Good morning. My name is Fran and I will be your conference operator today. At this time, I'd like to welcome everybody to the Victoria's Secret & Company Fourth Quarter 2023 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 & Company. Kevin, you may begin.

Thanks, Fran. Good morning and welcome to Victoria's Secret & Company's fourth quarter earnings conference call for the period ending February 3, 2024. 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. I want to first share my appreciation and gratitude for the hard work and dedication of our associates and partners around the world who executed our strategies, delighted our customers, and delivered solid financial results in the all-important holiday quarter. I'm pleased to report that fourth quarter adjusted operating income and EPS came in at the high end of our guidance. Sales in the quarter were up 3% compared to last year and were at the midpoint of our guidance. Our fourth quarter gross margin rate increased significantly compared to last year, exceeding our expectations, driven by disciplined inventory management and cost reductions related to our Transform the Foundation initiative to modernize our supply chain. Sales trends during the quarter were volatile by week, but we were encouraged by the improving quarterly sales trend in North America, driven by a sequential improvement in traffic and average unit retail in both our stores and digital channels, with traffic in our stores increasing in the fourth quarter as compared to last year. We were particularly pleased with our early holiday sales in November and during the peak days and weekends leading up to Christmas, both in stores and through our digital channels, led by strong response to our giftable merchandise assortment, improving customer experiences, and marketing messages. The team strategically managed promotional activities to amplify key moments through the days and weeks leading up to Christmas, and we entered the semi-annual sale period with lower inventory levels than last year, which allowed us to maximize margins during the sale period and enter the spring season with healthy inventories. Our international business continued its strong performance with system-wide retail sales up more than 20% in the fourth quarter compared to last year, driven by significant growth in China and globally with our franchise and travel retail partners. We continue to experience profitable growth across stores and digital, and we're excited about our aggressive growth plans to expand our footprint in both stores and digital around the world. From a market perspective, sales for the intimate market in North America as a whole decreased mid-single digits in the quarter compared to last year, which was the fourth consecutive quarterly year-over-year decline. We remain the leader in market share for the intimates category, including both bras and panties. Our share in the intimates category remains at about 20% with our digital share up slightly and our store share down slightly. We were encouraged by our market share gain in digital increase in both bras and panties. From a merchandise category perspective, starting with Victoria's Secret, our beauty business continued to be our best performing category with year-over-year growth for the second consecutive quarter and was followed by performance in casual sleepwear, panties, and bras. Within PINK, sleepwear outperformed intimates and apparel. We continue to roll out our reimagined PINK apparel merchandising assortment in the fourth quarter. The sales trend improved and while still down compared to last year, we continue to buy the category cautiously. The impact of the PINK apparel challenges in the fourth quarter was approximately 1 to 2 points compared to last year. 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, we continue to further develop our understanding of our Victoria's Secret and PINK customer through our multi-tender loyalty program, which now has more than 26 million members who drive more than 75% of our sales on a weekly basis. Through insights and data, we're focused on turning our understanding of her into world-class customer experiences. In February, we relaunched our number one bra collection Body by Victoria, with all new styles and our latest innovation. The popularity for online bras continues to increase, and our newest invisible lift technology offers lightweight design that smooths, shapes, and supports without an ounce of padding. In February, we also released our PINK apparel Spring campaign Going Places, featuring Natalia Bryant with new PINK styles and comfy fits. As part of our commitment to expand our categories, we debuted swim product under our new swim collaborative label PINK by Frankies Bikinis which celebrates the iconic PINK brand reimagined through the lens of founder and creative director of Frankies Bikinis, Francesca Aiello. From a technology perspective, we entered a multi-year partnership with Google Cloud to embark on VS&Co’s AI journey to focus on improving customer experience online and on our mobile apps, improving the associate experience, and improving operational efficiency across the enterprise. As we expanded our Store of the Future fleet to 83 stores or approximately 10% of the fleet in North America and continue to expand our footprint internationally. From a liquidity and capital allocation perspective, we ended the year with a strong balance sheet and ample liquidity to execute our strategic plans. We generated significant cash flow in the fourth quarter and ended the year with a cash balance of $270 million and debt down over $150 million year-over-year. Additionally, our Board has approved a new share repurchase program, authorizing the repurchase of up to $250 million of the company's common stock. As we look into the New Year, we recognize the broader intimates market in North America has been down for four consecutive quarters and the macro environment remains challenging, putting pressure on the consumer. As such, we are planning the business conservatively in the near term and maintaining open-to-buy to capitalize on any changes in trend. At the same time, we remain focused on delivering on multiple initiatives to drive growth in our business over the longer term. For fiscal 2024, our forecast assumes the broader intimates market in North America will remain pressured throughout the first and second quarters, with sales trends improving through the back half of 2024 as we continue to roll out growth strategies and new customer experiences. For the 52-week fiscal year 2024, we're forecasting sales to be about $6 billion or down low single digits to a comparative 52 weeks from fiscal 2023. At this level of sales, we expect adjusted operating income for the year to be about $250 million to $275 million. For the first quarter of 2024, we're forecasting sales to decrease in the mid-single-digit range compared to sales of $1.407 billion in the first quarter of 2023. This forecast reflects our expectation that the domestic intimates market will remain challenged and that our core customer will be cautious in this environment. These challenges will be partially offset by the continued strength in our international business. At this level of sales, we're forecasting first quarter adjusted operating income to be in the range of $10 million to $35 million. The team continues to manage inventories with discipline, and we expect to end the first quarter with inventory levels in our core Victoria's Secret and PINK businesses down mid-single digits compared to last year. At our Investor Day in October 2023, we discussed the opportunity to drive operating margin expansion through our initiatives to transform the foundation of the company by modernizing the operating model. We remain on track and committed to a total of $250 million, three-year goal that we established at our Investor Day in October 2022. We realized about $90 million of savings in 2023 and expect to realize approximately $120 million of savings in 2024, primarily in gross margin. Lastly, as we have shared consistently inside and outside the business, with the long-term health of the business in mind, we remain committed to our strategic priorities. Firstly, to accelerate the core; second, to ignite growth; and thirdly, to transform the foundation. As we look into the New Year, we are committed to our initiatives designed to leverage our market leadership position and unlock the opportunity to convert our significant cultural influence into long-term financial growth. We believe our evolving strategies will position our business to deliver the potential of our category-defining brands, and we remain confident and are committed to delivering long-term financial targets and returning value to shareholders. Thank you. That concludes our prepared remarks, and at this time, we'd be more than happy to take whatever questions you might have.

