Good morning. 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 & Co. Fourth Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. All parties will remain in a listen-only mode until the question-and-answer session of today's call. I would now like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria's Secret & Co. Kevin, you may begin.

Thank you, Amanda. Good morning, and welcome to Victoria's Secret & Co.'s fourth quarter earnings conference call for the period ending January 28, 2023. As a matter of formality, I would like to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statements found in our SEC filings and in our press releases. Joining me on the call today is CEO, Martin Waters; and CFO, TJ 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 Martin.

Thanks, Kevin, and good morning, everyone. Before we dive right into the quarter, I want to first share my deepest appreciation for the hard work and dedication of our associates and partners all around the world. I'm especially thankful for the team's continued commitment to the evolution of our brand and for all they're doing as we push forward our strategic growth plans. I'm delighted by the connections we're making and deepening with our customers as we aspire to become a Victoria's Secret where everyone feels seen, respected, and valued. And of course, I'm delighted to welcome Adore Me associates to our family for the first time this quarter. Welcome, welcome. As we look back on 2022, our first full year as an independent public company, I wanted to spend a few minutes reflecting on the key actions that we've taken over this past year in support of our strategy and positioning for the long term. It's been a year filled with innovation and many firsts for our customers and our brands. To name a few, we debuted Love Cloud, both a proof point in our best of bras story and our most inclusive marketing campaign ever. We shared our first bilingual campaign for Victoria's Secret Beauty featuring Camilla Cabello. We launched Pear, our first fine fragrance pillar in five years and a one-of-a-kind center that is personal to each individual. We introduced our inaugural global brand campaign, Undefinable, that celebrates individuality and diversity. We extended our channel distribution and now offer an edited assortment of Victoria's Secret and PINK on Amazon, a natural extension to continue to grow our business. We deployed a new digital bra-fit technology and have begun to make meaningful improvements to our digital experience to improve the customer journey. We expanded our store-of-the-future fleet to 52 stores worldwide, and we released our first-ever ESG summary report in the spring, our ESG materiality report in the fall, and we look forward to publishing our first full ESG report next month. This past year, we also made acquisitions and developed partnerships and organized ourselves to fuel our future growth. Importantly, we acquired the digitally native intimate brand Adore Me to further enhance our market leadership in intimates and strengthen our ability to put technology at the forefront of everything we do. Internationally, we accelerated our growth as we entered new markets like India and Israel and completed the joint venture agreement with Regina Miracle in our China business. We invested in women-owned and run businesses, including a minority stake in Frankie's Bikinis to help us reclaim our leadership position in swim and enhance the partnership with the inclusive lingerie brand Elomi. We announced a new corporate leadership structure uniting the Victoria's Secret and PINK brands into a single collaborative organization centered around our focus on the customer and built to capitalize on efficiencies to yield stronger growth. As part of that new structure, we welcomed a Chief Customer Officer, a Chief Supply Chain Officer and also named a Chief Growth Officer, giving us focused leadership expertise to steer us to the next stage of our transformational journey. Additionally, in 2022, we continued our commitment to women, our associates, our partners, and our communities. A few examples include we brought on more models and ambassadors of diverse sizes, ages, abilities, and identities. This past year, we achieved third-party pay equity certification for all genders, races, ethnicities, and intersections of those identities. We're committed to maintaining our status as a leader in pay equity. We're especially proud of our associate satisfaction metrics, with 87% of our associates reporting that they feel proud to work at VS & Co. We welcomed a new Independent Director, and seven of our eight Board members are women, mirroring our customer base. We launched VS & Co. Essentials and we'll supply more than 1 million young women and young adults with undergarments by 2025. We maintained our partnership with Pelotonia and administered the first grants to researchers as part of the Victoria's Secret Global Fund for women's cancers. We're certainly not stopping there. Already in fiscal '23, we launched the new Victoria's Secret x Naomi Osaka Collection, a first design collaboration with Victoria's Secret Collective partner, Naomi Osaka. The collection features the forever bra with our first-ever bra pad that can be recycled in a closed-loop system. Our first-ever Frankie's Bikinis Victoria Secret Swim Collection is now available exclusively at Victoria's Secret and inspired by founder Francesca's beloved early memories of shopping at Victoria's Secret. We announced the rollout of our new Victoria's Secret and PINK customer loyalty program, which is our first rewards program to allow customers to earn points regardless of payment method. We were recently named by Newsweek as one of America's Greatest Workplaces for Diversity. So, as you see, we've been busy. At our Investor Day in October, we announced our intent to become the world's leading fashion retailer of intimate apparel, guided by our three key pillars: number one, strengthening our core; number two, igniting growth; number three, transforming the foundation of the company. We believe we are two years into a five-year journey in the turnaround of our business, and we have a clear roadmap to be the world's leading fashion retailer of intimate apparel. And now I'll dive into the results for a few moments. For the fourth quarter, despite a macroeconomic environment that remains challenging for our customers, we