in the early stages of the Store of the Future initiative. Currently, we have three stores operational, and our goal is to open 15 more this year, along with 15 renovations that will reflect the Store of the Future concept. Our key insights from this initiative are still forthcoming. However, certain aspects of the Store of the Future are proving popular with consumers, particularly our technology enhancements in fitting rooms and the improved visibility of our extended digital assortment within the stores. We feel optimistic about this program's potential to reduce our operating costs and develop a scalable solution that can be implemented globally. The first international iterations of the Store of the Future will launch later this season. Overall, we are pleased with the progress, but it's still early days, and we will delay any decisions on capital impact for 2023 and 2024 until later this year. Regarding your broader question about sales, we are witnessing a significant resurgence in store traffic, which is encouraging for us, especially since we have over 800 distribution points and the industry's best fitting model, along with superior service. This resurgence is contributing positively to our business. While digital sales have decreased, this was somewhat anticipated given the rebound in in-store shopping. Our most engaged customers are those who shop across both channels; they are three times more valuable to us than single-channel shoppers. Therefore, our focus will be more on customer needs rather than which shopping channel they prefer. In the future, you can expect us to discuss customers more than channels. Does anyone have additional comments? If not, we can move to the next question.

Operator, Operator

Our next question comes from Omar Saad from Evercore Partners.

Omar Saad, Analyst

I wanted to ask about some of your comments on lounge and sleep kind of benefiting during COVID for obvious reasons. Maybe you could give us some idea how big a business that became during COVID and how much of a rightsizing you think needs to happen or could need to happen? And also I was interested by your comments around stores rolling back. Are you seeing mall traffic getting anywhere near 2019 levels at this point, and do you expect it to get to the next the mall traffic at the pre-pandemic level?

Martin Waters, CEO

Thanks, Omar. I'll go to Brad to dimension the size of the business, but let me just answer the rightsizing. The relative rightsizing of those categories is not huge. It's not a major shift for us. It's an important part of the business, but it's not the business. We're in the intimates business. That's the most important category. So while there has been some degradation, some deterioration, some lowering of the participation of those categories, it's not a material and meaningful shift. While Brad is just looking at the specifics for you, I'll tell you, on mall traffic, no, we're not seeing mall traffic back to 2019 levels yet. It's significantly up from where it was in '20 and '21, but not yet back to pre-pandemic levels. Brad?

Brad Kramer, EVP, Finance

Yes. So from an overall sleep lounge and then the apparel business within PINK within the Victoria business, the sleep lounge business kind of at peak represented about 20% to 25% of the volume. We've lost some share of that in the recent trend. And then from a PINK perspective, the total apparel business and PINK represents about 40% of the overall PINK business.

Martin Waters, CEO

Yes. And intimates and PINK continues to grow and be the most important cash flow, which is a strategic change for us. It wasn't always that way. We're leaning into intimates and PINK, and we think it makes more sense for the health of the brand overall.

Operator, Operator

Our next question comes from Kimberly Greenberger from Morgan Stanley.

Alexandra Straton, Analyst

This is Alex Straton on for Kimberly Greenberger. I just wanted to follow up quickly on the price up opportunities you were discussing. Can you just talk to me about kind of how you assess or there's opportunity and where you've taken price? And then a quick follow-up is just I was wondering if you could give us any color on sales trends quarter-to-date compared to kind of the challenges in April.

Martin Waters, CEO

So we'll go to TJ on the latter part of the question. But Alex, I think the key thing to know about pricing is that it's a test and learn situation. We're blessed to be able to have agility in our systems to enable us to test consumer reaction before we go full out on it. So we have multiple cells in place that are testing different prices in different categories. And what we find is the market is incredibly dynamic, and that shouldn't be a surprise to anybody. While it feels relatively straightforward to simply add $2 or $3 to the bundle price of panties, we see real impact when we do that and it's different by different geographies around the country. So it's a very sophisticated problem that we're solving for, and we do it as carefully and diligently as we can to protect our margin dollars but also to give the customer the value that she needs and not open us up to undue competition elsewhere. We're also super conscious that with gas prices 42% higher this year than they were last year, there is competition for share of wallet and we have to be relevant. We have to give compelling offers, and if that means leaning into promotionality a little bit more in order to make sure we get our fair share of spend, that's what we will do. So I can't give you a specific because we're not in a commodity business. We have thousands of items, we have many hundreds of them that are on test at different prices at different times. And you got to trust us that we're managing to the best of our ability to meet the needs of the customer and meet the needs of the profitability of the business. TJ?