Thank you very much. We will now begin the question-and-answer session. Our first question is from Alex Straton with Morgan Stanley. Your line is open.

Great. Thanks a lot for taking the question. Just on the full year revenue guidance, it looks like there is an acceleration embedded after the first quarter despite compares getting harder. So can you just talk about what enables that acceleration? It sounds like it's particularly back half-weighted. And then I just have one quick follow-up.

Yes. Thanks for the question, Alex. So when we thought about the full year in relationship to first quarter and the trends that we've been seeing in the business, we made some assumptions around kind of where the domestic market share might go or the intimates market domestically might go. So as Martin mentioned in his prepared comments, the market for intimates has been down four quarters in a row now. As we look at the beginning parts of Q1 and 2024, it appears to us it's going to continue to be a challenge. We've assumed in our guidance that the domestic market for intimates will continue to be down through the spring season and will start to stabilize, not grow, but stabilize as we move into the back half of the year. So we've tried to align our forecast with that. We've tried to align our inventory and cost structure with that in mind. Additionally, as we move through the year, we recognize that many of the merchandising strategies that were articulated at the Investor Day in October will be in full flight as we move into the fall season. So things like category adjacencies that Greg spoke to, the relaunch of sport which Greg spoke to at the Investor Day. So those high-level merchandising initiatives that will put out different products and present differently in the store really are in full flight in the back half of the year. So the combination of an assumption around the stabilizing intimates market and newness in category and presentation and expansion of category, particularly as it relates to intimates and bras and sport are part of our assumptions for an improving trend, ever so slightly quarter-to-quarter as we move throughout the year. So down mid-singles, down low-singles for the year. You kind of get to flat to down low-singles the balance of the year.

