Q2 2021 Victoria's Secret & Co Earnings Call
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Good morning, My name is Missy and I'll be your conference operator today at this time I would like to welcome everyone to the Victoria's Secret <unk> Company's second quarter 2021 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 answer session of today's call at that time, if you would.
To ask a question. Please press star one I would now like to turn the call over to Mr. Jason Weber, Vice President Investor Relations at Victoria's Secret and company, Jason You may begin.
Thank you Missy good morning, and welcome to Victoria's Secret and Coast second quarter earnings Conference call for the period ending July 31.2021.
As a matter of formality I need to remind you that any forward looking statements. We may make today are subject to our safe Harbor statement found in our SEC filings and in our press releases joining.
Joining me on the call today are CEO Martin waters, CFO, Tim Johnson, and EVP Finance, Brad Kramer.
All of the 2020 results we discussed on the call today are adjusted results and exclude the special items described in our press release.
Also as a reminder, our results are on a carve out basis and include the Victoria's Secret segment and a portion of the unallocated overhead costs as part of L brands.
Thanks, and now I'll turn the call over to Martin.
Thanks, Jason Good morning, everyone. We're excited to have launched Victoria's secret, Nick Coe as a standalone public company.
Half of the management team and the board I'd like to extend our sincere appreciation to all associates, who work so hard on the successful spinoff I'm grateful to all of our associates for their contributions to the success of our business as we look forward to capturing the opportunities ahead and of course, we wish the Bath <unk> body works business and their associates well as they embark on that.
Jeremy as a standalone public company.
Turning to our second quarter performance, we delivered very strong results exceeding expectations and delivering all most profitable spring season in five years, we reported second quarter earnings of $1.71 per share compared to an adjusted loss of <unk> 97 per share last year.
Sales growth of 51% combined with significant growth in merchandise margin and disciplined expense management drove these results.
Compared to 2019 sales decreased 10%, reflecting the net closure of about 240 company operated stores since the second quarter of 2019, however, comparable store sales increased 5% compared to 2019.
Operating income in the second quarter was $203 million, an increase of $314 million compared to last year, and an increase of $197 million compared to 2019.
Second quarter operating income on a historical segment reporting basis as part of our brands totaled 233 million significantly exceeding our previously communicated guidance of more than $200 million.
As shared in our written commentary given the COVID-19 related uncertainty in our basic supply we are only providing guidance for the third quarter of 2021.
We believe the supply chain headwinds may impact merchandise flow and the promotional cadence of the business.
Operating income for the third quarter on a historical segment reporting basis as part of our brands and before standup and separation costs is expected to be in the range of $110 million to $120 million, which is broadly in line with last year's results of $115 million.
Thank you and that concludes our prepared comments at this time, we'd be happy to take any questions you may have.
Thank you Sir that does now time for question and answer session of today's call. If you would like to ask a question over the phone. Please press star followed by one please make sure that your phone is on mute it and record your name clearly when prompted if you wish to withdraw. Your question you can press star two. Thank you. Our first question comes from Matthew Boss.
<unk> from Jpmorgan. Your line is open Sir.
Great. Thanks.
Maybe two part question Martin first what inning do you see AUR expansion here today in terms of moving forward and with that do you see merchandize margin levels exiting this year as sustainable or any give back that we need to consider and T. J on SG&A Reinvestments that I know are in.
Bedded in the mid teens margin plan is it best to think about investments from here as linear over the three to five year plan or any timing to consider as we would think about on an annual basis next year relative to the back end of the plan.
Thanks, Matt I appreciate the question and your interest in the business as always so on AUR, Yes, we've made great progress on AUR, we feel very happy with where we are is there more room to go probably a little bit.
We develop better merchandise.
Improve our assortments and lean more into the core categories of bras, particularly our best that brought us maybe some more expansion of AUR. So if you had to push me for a number I would say, we're probably in the sixth innings as it relates to merchandise margin due I think our current position as sustainable absolutely. Our goal is to focus on profitable sales I have full.
Charities on the back of my hand, one of those priorities is profitable sales, it's not a market share gain for us is not a volume game for us it's about ensuring we deliver high quality merchandise high emotional content and that comes with higher margins and hopefully if we can manage with the discipline of buying process. So that we start the season light.
