Q3 2022 Victoria's Secret & Co Earnings Call
Good morning, My name is Amanda 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 third quarter.
<unk> quarter 2022 earnings conference call. Please be advised that today's conference is being recorded all parties will remain in a listen only mode until the question and answer session of today's call I would now like to turn the call over to Mr. Kevin Wink, Vice President of external financial reporting and Investor Relations.
At Victoria's Secret and company, Kevin you may begin.
Thank you Amanda good morning, and welcome to Victoria's Secret and company's third quarter earnings Conference call for the period ending October 29 2022.
As a matter of formality I would like to remind you that any forward looking statements. We may make today are subject to our safe Harbor statement found in our SEC filings and in our press releases.
Joining me on the call today is CEO Martin waters, and CFO TJ Johnson, we are available today for up to 45 minutes to answer any questions certain results. We discuss on the call today are adjusted results and exclude the special items described in our press release and our SEC.
Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release, our SEC filings and the Investor presentation posted on the investors section of our website.
Thanks, and now I'll turn the call over to Martin.
Thanks, Kevin and good morning, everyone.
Before we dive right into the quarter I want to first my gratitude during this holiday season for our associates and partners around the world.
Hard work and dedication.
Especially thankful for the team's continued commitment to the resolution of our brand and our strategy and I'm delighted by the connections, we're making and deepening with our customers as we aspire to become a Victoria's secret where everyone's still seen respected and valued.
After nearly a year and a half as an independent company, we continue to make significant progress towards our transformation.
It created a solid financial platform with a new more agile operating structure driven by our two category defining brands and merchandise leadership positions in intimates and beauty.
The third consecutive quarter, we've seen growth compared to last year and our domestic market share to the intimates category. We remain energized by our customers response to our brand repositioning but of course recognize that this transformation is a journey and there is.
Still more to do.
For the third quarter and will continue to be a very challenging macro economic environment, we were able to deliver operating income and earnings per diluted share results above our guidance.
This represents our fifth consecutive quarter since the separation that we have delivered adjusted operating income and adjusted earnings per share within results within or above guidance.
We believe this type of performance continues to demonstrate the strength of our brand repositioning our domestic share market share leadership and growth in the intimates category.
In addition, the financial platform that we've created supported by our team's relentless focus on execution.
Now as to deliver better than expected results even in this challenging environment.
We remain steadfast in our belief that we have stabilized our business model to weather difficult times.
And are positioned for significant operating leverage and more normal economic times.
Turning to our third quarter results, our operating income of 43 million and earnings per diluted share of 2009.
Both as I said above our guidance range.
Sales declined 9% in the quarter compared to last year, which was in line with our expectation.
Traffic was up in our stores in the quarter and <unk> remained healthy and at or near record highs in most categories, enabling us to drive profitable sales. However, average basket sizes and conversion rates were down in the quarter, highlighting a customer who is very cautious and cost conscious in this current environment.
From a merchandise category perspective beauty was our best performing category and significantly outperformed the balance of the business followed by Bras, whose performance was in line with the overall business entities in apparel performance in the quarter lagged behind the balance of the business amidst an extremely promotional.
In those categories.
Our international business continues to be a bright spot with sales up more than 40% in the quarter compared to last year.
The international business has been profitable in each of the last three quarters with most lines of business in countries performing well.
I am encouraged with the rates of progress, we're making in all parts of our international business.
We continue to be optimistic about growth for our partners around the world.
T J and I recently visited and spend a few days with our teams partners and vendors in the far east, including our partners in the China Joint venture business Virgin America, We've made substantial progress stabilizing our business and growing digital sales in China with Regina.
After years of significant losses, I am expecting the China business will breakeven in spring 'twenty three.
Aside from our financials over the last 90 days, we've executed several key actions in support of our strategy and positioning for the long term, including.
We signed a definitive agreement to acquire Domy digitally native technology first intimates brand. We believe the deal will strategically position us for growth by allowing us to leverage our domain expertise and technology to continue to improve the Victoria's secret and pink shopping experience and accelerate the modernization of the <unk> digital.
Platform.
Secondly, we launched our undefined will campaign to cement the brand's continued commitment to welcoming and championing all women.
We delivered newness and innovation with the launch of <unk>. So obsessed our new push up bra, which provides the fit and shaping of the traditional wide bra and an extremely comfortable wireless frame.
We further enhanced the shopping experience by expanding our profit services with the launch of a new profit technology that will help customers more easily find the right sized when shopping in the Victoria's secret App.