Great, that's super helpful. And maybe just one quick follow up, just with the headlines recently on the credit card late fee proposal or a ruling going through. Have you contemplated that in the guidance or how should we think about what that means for Victoria? Thanks a lot.

Yeah, good question. Obviously, that's very topical at the moment, but it's not a new topic. It's been out there for several months and several quarters, but does seem to be picking up a little bit of momentum lately. First, I think it's important to understand that we do not necessarily recognize any revenue on some of the fees that are being discussed or debated, but certainly our provider does, and that impacts their model. So we've got a long-standing relationship with our partner, and we'll continue to try to work with them, but I think it's important to understand that some of the fees that are being discussed do not directly go into our P&L. It's certainly something that our partner relationship will need to work on now.

Thanks a lot…

I think additionally, Alex, you might recall or others might recall, too. The launch of the non-tender or multi-tender loyalty program in the middle part of last year, obviously, was a big, big move for the company and a big opportunity to communicate and incent customers differently than maybe in the past. So we do have a couple of different ways to be working with our customers to incent traffic and encourage them to continue to shop in our stores, not just one dimension like in years gone by.

Great, thanks a lot.

Thank you. Our next question now is from Ike Boruchow with Wells Fargo. Sir, your line is open.

Good morning, everyone. I have two questions, both for TJ. First, can you discuss the impact of the lower sales outlook on the guidance? It appears that the revenue guidance for next fiscal year is about 3% below the street estimate, while EBIT is projected to be 20% to 25% lower. How should we interpret this discrepancy? Are there aspects of the cost structure we should consider? It seems like there's a significant loss in EBIT compared to the relatively minor revenue decline. The second question is regarding the share buyback. How opportunistic do you intend to be with that for the remainder of the year? Thank you.

Thank you for the question, Ike. Regarding our full year guidance, I can’t comment on other models, so I will share how we are approaching it and how it relates to our Investor Day in October. Back then, we highlighted several factors necessary for expanding our operating margin and achieving significant flow-through to operating income. We mentioned that North America sales needed to improve and reach the low single-digit range, which has not occurred, and we do not expect it to in the current year. This presents a headwind. We also noted that our international business needed to continue growing, which it did, and it is becoming a more substantial part of our growth. This was evident in the fourth quarter of 2023, so I’d say that aspect was executed well by the team. Additionally, we stated that Adore Me needed to continue its growth in both sales and profitability. They were close to their 2023 targets, and we have plans for growth in 2024, so we are optimistic about that. We expected that the gross margin rate would increase due to sales and some cost management with goods sold, which we began to see in the fourth quarter and is included in our first quarter guidance. The expense rate required about a 1% to 2% sales increase to leverage expenses, which is not our current forecast. However, we feel comfortable that our expenses are aligned and would leverage positively with that sales increase. We also pointed out that our debt to EBITDA ratio should be 2 times or less, which was confirmed over the past year. The primary challenge right now is the North America sales trend, which is the main driver of the flow-through concerns you mentioned. I believe our gross margin estimate is likely higher than market expectations for the year, even with lower sales. In terms of expense rates, any increases are minimal year-over-year. The focus really returns to the needed improvement in North American sales. Regarding share repurchase, we noted in our prepared remarks that our guidance for 2024 doesn't include any share repurchase activity. We have an authorization aligned with our board based on shareholder feedback, but we aren't providing a forecast for market engagement at this time. We're concentrating on improving our business trend while ensuring we have adequate liquidity for our strategies, and we are confident in that based on our forecasts. Future decisions regarding capital allocation and share repurchase will be made in collaboration with the board quarterly. I hope this clarifies things.

