Good morning. My name is Ivy and I will be your conference operator today. At this time, I'd like to welcome everybody to the Victoria's Secret & Company Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded and 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 & Company. Kevin, you may begin.

Thank you, Ivy. Good morning and welcome to Victoria's Secret & Company's third quarter earnings conference call for the period ending October 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 Tim Johnson. We are available today for up to 45 minutes to answer any questions. Certain results we discussed on the call today are adjusted results and exclude the impact of certain items described in our press release and our SEC filings. Reconciliation of these and other non-GAAP measures to the most comparable GAAP measures are included in our press release, our SEC filings, and the investor presentation posted on the investor section of our website. Thanks. And now I'll turn the call over to Martin.

Thanks, Kevin. And good morning, everyone. Before we dive right in, I want to first share my appreciation and gratitude for the hard work and dedication of our associates and partners around the world. I'm especially thankful for the team's continued commitment and for all they're doing as we move forward throughout the holiday season. I speak to you today very energized with our holiday season now in full swing and with excitement about our sales performance in November to start the fourth quarter. In North America, both in-stores and online, the November sales and margin result was our best monthly performance in nearly two years, which we believe is evidence our initiatives are working and is led by a strong response to holiday giftable merchandise assortment, improving customer experiences, and a powerful marketing message featuring Mariah Carey. Our international business has great momentum, our footprint is growing both in-stores and online, our partners are performing very well, and we continue to be excited about performance in China. As I have consistently talked about, our teams have been working tirelessly on multiple growth initiatives designed to create momentum as we enter the second half of the year and into the holiday season, and we're delivering on those key initiatives. Initiatives such as a new multi-tender loyalty program, new customer experience enhancements in our digital business, product improvements and launches to enhance Victoria's Secret brand and accelerate our beauty business, a reimagined merchandise strategy for our PINK brand, and of course, the return of the iconic fashion show with the Victoria's Secret 2023 World Tour. Now turning to the third quarter for a moment, we delivered results within our guidance range and our sales trend in North America continued to improve as planned each month throughout the quarter, with October being the strongest month of the year, now happily exceeded by November, of course. Outside of North America, our business continues to provide profitable growth across stores and digital, with international system-wide retail sales of high-teens in the quarter, driven by growth in China and globally with our franchise partners. Our teams are doing an excellent job of managing selling margins, diligently controlling costs and delivered inventory levels at Victoria's Secret and PINK down 9% to last year, and we have agility heading into the holiday season and into the new year. Overall, sales declined 4% in the quarter compared to last year, which was at the midpoint of our guidance. In North America, sales trends improved in the quarter in both stores and digital, driven by sequential improvement from last year in average basket size and in traffic. Conversion in our digital channel also improved as compared to the second quarter, and it was roughly the same in our stores business. Adore Me sales were up year-over-year again this quarter and represented about 5 percentage points of total sales growth for VS&CO in the quarter. From a merchandising perspective, external market data indicates that sales for the intimate market in North America as a whole decreased mid-single-digits in the quarter compared to last year. Importantly, we remain the leader in market share for the intimates category, including both bras and panties. Our share remained essentially flat, with digital share up slightly and stores share down slightly. From a merchandise category perspective, starting with Victoria's Secret, our beauty business continues to be our best performing category. We also saw significant trend improvement in panties, bras, and sleepwear in the quarter. Within PINK, intimates and sleepwear outperformed apparel. Our new reimagined PINK Apparel assortment began delivering to our stores and digital customers during the quarter. We acknowledge that it will take time to turn around that business and believe we're on a path towards improvement with some definite green shoots of recovery. We estimate that the apparel challenges in PINK negatively impacted the third quarter sales result by approximately 3 to 4 points. Aside from the financials, over the last 90 days we've executed several key actions in support of our strategy and brand positioning for the long-term. For example, our loyalty program now has more than 22 million members who drive approximately 75% of our sales on a weekly basis. We kicked off the holiday season with new product arrivals and a powerful marketing message featuring Mariah. From a technology perspective, we launched over 50 new releases impacting the overall customer experience on our digital platforms and apps. And we expanded our store of the future fleet to 71 stores, or approximately 8% of the fleet in North America, and we'll be at 85 stores by the end of the year. Looking forward, our outlook for the fourth quarter embeds results from November and overall for the quarter we expect sales to increase in the range of 2% to 4% compared to last year. Quarter-to-date through Cyber Monday, we estimate we have generated roughly one-third of our fourth quarter sales, and obviously we have many very large days and weeks to come in December. We're forecasting an adjusted operating income in the range of $245 million to $285 million for the fourth quarter. And for the full-year 2023, we're forecasting sales to decrease in the range of 2% to 3% compared to last year, and we expect adjusted operating income to be in the range of $290 million to $330 million. At our Investor Day in October, we discussed three strategic priorities: one, accelerate the core; two, ignite growth; and three, transform the foundation. And in particular, we spent lots of time on our plans for our key area of focus, which is obviously the North American business. With the long-term health of the business in mind, we're energized by the start of the holiday season and the positive signs in the business, and remain committed to our initiatives designed to leverage our market leadership position and unlock our opportunity to convert significant cultural influence into long-term financial growth. Thank you, and that concludes our prepared remarks. At this time, we'd be more than happy to take whatever questions you might have.