controlled what we could control while navigating a highly promotional retail landscape. We delivered adjusted operating income and adjusted earnings per diluted share results for the quarter above our most recent guidance. This represents the sixth consecutive quarter since the separation that we've delivered adjusted operating income and adjusted earnings per share results within or above our guidance. Importantly, we exited the year with Victoria's Secret and PINK inventory levels down double digits on an adjusted basis, prudently positioning us as we begin the new year. We believe this performance in a challenging environment continues to demonstrate our position of strength and highlights our dominant domestic market leadership position and the stability of the financial platform that we've created. We remain steadfast in our belief that we've stabilized our business model to weather difficult times and are positioned for significant operating leverage in more normal economic times. In the fourth quarter, our adjusted operating income of $280 million and adjusted earnings per diluted share of $2.47 were both above our most recent guidance. Sales declined 7% in the quarter compared to last year, which was in line with our expectations. Traffic was up in our stores and online in the quarter and we were encouraged by our sales performance during peak periods of time during the quarter as customers responded positively both in stores and online to our marketing messages and targeted promotional activity. Our conversion rates were down in the quarter compared to the fourth quarter last year but remained above pre-pandemic levels. As a result of the positive response to our aggressive promotional position and the strength of peak selling periods, our average unit retail was down in the quarter as compared to the fourth quarter last year but again, remained healthy and at or near record highs in most categories, highlighting a customer who is very cautious and cost-conscious in this current environment. From a merchandising perspective, we remain the leader in domestic market share for the intimates category. On a rolling 12-month basis, we experienced slight growth compared to last year. Starting with Victoria's Secret, Beauty was our best-performing business followed by sleepwear and bras. Within PINK, intimates outperformed sleepwear and apparel, which had a difficult quarter. While PINK apparel has been a consistent challenge during the last couple of quarters, the underperformance gap widened during the holiday season, and we've already begun to urgently reimagine the PINK apparel strategy, assortment, and positioning with our customer, and we will see that impact in late Q2. The PINK apparel impact alone was a drag of more than four points on the fourth quarter for the company, so it's a very high priority for me going forward. Our international business continues to perform very well. Total international system-wide sales were up double digits in 2022. The business has been profitable in each of the last four quarters. Business continues to experience momentum with most countries performing very well, and we continue to be optimistic about our growth plans to expand our international footprint both in numbers of stores and countries around the world. As we begin the new year, we're mindful that the domestic economic environment continues to be challenging and continues to put pressure on our customers. However, we are evolving and innovating our business focused on our three key pillars, and we have organic growth strategies and new customer experiences well identified for 2023, including the recent launch of the Victoria's Secret and PINK customer loyalty program and a pipeline of bra launches. We recently acquired Adore Me, as you know, a technology-led growth vehicle. We plan to leverage some of their technology on our scale platform, starting in the second quarter and continuing through the fall season. Our international business has momentum with partner expansion plans for new stores and new countries planned throughout the next two years. Most importantly, we are a broad company and the market leader in the intimates category positioned for future growth, both in our core and with Adore Me now in the family. While the macroeconomic environment remains uncertain, we're assuming sales trends and comparisons will improve through 2023 as we anniversary softer sales trends which began in the second quarter of 2022. We expect sales for 2023 to increase in the mid-single-digit range compared to 2022. Our forecast assumes our Victoria's Secret and PINK businesses remain relatively flat over the year for 52 weeks and approximately one to two points of growth due to the 53rd week in fiscal 2023. Our forecast also includes Adore Me, which is now in our results in 2023 and is forecasted to see growth in the mid-teens compared to their most recently completed fiscal year. At this level of sales, we expect our adjusted operating income rate for 2023 to be similar to 2022. Given today's challenging environment, we believe an adjusted operating income rate in the high single digits demonstrates stabilization of our business and represents a solid base we will leverage when more normal macro trends return in North America. For the first quarter, we expect sales to decrease in the mid-single-digit range compared to the first quarter last year and forecasted adjusted operating income in the range of $55 million to $85 million. Moving forward into the new year, we remain committed to optimizing our performance by focusing on what's within our control, our brand transformation being best at bras, enhancing the customer experience and a relentless focus on cost and inventory management. Led by our two category-defining brands, a merchandise leadership position in intimates and beauty, and a global business positioned to increase our market share, our goal is clear: to be the world's leading fashion retailer of intimate apparel. Our focus as leaders and as a company is on ensuring we are a future-facing business that becomes more and more culturally relevant in this shifting environment. We're confident in our opportunities to remain committed and remain committed to delivering long-term sustainable value for our shareholders. Thank you, and that concludes our prepared remarks. At this time, we'd be more than happy to take any questions you might have.