Yep, it does. Thanks.

Thank you both. Our next question now is from Simeon Siegel with BMO Capital Markets. And sir, your line is open.

Thanks. Hey, everyone. Good morning. Martin, how are you thinking about marketing this year? I guess last year you had a tour in Mariah, I assume some big investments that were going to be lapping. So any learnings on those spends? How you are planning marketing this year? And then just maybe a little higher level, just recognizing the industry's top line pressures are what they are. And then TJ, the point you just made about despite operating profit guide down the gross margin is showing improvement. Any changes in how you are thinking about the value of promotions and maybe balancing the focus on revenue versus profits? Thank you.

Yes, thank you, Simeon. Good questions. I’ll start with the marketing. We plan to invest marketing dollars at about the same percentage of sales that we did in 2023. So continue to invest in the brand. Essentially that's across the five areas that we talked about at our investor day. So firstly, in terms of customer, really deeply understanding the customer, segmenting the customer file, building data and personalizing. So more and more of our spend is going through personalized marketing, particularly through social media, but also through curated online experiences through the app and on site. Continued investment in our brand focusing on relevance and brand heat, positioning around powerful, confident, sexy on her terms and then supporting product launches. Our broader category appeal beyond intimates, getting back into sport, all of those initiatives will be supported with marketing dollars. And trying to find ways to go to market that are at the intersection of brand and product and entertainment. And to some extent, the World Tour was a sort of a tiptoe back into that last year. As we hindsight it, I would say we got enormous media coverage, like 17 billion media impressions that were in excess of 80% positive, so that was good. We were part of the narrative about popular culture and that was certainly our intent and it gave us some good assets that we could use in the fourth quarter marketing. To a large extent, it met our objectives. However, I think about the way that we went to market during the fourth quarter as more of a sequence. World Tour was the start of it, we then had the My Wings, My Way campaign, which was extremely successful and very popular. And then that led into Mariah Carey, which was our best received of all of the work that we did last year. So as I think forward to what will be the next iteration of our flagship marketing events, I think it will be less fashion and more commercial. It'll be less ethereal and more fun. It'll be more of our own product and less of other people's products. And it will be more focused on holiday commercial and building commercial sales into the all-important time of year. So, I always try to look forward, Simeon, rather than to look backwards. We're excited about what we've got coming forward. The World Tour was a bold and progressive expression of our brand, and it gives us a basis from which to build and continue to move forward. As it relates to your second question on promotions, our level of promotionality in the fourth quarter was slightly up relative to prior year. We still, as TJ talked about, were able to maintain healthy gross margins, but we did feel the need in a down market in a very competitive environment to lean into promotionality. The first quarter of this year looks about the same with promotions up slightly. We, on a day-to-day basis, are balancing the art of offering newness at full price with being aggressive in our core categories. And I will tell you that it's very much the balance of art and science and it's different by category. In some areas where it's more difficult for us to defend share, like panties, which is a less differentiated merchandise category, we will need to be aggressive and you will see us leaning into promotions as aggressively as we ever have. In other areas where we've got true differentiation and added value, it's less of a requirement. So that's the skill of what we do, Simeon, and we manage it very carefully on a day-to-day basis and I'm very proud of the team that are doing that work. Thank you for your question. Next question, Fran.

Thanks, guys.

Jonna Kim with TD Cowen. Ma'am, your line is open.

Thank you for taking my question. Just curious what you've seen in terms of consumer behavior, quarter to date and in terms of traffic and conversion? And then also if you can talk about key drivers behind international strength and what gives you confidence that momentum will continue throughout the year? Thank you.