Thank you. We would now like to open the phone lines for questions. Our first question is coming from Simeon Siegel. Please go ahead.

Thanks. Hey guys, good morning and congrats on the progress quarter-to-date. So Martin, the quick growth in the loyalty program is really great to see. Can you elaborate on what you're seeing in terms of the revenue impacts from that multi-tender loyalty program? Maybe just speaking to any changes or just early learnings you're seeing? And then congrats on the ongoing success in beauty. Just what is the beauty margin versus the other categories? Thanks, guys.

So, thank you for the question, Simeon. Not much extra that we can give you, I'm afraid, at this point. I'll go to TJ on the margin question. But loyalty, as I said, we're over 22 million customers now. It's 75% of our revenue. It's kind of the bedrock of the business. The most important aspect of that program is the data that it gives us and our ability to match data about sales with data about customers, which enables us to personalize experiences and personalize marketing. The upside for that will really be in 2024 rather than in December of this year. But it's laying the foundation for the future and that program was a long time in the build, so we're super excited to have it launched and so well received. It also will be the basis for many new customer experiences that will come in 2024. The first one being leverage from the Adore Me acquisition, Try On at Home. But there will be other member services that will be linked to the loyalty program that we'll be excited to launch in 2024. TJ, do you want to take the margin question?

Yes, I think on the second part, Simeon, the beauty business tends to be favorable margin rate relative to the company average. I think it's important to note that as we move through the third quarter and on into the fourth quarter, we expect Beauty to be a leading category in the store. It is one of several contributors to why we believe Q3 was a bit of an inflection point for us and seeing merchandise margin rates go higher year-over-year. So we're excited about the Beauty business. We've got big plans for it for the holiday season. Margin accretive and based on everything we've seen and read, it was very top of mind during the Black Friday week with customers.

I might also say, I agree with all that TJ, that the strength in the Beauty business is coming across all areas. It's in fragrance, it's in mist, it's in all areas really pulling forward. So very pleased about that.

Next question please, Ivy.

Next we'll go to the line of Dana Telsey from Telsey Group. Please go ahead.

Nice to see the progress. As you think about PINK and Apparel, any update on the progress there, timing of some of the newness, I think some of it was coming in the third quarter and what you're seeing. And then just on the store of the future, how did those stores perform relative to the base even during the weekend? Thank you.

