Q4 2021 Victoria's Secret & Co Earnings Call

March 3, 2022

Good morning, My name is Cedric and I will be your conference operator today at this time I would like to welcome everyone to the Victoria's Secret and company's fourth 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 to answer session of today's call.

At that time, if you'd like to ask a question. Please press Star then one.

I'd now like to turn today's call over to Mr. Jason <unk>, Vice President Investor Relations at Victoria's Secret and company, Jason You may begin.

Thanks, Ed.

Good morning, and welcome to Victoria's Secret <unk> fourth quarter and full year earnings conference call for the period ending January 29 2022.

As a matter of formality I need to remind you that any forward looking statements. We may make today are.

Subject to our Safe Harbor statement found in our SEC filings and in our press releases.

Joining me on the call today are CEO Martin waters, CFO , Tim Johnson, and EVP finance spread Kramer, 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 special items described in our press release and our SEC filings.

Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release and our SEC filings.

And now I'll turn the call over to Martin.

Thanks, Jason Good morning, everybody two.

2021 was certainly a milestone year for <unk> and I want to thank all of our associates and partners for their hard work commitment and resilience.

And our first year as an independent public company our team is focused on execution through.

We delivered on our major objectives, even in a challenging environment for retailers.

Turning to the fourth quarter performance, we delivered results across all the major metrics.

At or above the high end of our previously communicated guidance.

We navigated significant supply chain headwinds and successfully lapped the start of federal stimulus benefits in the prior year.

For the quarter sales growth of 4% was led by strong performance in our intimates and beauty categories, along with broad based strength in our international businesses.

Our sales growth combined with solid merchandise margins and disciplined expense management drove operating income of $333 million, which was at the high end of our previously communicated guidance of $2 95 to 303 5 million.

We reported fourth quarter earnings of $2 70 per diluted share above the high end of the previous guidance of $2 35 to $2 65 per diluted share and that was driven by operating income gains along with a 4% benefit from our accelerated share repurchase program that we announced in December .

As we look forward to 2022, we expect the full year to be broadly comparable to 2021, but there are some key differences between the first and the second half of the year.

We expect first half earnings to be challenged and below last year is a direct reflection of supply chain cost pressures continuing through Q1, and Q2 of this year and.

And at the same time, we will be comping.

Federal stimulus benefits from last year as you know.

In contrast, we expect earnings in the second half of the year to be up to last year and for our operating margin rate to revert back closer to our longer range targets of mid teens.

Our optimism for the second half is based on an expectation of more normal sales and margin growth rates as we anniversary last year's significant supply chain disruptions and costs and.

And Additionally, our team has been intensely focused on several profit improvement initiatives to increase margin dollars and lower our expenses and the run rate of the business.

We expect these initiatives will start to deliver during the second half of the year.

But from a strategic viewpoint, we are focused on delivering every quarter and season. While we're also planning on investing for the long term sustainability of the business and we're thinking about sustainability in the broader sense of the world, which is ensuring that we are a company of loved brands. This links back to our vision mission and purpose.

It's connected to what we know from our customers, namely brands. They love play an important role not just in their lives, but in society and in the world at large.

They our customers expect us to take responsibility for where we've been where we are.

And for where we're going now living in a world that's become increasingly virtual and they demand authenticity and choose brands that are socially and ecologically responsible.

I will focus as leaders and as a company is ensuring that we are a future facing business that means having a business model and again I use that in the broadest sense of the term that increases in relevance and supports and reinforces our purpose.

We're investing in women led businesses using the power of our platform to support and encourage and partner with brands that promote advocacy for women like.

<unk> amplify benches, which we announced earlier this week.

We've made meaningful progress on sustainability, and social responsibility and our ongoing commitments in these areas are foundational to who we are this.

This year, we will release <unk> Inco ESG reports first in April and then again later in the fall season, transparently outlining our goals measures and our progress.

We launched a new digital first brand called happy nation.

Optimistic inclusive brand will fill a void in the tween market, bringing undisposed browse can be closing on body care. The parents and Tweens can feel good about you should expect to hear more about about that from us during April .

And our newly formed emerging businesses team is finding alternative sources of revenue and customer goodwill. For example, later this year, we'll launch a partnership with <unk> a pioneer in the plus size intimate space.

We continue to focus on maximizing our performance and leveraging the strength of our brand in connection with our customers and we're confident in our opportunities and remain committed to delivering long term sustainable value for shareholders.

Thank you.

That concludes our prepared remarks, and we'd be more than happy to take any questions that you might have at this time.

To ask a question.

If you'd like to ask a question. Please press Star then one please remember to mute your phone and record your name clearly and pumped. It if you would like to withdraw your question you May Press Star two.

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

Good morning.

To expand a little bit on the new bra launches and other new product initiatives. How these have gone over the past several months and then how these factors affect the pace of your sales growth as the year progresses.

Thanks, Laura and thanks for the question Yeah happy to so Youll remember me, saying that when this business was at its peak, we had at least two bra launches per year, and we got out of that cadence during the years of 2016 2019, and we're now back on that form so.

We had better Intendency flex launch, which was very successful in the full season and then most recently not within the fourth quarter, but within the first quarter, we launched the love cloud, which was the biggest launch in six years for our company exceeded our expectations and was met with delight from our customers old and new we found a younger customer.

Coming into this franchise.

The number of frames and the breadth of choice that we have on offer it's really been most popular browser in a most talked about bra and you may have seen the campaign that went along with featured 818 incredible women and was just another milestone along the way and the repositioning of our brands.

Being best at browse is the most important thing that we do in the business. It's the foundation of everything that we're about and I'm really happy to say that what we've done in the last year has worked and is working and I can see a pipeline going forward for the next two years with more innovation and some really really interesting developments.

In this space, so lots more to come from us, but it's not just about Roes, we have great development in the pink business, we have great development in the beauty business and so.

<unk> of the business comes from innovation and from new product development and I'm delighted with what I'm seeing in the business.

Thanks for asking.

Thank you.

Thank you and our next question comes from Ike <unk> with Wells Fargo. Your line is open.

Hey, Thanks, guys.

Two quick ones for you I think.

Number one can you I think Martin alluded to some profit improvement profit improvement driver as you guys have for the back half could you just give us some specifics around what those are and does that come alive Cogs are SG&A and then just when we think about Q4 and what we're lapping next holiday maybe I know you can't determine completion and what that will look like.

At that time.

This year, but just on the mix of air and Ocean, What's a typical holiday for you Air Ocean split.

What was it this year how inflated wasn't in terms of mix and then what are you kind of like planning for this year, just so we kind of understand what's embedded in the guidance. Thanks.

Yes. Thanks for the question I'll take the second part and ask Brad to speak to the profit improvement initiatives, but specifically as it relates to fourth quarter as we discussed in our prepared remarks, we had about $110 million of headwind from cost pressures related to supply chain.

Both great mix of Ocean and air as you mentioned.

That impacted results. It is difficult to look all the way out to fourth quarter of next year sitting here today, we are.

Are encouraged that were starting to see a little bit of positive movement from a rate perspective here in spring, we are encouraged that our merchant and planning teams.

<unk> made progress in starting to move more back towards ocean and less towards air, but it's a fluid. It's a gradual process as we look into the fall season, I think our hope and goal would be to try to get more back to historical rates, and maybe it's $50 or 60% Ocean and the <unk>.

<unk> being air to give us some level of flexibility or some level of.

Relief on the cost side of the business again. This is heavily dependent on how fluid will the supply chain be it that time, although we've seen progress it's still challenging.

Certainly mindful of the fact that there is some west coast port challenges that could creep into the equation as we move through the year. So we'll be very fluid hike in trying to understand that and make the best decision to make sure. We continue to make progress on improving the in stock inventory levels in our business as we look to holiday next.

Year again difficult to forecast, but our hope would be will be.

Good mix of Ocean and air going into the fall season have some level of flexibility to chase as we go into fourth quarter, but I am confident that our merchant teams will make good decisions when we get there.

On the profit improvement Brad you want speak to that.