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

Thanks. Good morning. It sounds like you do expect some sales recovery as the year progresses. Can you just talk through the areas of the business where you see the most opportunity to grow? And then also how much you think you will use the Adore Me platform or technology to try to grow the Victoria's Secret or PINK businesses? Thank you.

Yes, I'll take a crack at that one. So, as it relates to growth, obviously, the most important area for us to focus on is our bra business—that’s where we put most of our energy. While we are active in other categories, health in the core of the business is the most important thing we do. You heard me say at the time of spend that we would have at least two major bra launches per year, and this year will be no exception. In fact, we'll probably have more than two big bra launches. I don't want to say more about that yet for competitive reasons, but we're very excited about the plans that we have in the core of the business. The second area I would call out is PINK, where, as I mentioned, we have had a difficult time in the last 12 months, and it's time for some urgent reinvention. I've seen that reinvention, and I'm super excited about it. Customers will start to see it towards the end of Q2—a new design direction, a much more fresh approach, more and better outfit starts, and more modern raw materials and fabrications. It's a rebuild of the use of our logo, more minimal, less overt logo—an exit from some of our legacy graphics. So, there’s a lot going on in that very important part of the business that I think bodes well for the back half of the year. As for Adore Me, we’re super excited about it. It's a fantastic company, which just in and of itself is a great growth vehicle for us. We will leverage their technology in three ways going forward: First, we're going to test selling an edited assortment of Adore Me merchandise on our site, and that's incremental to our system; that will be up towards the end of Q2. Secondly, we're going to leverage the technology and try-on-at-home that Adore Me has perfected and apply that to our much larger scale customer base in Victoria's Secret and PINK, along with subscription services that will be rolled out in the back half of the year. There are many ways we can leverage Adore Me technology, but we're focusing on those three initially, with more to come in the future. I hope that helps.

Thank you.

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

This is Kate on for Ike. I guess my first question, Martin, just a follow-up on PINK. Could you remind us how much in revenue PINK was in 2022? And I'm curious, you noted the new organizational structure at VS between Lingerie and PINK. Can you just help explain how you think the new structure may benefit the brand? I think historically, we thought that having the separate structure might be helpful in terms of the guardrails around the two. So, I'd be curious just your view on the structure here? And then I have a follow-up on SG&A.

Yes. Thank you for the question. Sleep is a very important category for us, and we think about it in two chunks. The first part, we call taxi sleep, which leverages the very sexy and Dream Angels collections. The second part of sleep is more casual sleep, which did particularly well during the COVID period and is obviously a major part of gifting during the fourth quarter. The participation of sleep changes throughout the year depending on the season, but think about 15% to 20% of our total system across Victoria's Secret and PINK, that would be directionally close enough for you at this stage. What's the benefit of putting PINK and Victoria's Secret together? Well, there is a significant crossover of customers between the two brands. To a large extent, we're in the bra business in both franchises; 50% of the PINK business is bras and intimates. I think it makes sense to build our entire assortment with a single eye on how the customer traverses through the bra and panty experience. For the first time, I think, in our history, we have merchant leadership that is considering how the customer sees the entirety of our intimates category. There are also benefits in the back of house in the way that we source and merchandise that should lead to greater efficiency. In some cases, we're buying the same merchandise but with different design teams and factories. It makes sense to have a single eye across those two. So those are the main reasons: one, customer-facing, and secondly, organizational efficiency, both beneficial.

Sorry, I just had one quick follow-up on SG&A. You guys noted in the commentary with the earnings release, certainly, it seems like there are some priorities this year for spend between tech investment, incentive comp, supporting Adore Me. I guess I'm just curious about the SG&A flex to the extent we need to secure that high single-digit margin this year. Thank you.