Yes, thanks for the call, Dana. As you know, we identified a year ago that the PINK business had some challenges, had some difficulties, and we recommitted to the role and purpose of the PINK brand being the on-ramp for Victoria's Secret. We talked about that at our investor conference. We also clarified the market that we're serving and the market that we're not serving. Both of those two statements require a significant adjustment in the merchandise that we were offering. We identified four chapters that we'll focus on: the player, the code, the base, and wink, and we've had some really good hits in our first run at merchandising to that new agenda. Some of the green shoots that we've seen have been in bras and bralettes, in basics, in skin tones and nudes. Some of the fun and whimsical products we put out for Halloween just blew out, was gone by the end of September. The Chloe and Halle merchandise is a very clear hit. Specifically, the fold-over cotton flare pant has been a very big hit and sold out straight away. So we know we're going in the right direction, but as I said at the investor conference, we decided to buy PINK very cautiously. It didn't make sense to me, to us as a leadership team, to swing for the fences and assume recovery straight away. So we've been very cautious in our buys and we look forward to chasing into what's working for spring 2024. So don't expect an enormous amount of recovery in the balance of this quarter. Do expect us to continue to make progress into 2024. I hope that helps. We also made progress in reducing the size of the inventory in PINK, which had gotten away from us a little bit. So significantly higher productivity coming out of a smaller number of choice counts. TJ, do you want to take the store of the future?

Yes, on store of the future, Dana, we haven't necessarily broken things out, I'll say, by quarterly performance. I would just suggest to you that the overall trends of the Store of the Future that we called out at Investor Day and particularly around store remodels, getting a low-double-digit lift, that is holding and actually building as we move through the third quarter. So I would take that as a good early indicator from a holiday perspective. The teams have done a very nice job of keeping us on track for 2023 in terms of both new store openings and store remodels. So I feel very confident by the time we get to the end of the quarter, we'll have about 10% of the fleet for about 85 stores, as Martin mentioned, in the new Store of the Future format. So, yes, and Martin's whispering to me here. Internationally, I would be remiss if I didn't mention that Store of the Future has been equally well received around the world from our international partners and also our customers as we continue to grow out the store fleet there. And as you know, we have plans for upwards of 100 stores a year over the next two to three years to build out the international fleet. So all signs pointing green on Store of the Future performance and opportunity.

Thank you.

Next, we'll go to the line of Alex Straton from Morgan Stanley. Please go ahead.

Great. Thanks a lot for taking my question and congrats on the acceleration you're seeing. I wanted to focus in on that. Like how do you think of it in aggregate? Is it a function of just the initiative flowing through? Is the category at all improving? And did you change your promotional strategy at all? Like I'm just wondering if that's factoring in? Thanks a lot.

Thank you, Alex. That's a good question and something we constantly evaluate. To reiterate about the market size, for the recent quarter, we saw a market decline that was similar to the drop in Q2, specifically a low to mid-single-digit decline. We maintained our market share during this time. We believe the new products we've introduced have been well-received, which is consistent with our long-term history. Our categories, especially beauty, sleepwear, bras, panties, and novelty items, tend to perform better with new offerings. When we launch products that connect with consumers, it makes a significant impact. Regarding promotions, the promotional activity this quarter was similar to the previous year, and our adjusted product margins improved slightly. In November, we experienced a strong performance with margins also rising slightly. Despite appearing promotional, our approach was more strategic and focused, allowing us to manage key sales periods effectively while protecting margins. Additionally, our digital enhancements have significantly improved our position, with our digital sales now representing 35% of our total, up from 30% last year, driven by growth in North America with VS and PINK. Chris Rupp and her team have worked hard on various digital improvements, and we also benefited from Adore Me contributing positively to our growth. Furthermore, store traffic, especially in November, exceeded mall traffic levels, contributing to our overall momentum. Most importantly, our team under Greg's and Chris's leadership, along with the entire leadership group, is really coming together. We feel confident in our team and our planning for 2024. I hope this information is helpful.

Yes, thanks a lot. Good luck.

Next, we'll go to the line of Matthew Boss from JPMorgan. Please go ahead.

Great, thanks. So, Martin, what would be your best assessment, or maybe just an update on the health of the North America intimates category? Maybe what inning would you call your initiatives today? And then TJ, how best to think about the balance between driving top line relative to profitability given the elevated marketing and technology investments?