We continued to expand our channels of distribution and began featuring a fortunate about pink apparel assortment in our Amazon storefront, we expanded our store of the future fleet to 23 stores 12 in the U S and 11 internationally and we continue to make progress on our ESG journey by publishing in November our ESG.
Materiality assessment and strategy.
Looking at the balance of the year, we remain mindful of the continued economic headwinds and pressure on our customers that will likely drive a highly promotional retail environment as such we expect continued sales and margin volatility.
We believe we are well positioned for the holiday season, and we're confident in our ability to navigate the shifting landscape by aggressively pursuing our share of customer spending to optimize sales and margin and at the same time being extremely diligent on costs and on inventory management.
For the fourth quarter, we expect sales to decrease in the high single digit range compared to the fourth quarter last year, and we are forecasting operating income to be in the range of $240 million to $290 million.
I expect you are all likely to hear my take on our holiday performance. Thus far is my take the start of November up until the Black Friday weekend seemed to be very much a continuation of the trend from the third quarter, a reflection of the very cautious customer in a challenging economic environment. However, since.
Black Friday, our customers have responded positively and we've been very pleased with an uptick in the trend.
Evel of performance.
Our stores have been some of the busiest in the mall and our promotional levels were appropriately aggressive with increased traffic and conversion both in stores and online.
That being said there are still many very important days ahead in the month of December where we make the overwhelming majority of our profits for the fourth quarter.
Our guidance for the quarter reflects our results to date and the expectations that we will need to be aggressive in December to get our fair share and more of consumer spending this holiday season.
For the full year, we expect sales to decrease 6% to 7% and forecast adjusted operating income to be in the range of $5 25 to <unk> $75 million or approximately 8% to 9% of retail sales.
Given today's challenging macroeconomic environment, we believe an adjusted operating income rate in the high single digits demonstrate stabilization of our business Ah represents a solid base, we will leverage more when normal macro trends return in North America.
We're committed to optimizing our performance in the current challenging environment by focusing on what's within our control our brand transformation is being best abrash, enhancing the customer experience and a relentless focus on cost and inventory management.
At our Investor Day in October we discussed discussed our strategic growth plan, which we believe outlined significant runway ahead guided by three principles number one to strengthen the core number two to ignite growth number three to transform the foundation of our company.
Led by our two category defining brands and merchandize leadership position in intimates and beauty and the global business positioned to increase market share. Our goal is clear to be the worlds, leading fashion retailer of intimate apparel.
I'll focus as leaders and as a company is on ensuring we're future facing business that becomes more and more culturally relevant and this shifting consumer environment.
We're confident in our opportunities and remain committed to delivering long term sustainable value for our shareholders.
That concludes our prepared remarks, and we'd be more than happy to take any questions that you might have.
Yes.
Yes.
Operator are there any questions.
Yes.
We have our first question from Lorraine Hutchinson with Bank of America. Your line is open.
Thanks.
Good morning, I wanted to get your view on what it is that the customers are really responding to.
And your thoughts on.
Can you drive sales with numerous or does the environment require that you have to promote to really drive this conversion.
Hi, Larry that's a great question I think the short answer is yes, and yes, we know that when we have given the customer newness.
She has responded really well to it so the so obsessed bra is a great example of that.
Which had an immediate impact and was extremely positive the shacket within the pink assortment blew out within the first week of being in store the <unk>.
Fragrance launch was an immediate headwind straight to number one even ahead of bombshells America's number one selling fragrance newness works no question that says in these difficult times. She is looking for a deal and she is looking for help and she's looking at best brands in the market to recognize that times are difficult and to <unk>.
Give her a helping hand and so as customers were at over Black Friday weekend, and they're stocking up looking to buy Christmas gifts than five.
We made the decision that it was appropriate to be more promotional than we had been in the previous year to be more promotional than we had been in the balance of.
Q3.
In order to make sure that we were fighting as hard as we possibly could and we feel good about that choice, we will roll out in stores in different markets across the U S and everybody reports it back at the end of day and on Monday morning, with about the same take which is the customary is hungry for good value on great merchandise and that's what we're striving to do so.
Our guidance for the balance of the quarter, we provided for the opportunity to give her a great value.
That helps the right.
Thanks, and then.
One follow up can you talk through the pace of the recovery in freight costs.
Then also the piece and the additional $250 million of cost savings that you outlined at the analyst day.
Yes, Laurie this is TJ I'll take that one as we mentioned in the prepared remarks.
Third quarter freight costs were relatively consistent year over year, and what I'm, referring to is the incremental supply chain costs that we have articulated really over the last 12 months. So starting in the third quarter of 2021, all the way through the spring season.
