Q3 2024 Victoria's Secret & Co Earnings Call
Good morning, My name is Amanda and I will be your conference operator today at this time I'd like to welcome everyone to the Victoria's Secret and company's third quarter 2024 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.
Today's call.
Speaker Change: I would now like to turn the call over to Mr. Kevin <unk>, Vice President of external financial reporting and Investor Relations at Victoria's Secret and company.
Kevin: Kevin you may begin.
Kevin: Good morning, and welcome to Victoria's Secret and company's third quarter earnings Conference call for the period ended November <unk> 2024.
Kevin: 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.
Kevin: And in our SEC filings and in our press releases joining.
Kevin: Joining me on the call today is CEO Hillary Super and CFO, Tim Johnson, we are available today for up to 45 minutes to answer any questions. Certain results. We discussed on the call today are adjusted results and exclude the impact of certain items described in our press release and our SEC filings.
Kevin: 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.
Kevin: Thanks, and now I'll turn the call over to Hillary.
Hillary Super: Thanks, Kevin Good morning, everyone and thank you for joining us I'm pleased to be with you and honored to be leading these iconic brands at this pivotal moment in their evolution.
Hillary Super: Today I want to talk about where we are in our journey.
Hillary Super: Our results from Q3, our outlook for Q4, and finally share My 90 day insights, but first I want to thank the entire V S and co team for such a warm welcome over my first three months.
Hillary Super: We've had a very effective onboarding and had been energized by their love for our customers our brand and our company their hard work and commitment are behind the impressive results. We are sharing today and I'm proud to be on this team with that.
As you know when we stood up the S and co as an independent business. In 2021, we also undertook a transformation focus on strengthening the core of our business and establishing an operationally sound organization.
Hillary Super: Today, our strong Q3 performance indicates we've reached an important milestone in that transformation in short, it's working and we're starting to see the results.
Hillary Super: Q3 sales growth was well ahead of our expectation.
Hillary Super: And by broad based strength across our business all regions all channels, all major merchandise categories, and importantly, all brands Victorias secret Pink and the door me.
Hillary Super: Leading to our best quarterly sales growth performance since 2021.
Hillary Super: I am, particularly optimistic because these results were powered by emotional product she loves and clear elevated brand storytelling.
Hillary Super: They were supported by exceptional shopping experiences and I believe that the S and co is the best experience in the mall and it has and.
Hillary Super: And has been significantly enhanced and digital.
Lastly, our marketing and brand messaging integrated seamlessly with those shopping experiences resonated deeply with existing customers and as I saw myself and stores across the country attracted a new generation of customers to our brands.
Speaker Change: So what did that add up to.
Speaker Change: The third quarter sales increased 7% in total with mid single digit growth in North America, and 20 plus percent growth from our international businesses.
Speaker Change: <unk> sales well managed operations and disciplined inventory management led to healthy margins and a lower operating loss than originally forecasted.
Speaker Change: In North America, Victoria's secret and Pink had positive year over year sales growth across all major merchandise categories in both our stores and digital businesses grew in Q3 <unk>.
Speaker Change: Traffic was up compared to last year in both channels with significant outperformance in our stores compared to the balance of the mall.
Speaker Change: Third party market data indicates that sales in the overall intimates market in North America was down low single digits in the quarter, though our intimates business was positive in the quarter, which was encouraging.
Speaker Change: Tourists secret sales increase to last year and sales transfer all merchandise categories improved our beauty business continues to be our best performing category, followed by casual sleep and intimates, which also experienced growth. These categories, our must win for holiday and our current trends are very encouraging.
Speaker Change: Zinc sales trends also improved significantly in the quarter with sales for the brand increasing compared to last year.
Speaker Change: Typically in apparel, we were encouraged by improving customer response to our pink back to campus event in August and early holiday selling in October in Q4 to date.
Speaker Change: <unk> experienced a significant trend change in the last four months and is a key opportunity to reinvigorate the pink brand going forward.
Speaker Change: Outside of North America, our international business continued its strong performance in the quarter with system wide retail sales up mid teens, driven by growth with our franchise and travel retail partners and in our joint venture in China with our partner Regina Miracle.