All right, I think that's three questions. I'll take the first two. So how do I feel about the category? You know, it's difficult to know. We were very surprised by the decline in the category that we saw in Q1 that we hadn't seen that coming. You know, during good times and bad, the Intimates category has been very stable over the long run. So to see a high-single-digit decline in Q1 and then mid-single-digits in Q2 and Q3, it's unusual. I've talked a little bit about this at the investor conference. Do we think that it's structural, that somehow women are going to be wearing bras less often or replacing them less frequently, that there is a structural decline in the market? I have a hard time believing that. There is definitely some fashion trend around young women to not wear bras all the time. And there's definitely a trend towards more sports bras and more lounge bras, less constructed bras. But none of those things I see as being structural threats to our business. I think we're in a good position to take advantage of whatever the trends are in the market and to respond to them accordingly, whether it be with bralettes or with the rebirth of our sports business. I think innovation is the most important thing that will drive the category. And you know, as we're the largest player in the category by some distance, it's up to us to drive the market as a whole. We used to do that in the old days, and we're determined to do that in the new days. What innings are we in, in terms of the health of the company and the rebuild of the company overall? Probably mid-innings, I would say. I think we've made good progress. We feel good about the foundational work that we've put in place in transforming the way in which we do business. I think we feel very good about our growth initiatives, our international business is on fire. The Adore Me business is fantastic and bodes incredibly well for the technology we can borrow from them and leverage from them. The team there are working incredibly well, so we feel really good about that. But there are so many things ahead of us. You know, we've only just begun the journey on personalization. We're only just beginning to look at how AI can dramatically impact the way we go to market. We're only just beginning to look at how this new team and the new merchandising initiatives can show up and how the House of Victoria can come to life and how the Store of the Future and all the digital enhancements that we're making can make a difference to the customer. So there's a lot more to come for us. So I think probably my best assessment is mid-order. TJ, do you want to take the last question?

Yes, so from a top line perspective, Matt, I think you're building on Martin's comments, in terms of identifying the opportunities and executing against them. We are probably middle innings, as he mentioned. I think in terms of seeing the benefits start to flow through the P&L, which I think is where your question was going, I'd say from our perspective, the third quarter is some of the early innings of that. So we've been working on a number of the initiatives throughout this year and investing in them, particularly around technology and some of the brand repositioning efforts and seeing an inflection point in the third quarter in terms of growth and merchandise margin rate, seeing an inflection point in terms of the trend of the business in North America and seeing that continue on into the early holiday season, I think tells us that we're on the right track. I think the challenge has been and will continue to be seeing the North American business continue to build into the fourth quarter, build into the spring season. I think we've demonstrated a willingness and an ability to hold costs, and we've got new cost initiatives coming online here just in the fourth quarter around cost of goods that Chris and Dean and their teams have been working on. So I feel like we are right where we want to be in terms of that inflection point and seeing the flow through happen in the business as we start to see improvements in the North American business. So, again, some of these initiatives are just now starting to show up in the top line and sort of flow through in the P&L, although we've been working on them for months.

Thanks, Ivy.

Next, we'll go to the line of Alex Shaw from Bank of America. Please go ahead.

Hi, thanks for taking my question. On your strategic focus in reclaiming the sports bra category, can you talk about how the category did in the quarter versus the market? Have there been other notable launches since the featherweight max? What is your sports bra launch calendar like, compared to your core bra launch calendar? And then just lastly, in your view, what differentiates or is most attractive about a VS sports bra versus a pure offering? Thank you.

Oh, thanks for the question Alex. You know, this is a very sore subject for me. Because as the team here remind me just about every day banging the table on sport. We need to be better at sport, you know one of the missteps of the Victoria's business back in 2016, '17 and beyond was not participating in the sports bra market. We had back in 2015, we had 16% share of the sports bra market. Today we have 3.5% share of the sports bra market. So we're not really in the top 10. And we've got to rebuild. We have got to be right at the top of that list. And that will be a multi-year endeavor. The very first meaningful change that we made was the launch of the featherweight max as you mentioned, and it was very successful. The next phase is to expand that color multipliers, line expansions and we'll be facing into that in January and pulling forward as much sport as we can for the new year, new you momentum that there is in the market. So some more newness coming in January, but honestly the big relaunch of sport for us will be later in the year and that's just because it takes time to make a really good product. We're not looking to compete with tubes and unstructured sports bralettes. That's not where we will win. We will win by leveraging technology with the best vendors in the world. So you asked the question, why would we be good at it, or I'm paraphrasing slightly, but what gives us confidence that we can be good at that? Well, bras are a technical product. It's a particularly technical product when there's excessive movement required, and that's what sports bras are for. We know more about bras than anybody else on the planet. We have better and longer relationships with the best manufacturers in the world. They have access to the best technology, and they'll give it to us first. We have access to the best raw materials. You put all of that together with our design capability. It's a category where we should be the best. We know we can do it because we've done it in our history. So for us, it's a full court press to get after sport in the broadest sense, starting with sports bras. But I wish I could wave a magic wand and make it happen more quickly. It will be through the balance of 2024. And we're taking a long-term view of the opportunity rather than just rushing to newness for the sake of newness. So that's probably not the answer that everybody wants, because we don’t like to click our fingers and see us be aggressive in sports bras quickly, but it will take some time to get back to full strength in that business. Hope that helps.