Tim Johnson, CFO

And I think the second part of your question, Alex, around second quarter expectations from an early start to the quarter, May looks a little bit more like April, although slightly better than April. Our expectation has always been that June would be the best month of the quarter based on the strength or expected strength around semi-annual sale, our current inventory position, our ability to run semi-annual sale for the full period of time this year compared to last year. So this year's semi-annual sale will look much more like historic semi-annual sales the business has executed. So we see upside opportunity in the month of June. And then July, as newness starts to come in for the new season, we expect to be in a much better in-stock inventory position. You may recall that July and early third quarters were when we started to see inventory dislocation last year with all the supply chain challenges. So we would think that July should be a fairly good month for the business as well and probably in line with the midpoint of our guidance. So again, to summarize, May was always going to be the most challenging month. June is always going to be the best month of the quarter for the reasons mentioned. And July would probably fall somewhere in the middle or somewhere in the midpoint of our range. Those are our expectations. Obviously, we're going to be working diligently to not just deliver them but hopefully do better.

Operator, Operator

Our next question comes from Adrienne Yih from Barclays.

Adrienne Yih, Analyst

It's very nice to see the stores back where they should be. The product looks great. Martin, I wanted to ask you on the comment about promotionality. How much of that is baked into the fiscal year guide? But more at large for the sector, historically, when the apparel industry at large becomes very promotional. So I'm sure you've seen a number of apparel of online retailer print. Does that impact the intimates business that it steals from the wallet, just overall from the consumer? And then TJ, what percent of product is sourced from the Far East, in particular China? And can you give us an update? I know it's a small number, but on the China impact to your stores.

Martin Waters, CEO

Okay. We'll try to unpack that. So is the level of promotionality that we expect to be in the business baked into our guidance? Yes, it is. So we feel comfortable about the amount of promotionality that we have and what we see. We're modestly more promotional during the quarter; we were modestly more promotional than last year, but it's about flat. And we have a reasonable line of sight to what it will be through the balance of the year. On China, China is a single-digit percentage of our total inflow of merchandise. We're not particularly dependent on China at all. We're happy to say that we have not been impacted by the tough situation in China other than in our joint venture business where the stores are obviously closed and business is all online. So there's an impact to us at the retail level in China, but very little impact to us on the production. So I think there was another aspect to your question. I get both. Okay. No, I know it was. It was the impact of other categories. So yes, we don't have data on this, Adrienne, to say when outerwear categories are promoted intimates. So I can't track that from a mathematical point of view. But from an intuitive point of view, it feels to be so. And we know from being in the malls and knowing our customers as well as we do and listening to our store leaders and teams that yes, the customers go out with a notional idea of how much money they want to spend on a given day when they make a trip. And it's a contest. When in the venue, call it a mall or other venue, it's a contest to see who gets that share, and it could be a pair of jeans or it could be a lipstick or it could be some intimates from Victoria's. And that's the wonderful thing about the retail market; we're all competing for share of wallet. It's not just a category-by-category approach and probably that feels intuitive to people listening on the call that don't always divide up the money we have to spend by category. We just have an amount of money that we're comfortable spending, and then we go play. And it's always been that way, and I think it always will be.

Operator, Operator

Our next question comes from Jay Sole from UBS.

Jay Sole, Analyst

Martin, I was just wondering if you could give us an update on the international business outside of China, specifically U.K., some of the other key markets, what you see there? And then secondly, can you also just talk about if there's any hesitation to return to a little bit more promotion given that the company and the brand has worked so hard to train the consumer to pay a bulk price and to pay higher prices. Are you worried that it's sort of a little bit of a slippery slope that it's hard to stop once you start promoting again?

Martin Waters, CEO

Thank you for the question, Jay. Let’s address it in reverse order. Yes, we are aware of the potential pitfalls of being overly promotional. We understand that both we and other retailers can create a habit for consumers to wait for sales. This is not beneficial for the long-term image of our brand. The top retailers, especially in the fashion sector, tend to be less promotional, and we recognize that. At the same time, we know that customers respond positively to promotions as we compete for their spending. It’s a constant balancing act for us. We are very focused on this issue and mindful of its importance. It’s less about precise calculations and more about maintaining the overall health of the brand. We feel optimistic about our brand’s health thanks to our ongoing transformation, which is now a year in progress. While we feel accustomed to this pace, our research shows that most consumers are only just starting to recognize the changes. Therefore, we still have a lot of work to do. We need to amplify our message surrounding diversity, equity, and inclusion, focusing on being a brand for all women and improving lives globally, which takes precedence over minor promotional strategies. Regarding our international business, remember there are five segments. The most significant is our franchise business, where our partners operate Victoria's Secret stores excellently. Their performance has been very strong, showing remarkable comparables to a weaker period last year. The franchise business's health is encouraging. The second segment is travel retail, which is also thriving as travel resumes and airports become busier. Most of these stores have reopened, leading to good growth in that area. Our partnership in the U.K. with Next is working well; they are excellent operators and have enhanced our capability to provide a cohesive omnichannel experience. This segment is profitable, which is positive. The fourth area is our direct-to-consumer business based in Columbus, which is performing well. As we engage our global partners in creating an integrated omnichannel experience, we anticipate a structural shift that will reduce our reliance on shipping from the U.S. and allow us to offer a seamless experience in the 77 countries we operate in. Finally, our business in China is challenging. We had hoped things were returning to normal, but lockdowns have reoccurred, and we empathize with our associates there facing difficult circumstances. I should also mention Russia for completeness. In agreement with our partner, Alshaya, we decided to close our stores in Russia earlier this season, and they will not reopen. We believe this will not significantly impact this quarter, but we do not expect any future business from that region.