Estimated about us an incremental $300 million worth of supply chain cost or headwinds and that looked like higher ocean rates higher.
Air rates.
More difficult raw material price increases from an inflationary perspective.
Sure.
Need so to speak to be almost entirely dependent on air aerie merchandise into our stores, particularly in the holiday season last year.
So that was a 12 month runway Q3, 'twenty one through Q2 22 of about $300 million.
Through the third quarter, we start to anniversary that activity and we saw that the impact was relatively similar year over year.
$50 million that was embedded in our guidance and in our results as we move into fourth quarter, given that both ocean and air rates have now moderated significantly given that we've been able to put more of our merchandise on boes and take less merchant or take merchandize off of airplanes, which is a good thing.
For the business.
We believe we will recognize about an incremental $65 million of good news or lower supply chain costs in the fourth quarter. We think that number gets probably closer to about $100 million as we move into the spring season.
So of the $300 million, we think through the next.
Call it nine months, the stabilization of rates and our ability to move between airplanes and ocean containers will abate about half of the incremental cost in total where do Costco from there I think from our perspective, that's a TBD.
How much of this is sticky long term how far do rates continue to go down we know we're pressing everything that we can do from an ocean perspective.
And less reliance on airplanes. So to answer your question about half of the $300 million.
With incremental costs, we think comes back to us and starting in the fourth quarter and continuing on through the spring season.
Thanks, and then the $250 million of additional cost savings.
Yes. Thank you for reminding me the $250 million of incremental cost savings that we articulated at the Investor day, that's really a forward look for the business. So it started in a small way here in the fall season.
We will grow in 2023.
But from a $250 million perspective, I would think of it as growing from 23 to 24 to 25 as a reminder, there were three elements of that the first element was really about product costs and that looks like raw materials finished goods.
Yeah.
How we move goods between raw materials and finished goods from a freight perspective, lower duty opportunities et cetera. So the cost of goods sold was the biggest part of the $250 million. The second biggest cost was really I'll call. It modernizing the company or kind of transforming from being a high cost operator to a low.
Cost operator, and that looks like change.
Changes in terms of people and processes in our stores distribution centers and here in the office in Columbus in New York and around the World.
And then the third bucket as Youll recall was lower indirect procurement costs, which is really your non merchandise costs across the business. So.
The $250 million is different than in the supply chain headwinds that we talked about earlier.
These are new initiatives for the business and have started here in the fall season, we will grow in 2023 and grow in 2024 and 'twenty five.
Thank you.
Thank you. Our next question comes from Ike <unk> with Wells Fargo. Your line is open.
Yes, Hi, this is Kate on for Ike.
I wanted to dig in a bit more on the merch margin performance in <unk>.
And maybe more on for Q could you just parse it out by category. What you. Sir you saw in terms of broad P&G and apparel would you say that the majority of the degradation in <unk> and maybe what youre anticipating in <unk> would be in the apparel part of the business, while maybe the intimate side Tony.
Better.
Just trying to think of the performance of core lingerie versus apparel.
And then I have one follow up.
Yes, I think good question. Thank you Kate.
From a margin perspective, as Martin mentioned, it's our intention to be.
To get our fair share across the mall and be appropriately aggressive to make sure. We're capturing our fair share of traffic and we're doing everything we can to try to increase conversion on the traffic that's out there.
From a category perspective.
Think when you when you kind of look at our promotions that have transpired over the last few weeks and months those those category promotions tend to be.
Little more focused on apparel, a little more focused maybe in panties, but.
Generally across the store, we want to make sure.
That we're being appropriately aggressive on not just categories, but also giftable product at this time of year again to get that fast started and tried to build on conversion. So it's.
It's less about it's not.
What you might be seeing at other retailers that feels more like a liquidation. This is really about how do we use and strengthen our product that strengthen our margin profile to try to drive traffic and increase conversion. So we feel very good about our inventory position and the glide path that we're on again I want to underline this is not liquid.
Asian activity. This is using our product strength and product promotion to drive that drive traffic and conversion.
Okay, Great and then T. J I guess, just one follow up you know as we're looking ahead to next fiscal year I understand obviously youre not going to want to guide, but you talked about some of the easing of supply chain pressures. There a reason why maybe why we shouldnt think about gross margins being up next fiscal year as inventories are indeed.
Better. Please your last theme from the excess promotions here in the back half and some of the freight headwind.
Flip the other way.
Yes, I think from our perspective, you're correct, we are not giving guidance.
But as we think about 2023, a pivot back to the Investor day, and you really the messaging and the story remains the same I think we're very focused on strengthening the core which as youll recall we.
