Q4 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 fourth 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.
<unk> of todays 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 <unk> Company's fourth quarter earnings conference call for the period ending January 28 2023.
As a matter of formality I would like to remind you that any forward looking statements. We may make today are subject to our safe Harbor statements found in our SEC filings and in our press releases.
Joining me on the call today is CEO Martin waters, and CFO TJ Johnson, we are available today for up to 45 minutes to answer any questions.
Certain results we discussed on the call today are adjusted results and exclude the impact of certain items described in our press release and our SEC filings.
Conciliations of these and other non-GAAP measures to the most comparable GAAP measures are included in our press release, our SEC filings and the Investor presentation posted on the investors section of our website.
And now I will turn the call over to Martin.
Thanks, Kevin and good morning, everyone before we dive right into the quarter I want to first my deepest appreciation for the hard work and dedication of our associates partners all around the world.
Especially thankful for the team's continued commitment to the revolution of our brand umbrella doing as we push forward our strategic growth plans.
I'm delighted by the connections we are making in deepening with our customers as we aspire to become a Victoria's secret where everyone feels seen respected and valued.
And of course, I'm delighted to welcome Adobe Associates to our family for the first time this quarter a welcome welcome.
And as we look back on 2022, our first full year as an independent public company I wanted to spend a few minutes, reflecting on the key actions that we've taken over this past year in support of our strategy and positioning for the long term.
It's been a year filled with innovation and many firsts for our customers and our brands to name a few we debuted love cloud both the proof points in our best at Bras story, and our most inclusive marketing campaign ever wished.
We said our first bilingual campaign for Victoria's Secret beauty featuring <unk>.
Our first fine fragrance pillar in five years on a one of a kind that is personal to each individual.
We introduced our inaugural grant, Brian Global brand campaign, and definable that celebrates individuality and diversity.
We extended our channel distribution and now offer an edited assortment of Victoria's secret and pink on Amazon and natural extension to continue to grow our business.
We deployed a new digital broth Pic technology and have begun to make meaningful improvements to our digital experience to improve the customer journey.
We expanded our store of the future fleet to 52 stores worldwide and we released our first ever ESG summary report in the spring our ESG Materiality report in the fall when we look forward to publishing our first full ESG report next month.
This past year, we also made acquisitions and develop partnerships and organized ourselves to fuel our future growth importantly, we inquired that digitally native intimates brand a domain to further enhance our market leadership in instruments and strengthen our ability to put technology at the forefront of everything we do.
Internationally, we accelerated our growth as we entered new markets like India and Israel are completed the joint venture agreement with Regina Miracle.
Our China business we.
We invested in women owned and run businesses, including our minority stake in <unk> to help us reclaim our leadership position in swim and announced a partnership with inclusive lingerie brand alone.
We announced a new corporate leadership structure uniting the Victoria's secret and pink brands into a single collaborative organization centered around our focus on the customer and built to capitalize on efficiencies to yields stronger growth and as part of that new structure, we welcomed a chief customer officer, a chief supply chain officer and also.
Named a chief growth officer, giving us focused leadership expertise to steer as to the next stage of our transformational journey.
Additionally, in 2022, we continued our commitment to women our associates, our partners and our communities.
A few examples include we brought on more models and ambassadors of diverse sizes ages abilities and identities.
This past year, we achieved third party pay equity certification for all genders races, ethnicities and intersections of those identities, we're committed to maintaining our status as a leader in pay equity, we're especially proud of our associate satisfaction metric metrics with 87% of our associates reporting that they feel.
Proud to work at <unk>.
We welcomed a new independent director and seven of our eight board members are women mirroring our customer base.
We launched <unk> essentials, and will supply more than 1 million young women and young adults with under governments by 2025.
And we maintained our partnership with peloton, you and administered the first grants to research as part of the Victoria's Secret Global fund, but women's cancers.
And we're certainly not stopping that already in fiscal 'twenty three we launched the new Victoria's Secret Times, Naomi Osaka collection of first design collaboration with Victoria's Secret collected partner Naomi Osaka. The collection features the <unk> with our first ever <unk> pad that can be recycled in a closed loop system.
Our first ever <unk>, Victoria Secret Swim collection is now available exclusively at Victoria's secret and inspired by founder Francesco is beloved early memories of shopping at Victoria's secret.
We announced the rollout of our new Victoria's secret and Pink customer loyalty program, which is our first rewards program to allow customers to earn points regardless of payment method.
And we were recently named by Newsweek as one of America's Greatest places workplaces for diversity.
So as you see we've been busy and at our Investor Day in October we announced our intent to become the world's leading fashion retailer of intimate apparel guided by our three key pillars number one strengthening our core number two igniting growth number three transforming the foundation of the company.
