Good morning. My name is Cedric and I will be your conference operator today. I’d like to welcome everyone to the Victoria's Secret & Co.'s Third Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn today's call over to Mr. Jason Ware, Vice President, Investor Relations at Victoria's Secret & Co. Jason, you may begin.

Thanks, Cedric. Good morning and welcome to Victoria's Secret and Co.'s Third Quarter Earnings Conference Call for the period ending October 30, 2021. 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. All of the results we discuss on the call today are adjusted results, and exclude special items described in our press release. Thanks. And now I'll turn the call over to Martin.

Thanks, Jason and good morning, everybody. We're very pleased with our third quarter performance, which saw growth in all core categories. Our work to deepen our connection with the customer, while improving our operational fundamentals, is gaining traction, and the customer is responding positively to our brand transformation. We continue to improve our merchandise assortment and expand our already strong file. I'm so proud of the commitment and resilience demonstrated by our teams who delivered these results in obviously challenging circumstances and, in doing so, are demonstrating the power of a happy and healthy culture. Turning to our third quarter performance, we delivered sales margin and operating income growth on top of solid results last year, despite significant supply chain headwinds this year. We reported third-quarter earnings of $0.81 per share, ahead of our previous guidance of $0.60 to $0.70. The per-share result was similar to last year's adjusted earnings per share of $0.82 as the impact of operating income dollar growth was offset by the interest costs associated with the debt from our public company spin-off from L Brands. Sales growth of 7% combined with significant growth in merchandise margin rate and disciplined expense management drove these results. Compared to 2019, sales actually decreased 9%, reflecting the net closure of about 260 company-operated stores since the third quarter of 2019. However, comparable store sales saw a 4% increase compared to 2019. Operating income in the third quarter was $108 million, which is an increase of nearly $11 million, or 11% compared to last year, and an increase of $204 million compared to 2019. As shared in our written commentary, we believe the supply chain pressures will significantly impact our results in the fourth quarter. Operating income for the fourth quarter is expected to be in the range of $295 million to $335 million, which is down from last year's result of $388 million, driven by those same supply chain headwinds. We are estimating $100 million of costs from these pressures and lapping one-time rent abatements last year, which were about $65 million. Thank you. That concludes our prepared remarks. And at this time, we'd be more than happy to take any questions that you might have.

And our first question comes from Lorraine Hutchinson with Bank of America. Your line is open.

You had some new launches this quarter. And I just wanted to see if you could give a little bit more detail around the reaction to new launches, what you're hearing from customers? And then if you could give us a forward look into how robust the pipeline for newness is over the coming quarters. Thank you.

Yes, thanks, Lorraine. Thanks for the question. As you heard me say, Lorraine, we had growth in all major categories, which is terrific and actually margin growth ahead of sales in those categories. The good news is that it was driven by newness. There was particular strength in the Infinity Flex bra, which ranked as our number 5 bra frame, and given a relatively cautious buy, was an incredible result, and we will be building on that in 2022. We were thrilled with the response to the Maternity bra, which had amongst the highest likes and ratings of any of our social media posts through the year, and was our number 4 bra frame on the days it was featured. From a standing start of never having been in that business, we saw a huge jump. There were other pockets of newness that were less significant to the overall business but strategically significant, like the inclusion of a Mastectomy bra, which we bought 12,000 units of and sold out in 5 days. All across the franchise in Victoria, we saw good growth, particularly in the bra category. Within Pink, the new styles were very strong, as was our Intimates business. It's worth noting that our Logo Shop had its record year, which underlines the strength of the brand. Within the Beauty business, there's continued strength in Bombshell, obviously the core of our business, but there were a couple of other notable mentions. Natural Beauty in the daily Body Care line grew to 5.5% of sales from a standing start, which was incredible. In the T-shirt franchise, we added two new flavors, Chrome cloud and Candy in the Wild, that were both really big hits. Newness is driving the business across the board. Looking ahead, I'm less focused on what's new for Q4 and more focused on what's new in the next 18 months. We need a much longer time horizon to newness than we've had in the last couple of years. With our bra pipeline, we need at least two new bra frames per year, and I can see those coming. We need to engage and leverage the power of our collective to generate more newness. You'll remember, Lorraine, from the old days when this business was at its best, we had a lot of newness and genuine innovation. Right now, the focus is on getting the merchandise here rather than inventing new. We have 10 weeks left in the crucial fourth quarter, and we're ready for action. Thanks for the question, Lorraine.