We do need some improvement in the North American side of the business and particularly in the economic environment for our customer we continue to be focused on growing our market share from an intimates and beauty perspective.
Clearly we had very good performance from an international perspective. So when you think about the ignite growth pillar that we talked about international as strong new business development continues to progress, particularly with our success.
Beauty on Amazon and increasing points of distribution.
And the sort of the future we continue to be excited about so all of those.
Both opportunities remain intact for 2023, however, we do believe we need some help from the economy from a north American perspective, when we think about the margin just focusing in on your question for a moment we.
We do expect to have some tailwind as we go into two spring season, particularly around freight.
Freight rates and freight opportunity year over year I think the overall gross margin performance in rate performance.
There will be some level of impact on where do sales go.
Because we do anticipate that from an economic perspective.
I think most people believe that the challenges in North America will continue into spring, so what kind of deleverage that create on the base and then where does the promotional environment go in the mall.
Youre correct in assuming that most retailers seem to be much better inventory position coming out of the fall seasons.
<unk> activity across the mall subside.
Does it go lower than where it was in Q3 and Q4 I think thats a TBD, we'll see where that goes we will want to be competitive in the mall, though to continue to focus on traffic and conversion, but we do have some tail winds from a freight perspective so.
We're really going to have to wait.
To see where trends go and how do we continue to remain to be competitive on the mall and continue to gain share.
Great Best of luck for holiday.
Thank you.
Thank you. Our next question comes from Matthew Boss with Jpmorgan. Your line is open.
Great. Thanks so.
So Martin could you expand on the lower conversion rates that youre seeing in both stores and digital I guess, what gives you confidence that this is macro and not tied to product or pricing is there a competitive element in underwear that impacted trends this quarter, and then T. J to your point as we turned the corner post holiday.
I guess what are the puts and takes to consider as it relates to revenues relative to this year, meaning do we need macro improvement.
The level of revenue decline or just maybe if you could walk through the initiatives on the topline and if growth is reasonable as we think about next year.
Yes, I'll take the first part of that morning, Matt.
Of course, it's something we think about it on a daily basis as we look at our results how are we getting our fair share.
Over performing or underperforming relative to the market and when conversion is down and sales are down generally it's an extreme cause for concern. So we go to the other indicators that we can find.
Market share is goodwill is not the only one but it's a good one.
Our market share was up a nudge for the third quarter relative to where it was last year and intimates, that's driven by strength in bras so growth.
Broad market share ever to slight reduction in share in <unk>. So within that we could be satisfied with the overall performance of intimates, but look hard at the panty business and say gosh, that's a really promotional category.
Losing a little bit of ground, we got to work harder. So that's just one indicator of another indicator. We look at is the Wi <unk>, which indicates that purchase intent was higher for Victoria's than it was before we look at our traffic relative to mall traffic to the extent, we can get it.
And that other retailers share with us in landlord share with us and that looks like it's tracking.
So we look across the dashboard and say should we be satisfied should we be please should we be concerned and I think we're holding our own.
Honestly I think.
There or thereabouts in the mix and we've got it all to play for December is the most important month of the year we.
We feel very well set up in terms of inventory in terms of promotions in terms of the activity. We've got in the pipe. So its full focus on execution right now.
That's what we get paid to do and Thats what were focused on T. J do you want to take the second part, yes, I think the second part Matt from a.
Macro perspective, as we think about revenues going into next year.
Really what we talked about and remind everybody what we talked about at the Investor Day again, the North American side of the business.
We do need to see some level of improvement we believe from a macro perspective windows that calm and candidly.
We'll start to anniversary some of the challenges.
Towards the end of the first quarter, what trend then unfolds in second quarter. When you are comping the comp so to speak from a from a macro perspective, I think thats all in front of all of US as retailers do we have initiatives going on in the business to try to Buck the trend absolutely we do.
As Martin mentioned again, our core focus on being best step raws.
Look in terms of how do we make sure we're getting the appropriate amount of traction and growth in the P&C business. So instruments in total which is about a little over 50% of our business. That's our core that's our best at how do we contain to how do we continue to grow market share.
From a beauty perspective, clearly we continue to launch new fragrances and all they really do is go to the top of the chart. So to speak so feel very good about the beauty business and continued newness and refresh in that business and growing it as a percentage of the mix in the store.
We talked about at the Investor day, starting to deemphasize a little bit some of the apparel parts of our business again, focusing more into core intimates core beauty and growing the things that are working the best for us I think additionally.