Speaker Change: During the quarter I had the opportunity to meet many of our international partners. How does the V. S. Fashion show I was inspired by their passion and commitment to our brands and I share their excitement around our sales profit and growth opportunities around the world.
Our sales and financial performance over the last 90 days was driven by several key initiatives aimed at repositioning the business for success and holiday and beyond including <unk>.
Speaker Change: Creating meaningful and memorable connections with our customers through the return of Pink Friday, the last weekend of July as our collegiate customers headed back to campus and with the celebration of National underwear day in early August.
Speaker Change: We relaunched B S X sport done in a uniquely V S way, combining performance comfort and fashion with innovative designs that leverage body mapping and superior fabrics E. S. X is not a collection, it's a lifestyle with adjacent apparel categories that will drive higher shopping frequency and engagement.
Speaker Change: We kicked off the holiday season with the return of the V. S fashion show in October bringing fashion to the screens are millions of viewers around the world for the first time ever every looking to show with Shopper Bowl, allowing.
Speaker Change: Customers to purchase their favorite runway looks from our holiday assortment. In addition to driving brand awareness leading into holiday. The show drove brand relevance putting V. S. At the center of culture and fashion conversations with about 34 billion media impressions or billion, social media impressions and an increase.
Speaker Change: Of more than 4 million followers on Tech talk.
Speaker Change: Beauty is critical to our holiday success, and we started the season strong with compelling unique giftable like the Bombshell advent calendar and limited edition Bombshell Midnight holiday fragrance to ensure V. S. Beauty is at the top of everyone's holiday wish list.
Speaker Change: Finally, we continued to further develop our understanding of our Victoria's secret and pink customer.
Speaker Change: Through our multi tender loyalty program, which now has approximately 35 million members, who drive over 80% of our sales on a weekly basis.
Speaker Change: As we look forward, we are excited to see that our momentum from the third quarter continued through black Friday, and cyber Monday, our merchandize offering and giftable product assortment are clearly resonating with the customer and driving traffic both in stores and online.
Strong product acceptance supported by our best in mall in store experience and dozens of digital enhancements are driving solid conversion in basket size and well more anecdotal I would be remiss, if I didn't mention that as I as I've traveled stores over the last few weeks I've noticed ours are often the busiest minimal we.
Recognize that we have several large volume days and weeks in front of us in December and we are encouraged by the positive sales trends quarter to date and remain focused on winning each moment in the days ahead.
Speaker Change: For the fourth quarter 2024, we are forecasting net sales to increase approximately 2% to 4% to a comparative 13 weeks in the fourth quarter 2023.
Speaker Change: Our forecast assumes trends in North America remained relatively consistent with the third quarter adjusted for the timing impacts in the retail calendar shift.
At this forecasted level sales fourth quarter 2024, adjusted operating income is now expected to be in the range of $2 $40 million to $270 million.
Speaker Change: For the full year, we are increasing our sales and profit forecast to reflect third quarter outperformance and the positive start to the holiday season in November and early December we now expect sales for the year to be up approximately 1% to 2% on a comparative 52 weeks from last year.
Speaker Change: At this forecasted level sales, we now expect adjusted operating income for the year to be in the range of $3 $15 million to $345 million.
Speaker Change: So in summary, we're pleased with Q3 and optimistic about Q4.
Speaker Change: Now as promised at the start of this call I'd like to share a few observations from my first 90 days.
In addition to being focused on executing and winning holiday I've been listening learning and thinking deeply about how we can supercharge the best of who we are.
Speaker Change: Much of my time has been spent with.
Speaker Change: With the product and brand teams and traveling to stores meeting our wonderful associates, who are true ambassadors for our brands everything I've seen and learned so far has made me proud of who we are and confident in our future as I mentioned previously the team has established a solid foundation that we can build upon and a business that has momentum and is shown.
Speaker Change: Early signs of the growth, we all believe in our future.
Speaker Change: I believe our biggest opportunity is to put the best of who we are back at the center of how we work in three ways number one the customer making sure. She is at the heart of every conversation every decision everything we do.
Speaker Change: We are doing well with our existing loyalty customers, but I see opportunity to attract new customers by making sure our brands products and go to market strategies are in sync with the fast pace of culture and dialed in to the ever evolving world. She lives in.