Very helpful. Thank you.

Next, we'll go to Irwin Boruchow from Wells Fargo. Please go ahead.

Hey, everyone, I’m okay. I guess two questions for TJ or Martin actually. Just first, when we think about the improvement in comps, both digitally and in-store, when you take out the extra week of 4Q, when you take out Adore Me, your digital comps are down roughly high-singles, the store, the download low-doubles. Which of those channels would you expect to improve the fastest or improve the most as you guys continue to work on improving the business? Is there a reason why one channel would outperform the other? And then the second question would be, TJ, on the $250 million of COGS benefits that you have spoken to at the analyst day, can you remind us the timing of that? When will those start to flow into the P&L? Do those start to benefit you into next year? Is there anything at this point you can talk about next year on margin as it pertains to those cost savings? Thank you very much.

Good morning, Ike. You sounded surprised that the question came to you. I'm happy to take the first, and TJ, I'll take the second. So, you know, as it relates to the difference between the two channels, two channels is kind of an old-fashioned way of thinking about it as there are more channels emerging all the time, but let's take it as digital and stores. You know, historically we were in a very strong position in digital; we got there early. However, over the last four or five years, other people developed capabilities in digital that we didn't have. And when this management team took over, one of the first things we identified is that we were not world-class in digital experiences. Other people were further ahead of us. We had to catch up. Also, as you know, most of the new competition that has come to market in the last five years is digital. There aren't many new store entrants, but there are loads of digital entrants. So the focus for us has been in the digital arena for those two reasons, stronger competition and our offering was substandard and underweight. So in building new capability, our biggest area of focus is that digital channel. And we've been adding things like fewer clicks to get to product, removing category landing pages, visual search, shoppable video, barcode scanning, non-crawlable text, enhanced linking capabilities, using AI-powered personalization, those sorts of things we're getting into. And that's some of the stuff that's been in the 50 releases that we had during the third quarter. So just really accelerating the pace. And it's starting to work in that as I mentioned in prepared remarks our share in digital increased slightly during the course, so I think overall in terms of the market, the forecast industry experts forecast is that the category will move from 31% in digital where it is now to about 41% over a three to five year period. We expect to at least keep pace with that, maybe accelerate faster. We certainly expect to gain share in digital. Let me address stores. Stores is an area where we were kind of overweight. We feel that we had a better store experience than anybody; we still do. So how come we've lost a little bit of share? That's a surprise to us. It's a significant area of focus for Becky Behringer, who leads that business, and we're leaning into it to be the best that we can possibly be; I see no structural reason why we should give an inch of share away in stores. We have a better store fleet than anybody else in the market. We're renovating that fleet as fast as we possibly can. We're adding new technology like Crave now in 181 stores. So both channels are important to us and I'm expecting that we will gain share in each of them. TJ, do you want to take the other question?

Absolutely, and I agree with Martin's comments on the different channels. Ike, you're referring to the transform the foundation goal that we put out at Investor Day that was $250 million over a three-year period 2023, 2024, 2025. That was a combination of both expense and cost of goods. We did comment that cost of goods would be the majority of it. As it relates to 2023, we did say about a third or a little less than a third. So think $80 million of benefit in 2023. We did mention that the majority of that would be expense, particularly through the first three quarters of the year. And then as we get to the fourth quarter, which is where we are now, that's when the cost of goods sold benefits would start to show up. And that is happening. So the teams are delivering as expected on timeline, on target, from a dollars perspective. And that was one of a couple of different enhancers in our fourth quarter forecast. So as we move into 2024, the large majority of the benefit from a transform the foundation standpoint will be cost of goods and this again one of the reasons why we believe the margin inflection point at the third quarter will continue through fourth and on into 2024. So we're on track, feel good about $250 million over a three-year period, and feel good about how it's cadencing through the P&L as expected.