We believe we're two years into a five year journey and the turnaround of our business and we have a clear roadmap to be the world's leading fashion retailer of intimate apparel.
And now I'll dive into the results for a few moments for a few minutes.
For the fourth quarter, despite macro macro economic environment that remains challenging for our customers. We controlled what we could control while navigating a highly promotional retail landscape.
We delivered adjusted operating income and adjusted earnings per diluted share results for the quarter above our most recent guidance. This represents the sixth consecutive quarter since the separation that we have delivered adjusted operating income and adjusted earnings per share results within or above our guidance at.
And importantly, we exited the year with Victoria secret and pink inventory levels down double digits on an adjusted basis prudently positioning us as we begin the new year.
We believe this performance in a challenging environment continues to demonstrate our position of strength and highlights our dominant domestic market lead market share leadership position and the stability of the financial platform that we've created.
We remain steadfast in our belief that we've stabilized our business model to weather difficult times and are positioned for significant operating leverage and more normal economic times.
In the fourth quarter, our adjusted operating income of $280 million and adjusted earnings per diluted share of $2 47 were both above our most recent guidance.
Sales declined 7% in the quarter compared to last year, which was in line with our expectation.
<unk> was up in our stores and online in the quarter and we were encouraged by our sales performance during peak periods of time during the quarter as customers responded positively both in stores and online to our marketing messages and targeted promotional activity.
Our conversion rates were down in the quarter compared to the fourth quarter last year, but remained above pre pandemic levels.
As a result of the positive response to our aggressive promotional position and the strength of peak selling periods. Our average unit retail was down in the quarter as compared to fourth quarter last year, but again remained healthy and at or near record highs in most categories.
Writing a customer who is very cautious and cost conscious in this current environment.
From a merchandising perspective, we remain the leader in domestic market share for the intimates category and on a rolling 12 months basis, we experienced slight growth compared to last year.
From a category perspective, starting with Victoria's Secret beauty was our best performing business, followed by Sleepwear and bras.
Within pink intimates, outperformed sleepwear, and apparel, which had a difficult quarter, while pink apparel has been a consistent challenge during the last couple of quarters. The underperformance gap widened during the holiday season, and we've already begin to urgently re imagined the pink apparel strategy assortment and positioning with our customer.
And we will see that impact in late Q2.
The pink apparel impact alone was a drag of more than four points on the fourth quarter for the company. So it is a very high priority for me going forward.
Our international business continues to perform very well total international system wide sales were up double digit in 2022.
And the business has been profitable in each of the last four quarters.
<unk> continues to experience momentum with most countries performing very well and we continue to be optimistic about growth plans to expand our international footprint.
Both the numbers of stores and numbers of countries around the world.
As we begin the new year, we're mindful of domestic economic environment continues to be challenging and continues to put pressure on our customers. However, we are evolving and innovating our business focused on our three key pillars, and we have organic growth strategies and new customer experiences well identified for 2023 <unk>.
The recent launch of the Victoria's secret and pink customer loyalty program and our pipeline upfront launches.
We recently acquired a Dolby as you know a technology led growth vehicle, we plan to leverage some of their technology on our scaled platform starting in the second quarter and continuing through the fall season.
Our international business has momentum with partner expansion plans for new stores and new countries planned throughout the next two years and most importantly, we are a broad company and the market leader in the intimates category positioned for future growth, both in our core and where the Dolby now in the family to.
So while the macroeconomic environment remains uncertain, we are assuming sales trends and comparisons will improve through 2023, as we advance as we anniversary soft sales trends, which began in the second quarter of 2022, and as we begin to benefit from our new growth strategies and new customer experiences.
Being rolled out through the year.
With this in mind, we expect sales for 2023 to increase in the mid single digit range compared to 2022, our forecast assumes a victoria's secret and pink businesses relatively flat.
Over the year for 52 weeks and approximately one to two points of growth due to the 50 <unk> week in fiscal 2023.
Our forecast also includes a domain, which is now in our results in 2023 and forecasted up in the mid teens compared to the most recently completed fiscal year.
At this level of sales, we expect our adjusted operating income rate for 2023 to be similar to 2022.
Given today's challenging environment, we believe an adjusted operating income rate in the high single digits demonstrates stabilization of our business and represents a solid base, we will leverage when more normal macro trends return in North America.
For the first quarter, we expect sales to decrease in the mid single digit range compared to the first quarter last year and forecasted adjusted operating income in the range of $55 million to $85 million.
As we move forward into the new year, we remain committed to optimizing our performance by focusing on what's within our control our brand transformation being best it brought us enhancing the customer experience and a relentless focus on cost and inventory management.