With respect to the profit improvement plan as Martin mentioned the business is pursuing actions more focus on the back half of the year. The action plan is focused predominantly on two areas. One is on product price ups. We've done a lot of work in the business to action has seen and targeted strategic roll ups in terms of pricing we anticipate.

More go forward action related to that in the back half and then the second part is discrete cost takeout action plans that are under underway currently in the business. As an example, one of those is focused on indirect sourcing leverage and looking at our non merchandise spend you would anticipate that those have more SG&A benefit to them.

Again more focused on the back back half of the year as they become more meaningful throughout the year.

Thanks very helpful.

Thank you and our next question comes from Matthew Boss with Jpmorgan. Your line is open.

Great. Thanks.

Martin could you speak to recent drivers of business acceleration, how you feel about the inventory flow newness and innovation setting up as the year progressed.

And then T J as we parse through some of the moving margin pieces.

Best to think about the back half EBIT margin profile, maybe relative to the mid teens long term target. So if we think about the back half of the year and moving forward.

<unk> delta or differences to consider relative to that mid teens operating margin target.

Yes, thanks for that.

Matt Good morning, Thanks for the question so.

Yes, as you know January was a little slower than we would have liked and that continued into early February but the back half of February has been strong.

And the key driver of that was really the <unk> cloud bra launch that I mentioned earlier so.

So we've seen strong momentum in the bra business and good increases year over year, So thats really the foundation of.

The increase we've also seen good benefits from stores coming back we've seen in the stores channel performing very strongly higher traffic levels. We've been in a good position in terms of staffing those stores and really seeing good customer experience and we've made significant improvements in our digital channel so improving the experience though.

Thinking about personalization and generally improving the customer experience in our fulfillment capability.

So it's kind of broad based in terms of where the improvements. However, if I look at the beauty business. We've had great success with natural beauty and also our core fragrances performed extremely well, particularly the new fragrances.

And in the corner of the business the logo business in paint and in Victoria is continues to be strong. So this kind of strength everywhere that we feel really good about as you know we're in a good inventory position inventories were up about 35% at the end of year, principally driven by AUR increases from the supply chain pressures, but also is getting in <unk>.

<unk> the supply chain delays in bringing merchandise forward. So that we're in a good position to enter spring. So feel good about where we are not perfect by any stretch of imagination, but we're in a much better inventory position than we were.

Six months ago, and I feel like we're getting on top of the supply chain pressures that have been met.

And that for the last year or so.

T J I think Matt.

Matt.

The last part of your question as we think about the cadence throughout the year.

Coming into the back half, we do feel as if the third quarter and fourth quarter are inflection points in the business.

Our belief is that we'll have a more normalized.

Environment from a from a sales and a really supply chain or cost pressure perspective, so when I think about the P&L in the back half of the year as Martin just mentioned several different sales drivers coming online as we go through the year that should help shore up the top line along with the fact that we do expect.

Hopefully in a more normalized selling environment I think we've commented consistently throughout the fall season. This past year that we probably lost a point or two in comp around supply chain challenges and in stock levels and having the inventory in place for holiday selling season et cetera. So.

I think thats certainly an opportunity in the back half of the year.

Brad mentioned, some pricing opportunities again in some categories, it's gone better than others, but it's still a focus in the business to try to offset some of the costs as we move forward I think from a supply chain perspective in the back half of the year again, we're hoping for a more normalized environment or maybe some relief as we go into.

The third and fourth quarter, I think a little bit of a wildcard is where it is some of the inflationary costs on raw materials go but our teams are very focused on working through that.

And new to the business in the back half of the year will be some profit improvement initiatives that impact.

The margin line and the expense side of the business. So I think on multiple different.

Players multiple different levers to try to.

Improve the leverage in the back half of the year and improve the operating margin rate that was really the backbone for for while we feel good about delivering.

And up scenario in the fall season.

Best of luck.

Thanks, Matt.

Next question.

Thank you. The next question comes from Roxanne Meyer with MK and partners. Your line is open.

Great Thanks, and congrats on a strong fourth quarter.

I first wanted to follow up on the back half of the year and gross margin improvement what are you assuming in terms of.

Promotional levels and markdowns knowing that your back half of 2021, you had really strong full price selling.

TJ do you want to take that I think the answer is broadly flat but.

Thanks for the question Ross.

Sounds like it's broadly flat.

Yeah.

From a.

From a margin perspective, and really I think what the teams are doing a better a better job of that.

Month to month.

Order to quarter is really balancing.

That pendulum kind of swinging back and forth on promotion I think we've found kind of a good place in terms of balancing driving both sales and traffic whether it's traffic the stores of traffic with digital.

And the need for promotion in that equation. Obviously, we were very encouraged by some of the full price selling which speak to we think the health of the brand health of the merchandise offering that we have in stores, but we do recognize and expect that in the back half of the year in particular is.

As other retailers are improving on their in stock levels.

Being more and more and more competitive we do think that we need to be prepared to be promotional but we don't think necessarily that SB. The single biggest thing we're doing so finding that right balance is what we're focused on roxanne.

Both on the.

The brick and mortar side as well as online.

Okay, Great that's helpful and then.

Your international sales as you mentioned, we're up really nicely and definitely stronger than we were expecting I'm. Just wondering what we should attribute the improvement to and how we should think about the trajectory of international in 2022.

Yes, Im happy to say that Brooks.

Internationally, we had our best operating income in six years. So a very strong bounce back of course much of the increase in sales is coming from the fact that businesses were closed last year and our penetration of digital and internationally is lower than it is in our domestic business that with stores reopening. This year, we have a relatively easy compare to last year.

But beyond that there are five parks to the international business, both the franchise business run by our partners around the world is in very very healthy growth of travel retail business is the second part of that.

It was substantially closed in the last two years and is now bouncing back with over 90% of our travel retail locations opening in having traveled myself in the last few weeks I can tell you <unk> is starting to get busy again. So that's great in China, We announced on January 25, I'm really exciting partnership with Virgin America, Great friends and partners.

Over two decades.

The upside that we see for that business is more in the future than in the past quarter, but very excited about where China is going and we continue to see strength in the fourth part of the business, which is the U K with a partnership with <unk> is really starting to take hold and we're enjoying benefits from their direct to consumer capability.

Broad based marketing experience in the UK. So all four of those areas are good and of course, the face which is the direct to consumer business continues to be strong as we.

Improve our user experience broadly.

In North America, and all around the world. So all five areas of the business is strong looking forward over a three year period, we expect to open over 100 stores, so that should be double digit growth in the international business and retail sales for some years to come we feel very optimistic about the structure and the health of the business and the leadership of the business.

Great. Thanks for all the color best of luck.

Thanks Roxanne.

Next question.

Thank you and our next question comes from Simeon Siegel with BMO capital markets. Your line is open.

Thanks, Hey, good morning, everyone.

So Martin I was hoping you could talk about your view on AUR opportunity a little more I guess I guess through the pandemic you were probably the most successful example of someone who sold last charge more and you really got more profit dollars out of lower revenues I think this quarter you had reversed yet higher revenues lower profit next quarter youre expecting both to be down. So I, just I get the increased supply chain cost.

But if youre expecting an ongoing revenue decline in Q1.

Still below pre COVID-19 levels by choice should be charging even more even if it means selling less I guess.

It seems like you have a nice pricing power ahead, if you want to take it. So I was curious your views on AUR.

Thanks.

Great question.

I think when we spoke on previous calls.

And just to update you on the <unk>.

<unk> business within VSO.

<unk> kind of nudging towards 40 and higher than about 10% higher than they were at our peak in 2015. So we're seeing some help that to your point there is pricing path. Similarly in panties, we're nudging towards $7 AUR, which is the highest that we've had in our history. So there are areas of the business, where we have been moving pricing.

Been doing it successfully however, I don't think we have plans to just put prices up across the board and Brad mentioned that we test our prices and we look very carefully.

The impact is and in some cases the prices have been sticky and they work very nicely and the customer hasnt noticed in terms of volume, but in other areas, we see some volume decline.