Thanks so much.

Yes.

Next we'll go to the line of Mauricio Serna from UBS. Please go ahead.

Thanks. Good morning and thanks for taking my questions. I guess, I just wanted to first if you could talk about what was the underlying sales growth in the Adore Me brand in the quarter? And then on PINK apparel, I think the previous quarter the drag on sales was 2 percentage points to 3 percentage points, and this quarter was 3 percentage points to 4 percentage points. So just want to understand what was the driver behind that? And then just very lastly on the SG&A front, I think if I look at the guidance for 4Q, I think it implies SG&A dollars will be up mid-teens in 4Q. And that seems elevated compared to what the growth rate was in the first-half of the year. And I know that third quarter was like the fashion show, but just want to understand what is embedded in that, in SG&A dollar growth in 4Q? Thank you.

Yes, we can address the first two points quickly, and then TJ can cover the third. We aren’t disclosing the specific sales growth for Adore Me due to its size. However, Morgan and the team are effectively managing the business, and we are seeing growth and profitability year-over-year. Morgan and I discussed this earlier this week, and I can say there are smart investments being made in marketing. If the investment produces a good return, we will proceed; otherwise, we won’t. I have great confidence in that management team and the knowledge we can gain from them. I’m very optimistic about Adore Me, even though we won’t be providing specific details about it. Regarding PINK apparel, there isn’t a significant difference between Q2 and Q3, perhaps just a minor change, but nothing substantial. The decline in that business is concerning and was noted last year. We have implemented strong measures, and as I mentioned earlier, we are starting to see some positive signs. The main recovery is expected in 2024 when we can be more aggressive with our purchases. TJ, can you discuss SG&A?

Yes, on SG&A, Mauricio, the growth year-over-year in the fourth quarter is a combination of probably four or five different factors. I think the first one is obvious, in that Adore Me is in our numbers this year, and was not in our numbers last year. I think the second one is also pretty clear that we have an extra week of both selling and expense that flowed through the fourth quarter this year compared to last year. Next, continuing the trend of the year, investments in technology, which are showing up in enhanced digital capabilities and also completing separation efforts, that's an ongoing activity. I think the next item of note would be based on the improvements in trend in the business in the third quarter and in early fourth quarter, we do believe that incentive compensation expense will be up year-over-year. Again, last year at lower levels, this year performing closer to our internal budgets and expectations. So those are probably the four or five biggest items, Mauricio, and then some other items down below, or smaller in nature would be timing between third and fourth quarter or going into next year. So I feel very comfortable that the core operations of the business from an expense standpoint, so how we operate stores, how we operate our distribution centers, how we're managing headcount and costs. I feel very good about those disciplines throughout this year and as we head into next year.

Ivy?

Next we'll go to the line of Jonna Kim from TD Cowen. Please go ahead.

Hi there. Thank you for taking our question. This is Katy on behalf of Jonna. Just first on the holiday season, you know, what do you believe will be the key drivers there and how much of that is related to promos versus newness and just category strength? And then my second question is on the beauty category. What do you think is driving the strengths in that category? And how do you see that assortment fitting into the larger Victoria's Secret and PINK Brands over time? Thank you.