And read and react and chase into winners and cancel loses then we can continue to build on that margin growth that we delivered during 2020 and into the first half of this year.
Yes.
Yes. Thanks for the question Matt in terms of the forward look that we talked about on the Investor day in the mid teens operating margin.
Our desire to continue to invest in the business.
We would think of that more as a linear discussion and not just a point in time, so specifically our investments will likely be focused in stores and technology and then digital each of those timelines may look a little bit different. So for instance, we talked about a store of the future test here in fall and potentially a handful of <unk>.
Stores next year in 2022, when successful 2023 and beyond is where you would likely see us build that out in a more meaningful way. So again kind of a linear approach to stores technology may look a little bit different upon separation I think we've talked about from an LTV perspective 200 to 300.
And investment at.
And the majority of that being in technology, we would think of that as more consistent over a period of time.
And then from a digital perspective Martin's desire to be digital first we will continue to look at opportunities to invest there. So I think when you look at the components of our when you look at it in total it will likely be more linear and focused having said all of that ROI and profitable sales as Martin mentioned will be the priority.
When we think about reinvesting in the business. So hopefully that helps clarify how we're thinking about investment in the long term operating model.
Great. Okay. Good luck.
Thanks, Matt next question.
Our next question comes from Roxanne Meyer from <unk> Partners. Your line is open ma'am.
Great Good morning, and congrats on a solid quarter and a successful separation.
My question is around.
Third quarter the start of third quarter, you provided some guidance I'm just wondering if you could give us a little bit more color about the start and in that context talk about.
The new bra launch last week, which is exciting to see our new recent athletic lines.
How impactful a needle moving cannot can launches like this will be to sales and then just as a follow up as we appreciate the supply chain disruptions that are out there.
How should we think about what percentage of your sales are historically chased in the second half how to think about what could be.
Left on the table and capped if there are indeed disruption. Thank you.
Thanks, Roxanne I'll take that one and thanks for the question Hope you well. So we are excited about the start of the third quarter. The momentum. We saw in Q2 has continued or only two and a half weeks in but we're happy with how we've started and thank you for raising the new bra launch, which is very very important to us so the infinity flex for Arlo.
Which was our first big launch in a long time and when this business was its best we were launching two new bra frames a year, we stopped doing that during the period of execution missteps, we are getting back on the habit of doing that and we now have a pipeline of new bra is coming but.
But I can see out 24 months into the future. So very excited about the bra launch the results were overwhelmingly positive significantly exceeded our expectations and we didn't put that much marketing behind the bra and she found it and Thats a great indicator of the customers are coming back to this brand finding goes and Theyre excited for new merchandise.
We also had a couple of other really exciting proof points in the first quarter, one was pink Friday, where Amy sports team did an amazing job.
Launching the back to school campaign, with Pink Friday, and again exceeded our expectations and in the beauty business Greg's team really knocked the ball out of the part with the Crem cloud Frey.
Fragrance launch in the <unk> franchise, which was really really outstanding so three great launches to start the quarter and theres lots more to come so very excited about where we are are they needle moving of course.
I think the essential to the pipeline of being a full priced operates in a fashion forward business that is not chasing discounted sales and overly promotion promotional that is base that is focused on newness.
Having those kind of launches is essential.
You asked about.
Ability to chase so I've said publicly that when this business is at our best we would buy and commit to about half of the season, and we would leave half of our doors to read and react and chase and that is our long term objectives. Given the problem is that there are in our base of supply right now that would be fully going into the.
We'll see it is not safe to only placed 50 or 60% of our merchandize and hope that the base of supply we will be able to read and react. So we're going to break from our normal cadence the cadence that we reestablished in the spring and the fall of last year.
Going to commit a little harder than I would like and I think that is prudent based on all the challenges that we see but going forward, we should get back to that.
That cadence of booking about 50%, 55% of merchandise at the start of the season hope that helps okay.
Thanks, and best of luck.
Okay. Thanks, Roxanne next question.
Our next question comes from Ike <unk> from Wells Fargo. Your line is open.
Hey, good morning, everyone just two questions from me.
On the revenue guide for the quarter, the mid to high singles kind of curious.