And even if the appropriate rate turns out better it might be more healthy for us in the long run to maintain our competitive position and not allow room for competitors to get in so whats the answer to all of that it's about <unk>.

A very very precise science that we have an all time design.

Working with on a day to day basis, a couple of examples where we've moved that you may have seen.

I'll wear everywhere bra franchise, the biggest bra franchise in the business, we moved from 2% to 54% to 2% to 56 that seemed to snake relatively small increase in our anti business as we move from $5 to 32, 5% to 32 again that seems to have stuck pretty well, so where we can we're getting price ups I think the real answer.

He is in product development of newness, so rather than thinking about price upon the same merchandise how about we just launched an incredibly superior products.

She doesn't have a reference on what that prices the prices whenever the prices and left cloud is a good example of that.

There will be others as we move through the year as we develop better and better part of the commenced superior pricing.

Thanks for your question I'm happy to demonstrate that with all over and there is a very very sensitive part of our retail engineering.

Great. Thanks, a lot best of luck of the year.

Thanks Simeon.

Next question. Our next question comes from Susan Anderson with B Riley financial your line is open.

Hi, good morning, Thanks for taking my question.

I think you mentioned intimates and beauty categories drove the strength in fourth quarter I am curious how long did in activewear in the quarter and then also if you can give some color on peak and how that business performed and maybe some of the strength you saw there. Thanks.

Yes.

Within lounge, let's take sleep sleep, you might recall, if you've been tracking with us.

<unk> challenge because P. J as had been very delayed and so we did not have the volume of Bj's to sell early in the fourth quarter that we would've had in the prior year and so as we headed into Thanksgiving. We were in a tough inventory position and that really is the main part of the lounge business sleep is a key part of the lounge in apparel business. The great news is that we call it.

We had a terrific December largely driven by by sleep and other categories and so we ended ahead in the sleepwear business overall, it was a very healthy mix of.

What we call sexy sleep and also casual sleep.

The.

Sport business and the sort of the regular apparel was kind of okay in the middle nothing, particularly outstanding that within the Pink business. Our intimates continue to drive forward intimates is over 50% of the pink business and Thats the closest to our core that's the most important parts of the pink business to grow in seeing healthy growth.

In that area.

Frankly, the most important part.

Am I missing anything Jason T J any of the category highlights Cola bread.

No.

I think swim was the other one that maybe we don't talk about it. So much we had a good first season and swim first year back in the swim business very successful, we played our inventories and set ourselves up nicely going into spring.

Clean assortment, so yes, we feel pretty good about where we are.

That sounds good if I could just ask about it looks like you guys are going to launch a new brand happy nation next year focused on Tweens.

Is there any more color you could give on that do you expect to at some point have stores. It looks like it's going be a digital first brand.

But do you think there'll be storage around that brand at some point also.

Well never say never but we.

We have deliberately just teasing you we'd happy nation in saying coming soon we're going to say more about it in April we will open our digital dose in April .

And once we get early indications of the brand we will be delighted at our next call to tell you. What we think it might look like and what the opportunity would be but.

We see it as a very optimistic inclusive brand that fills a void in the tween market.

It builds on our core capability and undies, and first Roz and company clothing real expertise in young people in the pink business marketing expertise in the space. If it's a natural adjacency for us and we're also leveraging our knowledge and beauty to create a really young beauty business and happy nation that we think could be.

Exciting.

Once you go on to <unk> Dot Com you can see our splash page that went up yesterday and you can register and that will make you the.

Amongst the first people to see.

What comes during April , but we're excited about it.

And we will tell you more when we when we know more initially it will be digitally only but we'll tell you more when we know more.

Great. Thanks, so much good luck this year.

Thanks, Susan next question.

Yes. Our next question comes from Dana Telsey with the Telsey Group. Your line is open.

Hi.

As you think about raw materials and raw material costs.

Raw materials being adjusted for you in terms of categories, whether it pink.

Core Victoria's secret brand and how that plays into price for 2022. Thank you.

Raw materials being adjusted for US I don't think so.

<unk> products. So no we're not value engineering fabrics and on raw materials forecast, that's not really part of our DNA, but we are being smart about sourcing efficiently and effectively yes, I think so when we're moving production around the world in a dynamic sense.

Moving sourcing of raw materials, where it makes sense to do so but the reality is that the whole world is facing the same pressures on inflation in raw materials in transport and people and so I don't think there's much for a retailer like us to do in terms of engineering that it's about buying forward, taking a good position on raw materials. So we don't get exposed.

And continuing to focus on our best at which is developing superior merchandise.

So I hope Im not dodging your question Dana there if you have ideas, but how we can save money we'd happily.

<unk> listened to them, but it's not really where our focus is.

And then just on the new the new brand messaging with inclusivity, and new things that you've done like the collected any data points on new customer additions that you've gotten whether digitally or in store.

It's not my opportunity to talk about if the brand repositioning is working.

Yes. Thanks.

Yes, I think we may see one or two points.

The proof points for the new brand positioning and it's not new anymore.

This for a year now.

All around as closely inside the business, where our associate engagement is higher than it's ever been pride unemployment is higher than it's ever been we have incredibly low turnover, we have higher rates of people wanting to join the business than we've seen before.

In applications in stores and in terms in head office all around the business. There is good news that our sales we see our bra business bouncing back after years and years of decline or talked about that earlier, we also see health in our logo businesses.

Which speaks to the heritage and the appeal that there isn't the brand on Valentine's Day, we were sold out of Valentine's day merchandise a week before the event so wherever I look in the business around sales. There is good news on social media. This good news, we have our highest ever organic approval ratings, meaning earned approvals rather than paid approval.

Our media impressions ridiculously high the recent campaign, we'd love cloud Amazing Superstars like Sofia going all around the world.

And supporting the fact that we're the second most followed brand on Instagram over 71 million Boe of 7% on Instagram followers follow Victorias secret So incredible power in social media in our customer file has been growing too in 2021 after years of decline.

We added to the file we are seeing a younger customer with a higher average spend a higher margin.

And we're also seeing third parties wanting to work with us. So we didn't get many third parties knocking at our door. During 2016 2019 now some of the best brands in the world are coming to us and talking to us about collaborations.

We know that when we have successful third parties in our business that we get incredibly high frequency of shopping and we also get high crossover with the core business. So there are proof points everywhere not lease people that we know and love are proud of is again so yes.

Yes, we feel really good about that.

The new brand positioning and it's here to stay it's part of our DNA and it's forever.

Thanks, Brian .

Didn't ask.

Thank you.

Yeah.

Thanks Dana.

Next question.

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

Okay.

Good morning.

Thanks for taking my questions great year.

I wanted to ask maybe you can give us some more detail around the love cloud bra launch.

Well I can talk about some of the technical features target customers traction youre seeing especially if you are seeing traction with new customers and then maybe more generally talk about how we should think about your approach to newness.

It's nice to see that really nicely the broad category of strength again are you looking for.

Certain number of launches on an annual basis do you have a pipeline of launches like this or are you want to build these types of platforms out maybe help us understand that product.

Product line strategy around broad thanks.

Thanks, Omar I really appreciate the question I should be better prepared to answer the question that I am I feel like we need one of our lead merchants to come and talk to you about this.

All understand more than happy to take it offline and explain the details benefits at the left cloud and why it's a superior product.

I don't have that at my fingertips, So we'll take that away what I will tell you it.

That it exceeded our expectations.

Having five or six different frames with different functions across the business, we've been able to hit very very hard indeed, it speaks to our core and push up but it also speaks to comfort the match back panties that are associated with the bra arrived on time in the right column and the distributions that have been very successful. So we've seen a high rates of.

<unk> back.

We've seen a young customer about 50% of sales have come through new customers, which is pretty consistent with what we see across the file just now.

<unk> power has been good we haven't discounted.

We also had a good five patents.

<unk> with the bra, which was a very good promotion. So we'll very high linkage dependencies as I mentioned earlier.

You asked about product development, I think I mentioned earlier.