Yes. Thanks for the question, Kate. I think over several quarters, the business has demonstrated a very capable flex model, evidenced by each of the last three quarters when North American business has been challenging. Expense dollars in total have been down more than $40 million a quarter. I feel like the business has flexed quite well on store payroll, distribution, and logistics, particularly as sales have been somewhat volatile. I think supplementing that is to underline the transform the foundation savings goals that the business has set for the next three years, really a continuation of activity from 2022. That $250 million goal over the next three years, I think we said a little less than 1/3 of that will actually happen here in 2023. We feel like we have multiple levers, both on the expense and cost of goods sold lines to drive bottom line performance, but also insulate us a little bit if trends remain volatile here in North America. So, the teams are doing a very good job of flexing and executing against the expense initiatives. Our SG&A guidance, if you take the 32% to 33%, Kate, and put that on the volume estimates, you get an SG&A range of roughly $460 million to $470 million in terms of dollars. Within that, the VS and PINK business for the North America business is primarily about $430 million or flat to last year in the first quarter, even with those investments in technology, marketing, and also bonus-related costs. So hopefully, that helps you understand the volume of the different initiatives and how we're flexing the model to keep costs under control.

Our next question comes from Alex Straton with Morgan Stanley. Your line is open.

Great. Martin and TJ. Thanks for having my question today. Just two for me. First on the 1Q guide, it looks like it assumes the underlying revenue CAGR to 2019 accelerates a bit from the fourth quarter. So, I'm wondering, does that mean you're seeing acceleration quarter-to-date? Or how should we think about what's embedded there? And then secondly, the comment on the slight growth in market share. I'm just wondering what did the category grow? And maybe what do you include in that market? I'm just trying to understand how your share changed year-over-year. And also, if there's anything you can share on bras there, that would be great.

Why don’t I take the second question; TJ, you can address the first question? So, market share, we have lots of different measures of market share. The one that we use most is intimates as a combined category, which is essentially bras and panties, but excludes fine lingerie. In that definition, we have 20% market share. Within that 20%, the bra mix is stronger, while the panty mix is less. Why? The bra business is more competitive, with higher barriers to entry and fewer competitors. Frankly, we're better at it. It's our most important economic engine. Panties are a more accessible cut-and-sew business, with low barriers to entry, so it's a more competitive and price-led market. We've been essentially flat across the last 12 months, with maybe a 0.1 point increase. TJ, do you want to take the second question about acceleration?

Yes. Alex, as it relates to Q1 sales, I would suggest that we're looking at more current trends in our business relative to performance rather than going back to 2019, understanding that the business is in a much different place. I think about the most recent trends in the business; in the third and fourth quarter or fall season, North America was predominantly down high single digits, while international business was robust. In the first quarter, we expect North America to still be down in the high single digits. We are seeing strong performance internationally, which was accretive to our total sales numbers. Looking forward, the first quarter will likely be negatively impacted by PINK apparel trends, which were a drag of about four points last quarter. So, I believe there may be slight disconnect in expectations for first quarter sales given trends.

Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is open.

Great. Thanks. It's Amanda Douglas on for Matt. So, Martin, maybe to start, you cited expectations for higher promotional activity in the first quarter in the release. Could you expand on your mindset for promotional activity throughout this year as you manage the business with healthier inventories? And then maybe whether or not you see an opportunity for AUR growth with your new bra launches?

Yes. Thanks for the question, Amanda. My mindset on promotional activity is consistent with what I've said in previous calls. It has less to do with being over or under-inventoried and more to do with gaining fair share in a highly competitive environment. When consumers feel less affluent, we all have to be as aggressive as we can in trying to get our share. While newness and emotional content through fresh merchandise is the best way for us to compete, customers also need a promotional reason to shop with us. So, expect to see something of a continuation of our position from Q4 into Q1. As for AUR, yes, when designing our architecture for bras, we're thinking about what is the most competitive build across the board—not just extracting more money from the consumer at the top end of the price range. We're focused on the most competitive price point rather than being solely driven by AUR. However, I can say we're feeling positive about AUR trends.

Does that conclude your question?

Yes. Thank you.

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

Martin, could you help contextualize the size of the PINK apparel now versus historically and maybe if you have a view on where it should be in the future? You also called out higher Adore Me expenses weighing on 1Q SG&A, I believe. Would it also lift gross margin? Lastly, just clarifying your guidance—does it not account for any incremental buyback, including the remaining on the ASR? And maybe just any general thoughts on how you're approaching debt versus buybacks? Thank you.