Component the direction and store should direct remains negative given you still have some pretty robust compares just curious on that mix and then.
Maybe Martin.
The 7% dilution from the 88 million shares.
I'm trying to understand what exactly is driving that and then <unk>.
Spectation of that to go even further or higher.
Over the next quarter or so or is $93 million kind of the right way to be.
Yes. Thanks for the question I think on the on the first question on sales I think it's real important to us.
Reiterate for everybody, but if we think about sales and the progression. That's happened here so far in the business in 2021, we put out a 9% comp in the first quarter and a 5% comp in the second quarter. Please remember the 9% comp in the first quarter did have the benefit of stimulus so without that was more in the.
Low to mid single digit range. So we saw a nice comp progression from first quarter to second quarter on a two year basis, even the months within the second quarter. We were very pleased with May June and July as all three months were either in line or slightly better than our internal plans that we measure against Additionally, all three <unk>.
The business performed as Martin mentioned.
All three businesses are off to a great start in third quarter as well. So we feel very good about the progression of how the business has performed from a top line perspective in the first two quarters and here in the start to August we haven't necessarily provided guidance.
The two different channels that you mentioned like only to say that we are continuing to see the business shift in terms of mix as stores start to reopen as we start to be more able to open parts of the store to the customer that werent necessarily opened in the front half of the year, we are seeing some.
<unk> from from digital into stores, which again, we think is also very healthy for the business and very healthy as we reopen so we feel very good about.
The progression of sales in the guide here into August.
From a trend standpoint.
And the shares the share dilution, yes. So this is Jason on the shares so the $88 million the basic at the time of the separation the $93 million the dilutive.
Share expectation moving forward.
Okay.
Great. Thank you next question.
Our next question comes from Kimberly Greenberger from Morgan Stanley. Your line is open ma'am.
Great. Thank you so much.
Jeff.
If my math is correct here it looks like the exit rate coming out of the second quarter actually.
Accelerated maybe relative to what you had.
<unk> been trending at.
Sure.
Previously.
It's possible that I am off here, but it looks like maybe running low to mid teens.
On a year over year basis.
Looking at the Q3 guide it looks like maybe you're embedding a little bit.
Deceleration for third quarter in the mid to high single digit range compared to that double digit exit rate.
Am I doing the math there correctly and.
If so.
Martin are you thinking that there may be a little bit of inventory supply delays.
It could be.
Impacting Q3 sales.
So are you just trying to position the expectation a bit conservatively.
The event that you actually do encounter some delays in receipt.
So much.
Kimberly why don't I take the second part of that question first and then I'll throw it back to to TJ on your question about deceleration. So are we being conservative in our guidance for Q3, maybe.
Don't know what I do know is that there is definitely pressure in the base of supply most of that pressure will impact Q4, but some of it will impact Q3, how does that pressure show up well there are three parts to it one is the cost of freight coming into the country will increase significantly as we move from some plan C into add secondly, there will be delays.
It will push merchandize sales out and in some cases those delays will be so extreme we manda cancelling merchandise again more of a Q4 than Q3 and the third part is what I mentioned earlier, which is our inability to read and react in the way that we would like to because we're just going to have to place our bets because of the uncertainty around production going forward.
Are we being conservative I think we're being prudent I think we're being transparent.
The base of supply has some black.
Go ahead of it but all aspects of the business as they sit today or in a very healthy shape. So T. J why don't you pick it up on that.
Kimberly Great question on the trends here in the second quarter I think it is important to note internally the business made a decision on semi annualize semiannual sale and the timing of semiannual sales. So that had a bigger benefit in the month of July and a little bit of a hurt in the month of June So thats why its important that we look at.
Added the business trend against our original expectations month to month to month, and we were very pleased with that so we don't we do not see August is a deceleration actually we see it as a continuation of a broader trend and an encouraging one because it is merchandise based as Martin mentioned in some of the newness of new pro.
Grams.
Fantastic. Thanks.
Thanks, Kimberly next question. Please. Thank you. Your next question comes from Omar Saad from Evercore. Your line is open.
Thanks for taking my question. Good morning, I wanted to ask for maybe a little bit update on the brand evolution.
But you guys have been undergoing for a while how that's resonating with consumers any thoughts on what that means for product and category mix.