And our best years, we had at least two big bra frames per year, and we're committed to that so I can tell you that in the fall season, we will come back with another new bra launch so it will be very exciting and we can see at least two bra frames.

Forward that over the next two years I was integral anchor with two of our best vendors about three weeks ago, we had a team.

Functional team <unk> <unk> last week from Penguin from Victoria is traveling together working on newness.

We just see an incredible pipeline that speaks to some interesting innovation and sustainability.

Which we'll say more about when we're ready to go to market, whether it be in fashion and.

Sure.

In raw materials and sustainability.

But wherever it is we have ideas.

We have collaborations we have people who want to work with us.

I see great things coming.

The level of newness overall in the business to be more or less I would say about the same.

About the quality of the newness and the quality of the launch and our ability to speak to newness with relevance.

Culturally relevant marketing campaigns and people representing for the brand who speak to young consumers in the way that they want to be smoking spoken to so it's the <unk>.

Combination of all of those things I think Omar that will drive success for our business.

Thanks, Martin Thanks for asking no worries thanks for asking.

Thank you. The next question comes from Paul Kearney with Barclays. Your line is open.

Hi, everyone. Thanks for taking my question.

My question is on some of those store investments you are making so on the omni channel front expanding both vessels ship from store can you give us a sense of.

What percent of the business is today and where do you expect to expand to this year.

Second question is on the store of the future openings.

Or were you thinking about where to open. These in any metrics perform provide on how they perform whether it's productivity or payback.

Great. Thanks.

Yeah, Thanks, Paul kind of a lot to Patna, let me start and maybe keep me honest guys on the bits that I missed so I'll go in reverse order store of the future three store of the future three.

Three store of the future open right.

Right now only been open for a short amount of time, but we've seen very very positive responses.

And customer response and sales response traffic response, all have been very encouraging we have some good technology in those stores that doesn't need to wait for store of the future to be rolled out. So there may be elements of that store concept that we want to push broadly through the chain during 'twenty, two and 'twenty three more about that when we know more.

As it relates to expanding the concept we have 15 new stores in the pipeline for this year those will all be off mall locations, we have a.

A very high penetration of our store portfolio in malls right now we have a low penetration off mall and that gives us opportunity. So we'll be testing that with some smaller format stores. So think more like 5000 square feet than our traditional eight to 10000 square feet with.

With much lower capex than we've had historically so we're aiming for capex, that's less than $400 a foot. So we should be opening stores at less than $2 million of Capex. That's an exciting opportunity for us. We also have refreshes and I think to 30, 20, 2020 stores and about half of those re pricing as well.

See a reduction in square footage, which is good we don't need as much square Footages. We've had historically in some of our bigger models. So those are very healthy additions to the store portfolio.

The Big question I think is how quickly we get after renovating the entire fleet and it's too early to say and how much we'd want to spend on that it's too early to say, but I would think by the time, we get to our Investor update later in the year I think it's October .

We'd be very clear about what it is that we want to do that.

It would be rather than developing a new store format that you get an absolutely perfect last time.

I wouldn't suggest that we have but I think we're really close and there are some very very exciting elements of what we built.

Good where specifically we put them all answered by saying just off mall is the focus rather than on more its less about geography honestly in that we're pretty broadly distribute it already but.

Where opportunities arise where we're underpenetrated of course, we'd go there there are some markets around the U S where we closed in 2020, because we had the opportunity to close and thats because that location and that still wasn't wasn't good for the market might still be good and that may create some opportunity for us to go back.

As it relates to digital as you know we were late to the party with focus.

No point, saying it any other way, we only really got into the business. During the latter part of 2021 with I think 450 stores with focus capability.

This spring, we will roll out to all stores all stores in the fleet. We will have focused capability. The take up of it has been relatively light I don't know if thats because people in our category you don't want to buy online and pickup installed or.

Because we only had half of the fleet I don't know, we will continue to work it and even if it's only relatively small takeout, it's an important part of our omnichannel evolve multichannel.

Go to market strategy. So we're committed to it. We're also committed to ship from store, where it makes sense to do so and so reminder, on ship from store. That's the idea of using 800 points of distribution are many warehouses in order to efficiently distribute merchandise to customers customer it doesn't get to know the merchandize with ship from store rather than the warehouse portfolio.

Get to know because it's a much more efficient can be a more efficient margin play that capabilities in about 200 stores right now and will will will increase that as we go through the year end markets, where it makes sense to do so so I hope that gives you enough detail Paul did I Miss anything guys anything else you would add.

I think we got it all certainly very helpful. Thank you and best of luck.

Welcome welcome.

Thanks, Paul.

Next question, Yes. Our next question comes from Cory <unk> with Jefferies. Your line is open.

Good morning, and thank you for taking my question.

My first question has to do with a follow up on the AUR opportunity.

Are there any specific categories that you identified that you do.

<unk> will be an enhanced area, okay. When it comes to raising prices.

Back on the raising prices thing I think I think for us it's less about increasing the prices of stuff that we already have a more about developing merchandise this better than anybody else's and therefore commence a higher priced where should we be focused on doing that.

Cool luxury for us.

Eloping better products than anybody else. This brand Victorias secret should have the best promos in the universe.

Our mission and that's what we're going after and with that will come superior pricing.

And innovation.

But similarly, if you look at just pick a random categories swim for example, do we think we could get higher prices by having superior merchandise in better fashion than our competitor base, probably so there isn't any one area, where I say well that's an underweight category, we should move I think it's broad based.

I was applauding Greg in the beauty team yesterday for the movement, we've made in our midst and motion business unit, two very long ago that was a five.

Unit price, a very very big business with enormous global appeal.

At $5 Thats more like $8.

So really terrific movement, and it's not driven by just cheekily, putting the prices up it's delivered by enhancing the formulations.

Creating a better product.

And being more modern and I will go to market strategy, particularly on natural beauty, that's what drives the ability to increase AUR I think.

Great and then just a follow up.

How are you feeling about the current inventory positioning of the business and how should we expect this to evolve as we move throughout the year. Thanks.

P. J do you want to I mentioned earlier, we're about 35% up but do you want to take it yes, absolutely. Thanks for the question Corey.

Into the season I believe the business feels very good about the inventory position.

To start this season, and we believe that it only gets better from here and what I mean by that is you can look at the 35% that Martin mentioned earlier.

And have one take on it from our perspective about two thirds of that increase relates to.

Just average item unit cost increase for some of the great challenges, We mentioned and then also bringing in.

Goods earlier than last year earlier than planned and some of that is the mix back to ocean from air that has longer in transit times and then the third element I would I would add is just the <unk>.

Improvement in in stocks in some of our basic or key categories. Martin kind of mentioned that you are having their match back panting.

Panties with the bra launch in love cloud.

Would expect us to do that.

And Thats, what we executed again, so making sure that we're in better in stock position in intimates categories was a focus coming into the season.

So we feel very good about the inventory position and where we are even though 30, 35% seems like a big number I think the second piece dimension as we will continue to focus on in stocks and they should even get better as we move through the spring season, and what that means is we likely will be a little heavier than normal and that 35% range.

Most of the spring season, as we work through the shift from air to Ocean as we work through some of the price increases is that our in stocks get better and better.

Hey, T. J, we might also just add that.

Pushing for more size inclusivity, increasing the number of sizes that we also have a body by Victoria 33 sizes now that will push up our inventories a little and that's a healthy thing to do for the brand long time to take one more.

Thank you.

Thanks Corey.

We'll do one more question.

Our last question comes from Jay sole with UBS. Your line is open.

Great. Thanks, so much for taking my question Martin I, just wanted to follow up on the brand repositioning just come at it from a different standpoint.

Do you feel about the customers that were with the brand before the brand repositioning started do you feel like you've been able to keep those customers for has the new repositioning turned any of those customers away. Thank you.

Yes, it's a great question Jay. Thank you for asking all customers are welcome I don't think we have now I know, we haven't knowingly wave goodbye to any customers with not certainly not our intention we don't know within the business either anecdotally or systemically.

Groups of customers agile I do not hear about that either in stores from backyard leader of stores of information I'll lead with digital.