Operator, Operator

Our next question comes from Susan Anderson from B. Riley.

Susan Anderson, Analyst

I was wondering if you could give a little bit more color on the PINK business and the drivers or the categories of strength and weakness there. It sounded like intimates was strong, but maybe apparel a little bit lighter. And then also, are there any early thoughts on Happy Nation or any early reads on how the consumer is responding. And just curious also how you're marketing the new brand to new customers.

Martin Waters, CEO

Well, I'm so happy you asked about Happy Nation. Thank you for that. I think you answered your own question on it. It is what you said. Our intimates business is strong. We've seen less strength in the apparel part of the business, not much else to add other than it's an incredibly dynamic business, and there's a tremendous amount of newness and change coming. And so what you see at any given point in time is only what you see in the quarter. We've got lots of great merchandise coming for the fall season that we feel super excited about. Amy and the team continue to do an amazing job, and we're really pleased with our PINK business overall. Happy Nation, super early, as you know, it's really a test market for us, but the response has been overwhelmingly positive. It's the fit, and the fabrication and the quality and the wash is all coming out very well. We're getting great customer feedback. We're learning a lot. We are deliberately not putting much fire into the marketing of that brand yet because it's brand new. We need to understand how the consumer interacts with it. So it's very much a slow start and a deliberate start to test and learn. But I'm also delighted to say that we've had significant interest from potential partners around the world who are really, really interested in what we're doing in that space. And so that's very encouraging when the market at large notices good work and notices good products. So just as you've seen us partner with Amazon for extended distribution in our beauty business, you should expect to see us partnering with other people, be it through our VS&Co-Lab initiative where we're partnering with other third parties where it makes sense for us to join forces with strong businesses who can add to our overall customer experience, we will absolutely look to do that. And Happy Nation is potentially a good example of that.

Operator, Operator

Our next question comes from Marni Shapiro from Retail Tracker.

Marni Shapiro, Analyst

I love Happy Nation as well. However, I would like to ask about Frankies, which is a fantastic brand. What are your thoughts on investing in it? Is this something your company would consider doing in the categories you are already in or in related categories to help accelerate the growth of these smaller brands and benefit from that potential, or would you even consider bringing them in-house entirely?

Martin Waters, CEO

Thank you for your question, Marni. It's great to hear from you. We really appreciate the Frankies brand; it's exceptional, and we've admired it for quite some time. I had the privilege of meeting with Francesca last week, and it was a fantastic meeting. She is a truly dynamic creative force, and we believe partnering with her is a smart move. This partnership is similar to the one we have with For Love & Lemons, which is also a female-founded business with strong customer loyalty. We hold a minority stake in both brands, allowing us to benefit from their growth while enhancing our customer experience. There are three main reasons we collaborate with third-party brands: to reach customer segments where we currently lag, to access merchandise categories where we are underrepresented, and to enhance our overall brand perception. In both the cases of Frankies and Love & Lemons, we find that these criteria are met in all aspects. We take pride in partnering with them and believe they contribute significantly to our brand family. I see potential for Victoria's Secret & Co. to expand its investments in third-party brands, which aligns with the VS&Co-Lab initiative we announced last week. By building on the reasons for collaboration, we anticipate establishing a substantial business in this area. I'm pleased you brought this up, and I’m glad you appreciate the brand, Marni.

Operator, Operator

Our next question comes from Corey Tarlowe from Jefferies.

Corey Tarlowe, Analyst

You mentioned Amazon. Can you just provide a little bit more color as it relates to the strategy around selling the VS and PINK beauty products on Amazon and what that could mean for your business? And then can you just briefly highlight the co-brand credit card launch and how that's enhancing your offering and attracting new customers?