Led by our two category defining brands and merchandize leadership position in intimates and beauty and our global business positioned to increase our market share goal is clear to be the world, leading fashion retailer of intimate apparel.
Our focus as leaders and as a company is on ensuring we are a future facing businesses that becomes more and more culturally relevant and this shifting environment.
We're confident in our opportunities to remain committed and remain committed to delivering long term sustainable value for our shareholders.
Thank you and that concludes our prepared remarks at this time, we'd be more than happy to take any questions you might have.
Yes.
Thank you our.
Our first question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Thanks, Good morning.
Sounds like you do expect some sales recovery as the year progresses can you just talk through the areas of the business, where you see the most opportunity.
To grow and then also how much you think you will use dormie platform or technology to try to grow the victorias or pink businesses. Thank you.
Jeff I'll take a crack at that one.
So as it relates to growth obviously, the most important area for us to focus on is priced where abroad company. That's why we put most of our energy and while we are active in other categories health in the core of the business is the most important thing we do so you heard me say at the time of spend that we would be having at least two bra launches.
<unk> launches per year and so it has been this year will be no exception. In fact, we will probably have more than two big bra launches I don't want to say more about that yet for competitive reasons, but we're very excited about the plans that we have in the core of the business. So thats one the second I would call out as pink where as I mentioned, we have had a difficult time in the last 12.
<unk>.
And it's time for some urgent reinvention I've seen that reinvention and I'm Super excited about it customers will start to see it towards the end of Q2, it's a new design direction and it's much more fresh approach.
More and better outfit starches more modern raw materials and fabrication fabrications.
A rebuild of the use of our logo more minimal less overt logo.
ZIP from some of our legacy graphics, so a lot going on in that very important part of the business that I think bodes well for the back half of the year and you also asked about a domain.
As I've said previously with Super Super excited about the domain, it's a fantastic company, which just in and of itself is a great growth vehicle for us, but I think there are three ways that we can leverage that technology going forward. One is we're going to test selling an edited assortment of nuomi merchandise on our site, we're going to test that thats incremental.
To a system that will be up towards the end of Q2. We're excited about that secondly, we're going to leverage that technology and try on at home.
Adobe has protected and we're going to apply that to.
A much larger scale customer base and Victoria's in pink and the same with subscription services that will be applied towards the back half of the year. So there are many many ways in which we can leverage a dolby technology, but we're focusing on those three initially and then there'll be more in the out years as time goes by hotel hubs.
Thank you.
Thank you. Our next question comes from Ike <unk> with Wells Fargo. Your line is open.
Yes, hi, good morning, this is Kate on for Ike.
I guess my first question Martin just to follow up on Pink could you remind us how much in revenue Pink wise in 2022, and I am curious you noted the new organization structure Ibs between Andre A&P can you just think about help explain how you think the new structure, maybe will help benefit the brand.
I think historically, we thought that may be having the separate structure might be helpful. In terms of the guardrails around the two.
So I'd be curious just your view on this structure here and then I have a follow up on SG&A.
Yes. Thank you for the question. So sleep is a very important category for us and we think about it in two chunks.
The first part we call sexy sleep.
Which is very provocative merchandise leverages up very sexy and dream Angels collections.
And then the second part of sleep as more casual sleep, which did particularly well during the COVID-19 period, and obviously as a major part of gifting during the fourth quarter. So the participation of sleep changes throughout the year, depending on the season, but think about 15% to 20% of our total system across Victoria's pink.
That would be Directionally close enough for you at this stage, what's the benefit of putting pink and Victoria's together well to a large extent there is a significant crossover of the customer between the two brands to a larger extent where in the bra business in both franchises, 50% of the Pink business has brought us in intimates I think it makes sense.
To build our entire assortment with a single eye.
To how the customer traverses through the bra and panty experience and so for the first time I think in our history. We have merchant leadership that is considering how the customer sees the entirety of our intimates category and I think that's very important.
Also benefits in the sort of the back of house in the way that we source in the way that we merchandise that should lead to greater efficiency in some cases, we're buying the same merchandise.
But with different design teams and different factories and it makes sense to have a single eye across those two so those are the main reasons, one customer facing secondly, organizational efficiency on the back end for us.
Great question Paul.
Welcome.
Thank you I just had one quick.
Go ahead I'm sorry.
Alright, I just had one quick follow up on SG&A you guys noted in the commentary with the earnings release certainly it seems like there are some priorities this year for spend between 10.
Investment incentive comp.
<unk>.
I guess to the extent that the top line remains.
Thanks.
I guess I'm just curious on the flex on the expense, Brian just given that it seems like those investments maybe have a little less flexibility flexibility.
G&A flex to the extent to secure that high single digit margin. This year. Thank you.