See it in the file data so I don't think its a thing however, when we first announced our positioning we got a significant amount of mail from people who said.

This is terrible.

<unk>, you're spoiling our brand we love the way it was before why are you changing it.

And when we look closely all of those people.

Purported to be big fans at Victoria's and gold card holders.

When we look closely we couldnt find that it was principally from men and it was from people who don't subscribe to the values that we subscribe to so I think that initial noise of the repositioning being a dangerous thing to do has gone away. We don't hear about it now a social media posts overwhelmingly positively received.

And I hate to have gone away, but I know your question was more genuine.

On a women who are shopping with us who no longer find the brand attracted I don't think so we still sell provocative merchandise, we still embrace very sexy some of our best selling items are in the collections that are most provocative Valentine's day is a holiday that we celebrate them we own.

Unashamedly sexy.

That ton of yet, but we can do other things as well I hope youll see that when we launch mother's day.

A few weeks time, which I think is one.

One of the best campaigns that we've ever launched so for US it's about a balance.

Rather than the brand Victoria's secret just being one thing which is sexy.

Turing to secret the brand being.

Advocating for women in all aspects of their life be that <unk> be the date night being company owned <unk> whatever it is we want to be therefore her in every aspect of our journey through life. So thank you for asking the question.

Appreciate it got it thank you.

Thanks, Jamie.

That concludes our call. This morning. Thank you for your continuing interest in Victoria's secret.

Thanks, everybody.

Thank you and that concludes today's conference you may all disconnect at this time.

[music].

Good morning, My name is Cedric and I will be your conference operator today at this time I'd like to welcome everyone to the Victoria's secret and company's fourth quarter 'twenty 'twenty. One 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 to answer session of today's call.

At that time, if you'd like to ask a question. Please press Star then one I would now like to turn today's call over to Mr. Jason <unk>, Vice President Investor Relations at Victoria's Secret and company, Jason You may begin.

Thanks Ajay.

Good morning, and welcome to Victoria's Secret and co 's fourth quarter and full year earnings conference call for the period ending January 29 2022.

As a matter of formality I need to remind you that any forward looking statements. We may make today are subject to our safe Harbor statement found in our SEC filings and in our press releases.

Joining me on the call today are CEO Martin waters, CFO , Tim Johnson, and EVP finance spread Kramer.

We're 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 special items described in our press release and our SEC filings.

Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release and our SEC filings.

And now I'll turn the call over to Martin.

Thanks, Jason Good morning, everybody.

2021 was certainly a milestone year for <unk> and I want to thank all of our associates and partners for their hard work commitment and resilience in our first year as an independent public company. Our team is focused on execution through ads and we delivered on our major objectives, even in a challenging environment for retailers.

Turning to the fourth quarter performance, we delivered results across all the major metrics that we're either at or above the high end of our previously communicated guidance, we navigated significant supply chain headwinds and successfully lapped the start of federal stimulus benefits in the prior year.

For the quarter sales growth of 4% was led by strong performance in our intimates and beauty categories, along with broad based strength in our international businesses.

As we look forward to 2022, we expect the full year to be broadly comparable to 2021, but there are some key differences between the first and the second half of the year.

We expect first half earnings to be challenged and below last year is a direct reflection of supply chain cost pressures continuing through Q1 and Q2 of this year.

And at the same time, we will be comping.

Federal stimulus benefits from last year as you know.

In contrast, we expect earnings in the second half of the year to be up to last year and for our operating margin rate to revert closer to our longer range target of mid teens.

Our optimism for the second half is based on an expectation of more normal sales and margin growth rates as we anniversary last year's significant supply chain disruptions and costs.

And Additionally, our team has been intensely focused on several profit improvement initiatives to increase margin and lower our expenses and the run rate of the business.

We expect these initiatives will start to deliver during the second half of the year.

Now from a strategic viewpoint, we are focused on delivering every quarter and season. While we're also planning on investing for the long term sustainability of the business and we're thinking about sustainability in the broadest sense of the world, which is ensuring that we are accompanying loved brands. This links back to our vision mission and purpose.

It's connected to what we know from our customers, namely brands. They love play an important role not just in their lives, but then society in the world at large.

They our customers expect us to take responsibility for where we've been where we are and where we're going now living in a world that's become increasingly virtual and they demand authenticity and choose brands that are socially and ecologically responsible.

Our focus as leaders and as a company is ensuring that we are a future facing business that means having a business model and again I use that in the broadest sense of the term that increases in relevant and supports and reinforces our purpose.

We are investing in women led businesses using the power of our platform to support and encourage and partner with brands that promote advocacy for women like amplify benches, which we announced earlier this week.

We've made meaningful progress on sustainability, and social responsibility and our ongoing commitments in these areas are foundational to who we are.

This year, we will release <unk> ESG reports first in April and then again later in the fall season, transparently outlining our goals measures and our progress.

We will launch a new digital first brand called happy Nation. This optimistic inclusive brand will fill a void in the tween market, bringing on these first products can't be clothing and body care. The parents and Tweens can feel good about you should expect to hear more about that from us during April .

And our newly formed emerging businesses team is finding alternative sources of revenue and customer goodwill. For example, later this year, we'll launch a partnership with allow me a pioneer in the plus size intimate space.

Thank you.

That concludes our prepared remarks, and we'd be more than happy to take any questions that you might have at this time.

Yes.

To ask a question.

If you'd like to ask a question. Please press Star then one please remember to mute your phone and record your name clearly and pumped it if you'd like to withdraw. Your question you May Press star two.

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

Good morning.

Thanks, Laura and thanks for the question Yeah happy to so Youll remember me, saying that when this business was at its peak, we had at least two bra launches per year, and we got out of that cadence during the dark days of 2016 2019, and we're now back on that form so.

We had better Infinity flex launch, which was very successful in the fall season, and then most recently not within the fourth quarter, but within the first quarter, we launched the love cloud, which was the biggest launch in six years for our company exceeded our expectations and was met with highlights from our customers old and new we found a younger customer.

Coming into this franchise.

The number of frames and the breadth of choice that we have on offer it's really been most popular browser and a much talked about Brian and you may have seen the campaign that went along with it that featured 818 incredible women and was just another milestone along the way and the repositioning of our brands.

Being best at browse is the most important thing that we do in the business is the foundation of everything that we're about and I'm really happy to say that what we've done in the last year.

<unk> is working and I can see a pipeline going forward for the next two years with more innovation and some really really interesting developments.

In this space, so lots more to come from us, but it's not just about <unk>, we have great development in the pink business, we have great development in the beauty business and so.

Life blood of the business comes from innovation and from new product development and I'm delighted with what I'm seeing in the business.

So thanks for asking.

Thank you.

Thank you and our next question comes from Ike <unk> with Wells Fargo. Your line is open.

Hey, Thanks, guys.

P. J two quick ones for you I think.

Number one can you I think Martin alluded to some profit improvement profit improvement drivers you guys have for the back half could you just give us some specifics around what those are that come alive Cogs are SG&A and then just when we think about Q4 and what we're lapping next holiday maybe I know you can't determine inflation and what that will look like it.

That time.

This year, but just on the mix of air and Ocean, What's a typical holiday for you Air Ocean split.

What was it this year how inflated wasn't in terms of mix and then what are you kind of like planning for this year, just so we kind of understand what's embedded in the guide. Thanks.

Both great mix of Ocean and air as you mentioned.

That impacted results. It is difficult to look all the way out to fourth quarter next year sitting here today. We are encouraged that we're starting to see a little bit of positive movement from a rate perspective here in spring. We are encouraged that our merchant and planning teams have made progress in starting to move more back towards ocean and.

Less towards air, but it's a fluid it's a gradual process as we look into the fall season, I think our hope and goal would be to try to get more back to historical rates and maybe it's $50 or 60% Ocean and the balance being are they give us some level of flexibility or.

Some level of <unk>.

Relief on the cost side of the business again. This is heavily dependent on how fluid will the supply chain be it that time, although we've seen progress it's still challenging.