Thank you.

Thanks, Lorraine. Next question, please.

Our next question comes from Irvin Boruchow with Wells Fargo. Your line is open.

Hey, good morning, everyone. Wanted to focus on the direct business. This was the second quarter in a row of year-over-year declines. Can you kind of walk us through what's going on in that channel? How much of this is just right sizing, promotional activity, and better full-price selling? And then just want to look at the model. Q4 has a pretty robust compare as Q1. Should we assume that you're going to continue to have year-over-year declines in that channel until we start to lap that maybe in the second quarter of next year? Just trying to understand how that channel is performing right now.

Yes, thanks. So, you talk about decline, but remember, we're comparing against the very idea when stores were not open. So, I don't quite see it that way. The way I look at it is that our digital business in Q3 was up 23% on the two-year period, which is broadly similar, slightly behind but broadly similar with the increase that we saw in Q2. The real story is that stores came back. A significant part of our competitive advantage is having 150 points of physical distribution. Our most valuable customers are those who shop across both channels at the same time. My focus is less about the absolute participation of the digital business and more about the overall health of the system. That said, within digital we have literally hundreds of upgrades to our user experience. They're on the front end, but also in the backend in terms of omnichannel capability ship from store, buy online pick up in store, order from store deliver from the web. We also stood up our new automated distribution center, which is truly robotic and state-of-the-art. We're able to process over 2,200 orders per minute successfully, with peak hours at about 30,000 orders per hour being processed. In our stress test, we processed 99,000 orders in an hour. While there is still more work to do on our digital capability, I'm really pleased with the progress that the team has made. As for the fourth quarter, we don’t really know. What I would like to say is that, as I said, stores continue to roll back where they're healthiest when both channels are working hard. As it relates to the 2022 guidance, we're just not in a position to provide that right now. We will give you guidance for 2022 when we come back in January or February, but for now it's all about the fourth quarter. Thanks, Irvin.

Thanks, Martin.

Thanks, Irvin. Next question, please.

The next question comes from Matthew Boss with JPMorgan. Your line is open.

Maybe you're on mute, Matt.

Matt, you may be on mute.

He's gone for coffee.

Cedric, we can have the next question. We'll try to pick up Matt.

Okay. And next question comes from Roxanne Meyer with MKM Partners. Your line is open.

Great, thanks. Good morning, and congratulations on a strong quarter. My question is, first, on the sales metrics. Would you be willing to provide color on your AUR versus your basket size? And then second, I'm just curious, I know you mentioned Hailey Bieber as part of the collective. Can you talk about the impact that the collective is having so far and the consumer response? Thanks a lot.

Great. Let's start by discussing the collective. Good morning, Roxanne. It’s wonderful to connect with you. We are really excited about the response to the collective. The rebranding efforts are gaining significant momentum, which is reflected in our sales, the health of our customer database, and our social media engagement. We have 71 million followers on Instagram and have received some fantastic responses. Recently, we held a Facebook Live Event that was a huge success. We have 20 million followers on Facebook and 10 million on Instagram. Social media is a powerful tool for us, especially with influential advocates like Linda McCartney, Bella Hadid, Hailey Bieber, Valentina, Megan Rapinoe, and Naomi Osaka. Their support for women's causes has a positive impact on our brand. The feedback from our brand tracker shows that 95% of the responses regarding the collective are positive, which is an exceptionally strong rating, particularly considering that not all athletes and celebrities are universally admired. We are pleased with the diversity of our partnerships and the various ways we collaborate with these individuals. For instance, with Hailey, it could involve imagery, with Paloma, it might relate to a shapewear line, or with Priyanka, it could focus on breast cancer advocacy. We have multiple pathways to partner with these remarkable women, and I can assure you that the collective will expand, welcoming more individuals into our diverse community. Brad, would you like to address the financial question that Roxanne asked?