Yes. Thanks for the question I think over the last several quarters I think the business has demonstrated a very capable.
<unk> model.
As evidenced by each of the last three quarters when North America business has been challenging expense dollars in total have been down in excess of $40 million a quarter. So I feel as if the business from a store payroll and distribution and logistics standpoint, particularly as flex quite well as sales have been somewhat.
Volatile I think supplementing that is I'll just underline the transformed the foundation savings goals that the business is set for the next three years really a continuation of activity from 2022 does that $250 million goal over the next three years I think we said a little less.
And a third of that will actually happen here in 2023. So we feel like we have multiple levers both on the expense and cost of goods sold lines to not only drive bottom line performance, but also insulate us a little bit.
If trends remained volatile here in North America. So the teams are doing very good job of flexing and executing against the expense initiatives even here in the.
First quarter.
Writing some volatility in sales continued in North America, our SG&A guidance.
Do you think the 32% to 33% Kate and put that on the volume estimates you get an SG&A range of roughly $4 60 to $4 70 in terms of dollars.
Within that the vs and pink business or the North America business primarily.
It's about $430 million or flat to last year in the first quarter, even with those investments in technology marketing and also bonus related costs. So.
Hopefully that helps you understand a little bit better kind of the.
Obviously, the volume of number of different initiatives and ways that we're flexing the model to keep costs under control not to mention the wonderful performance on inventory levels.
The merchandising and merchandising planning and allocation teams have executed two year, so hopefully that helps.
Thanks, very much best of luck.
Thank you.
Thank you. Our next question comes from Alex <unk> with Morgan Stanley . Your line is open.
Great. Good morning, Martin T. J. Thanks for having my question today, just two from me.
First on the <unk> guide it looks like it assumes.
Underlying revenue CAGR to 2019 accelerates a bit from the fourth quarter. So I'm wondering does that mean youre seeing acceleration quarter today or how should we think about what's embedded there and then secondly, the comment on the slight growth and market share I'm just wondering like what does the category grow and maybe what do you include in that market I'm just trying to.
How youre sure change your year over year and also if theres anything you can share on broad there that would be great. Thank you.
So why don't I take the second question T. J you can address the first question. So market share we have lots of different measures of market share. The one that we use.
Used most as intimates as a combined category, which is essentially browse and pansies essentially it excludes fine.
What might traditionally coal lingerie.
Meaning sexy sleep so in that definition, we have 20% market share.
And what we see within that 'twenty is the bra mix is stronger in the <unk> mix is less.
Would that be froze us of how the business more competitive business higher barriers to entry fewer competitors and frankly, we're better at its our most important economic engine panties as a more of a cut and sew business. It's easily accessible to every player has low barriers to entry and so it's a more competitive price led market. So that's the key distinction we look.
And as I said earlier essentially flat across the 12 months, maybe no one point of increased TJ do you want to take the second question about acceleration, yes, Alex since it relates to Q1 sales candidly.
<unk> that we're looking at more current trends in our business relative to performance.
More so than back to 2019 understand the businesses in much different place than it was.
And much more aggressive kind of liquidation mode or inventory liquidation to move back during those times. So if I think about the most recent trends in the business.
And third and fourth quarter or fall season.
With North America, predominantly being down high single digits.
Strong performance in our international business, which was accretive to the total sales.
The numbers that we reported in the fall season.
In large part we expect those trends to continue into first quarter. So from a first quarter perspective, we would expect North America to be down high single digits.
We would expect the international business in terms of system wide retail sales to still be up in the low double digits, we're seeing that happen now and we're seeing nice response and kind of.
Growth quit.
Quickly in China in particular as the stores have begun to reopen so feel very good about the international part of the business.
And then obviously, we get the benefit of reporting <unk> in our results for the first time and in the first quarter alone that will add about four to four five point.
Increase in terms of growth. So that's how we get from negative high singles to negative mid singles with the addition of <unk> I think the one item of note because I know that in reading some of the sell side notes from last night and even this morning.
The first quarter guide from a sales perspective was a little different than maybe some were expecting I'll just underline for you something Martin mentioned in his prepared comments and that was the drag in the quarter of the impact of pink apparel being challenging that drag of about four points, where we're expecting that to continue.
On into the first quarter and potentially into early second quarter until some of the new merchandise that Martin mentioned starts to arrive. So I think Alex if there is a slight disconnect in terms of our expectations for first quarter sales that maybe what the street was expecting.
In fairness to you didn't have visibility to our thoughts around pen can pick apparel, so hopefully that helps.
Thank you alright.
Thank you. Our next question comes from Matthew Boss with Jpmorgan. Your line is open.