Certainly mindful of the fact that there is some west coast port challenges that could creep into the equation as we move through the year. So we'll be very fluid I think in trying to understand that and make the best decision to make sure. We continue to make progress on improving the in stock inventory levels in our business as we look to holiday.

Next year again difficult to forecast, but our hope would be will be.

On the profit improvement Brad you want speak to that.

With respect to the profit improvement plan as Martin mentioned the business is pursuing actions more focus on the back half of the year. The action plan is focused predominantly on two areas. One is on product price ups. We've done a lot of work in the business to action testing and targeted strategic roll ups in terms of pricing we anticipate.

More go forward action related to that in the back half and then the second part is discrete cost takeout action plans that are underway currently in the business. As an example, one of those is focused on indirect sourcing leverage and looking at our non merchandise spend you would anticipate that those have more SG&A benefit to them.

Again more focused on the back back half of the year as they become more meaningful throughout the year.

Thanks, that's very helpful.

Thank you and our next question comes from Matthew Boss with Jpmorgan. Your line is open.

Great. Thanks, Martin So could you speak to recent drivers of business acceleration, how you feel about the inventory flow newness and innovation setting up as the year progressed, and then T. J as we parse through some of the moving margin pieces.

Just to think about the back half EBIT margin profile, maybe relative to the mid teens long term target. So if we think about the back half of the year and moving forward any delta or differences to consider relative to that mid teens operating margin target.

Yes, thanks for that.

Matt Good morning, Thanks for the question so.

Yes, as you know January was a little slower than we would have liked and that continued into early February but the back half of February has been strong.

And the key driver of that was really the level of cloud bra launch that I mentioned earlier so.

So we've seen strong momentum in the bra business and good increases year over year. So that's really the foundation.

Thinking about personalization and generally improving the customer experience in our fulfillment capability.

So it's kind of broad based in terms of where the improvements how if I look at the beauty business. We've had great success with natural beauty and also our core fragrances performed extremely well, particularly the new fragrances.

And in the core of the business the logo business in paint and in Victoria is continues to be strong. So the kind of strength everywhere that we feel really good about as you know we're in a good inventory position inventories were up about 35% at end of year, principally driven by AUR increases from the supply chain pressures, but also is getting in <unk>.

Six months ago, and I feel like we're getting on top of the supply chain pressures that have been benign for the last year or so.

Yes, I think Matt.

Matt.

The last part of your question as we think about the cadence throughout the year.

Coming into the back half, we do feel as if third quarter and fourth quarter are inflection points in the business.

Our belief is that we'll have a more normalized.

And hopefully in a more normalized selling environment I think we've commented consistently throughout the fall season. This past year that we probably lost a point or two in comp around supply chain challenges and in stock levels and having the inventory in place for holiday selling season et cetera. So.

I think thats certainly an opportunity in the back half of the year.

The third and fourth quarter, I think a little bit of a wildcard is where it is some of the inflationary costs on raw materials go but our teams are very focused on working through that.

And new to the business in the back half of the year will be some profit improvement initiatives that impact both.

The margin line and the expense side of the business. So I think on multiple different.

Players multiple different levers to try to.

Improve the leverage in the back half of the year and improve the operating margin rate that was really the backbone for for a while we feel good about delivering.

And up scenario in the fall season.

Best of luck.

Thanks, Matt.

Next question.

Thank you. The next question comes from Roxanne Meyer with MK and partners. Your line is open.

Great Thanks, and congrats on a strong fourth quarter.

I first wanted to follow up on the back half of the year and gross margin improvement what are you assuming in terms of.

Promotional levels and markdowns knowing that your back half of 2021, you had really strong full price selling.

TJ do you want to take that I think the answer is broadly flat but.

And on that thanks for the question Ross.

It sounds like it's broadly flat.

From a from a margin perspective, and really I think what the teams are doing better and better job of about a.

Month to month.

Order to quarter is really balancing.

That pendulum is swinging back and forth on promotion I think we've found kind of a good place in terms of balancing driving both sales and traffic, whether it's traffic to stores and traffic with digital.

And the need for promotion in that equation. Obviously, we were very encouraged by some of the full price selling which speak to we think the health of the brand that health of the merchandise offering that we have in stores, but we do recognize and expect that in the back half of the year. In particular is as other retailers are improving on their in stock levels.

<unk>.

Being more and more and more competitive we do think that we need to be prepared to be promotional but we don't think necessarily that has to be the single biggest thing. We're doing so finding that right balance is what we're focused on roxanne.

Both on.

The brick and mortar side as well as online.

Okay, Great that's helpful and then.

Yes, Im happy to say that Brooks.

Internationally, we had our best operating income in six years. So a very strong bounce back of course much of the increase in sales is coming from the fact that businesses were closed last year and our penetration of digital and internationally is lower than it is in our domestic business. So with stores reopening. This year, we have a relatively easy compared to last year.

But beyond that there are five products to the international business most of the franchise business run by our partners around the world is in very very healthy growth our travel retail business is the second part.

That was substantially closed in the last two years and is now bouncing back with over 90% of our travel retail locations opening in having traveled myself in the last few weeks I can tell you <unk> is starting to get busy again, so thats great in China, We announced on January 25 are really exciting partnership with Virgin America, Great friends and partners.

Over two decades.

The upside that we see for that business is more in the future than in the past quarter, but very excited about where China is growing and we continue to see strength in the fourth part of the business, which is the U K with a partnership with <unk> is really starting to take hold and we're enjoying benefits from their direct to consumer capability.

Really broad based marketing experience in the UK. So all four of those areas are good and of course, the face which is the direct to consumer business continues to be strong as we improve our user experience broadly.

In North America, and all around the world. So all five areas of the business is strong looking forward over a three year period, we expect to open over 100 stores, so that should be double digit growth in the international business and retail sales for some years to come and we feel very optimistic about the structure and the health of the business and the leadership of the business too.

Great. Thanks for all the color I would add that good luck.

Thanks Roxanne.

Next question.

Thank you. The next question comes from Simeon Siegel with BMO capital markets. Your line is open.

Thanks, Hey, good morning, everyone.

So Martin <unk> I was hoping you could talk about your view on AUR opportunity a little more I guess I guess through the pandemic you were probably the most successful example of someone who sold last charge more and you really got more profit dollars out of lower revenues I think this quarter you had the reverse you had higher revenues lower profit next quarter youre expecting both to be down. So I, just I get the increased supply chain cost.

But if youre expecting an ongoing revenue decline in Q1.

You are still below pre COVID-19 levels by choice should be charging even more even if it means selling last I guess it just seems like you have a nice pricing power ahead, if you want to take it. So I was curious your views on AUR.

Yes, it's a great question.

I think when we've spoken on previous calls I mean, we've said, we've still got room in AUR, because we haven't yet hit our peak.

Date, you on that bra business within BSO.

Our AUR as a kind of nudging towards 40 and higher than about 10% higher than they were at our peak in 2016. So we're seeing some help that to your point there is pricing path. Similarly in panties nudging towards $7 AUR, which is the highest that we've had in our history. So there are areas of the business, where we have been moving.

And we've been doing it successfully however, I don't think we have plans to just put prices up across the board I'm, Brad mentioned that we test our prices and we look very carefully.

Where the impact is in some cases the <unk>.

<unk> have been sticky and they work very nicely and the customer hasnt noticed in terms of volume, but in other areas. We see some volume decline and even if the appropriate rate turns out better it might be more healthy for us in the long run to maintain our competitive position and not allow room for competitors to get and so whats the answer to all of that it's a balance.

As a very very precise science and.

I'll now turn the science that we're working with on a day to day basis. A couple of examples where we've moved that you may have seen in our wear everywhere.

Bra franchise, the biggest bra franchise in the business, we move from 2% to <unk> 54 to $2 56 that seemed to snake relatively small increase in our <unk>.

<unk> business as we move from $5 to 32, 5% to 32 again that seems to have stopped pretty well, so where we can we're getting price ups I think the real answer is in product development of newness, so rather than thinking about price. Upon the same merchandise how about we just launched an incredibly superior products and she doesn't have it.