Hi, Roxanne. This is Brad. Just in terms of retail metrics in the third quarter, we've made significant progress over the last five quarters in driving AUR expansion, and we saw those themes continue into the third quarter. We believe this is partly driven by the strength of the assortment and the health of the brand. The two key points would be that AUR expansion and margin rate expansion in Q3 is driven by a higher mix of full-price selling and a pullback in promotional activity within the quarter. We also saw balanced growth in basket size across both channels and on a year-over-year basis an expansion of that basket. So, very healthy indicators looking at the metrics of the quarter.

Thanks, Brad. And forgive me, I inadvertently referred to Stella McCartney as Linda McCartney. I'm showing my age there, using her mum's name, so forgive me for that. So, next question, please.

The next question comes from Simeon Siegel with BMO Capital Markets. Your line is open.

Thanks. Hey, good morning, everyone. Congrats on the ongoing progress. So just a follow-up on that, briefly—a different way of thinking about it. Any way to break out the 1% to 2% of supply chain sales pressure between the last units versus maybe the offset you have for being able to raise prices because of scarcity? As you're basically trying to think going forward, how you see the balance of units versus AUR as the supply chain ultimately reopens. And maybe as a follow-up to that, how are you buying inventory at this point into next year? Thanks, guys.

Yes, I'll start with some color around supply chain and maybe won't directly answer your question, Simeon, but I'll give a sense of what's going on in the supply chain which we hope will be useful to everybody. As it relates to the fourth quarter and the back half of the year, we ordered approximately 200 million units of stock, and 90 million of those 200 million are delayed. That's 45% of our purchase requirements for the fall season delayed, and the delays are between 2 and 9 weeks. In some instances, we won't receive the merchandise at all. Our plans are being reworked accordingly. 90% of our merchandise will come in by air, which currently doesn't make it super quick, as air that used to take 2 days now takes about 9 days. Additionally, we have 100 vessels anchored right now that are not coming ashore. This aligns to about $150 million of cost pressure, with $50 million recorded in Q3 and $100 million projected for Q4. I don't subscribe to the idea that scarcity leads to faster selling; we don't see that happening at all. For instance, with pajamas, currently, 25% of our PJs are late. We have 30% less PJs in our system than a year ago, which is clearly harmful for business. It impacts the customer in that she doesn't see the array of newness that she's accustomed to at this time of year. We're hoping that December will be better, and we see some upside in January as well. The biggest issue is the lack of ability to chase. Normally, we would buy a season at 55% or 45% chase, but we can't do that now; we must place all of our bets. More buying forward means longer lead times, less agility in our supply chain, and reworking our plans daily to respond to what we have. With that said, the customer doesn't care. She won't come into our shop and say, 'Oh, I see that they've got some delays.' Our job is just to make the best out of the assortment we have. I hope that provides more color on the question, but if there's anything I missed, please feel free to jump back in.

No, that's great. Thanks a lot, guys. Best of luck for the holiday.

Cool.

Thanks, Simeon. Next question.

The next question comes from Matthew Boss with JPMorgan. Your line is open.

Great, thanks. I had some technical difficulties there to start off the queue. So, congrats on a really nice quarter.

Great, thank you.

Martin or TJ, on the multiyear, mid-single-digit revenue target, thanks for all the color on the fourth quarter. My sense is that there might be a little lumpiness as we start the year with supply chain and lapping stimulus. But as we think about that multiyear, mid-single-digit annual run rate, is there any change in your confidence? I mean, I think that's where you see the category growing. Seems like there's opportunity relative to the category potentially on a market share perspective. If you could just kind of walk us through that annual target, is that an annual step up that we need to hit that target? Or was that a mid-single-digit target that you planned on hitting each year if there weren’t any of these kind of one-time transitory items?