Growth and profitability.
If it does play out in terms of the products and categories that you sell most thanks.
Great. Thanks, Omar Thanks for asking the question, we are very happy with where we're sitting in terms of the brand Revolution. As I think you know we started this journey back in January but we're relatively quiet about it in terms of just getting on with changing the imagery that we put forward in the way we talked about the brand and the language we used in the branch.
It wasn't until the middle of the year around June when we came out publicly and said this is a brand revolution, we are dramatically changing the positioning of the brand and we already knew by that point there was significant proof points to be seen the good news is that since those announcements and specifically the announcement of the <unk> collected.
Gone from strength to strength, what do I mean by that.
I look at our daily sales and I see evidence of success that I look at the three launches I mentioned earlier that some of the best launches. We've seen in recent years success I look at the growth of the customer file which has been terrific I look at the response to the reopening of the fifth Avenue store in New York, which again has just been terrific.
Lift flow sweat.
In the active space that we launched really really excellent momentum that all around the business, we see positive proof points and we see that showing up in our social media as well. We also run a customer panel that keeps us close to the voice of our consumer and we test all of the things that we're putting out.
With that and the indicators are very positive, particularly as it relates to body diversity to inclusivity and to showing up in a way that is culturally relevant what does it mean for our product category mix going forward well you remember that slide that I showed at the Investor Conference.
The number one thing for us to focus on is growth from Nicole the area, where this business lost the most sales and profit is in the bra category.
We have a bra business the number one objective for these companies to be best at Bras that means world class nobody better than us at bras, So all roads lead to broader innovation.
<unk> will bra launches thats, the most important beyond that.
Other growth opportunities in categories that we're excited about thereof, and they all happen to be very close to the core adjacent to the core so I'm thinking about areas like maternity that are strategically important we launched and maternity bra within the last month, but very <unk>.
Quietly no marketing barely any in store signage has defined it deep on the website. We sold 100000 units in a week the customer is rooting for us Shapewear very important category for us size expansion very important swim because you know we entered that category and building back sales with a very good franchise thats close.
To the call and I think there are other opportunities as well, particularly in aggregating third party content. So wherever we look around the business the grounds for optimism Omar we're very pleased with how the customer is responding so thanks for asking and I hope that helps.
Great color Martin Thank you.
Great. Thanks Omar next question. Thank you. Our next question comes from Janine Stichter from Jefferies. Your line is open.
So my question I wanted to ask a bit more about the odd point active Audrey noticed in stores and it seems like a pretty big departure from what you've got enacted thus far is maybe just elaborate on the opportunity for that category, what you're seeing in the initial uptake and the broad strategy for active just knowing it's gone through some fits and starts over the years. Thank you.
Yes, I'll take that Jay so the.
Lip flow sweat launch was very successful and I don't know if you saw the campaign.
We have Eileen <unk> is one of the members of our collective representing floors and the imagery was absolutely stunning and very representative of Victoria Secret should show up going forward. So very pleased about that.
Activewear.
Category is an important one for us, but I must say that the basis of us being in the <unk>.
Category.
Its adjacency to browse what do I mean by that it's about sports bras disposed for I suppose for US we're underweight influence for US we've been underway for many years. It's a key part of all womens bra wardrobe and we have to get better at it now one of the ways you get better at being in the sport bra business is by having really good leggings and other.
Components are active with the fashion forward and they help complete the outfit and they are very relevant to what young women are wearing out there in the market at large.
It's a very important category for us, but you must remember that its adjacency to the core that is the reason that we're doing it hope that helps.
Helpful color. Thank you very much.
Thanks Janeen next question. Please. Thank you. Our next question comes from Simeon Siegel from BMO capital markets. Your line is open.
Thanks, Hey, good morning, everyone. Congrats on the separation and the ongoing progress of the business.
How how are you guys thinking about long term gross margin from here, maybe how you're benchmarking your opportunity and then just given all the successful initiatives you've done last year could you share the occupancy dollars you would expect on an annualized basis at this point.
Yeah, I think Simeon I'll start and certainly Brad Martin can weigh in here I guess from our perspective from a margin rate.
Perspective, we know that we are still trailing our peak margin rates.