I want to underline again, the international growth in the first three quarters of 2023 and so the world is starting to open back up again.
Seeing very strong performance there, we can see a pipeline of both country growth store growth digital growth internationally.
For the foreseeable future out through 2023 2024, so we feel very good about the international part of the business New business development, Greg and his team have done a great job starting to grow our Amazon business, we think thats an opportunity going forward.
New store of the future.
Keep going down the list of initiatives that we talked about at Investor day, but.
Only six weeks ago all of those are still in place all of those are still on track and we feel very good about those.
Great Best of luck.
Thanks.
Thank you. Our next question comes from Simeon Siegel with BMO capital markets. Your line is open.
Thanks, Hi, everyone. Good morning, Hope you and your families have a nice Thanksgiving.
So can you setting aside the $65 million could you just speak to any of your expected competition at the <unk> gross margin. So within guidance. So just thank you for parsing out the other levers and then Martin. So you said AUR was healthy any way to I.
I guess quantify or just give us context, what that means and I assume the implications at <unk> were down. So if AUR is healthy <unk> is pressured.
What does that tell you about using promotions I guess it sounds like people are willing to pay what you said theyre just buying fewer units or do you think it might be reflecting that.
Maybe they just over purchased over the last couple of years and are still working through the excess and then just need fewer things. So we'd love your view on that.
<unk>.
T J you want to take the first part of the question, Yes, I think from an AUR perspective.
And we still feel very good about the AUR positioning of the business and really what we're talking about is.
From a from a ticket perspective, we feel very good about where we are what we're really talking about is how do we use that strengthen and ticket and strengthened margin profile of the business.
And if the net AUR needs to change a little bit here in the fourth quarter to continue to get the kind of conversion that we want and the kind of basket.
Growth that we would like to see and traffic growth, we'd like to see we want to use that strength again.
It doesn't necessarily mean that we have to be at this level of promotion for all four quarters of the year, that's not what we're talking about but clearly in the fourth quarter. When it's our Super Bowl, we need to do everything we can do to make sure we're getting our fair share.
In terms of your question around over over purchasing or over producing in the past.
Not necessarily sure we're thinking about it that way.
I think we're thinking about it is there is a very competitive environment across the mall there are others in our view that are in much different inventory position than we are.
And are more in a liquidation mode.
Our position.
Position of strength from an inventory perspective is not a liquidation.
And how do we make sure that we're getting profitable sales in a difficult environment.
Yes.
Piggyback that a little bit T. J I think you've covered it but units per transaction and basket size is down but TJ said I don't think we were over performing in the past, but <unk>.
Do recognize that the customer has different categories to choose from all of the dollars that are available.
And say I'm going to point those the intimate apparel category. It just does the wallet.
Other categories have come back stronger than they were in previous years, and that's a reflection of times changing being more open now than we were joined Covid time. So.
What I go to is looking at our performance relative to the market in which we compete and the market's down without the market's down.
It will come back.
The most important thing is to make sure that we're super competitive.
We're giving the best possible offer that we can in terms of newness and in terms of value. So that's that's where we're focused right now control what we can control.
Perfect. Thanks, guys, Yeah, I thought the AUR being healthy was the interesting point in light of all of that commentary. So thats just what I was asking about by that thank you best of luck for holiday.
Yes, thanks for the clarification.
Yes.
Thank you. Our next question comes from Alex <unk> with Morgan Stanley . Your line is open.
Great. Thanks, so much for taking my question I wanted to focus kind of on some of the supply chain challenges.
Victoria's is known for its a read and react strategy and that's really been an advantage in the past, but has been pretty impaired over the last year or so is that contributing to some of the sales pressure or how should we think about that and maybe where does it stand in terms of the progress to being fully back to the read and react.
Advantage or when do you think that normalizes.
Yes happy to take that thanks, Alex So we don't think about the supply chain being in pad to be honest, we feel like we performed very well during COVID-19 and a very difficult competitive environment and base of supply we got the goods that we needed.
We had to pay a bit more for them because of the freight challenges, but we've got more than our fair share of what was available in the base of supply. So we feel that we did very well during the COVID-19 period.
As it relates to the current period, where supply chain pressures are really behind US TJ mentioned that there was some cost in the third quarter that starts to.
Go away during the fourth quarter. So the cost is substantially behind us and the difficulty of the supply chain is substantially behind us.
It really biases in our ability to enter a new season open and I have said previously that when the business is at its best we would stop the full season about 60% board and about 40% open we didnt get quite back to that level. This fall we were more like 70%, 30% open, but we don't get to.