Great. Thanks, It's Amanda Douglas on for Matt.
Martin maybe to start you cited expectations for higher promotional activity in the first quarter in the release could you expand on your mindset for promotional activity throughout this year as you manage the business with healthier inventories and then may be whether or not you see an opportunity for AUR growth with your new bra launches.
Yes, thanks for the question.
So my mindset on promotional activities consistent with what I've said with what I've said in previous calls and it has less to do with being over inventoried or under inventory and more to do with getting fair share.
Or more than fair share in a highly competitive environment. So when the consumer is feeling less affluent when she has less money to put food on the table. When she has less money to spend on discretionary items. We all have to be as aggressive as we can and trying to get our share of that wallet.
Competing with beauty, we're competing with Azure, we're competing with vacations or it could be with all kinds of.
Our competitors, who are after that discretionary spend.
While the best way for us to compete on that is with newness and to talk about emotional content.
And fresh merchandise definitely the best way to go to market, but also she needs a nudge in the promotional.
But in the sense of having a promotional reason to come and shop with us. So that's what drives the stance I think it's time to sharpen our has been time during the fourth quarter to sharpen our elbows and make sure that we get.
A good amount of what's available in terms of discretionary spend it doesn't have much to do with inventory our inventories are very healthy.
We're well positioned we're down double digit on an adjusted basis, we have returned.
Agility to be close to where we used to be entering the season at like 70%, 30% open so that we're keeping our powder dry to enable us to chase the winners.
So expect to see something of a continued <unk> of our position from Q4 into Q1 and as it relates to the balance of the year, but let's see how the health of the consumer stands up I would be optimistic that we can lean more into newness and fresh fashion than promotion, but let's see how the consumer responds.
The second question was about au.
And yes, I mean when we.
Designing.
Architecture for <unk>.
For us we're not just thinking about extracting more money from the consumer at the top end of the price range, we're thinking about what's the most competitive build across the board.
So actually having a stronger opening price point than we've had historically.
Is it better.
Our back to the competitive activity in this environment then that's what we'll do.
We're not just driven by it has to be all about AUR, we're more driven by what makes most sense for the consumer what gives the best broad range of products across the spectrum of occasions and emotion.
Throughout the year.
But yes.
Pretty healthy.
Higher than they were pre pandemic.
And we feel good about what's coming.
Yes.
Does that conclude your question.
Yes. Thank you.
Thank you. Our next question comes from Simeon Siegel with BMO capital markets. Your line is open.
Thanks, Hi, everyone. Good morning.
Barring any help contextualize the size of the pink apparel now versus historically and maybe if you have a view on where it should be in the future and then Martin RTG you called out higher <unk> expenses weighing on your SG&A I believe when it also lift gross margin and then just last quick one just clarifying to your guidance.
Did not account for any incremental buyback, including the remaining on the ASR and then maybe just similar vein interest is growing so just any general thoughts on how youre approaching that versus buybacks. Thank you.
I'll, let TJ take the financial question.
Can you just give me the pink question again, what specifically you're asking about.
How large is pink apparel, maybe how is that in the context, how large do you want it to be so in round numbers, the pink business is approaching $3 billion.
Half of it is intimates so the other half is apparel and sleep.
I won't give you the split between apparel and sleep maybe.
Guesses that yourself, but you can tell from that framing that.
Inefficient part of the business and Thats why when it was underway in the fourth quarter. It had such an impact on the total company is four points.
T J, yeah, Simeon on the <unk> piece I just wanted to clarify I would think about it this way I would think about their model.
Is different than the <unk> model from the perspective of digitally only digital only business in large part they have.
Six stores more in test mode than anything else, but it's a digital business for the most part.
Their margins from a gross perspective are in the mid fifties.
So that would be slightly accretive to the company.
Which means given their operating margins are similar to ours their expense levels are going to be in the mid to high forty's and more comfortable with that that's been successful for them they have grown their business consistently.
Consistently year after year in the 20% range and we're forecasting mid teens here again in 2023, so we're comfortable with the financial model.
The point in mentioning it here as it relates to expenses is obviously.
<unk> up in our P&L for the first time and first quarter. So their expense levels also tend to be a little more frontloaded from a marketing perspective.
In Q2.
Two shapes first off Valentines day, obviously as it relates to the biggest holiday of the year in the first quarter.
Appropriately been aggressive going after the customer when Theres a high intent to buy Additionally from a marketing perspective, a high intensify at a high level of interest in the first quarter with their customer gives them an opportunity to really kind of feed the pipeline for the balance of the year. When you think about their model.
Being a high subscription.
Model basis, so earlier, they can get customers in the funnel the better similar from a try on at home perspective. So we're very comfortable with the model. We acquired it's just helping you in the street to understand that the expense profile is a little bit different than ours.