Thanks, Matt, and welcome back. This call is all about the third quarter looking backward and staring forward into the fourth quarter, so we're not spending much time on our multiyear analysis. But I can answer your question: we believe in the target of mid-single-digit growth per year on the basis that it keeps pace with market growth. We are not guiding to growth in market share; rather, we’re saying that if the categories we operate in are growing at mid-single digits, then we should do the same. Is there a reason to believe we could do better than that? Yes, but the competitive environment has changed significantly during the four years of our execution misstep. We don't have the unassailable right to assume the market shares we had in the old days; the landscape has changed. Therefore, I think we'll do well if we at least keep pace with the current market. We have reason to believe we might perform better, but we're not guiding to that. Hope that helps, Matt.

Great. Best of luck.

Thanks, Matt. Next question.

The next question comes from Susan Anderson with B. Riley. Your line is open.

Hi, good morning. Alec Legg on for Susan. Nice job on the quarter. But, yes, my question is just related to the website. You have the Brands We Love section, which is essentially a third-party marketplace, and it carries some high-heat brands. How big is that for the overall business and thoughts on the direction of that going forward?

Well, that's a great question. I love that question. I think there is very high strategic significance in aggregating other people's content. I think it's a very important idea for us that we haven't leveraged previously. If you attended our Analyst Call before the spin, I talked about one of the four pillars of the brand as aggregation. There are three reasons why I think it's a good idea: Number one, it gets us to categories, or segments where we're currently underrepresented; Number two, it gets us to customer groups where we're currently underrepresented; Number three, if the brand adds to the halo of our overarching Victoria's Secret positioning, it’s worthwhile. Among those three points, there are several segments we could explore. For example, extended sizes on the small end and large end. A beautiful example launched this week is MINDD bras, which come in five sizes in the DD and above category, giving access to something like 38 different bra sizes. It's an incredible innovation and a fantastic product at an accessible price point. So, why wouldn't we partner with them? You should expect to see more in that area, including rethinking our budget and how we present what's in that collection to ensure it aligns with our strategic purpose around advocating for women. You asked how big it is? Currently, it's less than $100 million. But I see significant growth potential in the years ahead. We’ve created a specific department focused on this opportunity. So, thanks for the question. I appreciate it.

That's very helpful. Thank you.

Great. Thank you. Next question.

The next question comes from Kimberly Greenberger with Morgan Stanley. Your line is open.

Hi, great. This is Alex Straton on for Kimberly Greenberger. I have a quick question on your cash levels. It looks like you ended the quarter with over $300 million in cash already. Do you have any plans for how to use that? How much leverage is the business comfortable carrying? Just trying to get a sense for the use of cash flows and any near-term plans for that.

Thanks for the question. We're very pleased with where we ended the third quarter, with a very strong cash position at $330 million, as you mentioned. As we look out over the fourth quarter, if you were to take our guidance and roll that out, that would suggest a cash balance at year-end probably in the range of $700 million to $750 million, with arguably light leverage in the business. We feel like we have significant flexibility going into 2022. As we've discussed before, the business is producing an EBITDA at a $1.2 billion basis. So, we have a lot of options for growth, whether investing back into our core business or looking into emerging business areas as Martin mentioned. Growing relationships there, we think there are many ways to grow our internal business, which normally is the best return opportunity for shareholders and for the company. However, we have so much cash on hand and availability, we will also be looking at capital allocation opportunities with our Board of Directors. We've stated clearly that we want to ensure we get through the holiday period since that's when we generate the majority of our cash and have a comprehensive view of 2022 that we can share with you strategically. Capital allocation will be part of that communication at the end of February or beginning of March when we announce our fourth-quarter earnings.

Great, thank you.

Thanks, Alex. Next question.

The next question comes from Adrienne Yih with Barclays. Your line is open.