Hi Katy. Thank you for the question. Great question about what are the key drivers in the holiday season. You know, it's a really interesting period we're in because I don't know if everybody knows, but this particular calendar year has the longest number of days between Thanksgiving and Christmas, which is 31 days. So we have kind of a long season. Is that a good thing or a bad thing? I think it's a good thing. It gives us opportunity to really tell multiple stories and the truth is between the balance of the two things you mentioned, newness and promotions, it's some of both. It's some of each. Generally speaking, when people are looking for gifts, they go to tried and tested categories like PJs, but they want new PJs, they want different PJs, they want something different, something they've not seen before. So, you know, carefully adjusting the assortment to bring newness that's skillfully done that represents something that's new and different maybe in fabrication or fit or design, to a category that's an established gift-giving category is a good place to be and we feel very strong about, feel very good about the assortments that we have. I was in store last night looking at what we have and seeing the customer reaction and I think we're very well positioned. We've seen early strength in those giftable categories. The second part is that times are tough. We are in a difficult economic environment and when those kind of conditions exist, people do lean more into value for money. So being at the kind of in the ring for the fight, so to speak, is important to us. We're not just competing against other people in our category, we're competing against jeans, against apparel, against beauty, against all sorts of different players. Our goal is to balance the mix of storytelling between newness and innovation and hard-hitting value for money. Get it now while it's here. Promotions, and we should tell both of those stories equally well during December. Your question about beauty, beauty has always been a big part of the Victoria's Secret business. We have over a billion-dollar business in beauty. It has a very close adjacency to lingerie. We're genuinely really good at it. We have the number one selling fragrance in North America, the line extension in Bombshell. The line extensions that we've had at bombshells, the seasonal extensions have been terrific and really strong. The team continues to bring newness to the category, particularly in mists and lotions. So we have a great team with great capability and a really good strong brand. By the way, that's a global business. The strongest part of our international business is our beauty business. It was the foundation, the start of the international business with beauty. We know that the brand competes against the best brands in the world; when we put Victoria's Secret beauty, and Arun and his team are responsible for this, when we put Victoria's Secret beauty into department stores worldwide against the best brands in the world, we're right up there in the top one, two, three brands. So beauty isn't in any way an afterthought for us, it's absolutely central to what we do and I'm very proud of the team that's leading that. TJ?

Very helpful. Thank you.

You're welcome.

Yes.

Okay, I think next question, Ivy.

Next we'll go to the line of Janet Kloppenburg from JJK Research Associates. Please go ahead.

Good morning everyone and congrats on the progress. I was encouraged at the analyst day or the investor day that you had seen some green shoots in PINK apparel, but maybe your inventory levels were too light, Martin? And I was just wondering if that's a constraint right now or if you're still working through some of the merchandising challenges there? And if you're pushing out the churn in PINK apparel to later in 2024 as opposed to earlier in 2024? And then I think you're calling for comps in December to moderate versus where they are right now. And I'm wondering if that's because you think that if you have tougher comparisons or if you think that you'll have AUR pressure, because of promotions picking up? Thank you so much.

Thank you, Janet. Good to hear from you. Let's take the second part and then TJ, I may be asking you to take some of the second part. In terms of our plans for the year, it's not unusual after a very strong Black Friday and Cyber Monday to see a kind of a lull during the early part of December and things to slow down. As we look at historical patterns, we've seen that before. So we're not being overly optimistic about what we see for December, but equally there's opportunity in that. So that's probably all I can tell you about the outlook for December. TJ, feel free to add it in a minute. As it relates to PINK, your two observations. Yes, and yes; I mean both right. Are we constrained on inventory on the best product? Yes, the best stuff that we put out blew out really quickly and we wish we had more we can't get anymore. And are we still working through what the assortment should be? Yes, we are. It's not 100% right. It's better. As I look at the assortment, I feel significantly more proud of the way we show up now. I think it's more relevant to the Gen Z consumer. I think it's a better fit with Victoria, but there are still significant areas for opportunity and the team that are responsible for it see that completely and we're all aligned on where it is that we need to go to get after it. I don't think we're pushing back the timeline to late 24. Our expectation is that all through 24, we should be making continuous improvement. Some of the things that have worked well are actually relatively short lead time, like panties. So we should expect to be quickly into those businesses in spring. Other items are longer lead time, as you know, and may take a bit longer. So it's a work in progress. I'm pleased with the progress that we've made. It's kind of a no regrets decision that we didn't go full on and buy too aggressively for the fall season. I think that would have been a mistake. So, you know, we live and learn. And thank you for your encouragement. TJ, anything else to add on December?