Spend that 30, presenting this open because with the economic outlook the way that it is and so being pressured it would be unwise to spend those opened so we're more like 80 20, 80% committed 20%.
When does it get back to completely normal I would guess towards the middle of the year, we would expect to be at full capacity on read and react. There is no structural change in the base of supply out of the way that we do business that indicates that it won't do so it's just a question.
Are those being very careful in the way that we placed our orders and the amount of commitment that we make.
Agile.
In our ability to switch out of boats and into airplanes, if some things checking faster than we anticipated to do so I hope that gives you a bit more color on the question.
Broad outline I would say, we would expect 'twenty three to be substantially normalized from a supply chain perspective.
Great that sounds like a nice tailwind for next year, maybe just taking a step back one more from me. That's bigger picture can you just walk us through kind of the puts and takes around kind of that high single digit margin. This year on an EBIT level and how you see the path to kind of that mid teens longer term target from here.
Yes, I think.
Alex I would just the Investor day, we kind of step through this and from our view nothing has really changed in the last six weeks. So.
We've maintained our guidance for the current year.
From an operating income rate perspective, so if you think about take the high end of the range just to keep the math simple at 9%, what we talked about in terms of the path to 15% the first.
Next percent nine plus one plus one is really where we're focused on strengthening the core that's the best step raws, That's North America, that's growing intimates share thats growing beauty share thats starting to mix a little lighter on the apparel side those initiatives that we talked about at the Investor day.
The next two points so nine plus one to the next two points is really the igniting growth pillar that looks like international growth, which happened in the third quarter and we feel very good about the outlook for fourth quarter in 2023, it looks like new business development, whether it's new partners.
New channels of distribution et cetera, or all of the above it looks like continuing to focus on store of the future growing the store base from a store of the future perspective renovating stores into the sort of the future format that is well on track and we're pleased with the results to date and then the last three points of <unk>.
<unk> plus one plus two plus three equals 15 in the last three points as the $250 million of.
Efficiency opportunity in that transforming the foundation bucket I spoke about that earlier that looks like cost of goods sold opportunity.
Modernizing the company from an efficiency standpoint in terms of people and processes and then also indirect procurement. So nothing's really changed in the past from eight or 9% here in the current year to that mid teens.
From an initiative perspective or anything different strategically.
Do think it's important to note Martin mentioned in his prepared remarks, something that is new and different.
We are waiting on.
Approval for from an HSR perspective is the announcement of the acquisition of the door.
We will have more to say about that win win when that happens, but clearly that's a growth opportunity for the business and are transforming opportunity for the business that wasn't originally contemplated at the Investor day.
Thanks, so much good luck.
Thank you and to be clear, we were contemplating at Investor Day, We just couldn't talk about it yet.
Fair.
Yes.
Thank you. Our next question comes from Omar Saad with Evercore Partners. Your line is open.
Thanks, Good morning, Thanks for all the information.
I wanted to do one kind of follow up on the near term.
Acceleration.
Yes.
Hard time figuring out is it kind of accelerated promotion nowadays as you guys kind of really lean into the value in front of the customer respond to that or the black Friday acceleration or do you think it's more shopping.
Tumors, returning to kind of historical shopping patterns more centralized around the holiday period I'd love to ask if you have any thoughts around that.
Quick follow ups.
Yes, good morning, Omar I'll take a shot at that and its really looking at the crystal ball and guessing what's going to happen.
<unk> to me that when the customer is pressured in a very tough economic environment.
She gravitates towards opportunities to save money on Black Friday, and cyber Monday are opportunities to save money. So was I surprised that it was a strong black Friday and a strong cyber Monday no. It wasn't.
I was not surprised about that at all what I don't know is whether this is the beginning of a new trend in the whole of December is going to follow and that way I doubt it because I think when we look at previous patterns of difficult economic times customers gravitate to deals and then she spends out in anticipation of the next round of deals so.
We are in for a tough December all around across retail and we need to be prepared to sharpen our elbows and fight as hard as we can because as I said before it's not just about winning within our category. It's about taking those to all category rather than to somebody else's.
So that's about the only forecast.
Give you Omar you should be assured that we're taking on a day to day basis with.
All over our results even intra day results.
Joe.
Able to change and pivot as needed we have strong plans and we have contingencies in place and we will be prepared to make sure that we get whatever is available on T.
TJ do you want to add anything yes, I agree with everything that Martin mentioned, there and the one add I would have is really an acknowledgment to the team both here and across the country in our stores.
Being prepared for Black Friday weekend.
Most reports out there and certainly when we look at from a mall perspective of mall traffic.