Martin Waters, CEO

Yes, happy to. So on Amazon, just a reminder, we have an incredible beauty business. We have a $1 billion beauty business in Victoria. We have, I think I'm right in saying, three of the top ten fragrances in America. We have the number one fragrance in America. And that's from only distributing those products through 800-plus points of distribution and a single website. How much more business could we do if we partnered with other people who are in the category? And is that business, if we were to access it, going to cannibalize what we already have? That's the question. We think it makes sense to test the proposition. We are delighted to be working with Amazon, who've been an amazing partner for us. Our initial results indicate it gets us to a new consumer who is not currently shopping with us. It's additive to our mix that it's not cannibalizing our existing business, but we'll continue to test and learn. We haven't gone full bore on that initiative by any stretch of the imagination. We're testing our way into it. But I think it's really interesting, and I think it offers a model for how we might be able to partner with other people where it makes sense to do so. So early days. We'll update more at our investor meeting in October, later in the year, and we'll have more data points. But we're delighted with the partnership. Brad, do you want to pick up the second part of that question?

Brad Kramer, EVP, Finance

Yes. Corey, with respect to the loyalty programs, today, we have two large loyalty programs that are in place and very dominant and run at scale. We have a PINK Nation loyalty program. We have a credit-based loyalty program with Brad, who is our financial credit provider. Both of those programs provide high customer engagement, and we see very accretive results from the members of those two programs. The reference that Martin made earlier is that we are on a pathway to modernize both programs this year. The first step of that modernization was a launch of a co-brand MasterCard product with Red that occurred in the first quarter. And early results of that are very successful, and we're optimistic that that will build and become more accretive throughout the year. And then the second part of the modernization roadmap relates to a noncredit loyalty program that we'll begin piloting later this year and very excited about adding an overlay of a noncredit based program to the business that we have not had historically. And again, I would expect that that is a more meaningful impact to fiscal 2023 as well.

Jason Ware, Vice President, Investor Relations

I think we have time for one more question.

Operator, Operator

Our last question comes from Janet Kloppenburg from JJK Research Associates.

Janet Kloppenburg, Analyst

I'm glad to be here, Martin, it’s nice to hear from you. I wanted to know if you could elaborate a bit more on PINK for me. There’s a lot of concern regarding it within the apparel sector, and I’m curious if you anticipate it becoming a smaller segment of your business. Could you provide some insight into your objectives there? Also, is the overall fleet aspect of the business expected to decrease? As intimates grow, where should we expect to see category development increase? Regarding bra launches, I know the cloud line performed very well, and we should anticipate at least one more launch. Is there a chance there will be more than one additional bra launch this year?

Martin Waters, CEO

Thank you, Janet. Please don't be concerned about PINK. PINK is alive and well. That is a great business with an incredibly strong followership, really clear positioning around people, purpose, and planet, great merchandise. The stores are busy, and the business is performing well. There is absolutely no structural issue with PINK whatsoever. It makes enormous sense for Victoria's Secret & Co. to have Victoria's Secret and PINK side by side. It gives us an unfair advantage in getting to young women early in their life cycle. So it has incredible strategic sense for us. The most strategic sense is that it is the dominant player in intimates for young women. That's the real rationale for us owning it and operating it and having it as the little sister to Victoria. So that's our primary focus. If we could grow any single category, if we could wave a magic wand and say which category do we want to grow, it would be the bra and panty business in PINK. That is the lifeblood of bringing new young customers into the business. So if we have a lower participation as a consequence of that from apparel and sleep, I'm absolutely fine with that. We're not deliberately planning those businesses down. That's not the intent. We are deliberately planning to have a higher participation in intimates and swim because those are the core of the offer, and those are the parts of the business that make the most sense relative to Victoria's Secret. So I hope that all makes sense to you. I definitely don't want anyone to be concerned about it; it's a fantastic business, and it resonates incredibly well with customers. And all of our research that we very carefully track shows that the health of the brand is very strong, very strong. We've seen very positive momentum. Love Cloud has been excellent for us. Really strong launch. We are committed to at least two bra launches per year. So yes, there will be more activity in the back half of the year. You wouldn't expect me to tell you what that is, Janet, for commercial reasons, but we spend more time talking about bras, more time developing bras than anything else that we do. It's the most important category that we're in, and I'm delighted to say we have incredible talent working on our bra business in both of our big brands.

Jason Ware, Vice President, Investor Relations

That concludes our call this morning, and thank you for your continuing interest in Victoria's Secret & Company.

Martin Waters, CEO

Thanks, everybody.

Operator, Operator

That concludes today's conference. Thank you for participating. You may disconnect at this time.