Yes, absolutely, Janet. So after a slightly positive November in North America, we do expect that December will be down year-over-year. As Martin mentioned, we come off of Cyber Monday and typically the customer takes a bit of a break. And we do have a longer period between Thanksgiving and Christmas this year, so we do expect the customer to come back in abundance as we get closer to Christmas. From a planning perspective, we think it's prudent to set our expectations accordingly with that in mind. I think additionally, just setting our operational expense plans at that lower level of sales also helps us. And you know what, if we're a little bit off and the customer comes back sooner and stronger than we think in December, then the flow-through will be very high and we'll be very happy with that. I think additionally what you might also be seeing in the guidance is we do have expectations that the month of January will also be down to last year. Part of that, Janet, is because semi-annual sale is such a large part of what happens in the month of January and coming into the quarter with inventory levels in our VS and PINK businesses down high-single-digits, we think sets us up well to have a very profitable semi-annual sale and not have to move as many units and maybe have some opportunities to be a little less promotional in semi-annual sales. So that does have an impact on the top line. I feel as if we've set our expectations very diligently for the balance of the quarter and positioned the business that, you know, in the event that things are more robust than we think, the flow-through would be very high, and that's a good position to be in.

The other opportunity that we have, Janet, is as TJ said, if our inventories are clean, we are expecting our inventories to be clean is to pull forward spring fashion, so we're actively looking at ways in which we can pull forward newness to help that January period with full-price selling. I think we have time for one more, Kevin do we?

Yes. Thank you, Janet. And Ivy, I think let's go with one more question, please.

Thank you. And our final question comes from Marni Shapiro from Retail Tracker. Please go ahead.

Thanks, guys. And congrats to the stores. It was a pleasure having to wait online to get in on Black Friday, I have to say. You have made some big investments in the third quarter marketing moments, I would call them, from the show, Netflix, et cetera. I'm curious if you could just talk a little bit about the halo effect. Did you see a bump in traffic around those events? Did you see the sell-through that you were expecting? And curiously, Millennials grew up with Victoria's Secret. It was where they went. It was their be-all, end-all. PINK was their baby brand. But Gen Z, less so. As they were growing up, Victoria's Secret was sort of hitting a lot of speed bumps, I guess is the way to put it. So I'm curious if you're now, when starting to win over Gen Z now, and is PINK the vehicle to do that? If you could just talk about that under the guise of marketing?

Thank you for your questions, Marni. We made significant adjustments to our marketing strategy in the third quarter, especially in September and October during the World Tour. Our goals for the World Tour, as mentioned on Investor Day, were to generate a media buzz, involve ourselves in current popular culture discussions where we had previously been absent, and create lasting marketing assets. We successfully accomplished all of this. Following that, we quickly launched the My Wings, My Way campaign, which presented a different angle. Mariah's involvement also generated considerable attention for the Victoria's brand. A key metric we monitor is brand sentiment, which is currently about 80% positive, a good sign. We track independent research on various metrics such as relevance, intent to purchase, and consumer connection to the brand through multiple means. We focus more on trends in these metrics over time rather than immediate traffic lifts, which are more associated with promotional and performance marketing in digital and social media. The moments I mentioned earlier are more about establishing a long-term positive perception of the brand. The effectiveness of these investments will take time to evaluate. We're currently considering our strategy for 2024 and planning the anniversary for the World Tour, with decisions to be made in the upcoming weeks and months. Regarding Gen Z and Millennials, I’m pleased to report that we are performing well with Gen Z. However, we are not currently meeting expectations with PINK, which presents further opportunities. I am confident that once we revitalize PINK, we will attract both Gen Z and Gen Y customers effectively. Our main opportunity lies with Millennials, particularly younger Millennials, and we are focusing on that group. Our personalized marketing capabilities will help us approach marketing not just by generation but also by consumer behavior. We have identified specific target customers we want to reach and will tailor our marketing strategies based on their preferences. Thank you again for your question, Marni, and thanks to everyone for their interest in our brands. Wishing you all a happy holiday.

Thank you all for participating in today's third quarter 2023 earnings conference call. That concludes today's conference. Please disconnect at this time and enjoy the rest of your day.