The balance of the company in the <unk> portion of the expense base I am very happy with how the teams are managing that and how it's performing in terms of the buyback in that question. Yes, we are assuming the full $250 million share repurchase.
Our weighted average.
Share count I'll, just point out that the ASR is predominantly the activity for spring.
As we mentioned in our release the agreement runs through.
The second quarter.
The second piece to that is as you know.
Coming out of the spring season.
We will head into our kind of peak borrowing time or cash trough that peak in terms of purchasing inventory for holiday season predominantly in the third quarter. So at the point in mentioning that as the balance of this share repurchase activity will likely happen later in fiscal 'twenty three and therefore not.
A significant amount of waiting on the <unk> for the year.
The last part of your question from a debt perspective.
Our model assumes for the most part throughout the year, we'll be carrying the balance of the ABL that we came into the year with the $295 million of ABL balance we came into the year with will largely carry that for the majority of the year until we get to holiday.
<unk>.
Season, and the importance and understanding that is really the first quarter of this year Simeon.
Is actually a cash outflow quarter for the business.
In two or three respects I think first off.
401, K matching bonus payouts withholdings.
Paid out in the first quarter. Additionally, the ASR execution that I mentioned happened early in the first quarter and then the third component that we've described in our filings is really.
I'll call it a real estate or legal settlement that we anticipate paying out in the first quarter as it relates to our property.
In New York City. So all of those items suggests that the first quarter's a cash outflow quarter.
Therefore, again, we will be carrying the ABL for the majority of the year until after we get holiday cash coming in I hope that helps.
Thanks, guys best of luck for the year.
Thank you.
Thank you. Our next question comes from Omar Saad with Evercore Partners. Your line is open.
Okay.
Good morning, Thanks for taking my question.
I was hoping just a couple of quick follow ups I Hope you guys, maybe talk a little bit more about performance across some of your store formats and channels.
The mall versus mall the store of the future and then maybe also something you mentioned at Investor day, but on or an update on the marketplace strategy.
Yes, good questions.
So let's talk about real estate so.
Store of the future pilots. The first pilots that we opened that had been open for a reasonable period of time.
Performing.
High single digit relative to the control group, so high single digit relative to that control group. So that's good.
The first stores that we opened in the new format.
Were in off mall locations and those have been good all of them are projecting to be profitable, which is good news with particular strength in the stores that are in outlet. So I don't mean, this kind of outlets I mean <unk>.
Mall outlet locations, where we put a full price store those have been particularly good and there are a number of those across the United States of America, where we see opportunity.
It relates to the real estate strategy of having a higher participation in off mall, we feel really good about where we are.
As it relates to the deterioration of the fleet and malls that are vulnerable no new news the situation hasnt gotten any better the situation hasnt gotten any worse, it's about where we expect it to be so we're projecting that for the year ahead. We will have 15 to 20, new stores, all of which will be in store of the future and about.
50 renovations that will move some of our better and bigger higher performing stores from the current old format to new store of the future format Internet.
And many of those occasions, not all of them, but many of those occasions, we take the opportunity to downsize, sometimes bring paint from being standalone into the bulks.
Leads to higher sales densities and more efficiency in terms of the way that we run the operation. So we feel pretty good about that and there's about $100 million more capital going into our stores organization on historically this year than we had in prior year. So hope that helps in terms of the.
Format. The second question was.
<unk>, yes, yes, yes. Thank you.
<unk> marketplace. So when we started working with policies I'm going to say a couple of years ago. It was a little bit of.
Across the board.
Lots of different brands, particularly in Sweden, too many brands frankly, when the new management team took over we determined that the marketplace will be curated and it should be curated on the basis of three things. One does this brand get us access to a category of merchandise, where we're currently underweight number two does this.
Party relationship get us access to a customer base, where we're currently underway and number three does this third party relationship, bringing a halo to the overall has to Victoria and we feel really good about where we are now in the curation.
It looks a lot like what I've, just said and is helping very much. We also see that where customers buy into those that obviously.
They also find to Victoria opening at the same time and they are our most valuable customers with the highest spend per customer.
Is it an important part of our strategy as you go forward. Yes. It is we think it's a very very good tool and it's an area, where we can broaden the appeal of the franchise without needing to do all of the lifting within Victoria.
On her own so hope that helps.
Thanks for the color Martin.
Thank you. Our next question comes from Aegean Excuse me Adrienne <unk> with Barclays. Your line is open.
Oh, great. Thank you very much Martin I was wondering if I can go back to kind of be the remedy to the pink apparel piece of the business you talked about.
Corrective actions.
Exactly.