Yes, on consumer behavior, I would say nothing particularly meaningfully different year-over-year. We did see spikes in traffic. So traffic to stores came back at certain peak weeks, and that put pressure on our selling organization to be ready. We did see an increase in browsing traffic, so conversion was down in stores, and some peak times. We saw that our digital business performed slightly better in the quarter than our stores business. We actually picked up some share in digital. That's partly due to us being more efficient with our marketing dollars, partly due to the enhanced digital experiences that we're seeing. So honestly, I think it's more about us than it is about the consumer behavior. So I would say, nothing particularly meaningful. As we look across the different cohorts of customers behaviors were broadly similar at the higher end of the income bracket as they were at the lower end of the income bracket. As it relates to international, the headline is really about China, where our partnership with Regina Miracle continues to go from strength to strength, working closely with that team on digital experiences, direct to consumer experiences that are working extremely well. I think we're marketing the brand very well in China and we still have a lot of growth still to come. Across the franchise network, we saw health all around the globe. We're very pleased with our partner operations, getting a store model that enables us to expand. We're going to open 70 to 90 stores this year, so a smaller footprint with a lower capital expense that enables us to get to more customers more quickly. And also embracing digital in the international space, be it operated by us or operated by our partners, a combination of both. All of those factors are driving growth. We also see some opportunity in new markets in Scandinavia, Benelux, Balkans, again both in digital and in stores. So all across the system, and I didn't mention travel retail. I should mention strength in travel retail as well. So all across the system, we see opportunity to continue to grow that business. So well done to the international team. Thank you for the question.

Thank you.

Our next question now is from Dana Telsey with the Telsey Group. And ma'am, your line is open.

Hi, good morning, everyone. Martin, can you expand on the Store of the Future, how it's looking to you and any tweaks since you first introduced it? And on the PINK apparel, the path to improvement there and how you're thinking about directional change along with the marketing message with the Victoria's Secret Collective and how that's progressing and how you're utilizing that tool? Thank you.

Thank you, Dana. Let's start with PINK, and then I'll ask TJ to share his thoughts on the Store of the Future. We recognized about 15 months ago that the PINK brand was facing significant challenges. We weren't satisfied with the type of customer we were attracting. We needed to reposition PINK as a gateway to Victoria's Secret, clearly focusing on a younger, collegiate demographic. We embarked on a comprehensive brand rebuilding effort, which included redefining our identity, the categories we operate in, and our marketing strategies. Given the scale of this overhaul, we chose to approach it cautiously rather than taking big risks. In the fourth quarter, we saw an increase in customer visits to PINK, which was encouraging, and our brand equity showed substantial improvement. The perceived value of the brand also saw a slight uptick. However, we unfortunately noticed a decline in top of mind awareness among the younger consumer base. To regain this awareness, we know we must enhance our product offerings. We're focusing on key items like intimates, bodysuits, innerwear, a compelling gift assortment, and strong sleepwear options, all of which have positively impacted the brand. The most challenging area remains outerwear apparel, and we continue to explore new market approaches. We are particularly pleased with the Going Places campaign featuring Natalia Bryant, which appears to be yielding positive results. While PINK's challenges are lessening, we still have work ahead. We are proceeding cautiously with purchases and allowing ourselves the flexibility to chase opportunities. Currently, we are in a favorable open-to-buy position for fall, which we haven't experienced in several years, enabling us to test and adapt our strategy and invest in successful initiatives. TJ, would you like to address the Store of the Future question?