A reference on what that prices the prices whenever the prices and left cloud is a good example of that and.

There'll be others as we move through the year as we develop better invested part of that commence superior pricing.

But thanks for your question I'm happy to demonstrate that we are all over and there is a very very sensitive.

Retail engineering.

Great. Thanks, a lot best of luck of the year.

Thanks Simeon.

Next question. Our next question comes from Susan Anderson with B Riley financial your line is open.

Hi, good morning, Thanks for taking my question.

I think you mentioned intimates and beauty categories drove the strength in fourth quarter I am curious how lounge did in activewear in the quarter and then also if you can give some color on peak and how that business performed and maybe some of the strength you saw there. Thanks.

Yes so.

We then lines, let's take sleep. So sleep you might recall, if you've been tracking with US sleep was challenged because P. J as had been very delayed and so we did not have the volume of bj's to sell early in the fourth quarter that we would've had in the prior year and so as we headed into Thanksgiving. We were in a tough inventory positions and that really is the main part of the.

<unk> business sleep is a key part of the lounge in apparel business. The great News is that we caught up we had a terrific December largely driven by by sleep and other categories and so we ended ahead in the sleepwear business overall is a very healthy mix of.

What we call sexy sleep and also casual sleep.

The spa.

Sport business and the sort of the regular apparel was kind of okay in the middle nothing, particularly outstanding that within the Pink business. Our intimates continue to drive forward instruments is over 50% of the pink business and Thats the closest to our core that's the most important parts of the pink business to grow in seeing healthy growth in that.

Area.

Frankly, the most important.

Missing anything Jason T J any of the category highlights.

<unk>.

No.

Swim was the other one that maybe we don't talk about it so much we had a good first season and <unk> first year back in the swim business very successful, we played our inventories and set ourselves up nicely going into spring.

With clean assortment. So yes, we feel pretty good about where we are.

Great that sounds good if I could just ask about it looks like you guys are going to launch a new brand happy nation next year focused on <unk>.

Is there any more color you could give on that do you expect to at some point have stores. It looks like it's going to be a digital first brand.

Or do you think there'll be storage around that brand at some point also.

Well never say never but we.

We have deliberately just teasing you, we'd happy Nathan and saying coming soon we're going to say more about it in April we will open our digital dose in April .

And once we get early indications of the brand we will be delighted at our next call to tell you. What we think it might look like and what the opportunity would be but we.

We see it as a very optimistic inclusive brand that fills a void in the tween market.

It builds on our core capability and undies, and first Roz and company clothing real expertise in young people in the pink business marketing expertise in that space. If it is a natural adjacency for us and we're also leveraging our knowledge and beauty to create a really young beauty business and happy nation that we think could be.

Really exciting if you want to go on to <unk> Dot Com you can see our splash page that went up yesterday and you can register and that will make you the.

Amongst the first people to see.

What comes during April , but we're excited about it.

And we will tell you more when we when we know more initially it will be digitally only but we will tell you more when we know more.

Great. Thanks, so much good luck this year.

Thank you Susan next question.

Our next question comes from Dana Telsey with the Telsey Group. Your line is open.

Hi.

As you think about raw materials and raw material costs.

Raw materials being adjusted for you in terms of categories, whether it's pink.

Core Victoria's secret brand and how that plays into price for 2022. Thank you.

Raw materials being adjusted for US I don't think so.

For us we would not go to an adjustment in your raw materials in order to save price, that's not where we go we would go to an adjustment in raw materials in order to drive superior comfort or superior fashion with superior look with smoothness of better and better products. So no we're not value engineering fabrics and on raw materials forecast, that's not really part of our DNA.

While we are being smart about sourcing efficiently and effectively yes, I think so when we're moving production around the world in a dynamic sense, we're moving sourcing of raw materials, where it makes sense to do so but the reality is that the whole world is facing the same pressures on inflation in raw materials in transport and people and break.

I don't think theres much for a retailer like us to do in terms of engineering that it's about buying forward, taking a good position on raw materials. So we don't get exposed and continuing to focus on our best at which is developing superior merchandise.

I hope I'm not dodging your question Dana there if you have ideas, but how we can save money we'd happily.

Listen to them, but it's not really where our focus is.

And then just on the new the new brand messaging with inclusivity and the new things that you've done like the collected any data points on new customer additions that you've gotten whether digitally or in store.

Oh, it's not my opportunity to talk about if the brand repositioning is working.

Yes, I think so yes.

We may see one or two points.

The proof points for their new brand positioning and it's not new anymore.

At least for a year now.

All around it's firstly inside the business, where our associate engagement is higher than it's ever been pride unemployment is higher than it's ever been we have incredibly low turnover, we had higher rates of people wanting to join the business than we've seen before.

Implications in stores and in terms in head office all around the business. There is good news that in our sales we see our bra business bouncing back after years and years of decline or talked about that earlier, we also see health in our logo businesses.

Our media impressions ridiculously high the recent campaign, we'd love cloud Amazing Superstars like Sofia going all around the world.

And supporting the fact that we're the second most followed brand on Instagram over 71 million Boe of 7% on Instagram followers follow Victoria's secret So incredible power in social media in our customer file has been growing too in 2021, two after years of decline.

We added to the file we are seeing a younger customer with a higher average spend a higher margin.

We know that when we have successful third parties in our business that we get incredibly high frequency of shopping and we also get high crossover with the core business. So there are proof points everywhere not least people that we know and love are proud of is again. So yes, we feel really good about the about the new brand positioning and it's here to stay it's part of.

DNA.

Miranda.

Thanks, Brad you didn't ask.

Thank you.

Thanks Dana.

Next question, yes.

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

Good morning.

Thanks for taking my questions great year.

I wanted to ask maybe you can give us some more detail around the love cloud bra launch.

Let's talk about some of the technical features.

Target customers traction you are seeing especially if you're seeing traction with new customers and then maybe more generally talk about how we should think about your approach to newness or you're going to see nice to see that really nice to see the broad category of strength again or are you looking for a certain number of launches on an annual basis do you have a pipeline of new launches like this or are you want to build these type of platforms out maybe help.

US understand that.

Line strategy around broad thing.

Thanks, Omar I really appreciate the question I should be better prepared to answer the question that I am I feel like we need one of our lead merchants to come until June .

In all honesty can't be more than happy to take it offline and explain the detailed benefits of the cloud and why it's a superior product.

I don't have that at my fingertips, So we'll take that away what I will tell you it.

That it exceeded our expectations.

And having five or six different frames with different functions across the business, we've been able to hit very very hard indeed, it speaks to our core and push up but it also speaks to comfort the match that pansies that are associated with the <unk> arrived on time in the right column and the right distribution that have been very successful. So we've seen a high.

Rates have matched back.

We've seen a young customer about 50% of sales have come through new customers, which is pretty consistent with what we see across the file just now pricing power has been good we haven't discounted.

We also had a good five.

Panty with the bra, which was a very good promotion, so well very high linkage dependencies as I mentioned earlier.

You asked about product development, I think I mentioned earlier.

And our best view as we had at least two big bra frames per year, and we're committed to that so I can tell you that in the fall season, we will come back with another new bra launch that will be very exciting and we can see at least two bra frames looking forward over the next two years I was integral anchor with two of our best vendors about three weeks ago.

We had a team.

A cross functional team in shoreline can last week from Penguin from Victoria is traveling together working on newness.

We just see an incredible pipeline that speaks to some interesting innovation and sustainability.

Which we'll say more about when we're ready to go to market, whether it be in fashion and.

In raw materials, and sustainability and fit and comfort wherever it is we have ideas. We have collaborations we have people who want to work with us.

And I see great things coming.

The level of newness overall in the business to be more or less I would say about the same.

About the quality of the newness and the quality of the launch and our ability to speak to newness with relevance.

Culturally relevant marketing campaigns and people representing for the brand who speak to young consumers in the way that they want to be spoken spoken to so it's the combination of all of those things I think that will drive success for our business.

Thanks, Mark and thanks for asking no worries thanks for asking.

Yeah.