Well, let me add congratulations on the progress. The product looks great. I wish you had more of it. Martin, I guess the first question is to talk about the five consecutive quarters of average unit retail increase. Clearly, we're seeing lots of promotions, but we’re also seeing initial retail changes. I’m wondering what's happening with the initial retail side of things. And then two other quick questions, kind of more in parallel. What is your current average hourly rate with your ability to manage or hire associates within the stores? And is there any long-term technology investment you're making, either in stores or in terms of seeing increases in automation and productivity? Thank you very much.

I'll take the last two, as there are multiple questions. On the hourly rate for associates, it differs across geographies in the United States, so it isn’t reasonable to call out a single number. When I do, those who are under that level say, 'Oh, what I'm getting is more than that.' So, it’s not a meaningful number. However, I can tell you that there has been a modest increase in the rate we're paying in our stores. Right now, we have 25,000 people in our associate population. At peak, we're looking to get to about 30,000 people. We are on our way to peak for the December period. We haven't encountered significant obstacles in getting the people we want, partly due to the health of the brand and the happy and healthy culture we've created. We have moved wages a little, but not in a particularly meaningful way. As for the distribution centers, our wage rates are notably higher in the warehouse, given the competitive environment here in Central Ohio where most of our DC operations are. Yes, as previously mentioned, we have a fully automated DC running that will deliver about 30-40% of our direct-to-consumer merchandise for this holiday season. It resulted from a $150 million investment over a couple of years and is very impressive. If you're ever in Columbus, Ohio, I'd love to show you around.

If I understood correctly, Yih, your question was about the five consecutive quarters of average unit retail increase and how we’re feeling about that relative to promotions. In short, we feel very positive about how our sales mix transpired in the third quarter and how we are positioned for the fourth quarter. Regular price selling was up a little, and promotional and redline selling was down a little. This may have been different than what we were hearing from investors during the quarter. We sensed a perception that we were being more promotional, but the numbers and margin rate performance in the quarter don't reflect that. What we heard from the promotional side was better execution concerning messaging being clear and bold when we have something to convey from a promotional standpoint. Different segments of the business performed differently, with stronger regular price selling in lingerie, particularly around bras and the launches. We’re pleased with the mix of regular price vs promotional activity. It’s important to note that timing of when we receive deliveries and the glide path to holiday can impact fourth quarter dynamics, including flexibility with pricing. Our margin guidance is designed to account for that.

Fantastic. Best of luck for the holiday.

Thank you.

Thanks, Adrienne. Next question.

The next question comes from Marni Shapiro with The Retail Tracker. Your line is open.

Hey, everybody. Congratulations. Stores are looking great. Martin, you guys have done a fantastic job of not just expanding sizes but changing your marketing to target this customer. So, I'm curious if you could talk about growth in this category in bras and panties. Are you seeing that outpace your regular size business? And could you also talk about the growth in the customer file, particularly on that side?

Good morning, Marni. Thank you for that question, and thank you for the encouragement. As I mentioned, we are seeing our strongest growth in Intimates, which is significant because we are primarily a bra company. This is the best-growing segment of the business, coming from all sizes, to be honest. We are seeing some pickup from extended sizes, but the growth isn't solely from that area; it's across all segments. In the last quarter of Q3, about 46% of our recognized customers were new to the business. That shows that we are attracting a new customer base. As you know, we are targeting millennials and Gen Z rather than solely focusing on winning back previous consumers. I'm less concerned about the size of the customer and more focused on making a positive impression in every interaction we have. Each customer encounter either polishes or tarnishes the brand, and I aim for a positive ratio. Our file has seen a significant uptick after years of decline; we welcomed around 400,000 new customers, reflecting a net growth of several million new customers, offset by the usual attrition. The net growth in our file is a positive indicator. For obvious reasons, I don't know how big or small those customers are, nor do I care. We need to reflect the customer base in our workforce and how we present ourselves, including photography and store displays. We're improving significantly in this regard, and the customers are starting to notice.

That's outstanding. Are you seeing these customers come in digitally, in stores, or a mix of both?