Absolutely. So Dana, we continue to be very encouraged by Store of the Future results, both in this new class of stores from 2023, as well as the class of stores that was executed in 2022, which are now in their second year. So the stores that have been remodeled the longest continue to see double-digit sales increases, so that's a very strong performance, very good due for us. The stores that have most recently been renovated are more likely in the mid to high single digits and growing. Again, same narrative as what we experienced in the 2022 stores. They start out at one level and they continue to build, particularly through traffic over time. So we're very happy with the remodels and renovations. What's changed or what's different? Candidly, we've tested and gotten comfortable that we can do, I’d say, a less disruptive remodel, meaning, kind of utilizing or better utilizing some of the walls and fixtures that were in place, so there's less construction that needs to happen. So it's a less disruptive process at a lower cost. That's something that we've learned and obviously we like the lower cost element of it at the same productivity. So that's a good do. I think another big win as it relates to Store of the Future is our opportunity to consolidate stores. And what I mean by that is, bring a freestanding PINK store together with a freestanding VS store to have a combined location. As the PINK business has been challenged, obviously, that challenge is freestanding stores. And additionally, it just gives our team, Becky and her team, an opportunity to really leverage and be more productive with the teams we have in place. So bringing stores together we're seeing footage go down 20% or 30% and sales maintain. So sales per square foot are much, much higher. And then the last point that I'll mention and just underline from Martin's comments on international. Getting to a Store of the Future format, there's smaller square footage, easier to navigate, and easier to shop has really opened up the doors in a big way to expanding and increasing the number of new stores we're adding on an international basis. So it's a lower cost due for our partners and ever as productive. So a lot of key learnings. I think as I think about new stores in the Store of the Future format. We've had very good success today in off-mall, particularly in outlet centers. So as we work to decrease our mall exposure in certain locations or in certain markets where malls might be consolidating. We're finding off-mall, particularly outlet center with the new Store of the Future format is a very, very good do for us. So a lot of good learnings and very encouraging results continue in Store of the Future. Thanks.

Thank you. Our next question now is from Matthew Boss with JP Morgan and your line is open.

Great thanks. So Martin, maybe on current initiatives, could you speak to initial customer response to the recent Body by Victoria bra launch? And just larger picture, if any way to elaborate on customer trends that you saw in February and early March? And then just for TJ, what supports your view for back half improvement in the intimates category? Or what have you embedded for the promotional outlook in the first versus second half of the year?

Great, thanks, Matt. Thanks for the question. The Body by Victoria launch was our biggest and most successful bra launch in five years. So we talked previously about Love Cloud being a very big initiative for us. The BBV launch was even bigger and even better. Invisible lift technology meets endless comfort, and very much on trend in terms of lighter, thinner memory pads. Plus we had innovation in the online segment of our bra category. We also had a minimizer bra in that assortment which is very innovative and has proved to be very successful and with relatively low level of marketing customers finding it. Within BBV we have expanded sizes and expanded skin tone coverage and we've also seen success with the new shimmer panty that supported that launch. So kind of all across the franchise, we've seen strength, and we're very pleased with the performance of it. To your point about trends, it definitely supports trends for lighter, more comfort bras. So we feel very pleased with that overall. The challenge that we have is that. while that bra launch has been very successful overall, we haven't been able to lift the overall bra business. So finding a way to unlock great launches and at the same time maintaining the level of sale across the rest of the bra franchises where we're really, really focused. To your broader question about consumer trends. I think as we look at say the Valentine's Day period what we would observe there is that. we had more success with casual flirty comfort-driven merchandise than we did with sort of traditionally overt, more sophisticated, overtly sexy and provocative merchandise. Whether that's a long-term permanent trend or just a short-term remains to be seen. We feel appropriately covered on both of those dimensions. As we talked about before, an important thing for the Victoria brand is that we don't just show up as one way of being sexy, that we're sexy on her terms. And that means that we embrace all aspects of a woman's journey through life and provide better comfort and sport bras than anybody else in the market. So that's how I would respond to the customer trends.