We're seeing improvement in full price selling we're seeing improvement in lower promotional selling through the inventory.
Management and inventory disciplines that have been put into the business. We know we are running down meaningfully on a per square foot in terms of inventories. So I think we feel very good about the progress that we've made and we feel very good that there is still opportunity in front of us given we're well off of our peaks.
Still so hopefully that helps from a margin perspective.
I guess from an occupancy standpoint, Brad.
What I would add on that occupancy side is that a lot of the fleet rationalization work is behind us and we believe we have right sized the fleet and reset the store count we don't anticipate meaningful changes in our fleet Count go forward, obviously, we'll read the business year over year and look at store performance trends, but we believe the occupancy.
As stated in our trailing 12 month performance as a good proxy for ongoing rates.
Great. Thanks, Brad Best of luck for the rest of the year.
Thanks Simeon next question. Thank you. Our next question comes from Susan Anderson from B Riley. Your line is open ma'am.
Good morning, Thanks for taking my question and nice job on the quarter I.
I guess, maybe if you could talk a little bit about Paul maybe you can talk about the growth in the second quarter.
Well between Loungewear and lingerie and then also let's start to back to school what trends Youre seeing there so far.
Susan I think you asked about pink was the first part of your question what was the second part.
Just to start to back to school and the trends that youre seeing morphine.
Yeah got it thank you.
Pleased with the pink business the pink business is happening very closely with the BSL business and showing growth in all of the three pillars. So the three pillars of the business, our luxury which had its highest penetration I think in history certainly in recent history.
Approaching 60% of the business. So that's really really important for US is the lingerie business second pillar is logo. That's an indicator of the health of the business and that is also approaching peak levels and has seen double digit growth in the last year and the third pillar is active where we've seen very strong performance there as well so all three pillars of the <unk>.
Doing well Pink Friday was a very strong event for us we saw good momentum.
Starting to see early in the season in the back to school would be later than we'd seen in previous years, and we were hoping that it would come through strong, but we werent sure David So back to school happened. It just happened a little later than it has done previously we've also seen great customer advocacy and paint from.
This shifts like mental health awareness in May where we are.
Launched a very exciting program has great resonance with customers and similarly, our initiative with Chloe and Howie that Amy and her team have launched has been absolutely terrific for us. So very pleased with the progress that we're making in the pink business around thanks for asking Susan.
Great. Thanks, Rob.
Great. Thanks, Susan I think we have time for one more.
Okay. Sir our last question comes from Oliver Chen from Cowen Your line is open.
Hi, This is John on for Oliver today. Thanks for taking our question you just had a question about the international business, what you're seeing quarter to date, and if you're seeing any improvement in the travel retail and as we look towards second half are you thinking about the international segment. Thank you so much.
Thank you and please give our regards to all of US. So the international business is five businesses in one as you probably know the franchise business is rebounding relatively well the direct to consumer business that we run from North America has been very strong seen exceptional growth and continues to be very profitable.
China and the U K, China has been okay, not fully rebounded by any stretch of imagination, but okay, and we're making progress on our restructuring in that market. The UK has been very good for us considering all of the troubles that there had been in Covid, we've restructured our business, we have an amazing partner and next.
We have a really strong direct to consumer business in the stores business is starting to reopen and come back. So we feel very good about that travel retail as you mentioned is.
The area that has been the slowest to respond past, but obvious reasons. There are airports around the world that are back up and running and fully functioning in our business. There is good but equally there are parts of the world that are just closed down and so it's very much a mixed bag in travel retail, but arun and his team are doing a great job of.
Rebuilding steadily.
Main thing to look for in our international business is not the top line growth given that in the restructure in the U K we've changed the accounting.
But also it's more about appropriate storage and the swings that you will have seen year over year. In Q2 is very real and very meaningful and we expect that to continue into the back half of the business with all parts of the business showing profit with the exception of China, where we're getting close to cash breakeven, but we still have a bit of work to do in the back.
Half two to get that to flat. So hope that helps and thank you everybody for your interest in the business and your continued support we appreciate it very much J you want to go to that that's perfect. Martin. Thank you everyone.
Okay.
That does conclude today's conference you may disconnect at this time and thank you for joining.
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