It's a mixture of both. Our favorite customers are those who shop in stores and online together. As we think about enhancing our capabilities in 2022, building that omnichannel focus will be essential in encouraging customers to engage with both channels. It’s a great experience for those coming into our stores, having an enjoyable experience and then ordering online. So, we have three stores of the future opening, and I’m excited to be in Chicago for the pre-opening tomorrow. These new offerings reflect the omnichannel focus that we are working on and will be accompanied by further developments in 2022 and 2023. Thank you for the encouragement, Marni. We appreciate it.

Best of luck. Thanks, guys.

Thanks, Marni. Next question, please.

The next question comes from Janet Kloppenburg with JJK Research Associates. Your line is open.

Hi, Martin. How are you? And congratulations on a good quarter.

Thank you, Janet.

I just wanted to get back to the supply chain pressures. First question is, is there any chance that some of these delayed shipments of holiday products come in too late and that forces some markdowns or higher-than-expected markdowns in the postseason? Just wondering about that. And also, what is your outlook for supply chain pressure in the first quarter? How do you see that unfolding? Can it improve, or do you think it could continue to be as difficult?

Great. Thanks, Janet. I gathered three questions there. To the first one, yes, some merchandise is at risk of arriving late, and we got in front of that by canceling. Of the 200 million units expected, that number was 210 million back in August. We looked at what was seasonally sensitive and at risk of not arriving and canceled about 10 million units. We are confident that anything seasonal that needs to sell before December 25 will arrive on time. While we expect higher carryovers of merchandise like pajamas, robes, and slippers into January compared to previous years, we're somewhat okay with that because last year we left potential revenue on the table in January. We'll see how the initial pricing plays out during that time. I don't feel overly stressed about markdowns. I think stores will have more inventory in December than customers are used to seeing, and we just need to hold our nerve and let it play out. I think you've been in this game long enough to know that the skill lies in how you handle your cards daily. We have a stand-up meeting every morning in December to review what happened the previous day and adjust accordingly. So, I'm not overly concerned about markdowns, but we'll remain vigilant. Regarding your second question, there will undoubtedly be supply chain pressures in the first quarter. We're not specifying details today as we're focused on the fourth quarter, but yes, we expect continued pressure into 2022, as will everyone.

But it could improve, right, Martin? Or are you not sure?

I'm an optimist by nature, so I'm the guy who’s going to say, 'Don't worry. It's all going to be better.' The reality is this involves long lead time stuff. We already know what’s coming in February is impacted. So, my optimistic viewpoint must reconcile with reality, which suggests to expect similar conditions until further notice.

Thanks so much, and best of luck.

Thank you.

Thanks, Janet. I think we have time for one more question.

All right. And our final question comes from Oliver Chen with Cowen. Your line is open.

Hi, this is a follow-up question regarding the store refresh as we move through this year and into next year. Are you noticing any improvements in comparable sales from the refreshed stores? Additionally, have you seen any enhancements in e-commerce sales in the markets where these refreshed stores are located? Any insights would be appreciated.

I'm going to answer that with a not really, given that we improved every store in the chain. We didn’t have a holdout group where we said, 'Oh, let’s keep these stores looking terrible and see what the difference is.' We decided it was strategically important to refresh every location across our fleet. So, every store has been touched to some level. And again, in terms of where we invest our energy, I haven't been particularly concerned about whether we can pinpoint where we put the extra effort based on better outcomes. What I focus on is the ROI related to the store of the future which will become clear within the first quarter. What is significant for me is the ROI regarding new real estate. We plan to open at least 10 new stores in 2022 in optimal locations where we’ve been underrepresented. These new stores could provide valuable insights for our capital expenditures in 2023 and beyond. So, there’s not much to say about the refresh, but a lot to say about the store of the future and new locations as we enter into 2022. I hope that helps.

Thank you.

Welcome.

Thanks, everyone. That concludes our call this morning. Thanks for your continued interest in Victoria's Secret & Co. Thanks, everybody.

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