I'm always very busy we actually think that we were one of the busier stores in the mall and I think thats been reported and we're seeing that in the numbers. So the lift in traffic that we saw we think was a little bit better than the mall and we think that's a little that's directly.
Correlated to the preparedness programs that Martin mentioned on the part of the team so.
Got it helpful color.
Yes, that's very helpful color, maybe quickly any thoughts on why beauty is so strong and then Martin.
Important details on the store of the future for people who haven't been in one.
Yes.
So why would beauty would be stronger than other categories. I think it reflects the fact that the market is more open. So you are more likely to wear a fragrance when you're going out to policy.
<unk>.
Robin Van <unk>.
The reality is that people are more at about right now than they were this time last year. So it kind of logic to me.
My beauty team will be listening to the same but what about the newness what about all the great content that we developed and so I would give a nod to that also that we have got some terrific merchandise out the bad fragrance is truly.
Groundbreaking innovative.
And unique in some respects and so yes, it's a function of the fact that the team did a really good job and it's also a function of the fact that beauty is a stronger category across the board this year.
Then last store of the future. Thank you for asking we feel very good about store of the future. We've got 12 of the 16 that we plan to open in North America open.
And theyre doing well performing high single digits better than the control group.
The store presents as being less intimidating easier to shop lighter brighter the merchandise is the hero rather than the environment being the hero.
Overwhelming.
From a business perspective, it's lower Capex, it's typically smaller stores, we don't need the amount of square footage of the previous management.
Needed so it's a more efficient less intimidating.
More attractive environment and there are some neat technologies and that are really helping the crave technology that we have in the fitting room has been extremely well received.
Think as the highlight of the store of the future and we will continue to evolve it as we put more down on the ground yet one part of that initial.
The initiative is changing dependence on malls to have a focus on off mall locations, where we've been underpenetrated and we're very pleased with the performance of those off mall locations that indicate that they could be.
Very good backfill to downward pressure that will be on some the D and E malls across the United States. If we can replace some of that real estate with off mall real estate that will be a good thing for us. So in many respects from many perspectives. The store of the future is a really good initiatives. We're very pleased with the results so far.
So thanks for that holiday.
Thank you.
Thank you. Our next question comes from Adrienne <unk> with Barclays. Your line is open.
Hey.
Martin I had my first question for you.
How are you assessing and measuring marketing success, how do you know that it's working to acquire so younger millennial Gen Z customers first.
First one and then for both of you, yes inventory you can see on the balance sheet.
Last year in the fourth quarter.
75% of the net.
So a lot of that with safety stock in kind of a change in the model mix et cetera.
And maybe this is T J.
So.
How much of that was in transit how much of that on available for sale won't be purchased again and then from a unit perspective and I can appreciate the difficulty of debt, but how do you drive.
Positive sales.
Contemplating in this marketplace.
Thank you just had that philosophy. So how are you building in that flexibility to either be promotional if you need to be or to back off and drive.
Thank you.
Yes, great questions.
How do you know if marketing is working is this sort of classic question through the good news is that it's easier to tell where the marketing is working now than it was a decade ago.
So we will have multiple creative that at any given point in time.
And the algorithms and the system respond and push the best creative so the creative that is the best it is the most well received rises to the top so.
Spending marketing dollars these more efficient now than it was previously.
And excuse me at this time, we are having technical difficulties.
On a brief hold one moment.
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And I do apologize again at this time, we are having technical difficulties.
I'll be back with you in just one moment.
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And again this is the operator, we are having.
We will be right back with you.
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And excuse me. This is the operator your lines are now open and the main call.
Okay.
Hi, Adrienne Thank you still with us I am still with you.
How much you had.
Monologue and then somebody came in is that out of the line cut it wasn't may I promise.
Let me start again.
I was saying is that marketing is now significantly more dynamic than ever it was in the past. So we have multiple creative at any given point in time and the algorithms work out which is the better and push those harder than others. So it's a more efficient way of spending money than previously so thats baked.
Big campaign that we had was the undefined will campaign, which was really about our dedication to evolving listening and reinforcing the beauty is in the eye of the beholder the individual's right to define Nordic companies about our commitment to welcoming and celebrating her on her terms not on our terms and that campaign generated 500 million media impressions.
<unk>, which is off the charts and was 87% positive and our readout, which is extremely strong. So we have metrics that indicate how successful.
Individual campaigns are we adjust accordingly, so we feel good about where we are at that said if you look at the 13% who are less positive. There is a significant demand in our base of consumers will be able to bring back the old way of doing business, we liked Victoria's as well and the reality is that as abroad.