<unk> is the core of the issue.
I would imagine that you immediately start changing the merchandise that takes about six months and it takes us kind of into the first.
The first quarter second quarter, but what exactly do you think that the issue.
And then for T J B.
Can we assume on a door me should we assume that the sales seasonality.
Also follows.
<unk>.
The cost right, so a little bit more then.
In the first quarter or so and then maybe kind of kind of matches the seasonality to be up in the back half and then for advertising expense.
For the year.
Joining me being DTC.
Secondly, higher so how should we think about that expense consolidated for 2020. Thanks. Thank you so much.
Yes.
Well.
I wont go we're making notes frantically on on all the questions you asked.
What's the challenge on Pink apparel, Pink apparel has been remarkably successful for us over a long period of time, it's been relatively edited and tight assortment of frames.
Renewed graphics over time, that's been a very high margin business and a very predictable business for us. So boy. We've enjoyed this part of the business over the years and often when business is a really really good and very healthy.
We forget to renew them and we lose focus on the product lifecycle, maybe we hang onto them a little longer than we probably should so as we look now at what's happening in the marketplace at large relative to our pink apparel assortment, we say we're missing some stuff, we're not quite as trend right as we should be.
<unk> reliant on our logo business and overly reliant on frames that we've had.
For a number of years, so the time for a refresh and so thinking differently about logo thinking about being more minimal less so but thinking about new fabrications thinking about new raw materials better outfit starches, just a fresher approach. So we have <unk>.
Fleet scrubbed all aspects of the business.
We've added to that things that we think don't fit and we've accelerated quickly with the help of our vendor base things that we think will be really on trend and fashion forward.
And we'll be ready to come out of the bulk strong, particularly for the fall season, but we should see early signs of recovery.
Q2 T J you want to take related questions Adrian <unk>.
The seasonality of the <unk> business as you've kind of alluded to first quarter is historically, they're better quarter, followed by fourth and then obviously Q2 and Q3.
Or a little more.
Or a little lower very similar to the <unk> business as you mentioned.
So that's about as low as we're going to go on.
The details on the Dormie I think the second part of your question around advertising.
For 2022 for the <unk> business.
As Martin has articulated a handful of times most recently at our Investor day.
Typically target about five to five 5% of sales.
For us in terms of I think marketing I don't see that changing.
In terms of absolute dollars the rate of sales might tick up a little bit depending on where volume goes but.
That expense level is something that we're comfortable with from a dollar perspective I'm not going to go deep on the army P&L I'll, just say as you mentioned.
In a DTC environment and a growing growth business.
They are advertising rate of sales is going to be meaningfully higher than what the <unk> business experiences historically, but we're comfortable with that we knew that thats not a surprise to us.
We're more focused on driving top line with our partners that are dormie and more focus on really driving that operating leverage on a go forward basis on the operating profit.
Fine.
Hope that helps Adrian yes.
Yes, Hey, guys, Hey, just before just before we take the next question. We did a fact check here on.
Sleep participation of our business I've said 15 to 20 course of the year, it's more in the fall season.
Substantially more in the bowl season, I think closer to 20 is a better answer than 15 to 20, So think about 20% plus sleep participation next.
Next question please.
Thank you. Our next question comes from Cory <unk> with Jefferies. Your line is open.
Hi, good morning, and thanks for taking my questions. So just double clicking on the pink apparel dynamic Martin I think you used the phrase a number of years. So as you think about the.
Transformation that you're undergoing within apparel.
What gives you the confidence that it's going to work number one and then number two could you talk about maybe what you saw on the Internet side at Pink just so we can get a sense for how the business is performing overall and then T J on the floor.
EBIT guide for the year.
With freight coming down.
Shouldn't that seemingly.
A benefit to margins this year. So how do you think about the.
Flat EBIT margin guide within the context of freight coming down.
And all of the supply chain issues and inventory issues that we saw last year now now getting a lot better.
Thanks.
Yes, I'll take the pink question.
The fundamental question, how do we know if things are going to work or not when we change merchandise well, we have a pretty rigorous process of testing we have customer panels that we used to.
Get feedback.
The community that I rely on most of our stores community, we had our regional managers from across the country in town last week and I personally went through the pink assortment with them and they were extremely excited they know customer inside out and they gave us a very strong thumbs up so whereas my.
Confidence level that it's time to change extremely high with my confidence level, we will hit it right with what we've got in the back half of the year well you never know for certain but I feel pretty good about what we've got the good news for <unk> is that our <unk> business is strong and continues to be good. It has been intuit has been increasing as a proportion of the business over the last several years steadily.
It is our focus we are a luxury company and being best at pros in both of the Big brands is the most important thing to do so that business into pink instruments is healthy and growing.