Thank you and our next question comes from Paul Korn with Barclays. Your line is open.

Hi, everyone. Thanks for taking my question.

My question is on some of those store investments you are making so on the omni channel front expanding both vessels ship from store can you give us a sense of.

What percent of the business is today and where do you expect to expand to this year and then my second question is on the store of the future openings.

Or were you thinking about where to open these and any metrics you can perform provide on how it's performed whether it's productivity or payback.

Great. Thanks.

Yes, Thanks, Paul it's kind of a lot to patent Ed Let me start maybe.

Maybe keep me honest guys on the bits that I missed so I'll go in reverse order store of the future three store of the future.

Three store of the future open right.

Right now only been open for a short amount of time, but we've seen very very positive responses.

Customer response and sales response traffic response, all have been very encouraging we have some good <unk>.

Technology, and those stores that doesn't need to wait for store of the future to be rolled out. So there may be elements of that store concept that we want to push broadly through the chain during 'twenty, two and 'twenty three more about that when we know more as it relates to expanding the concept we have 15 new stores in the pipeline for this year.

Those will all be off mall locations, we have.

With much lower capex than we've had historically so we're aiming for capex, that's less than $400 a foot. So we should be opening stores at less than $2 million of Capex. That's an exciting opportunity for us. We also have refreshes and I think to 32000 2020 stores and about half of those repricing as well.

We'd be very clear about what it is that we want to do that.

It would be rather than developing a new store format that you get an absolutely perfect last time.

I wouldn't suggest that we have but I think we're really close and there are some very very exciting elements of what we built.

Good where specifically we put them I'll answer it by saying just all small as the focus rather than on more its less about geography honestly in that way are pretty broadly distributed already but.

Where opportunities arise where we're underpenetrated of course, we'd go there there are some markets around the U S where we closed in 2020, because we have the opportunity to close and thats because that location and that still wasn't wasn't good for the market might still be good and that may create some opportunity for us to go back.

As it relates to digital as you know we were late to the party with focus.

No point, saying it any other way, we only really got into the business. During the latter part of 2021 with I think 450 stores with focus capability.

This spring, we will roll out to all stores all stores in the fleet will have focused capability. The take up of it has been relatively light I don't know if thats because people in our category you don't want to buy online and pickup in store or.

Because we only had half of the fleet to I don't know, we will continue to work it and even if it's only relatively small take up it's an important part of our Omnichannel multichannel.

Go to market strategy. So we're committed to it. We're also committed to ship from store, where it makes sense to do so and so reminder, on ship from store and Thats. The idea of using 800 points of distribution of many warehouses in order to efficiently distribute merchandise to customers customer it doesn't get to know the merchandize with ship from store rather than the warehouse portfolio.

Get to know because it's a much more efficient can be a more efficient margin play that capabilities in about 200 stores right now and we will.

We will increase that as we go through the year end markets, where it makes sense to do so.

I hope that gives you enough detail Paul did I Miss anything guys anything else you would add.

I think we got it all certainly very helpful. Thank you and best of luck welcome.

Welcome welcome.

Thanks, Paul.

The next question, Yes. Our next question comes from Cory <unk> with Jefferies. Your line is open.

Good morning, and thank you for taking my question.

My first question has to do with a follow up on the AUR opportunity.

Are there any specific category.

You identified that you believe will be an enhanced area of focus when it comes to raising prices.

Back on the raising prices thing I think I think for us it's less about increasing the prices of stuff that we already have and more about developing merchandise this better than anybody else's and therefore commands a higher price where should we be focused on doing that.

Cool lingerie bras.

Eloping better borrowers than anybody else. This brand Victoria's secret should have the best borrowers in the universe.

Our mission and that's what we're going after and with that will come superior pricing.

And innovation.

But similarly, if you look at just pick a random categories swim for example, do we think that we could get higher prices by having superior merchandise in better fashion than our competitive base, probably so there isn't any one area, where I say well that's an underweight category, we should move I think it's broad based.

I was applauding Greg in the beauty team yesterday for the movement that we've made in our midst and motion business not too very long ago that was a five.

Unit price, a very very big business with enormous global appeal.

At $5 Thats more like $8.

So really terrific movement, and it's not driven by just cheekily, putting the prices up it's delivered by enhancing the formulations.

Creating a better product.

And being more modern and I'll go to market strategy, particularly on natural beauty, that's what drives the ability to increase AUR I think.

Great and then just a follow up.

How are you feeling about the current inventory positioning of the business and how should we expect this to evolve as we move throughout the year. Thanks.

TJ do you want to I mentioned earlier about 35% up but do you want to take it yes, absolutely. Thanks for the question Corey.

Into the season I believe the business feels very good about the inventory position.

To start this season, and we believe that it only gets better from here and what I mean by that is you can look at the 35% that Martin mentioned earlier and have one take on it from our perspective about two thirds of that increase relates to.

Just average item unit cost increase for some of the freight challenges we mentioned and then also bringing in.

Goods earlier than last year earlier than planned and some of that is the mix back to ocean from air that has longer in transit times and then the third element I would I would add is just the <unk>.

Improvement in in stocks in some of our basic or key categories. Martin kind of mentioned that you are having they are matched back Panther.

Panties with the bra launch and loved cloud and <unk>.

Expect us to do that.

And Thats, what we executed against so making sure that we're in better in stock position in key intimates categories was a focus coming into the season.

So we feel very good about the inventory position and where we are even though 33, 35% seems like a big number I think the second piece dimension is we'll continue to focus on in stocks and this should even get better as we move through the spring season, and what that means is we likely will be a little heavier than normal and that 35% range.

Most of the spring season, as we work through the shift from air to Ocean. As we worked through some of the price increases is that our in stocks get better and better.

Hey, T. J, we might also just add that.

Pushing for more size inclusivity, increasing the number of sizes that we offer body by Victoria 33 sizes now that will push up our inventories a little and that's a healthy thing to do for the brand long time to take one more.

Thank you.

Thanks Corey.

We'll do one more question.

Our last question comes from Jay sole with UBS. Your line is open.

Great. Thanks, so much for taking my question Mark I just wanted to follow up on the brand repositioning just come at it from a different standpoint.

Do you feel about the customers that were with the brand before the brand repositioning started do you feel like you've been able to keep those customers or has the new repositioning turned any of those customers away. Thank you.

Yes, it's a great question Jay Thank you for asking all customers and welcome I don't think we have no <unk> no. We haven't knowingly wave goodbye to any customers with not certainly not our intention we don't know within the business either anecdotally or systemically that we booked.

Groups of customers at all I do not hear about that either in stores from backing our leader of stores of information our leader of digital I.

I don't see it in the file data. So I don't think its a thing however, when we first announced our positioning we got a significant amount of mail from people who said.

This is terrible scorching, you're spoiling our brand we love the way it was before why are you changing it.

When we look closely all of those people.

I wanted it to be big fans of Victoria Gold Cardholder is known when we look closely we couldnt find that it was principally from men and it was from people who don't subscribe to the values that we subscribe to so I think that initial noise of the repositioning being a dangerous thing to do has gone away. We don't hear about it now a social media.

Post overwhelmingly positively received.

I hate to have gone away, but I know your question was more genuine and that in say auto women, who are shopping with us who no longer find the brand attracted I don't think so we still sell provocative merchandise, we still embrace very sexy some of our best selling items are in the collections that are most provocative Valentine's day as a whole.

Today, we celebrate and we own.

Shame at least.

At that time of yet, but we can do other things as well and I hope Youll see that when we launched mother's day.

A few weeks time, which I think is one.

One of the best campaign that we've ever launched so for US it's about a balance.

Rather than the brand Victoria's secret just being one thing which is sexy.

Tourist secret the brand being.

Advocating for women in all aspects of their life be that <unk> be the date night being company owned small whatever it is we want to be there for her and every aspects of the journey through life. So thank you for asking the question.

Appreciate it got it thank you.

Thanks Jay.

Concludes our call. This morning. Thank you for your continuing interest in Victoria's secret.

Thanks, everybody.

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

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