The PINK business is approaching $3 billion; half of it is intimate, and the other half is apparel and sleep. I won't provide a precise split between apparel and sleep, but it’s significant. That's why PINK apparel underperformance had such an impact on the total company in Q4. I hope that helps, Simeon. T.J.?

Yes. Simeon, think about Adore Me's model as slightly different than ours— it's a digital-only business with mid-50s gross margins, slightly accretive to the company. Their expense levels trend in the mid to high 40s. We're comfortable with that forecast. As it relates to buybacks, yes, we are assuming the full $250 million share repurchase in our weighted average share count. The ASR is predominantly the activity for spring; it runs through the second quarter. We'll be approaching peak borrowing time in the third quarter for holiday inventory purchases, so there may be a delay before we execute further on buybacks.

Our next question comes from Omar Saad with Evercore Partners. Your line is open.

Good morning. Thank you for taking my question. I was hoping just a couple of quick follow-ups. Can you discuss performance across some of your store formats and channels, including off-mall versus mall, and the Store of the Future? Additionally, could you provide an update on the marketplace strategy?

Good questions. Store of the Future pilots are performing up high single digits compared to their control group, which is good. The first stores we opened in the new format were in off-mall locations, which have been profitable, particularly in outlet locations. Our real estate strategy focuses on higher participation off-mall, and we feel positive about where we are. For the year ahead, we'll have 15 to 20 new stores and about 50 renovations. As for the marketplace strategy, we previously worked with various brands, but the new management decided it should be curated based on three things: accessing underrepresented categories, reaching underweight customer bases, and brands enhancing the overall house of Victoria. We’re pleased with the current success.

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

Great. Thank you very much. Martin, I was wondering if we could go back to the PINK apparel piece of the business. What exactly do you think the core issue is, and how quickly do you expect some changes to be effective? Also, for TJ, could I ask about Adore Me's sales seasonality versus VS, and then how you should think about ad expenses consolidated in 2023?

There’s a lot to unpack there. The challenge with PINK apparel is that it has historically been high-margin and predictable. However, we may have become complacent with our product life cycle, and we're missing some current trends. We have scrubbed our offerings and edited out what doesn't fit while accelerating fresh, trend-forward merchandise. We expect early signs of recovery by the end of Q2. T.J., do you want to address advertising expenses?

Yes. Regarding Adore Me’s sales seasonality, typically first quarter is their best, followed by fourth, while Q2 and Q3 are lower—similar to VS trends. Our targeted advertising spend for VS & Co ranges from 5% to 5.5% of sales, which I don't see changing. Adore Me, being a DTC company, will likely have significantly higher ad costs. We're comfortable with that as it aligns with our revenue growth strategy.

Just before we take the next question, we did a fact check here on sleep participation of our business. I said 15% to 20% across the year. It's more substantial during the fall season. Think about it as 20% plus for sleep participation. Our next question comes from Corey Tarlowe with Jefferies. Your line is open.

Good morning and thanks for taking my question. On the PINK apparel dynamic, what gives you confidence that your transformation will succeed? Also, could you discuss the intimate side at PINK to get a sense for its overall performance? TJ, on the flat EBIT guide for the year, shouldn't freight reductions positively impact margins? How do you view that in the context of your flat EBIT margin guide?

How do we know if changes will work? We have a rigorous testing process utilizing our customer panels for feedback, which are essential. I met with regional managers, and they are excited about the refreshed PINK assortment. I feel very high confidence in how we will perform moving into the back half of the year. The good news for PINK is that our international business is strong and continues to improve, which is important.

I can appreciate the flat EBIT rate guide for the year. We expect the gross margin rate for the year to be slightly higher than last year, as the supply chain pressures have eased. We're seeing improvements in both container rates and air rates compared to last year. However, expenses are rising for various reasons; we're investing in technology and marketing, and we are undergoing separation costs from our former parent company. Thus, even with cost prevalence declining, we have prioritized key investment areas for the future of the business.

We have time for one more question.

Our next question comes from Jonna Kim with TD Cowen. Your line is open.

Thank you for taking my question. Any early learnings from the loyalty program? What trends are you seeing in terms of customer retention and how do you plan to leverage the program to increase retention?

It's too early to declare victory on the loyalty program; we've only been out for a week. However, I spent time with our store teams, and they are energized by it. During conversion, we’ve converted our current customer base from our credit card system, which should lead to around 3 million participants by the end of the month. The benefits for customers are solid, and we believe that they will see advantages as we move through the year.

Thank you all for your interest in our business. Wish you well.

Thank you.

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