Yes, Cory and the second part of your question I can appreciate the flat EBIT rate guide for the year, we would expect that in fairness to your question. We would expect the gross margin rate for the year to be slightly higher than last year.
As you mentioned the supply chain pressures certainly have abated.
As we move into the fall season, we'll see if there is the typical kind of seasonal build in rates or not.
Or where rates go but clearly here in the spring season.
Rates, both on a container basis and from an air perspective.
Our lower than last year, and getting back close to pre pandemic levels. So good for us we're happy about that.
I think the flip side is from an SG&A perspective, and we kind of mentioned this earlier.
We've known all along there were certain parts of the business that we were going to want to invest in here in 2023.
As I mentioned, just as a side note the expense profile for a door means slightly different than ours.
Some deleverage on the on the SG&A line. However, we're really seeing investments in three key areas first off technology as we start to.
Increase the amount of focus on the customer experience and customer integrations with Christopher up and her team.
That's an investment we're happy to make and we're confident we'll see benefits from that as we move throughout the year I think the second piece is I'll just remind people that we are in the middle of separating from our former parent company or limited brands.
Separating into two different business Bath and body works and Victoria's secret from a technology standpoint, a separation we indicated.
And the two brands that there would be $200 million to $300 million incremental spend in terms of technology.
And that each business would have roughly half of that so I'm happy to report that from <unk> perspective, we're trending towards the lower end of that technology spend as it relates to the separation, having said that the bulk of the large systems to be separated the bulk of the labor and activity associated with that.
Right in front of Us right now.
Having separated a couple of systems successfully already in the month of February we have many more to come here in the spring season. So at the point in mentioning that Corey is the cost associated with that will peak here in the spring season or in 2023, that's an investment again, we're happy to make I think the second piece.
Building on the Adrian <unk> question, we're going to continue to lean into the marketing spend to invest in the business both that top of funnel and also to support.
The new version of our fashion show, which is to come later this year. So we're going to invest in our marketing spend we're going to invest in store of the future as Martin mentioned.
Roughly $100 million of increase in store related capital associated with taking store of the future from being 2% or 3% of our fleet at year end, two upwards of 10% or more as we exit 2023, and then the fourth item I'd mention as it relates to SG&A increased year over year clearly 2000.
22 was a difficult year for the business and the level of incentive payout reflected that.
As we come into 2023, and we established new targets obviously.
We refilled the incentive bucket that would be an increase year over year for achieving these targeted levels of profitability or better so hopefully that helps.
We understand where there are three or four areas, where we're making investments for the future of the business, even though the current environment remains a bit challenging.
Got it that's helpful. You talked about investments that you're making could you just update us on the $250 million in cost savings plans and then also are you planning to make any more acquisitions this year.
Last question I won't answer, which is probably not surprising to you but.
The first part of the question Cory I think you were referring to the transformed the foundation goal that we set in October at our Investor day at $250 million in our prepared remarks.
I think we indicated that less than a third of that or a little less than a third of that happens here in 2023, and I would suggest that's fairly evenly split or maybe a little bit more tilted towards expense and then a little less towards margin.
Year end 2023, so slight margin benefit more benefit on the expense line to fund some of the growth initiatives that I mentioned as we move through 2023 get to the fourth quarter and into 2024, that's really where you'll see the.
The amount of savings from the transform the foundation goal start to grow.
It'll grow most notably from a margin perspective and cost of goods around initiatives that we're working on with Dean and Chris Kelly area and their leadership team.
Okay.
Great. Thank you very much.
Okay I think we've got time for one more question.
Thank you. Our next question comes from John Kim with TD Cowen Your line is open.
Thank you for taking my question just a quick one.
Our early learnings from the loyalty program and what are you seeing in terms of the customer retention trends and how you plan to leverage the program further increase retention rate. Thank you so much.
Yes.
Too early to declare victory on the loads because we've only been out for a week.
Again, referencing the time I spent with our stores team they were super energized by it take up has been good reminder, this is freight.
And we convert all of the customers who are currently in our credit card system onto the program. So we should be at about 3 million people in the system by the end of this month. So there is a sizable body sizable community theyre going to benefit from this program and we feel really good about where it is that we've got new benefits for customers.
<unk> $300, we got a VIP tier $750. We've got features that we'd never had before that will enable consumers to talk to each other as well as talk to us. So we think it's going to be a great program. It's been a long time in coming.
And I think the benefits will come through in the back half of the year.
That's probably all we've got time for right Kevin.
55, we can we committed to finishing at 855 so.
Thank you all for your interest in our business.
Wish you well.
Thank you.
That concludes today's conference. Thank you for participating you may disconnect at this time.
Okay.