Yes. In response to your question about February and early March, our guidance for the first quarter was based on early results from the first five weeks. We observed characteristics similar to the fourth quarter, excluding the impact of the extra week. While traffic in our stores and mall traffic had improved in the fourth quarter, this quarter we face more challenges, with both down compared to last year and conversion rates remaining flat. Consequently, the top line results are similar. Some key metrics are showing different behaviors early in Q1 compared to the holiday period. Regarding our assumptions moving forward, we expect the intimates market to remain difficult in spring but anticipate it will stabilize, rather than improve, by fall. Within our strategy, we are implementing new merchandising approaches that Greg discussed at the Investor Day, focusing on items like sport bras. The sports market is growing, but we are currently under-penetrated. The sport segment represents about 30% of the overall bra market, while our stores do not reflect that proportion. By aligning our product offerings with market demand and targeting the sports business, we hope to enhance our performance in the intimates category. Although there will be new offerings in the latter half of the year, we are assuming some stabilization will occur, particularly in the fall. Overall, the top line is projected to show mid single-digit declines in the first quarter and low single-digit declines for the year, indicating that while we don't expect a significant uptick, we are hopeful for stabilization in the latter half of the year.

Great color. Best of luck.

Thanks.

Thank you. Now our next question is from Marni Shapiro with Retail Tracker. And your line is open, ma'am.

Hey, everybody. Just touching on this whole sales notion, because it sounds like the goal here for 2024 is to drive sales. Martin, could you touch on a little bit some of the new products like Fun and Flirty, like Wink, like Body by Victoria? I know they are newer this year, but are they driving traffic to the stores, and are they driving sales? And it sounds a little bit like even as some of the new stuff is selling, it's not driving the rest of the store. Do we hear that right? And then I noticed in a couple of stores that you have a Adore Me in the Victoria's Secret stores. Could you talk a little bit about the strategy there as well?

Hi Marnie, thank you for your question and for recognizing the newness in our stores. When our brand performs at its best, we see a lot of new offerings across all categories, which is essential for driving our business. Over the past few years, we've established an innovation pipeline to increase the frequency of our bra launches. The BBV bra launch was critical, as it's our largest bra franchise and overdue for an update. All our bra collections require refreshing to maintain customer interest. The positive aspect is that customers do notice these changes. The BBV launch is the most significant we've had in over four years, and customers have responded well to the Wink bra, PINK seamless, and featherweight max sports bra. We need to draw in more people into the franchise, which requires more effective marketing. Our loyalty program, now with over 26 million members, is a key tool for targeting marketing efforts appropriately. This allows us to present the right products to the right audiences, making our marketing investments more focused. It's crucial to develop new products with careful consideration of our target audience. You also have a keen eye for our presence in stores, as we only have Adore Me in a few locations. Adore Me is growing, recording gains in both the fourth quarter and for the year, and is well-positioned for 2024. They are currently enhancing their marketing efforts and expanding into new distribution channels. Their recent fashion show was a success, highlighting inclusivity and diversity. Although Adore Me is primarily a digital brand, as its owner, we need to explore every way for customers to interact with it in-store. While we don’t anticipate a significant increase of Adore Me in stores, we will continue to seek opportunities to integrate the brand within our broader strategy.

Great. And can I ask one more follow-up on bras? There is a broad trend bubbling up that bras are actually coming back in style. Push-up bras are actually coming back in style, not the way they were back in the day. But what could this mean for your brand? Because it feels like if this trend continues to bubble up, it could be pretty significant for you guys, because bras have been out of style for a couple of years now.

Yes. I mean, look, if you think about what the different trends of bras have been over the years, the one that we would like to come back the most and the strongest would be the push-up bra because we dominate that part of the market. Our share in push-up is significantly higher than it is in online or in sport or in any other aspect of bras. So yes, that would be great. I don't see that as a structural change right now in the data that I'm looking at. But from your lips to God's ears, if that is a trend, we'll be very, very well positioned to take advantage of it, Marni.

Okay, great. Thanks, guys.

Thank you. Our next question is from Warren Chang with Evercore ISI. Please go ahead.

Hey, good morning. I was wondering if you guys could walk us through the shaping of the gross margin through the year a little bit in a little more detail. It sounds like leverage picks up a little bit in the second half. I think you said promotions will be higher in the first quarter. I know there's some moving pieces with cost savings, but maybe if you can contextualize for us the drivers this year and any call-outs on shaping.