A very broad appeal brand is such that we are the customers expect multiple things from us they expect us to be very sexy and very provocative they expect us to be leading in comfort they expect us to be democratic and inclusive and we will be all of those things and our broad communication.
The brand so.
We think that we're on a good track the indicators suggest that we're on a good track and we are determined to proceed with high energy. So I hope that helps a great. It does take the second part, yes, Adrian if I understood. Your question right on inventories, let me, let me try to address how it's been flowing. So you are correct that you are coming out of last.
Year, and the timing of when we received inventory due to supply chain challenges certainly made fourth quarter last year difficult as we moved into 2022 and supply chain started to get incrementally better from a flow perspective. It gave us the confidence that we could start taking merchandise off of airplanes.
And start putting in on boats that did cause some dislocation in terms of when it shows up on our balance sheet to your point.
Because it starts to show up in in transit before it's actually received in the distribution center is it's coming here on boats.
Lead times, there are obviously are longer than airplanes. So we've been working against that all year long from a balance sheet perspective. The good news is being a financially stable company generating our own cash and having a strong balance sheet. It gave us the flexibility to do that and start to lower overall cost and increase our flexibility.
As Martin mentioned earlier as we think about exiting this year. We do think the majority of that timing difference on inventory receipt is starting to work its way through the system.
We think we will end this year with inventories on a dollar basis on the balance sheet up in the mid single digit range again from a modal mix perspective, we take that into account, we think inventories will actually be down mid single digits.
And we start to fully anniversary it as we get into early 2023. So we think we have the opportunity to exit 2022 with an enter spring with inventory dollars down in the mid single digits. When we take into account modal mix now having said that we.
Go into 2023, we do believe having that inventory flexibility, having the flexibility to chase goods. They are starting to get back closer to that 60 40 mix as Martin mentioned gives us the opportunity to chase winners losers and be much more efficient with our inventory I think <unk>.
<unk>.
We have opportunity.
As we enter into next year to start to see incrementally a little bit of improvement on inventory turnover as I mentioned because of it.
The timing of inventory and being more in position. So we feel like even if we entered 2023 with inventories down in the mid single digit range, we have the opportunity to chase and generate higher sales.
On that inventory so inventory it gives us the opportunity to be more productive when were more flexible so we.
We feel much better about entering next year with inventory levels down and the ability to chase than where we've been in the last 12 months.
That's extremely helpful. Just two housekeeping what was deleverage in the quarter and what was digital presents itself. Thank you very much and best of luck for holiday.
Always deleveraged in the quarter on margin.
Yes.
And what was digital <unk>.
So Kevin joining <unk> digital sensors sales.
And then the 303.
Yeah.
The <unk> deleverage in the quarter was 80 basis points.
Then.
Percent of sales reps do some math here, we will get that tied to us yes.
In the high 30% perfect.
Thank you gentlemen.
Good luck for holiday thank.
Thank you. Thank you we take one more question before we call it a morning.
Perfect. Thank you. Our last question comes from Jonna, Kim with Cowen Your line is open.
Alright. Thank you for taking our question just curious on the Army acquisition. Congratulations on the deal in a way you can leverage that business for next year as you think about modernizing great.
Great any color will be helpful. Thank you so much.
Yeah. Thanks for the question, we're Super excited about a domain, it's a terrific company.
And I talk about it externally, we talk about it as being a two for one deal it's like.
It's a standalone business that is incredibly successful and growing and pointing at the value sector of the market that we don't currently compete in and that gives us a great source of growth and secondly, as a technology company, where we can leverage some of that great capability and skill set inside of a larger base of customers there. So.
Yes, there's two very good reasons for us to be a good owner for that for that brand.
We talked previously about there being three parts to the rationale for the deal number one is enhancing the customer experience MBS and paying by leveraging the two technologies of try on at home and subscription businesses and we're going to work incredibly hard to stand those both up during the early part of 2023, assuming the deal closes as we expect.
Well said.
Secondly, putting tech at the heart of everything that we do that company has been built on a foundation very different from the way that our company has been built and so working closely with Morgan and the incredible team at Adobe will find ways to bring technology to the heart of everything we do and transform the foundation of our company modernizing for the future and then the third.
He is just the engine for growth that it provides particularly targeting about $7 billion segment of the market that we call value.
When Victoria's Pink don't currently compete so lots of good reasons for us to be a very good owner for that business and I am glad you asked thank you.
So all that remains is for us to wish everybody, a very healthy and happy holidays and thank you for your interest in our business.
Okay.
That concludes today's conference. Thank you for participating you may disconnect at this time.