Yeah, Warren, this is TJ. I'll do my best there. So I think at a very high level, we would expect the margin rate to be up for the year, largely driven by the cost of goods sold initiatives that we have in place as part of the Transform the Foundation. Additionally, here in the early part of the year, we continue to see favorability from a transportation standpoint. So transportation rates that are embedded in our inventory are lower year-over-year, so that's a net positive. On the flip side, as Martin mentioned, we are seeing slightly more promotional activity here in the front part of the year. So those are the key elements from a margin perspective. And then the last one would be B&O deleveraged, which is really going to follow sales. So if you think about how we just talked about the sales trend or what the embedded sales trend is for the year, I would expect us to have cost of goods sold initiative benefit throughout the majority of the year, especially the first three quarters. When we get to the fourth quarter, we start to anniversary what just happened in this most recent fourth quarter. So it's more present in the first three quarters of the year. The transportation opportunity, we still think, is available to us in first quarter and potentially second. We don't necessarily have a crystal ball in where transportation rates will go in the back half of the year. So that benefit likely impacts spring in a positive way. From a promotional standpoint, Martin mentioned, we do expect to be a little more promotional than last year, here in the first quarter. As we move through the year, if our assumptions are correct, and the intimates market stabilizes, hopefully that promotional need abates a little bit. And then as I mentioned, B&O will track where sales are going and what sales trends look like. So down mid-single digits here in the first quarter, down low single for the year, or slightly better as we move through Q2, Q3, and Q4. So that's kind of how I would think about the key drivers. I do think there's an opportunity for the margin rate just in total, obviously, to be up in the first quarter and potentially up in the second and third. We had a very strong gross margin performance in the fourth quarter that we just came across. So I think anniversarying that might be a little bit more challenging, but we'll see what we can do when we get there. So I feel very good about the gross margin opportunity, again, on lower sales based on how the teams are managing inventories in our stores and our distribution centers.

Thanks, and I also just wanted to clarify an earlier comment on the impact of the CFPB ruling. It sounds like you're saying the late fees don't flow directly into the P&L. I wanted to clarify whether they flow indirectly or are you saying it's just not an input to your credit-sharing arrangement?

It's not an input to our P&L. That's something that is between our provider and the customer.

Thanks, good luck.

Yes, great. Thanks, Warren. Fran, I think we have time for one more question.

Then our final today is from Mauricio Serna with UBS and your line is open.

Good morning. Thank you for taking my question. I wanted to ask about the outlook for operating margins, specifically in relation to SG&A. Earlier in the call, you mentioned that SG&A dollars in the first quarter are up by about $10 million to $15 million year-over-year, which is roughly a 2% to 3% increase. I'm curious if we should assume this as the run rate for the remainder of the year, excluding the additional week impact in Q4. Could you provide more insight into the reasons for this increase? Is it related to technology, marketing, or something else? Thank you.

We are not breaking down Q2, Q3, and Q4 at this time, so I can't provide much more detail beyond what we've shared. However, I can say that the slight increase in expense hours during the first quarter is driven by a couple of factors. First, we are continuing to invest in technology and customer experience initiatives that we discussed at Investor Day. Additionally, there is some timing involved in marketing spend, particularly in the Adore Me business, aimed at growing the customer base and overall sales for the year. We will also experience some merit pressure across our more than 800 stores and 25,000 associates. Given a base of about $450 million in the previous year, a slight increase indicates we are managing the business effectively in a challenging environment. Overall, I am confident that the team can achieve an SG&A leverage point in the range of 1% to 2% on an annual basis for the year.

Got it. Thank you very much.

Thanks.

Okay, thanks everyone. Appreciate the time today. Have a great day.

Thanks everybody.

Operator: Thank you. We are now concluded. Again, thank you very much for your participation. Please disconnect at this time. Have your great day.