Speaker Change: Number two brand and product we need to continue to differentiate pink and Victoria's secret in every way from product to marketing to in store and online experiences speaking of Pink I'm, all in and I see a lot of white space with the brand and opportunity to reclaim our market share in apparel.
I'm impressed with the work the team has done already to improve the pink business and I see opportunity for even more brand clarity and elevation as well as a go to market strategy that is mobile first and culturally connected.
And number three innovation and brand heat Victoria's secret and pink can and should not only be in the cultural conversation, but also creating cultural moments through product and marketing. We've proven we can do it both with big events like our V. S X launch and the return of the fashion show.
Speaker Change: With viral moments like outfitting Sabrina Carpenter for her current tour and our viral shot in both P. J said theres a lot of opportunity there and we have the talent and brands to do it.
Speaker Change: Customer brand innovation watch for us to continue to leverage those areas to grow deliver shareholder value and most importantly delight her.
Speaker Change: That includes this month as we execute holiday. Thank you that concludes our prepared comments at this time, we'd be happy to take any questions. You may you may have.
Speaker Change: Yes.
Speaker Change: Thank you, ladies and gentlemen, if you wish to ask a question. Please press star one and record your name.
Speaker Change: Again, Please press star one if you would like to ask a question. Our first question comes from Simeon Siegel with BMO capital markets. Your line is open.
Thanks, Hi, everyone. Good morning, welcome Hilary and nice job on the progress.
Speaker Change: So from the outside it kind of feels like a switch has been flipped, but obviously, there's much more to it. So it's amazing to see the residents paying back to you My best guess Exelon fashion show, but can you speak to why the seemingly southern residents. How are you thinking about product gross marketing promotions at this point as the brands do appear to be regaining that perception among consumers and then I don't know if.
Speaker Change: This is hilary or T J, but we've gone back and forth over history, what co located versus independent stores Youre talking about closing I think 42, I think it was 35 renovations youre talking about consolidating the co located stores any color you can share on what you expect that would do to productivity and profitability as that progresses. Thanks very much.
Speaker Change: Hi, Simeon thanks for the for the question I'll start off and then.
Speaker Change: T J can fill in anywhere that's necessary. So on your first question.
Speaker Change: Victoria's Secret first you know our brand is about sexy glamorous accessible luxury and I think that we were building towards that with the new team that was put in place about a 12 to 18 months ago and that was in the works I think the fashion show really double down on that.
Speaker Change: And when you look at what's working in the business. It is exactly that is as sexy glamorous and it's accessible luxury.
Speaker Change: In terms of the sexy side, it's really the brand the broth fans franchises, such as dream and Wicked and lots of shine in the intimates assortment that is driving that success and beauty beauty is very broad based success, but what's really exciting to me is the upper price points and the beauty assortment, it's very very luxury and we're talking 100 200 plus.
Speaker Change: Dollar things that are doing really really well and then branded goods. So things that are like literally logo, which to me really indicates strong brand health and the heritage stripe collection, which was in the fashion show and a huge part of our Q4 assortment. It's just incredible this is very very recognizable b S.
And I think perfect not a perfect storm, because it's very purposeful, but.
Speaker Change: Assortment strategy married with marketing strategy married with a big Upper funnel event, just really came together in a very powerful way.
Speaker Change: In terms of Pink I think we're very much earlier in that trajectory. We've had a few fits and starts but apparel being the big driver there and I would say lots of virality through tick tock I'm driving a lot of our success a lot of heritage pieces, such as the flare and branded branded fleece and then as we.
Speaker Change: Moved into holiday I would say shine in both brands is working across the board so lots of lots of positive things there.
Speaker Change: On your second question around stores. This is something that I'm thinking really just a lot about.
Speaker Change: Especially as it relates to pink and how we pulled back on pink so we've.
Speaker Change: We've been traveling stores really thinking specifically about that and we're in the early stages of that.
You know when we've reported before our store of the future has been successful on many many levels and our unit economics are quite positive what I want to make sure is one are we delivering on the promise of sexy glamorous and accessible luxury and our store design and maybe thinking about ways that we can power that up a little bit and then number two are.
Speaker Change: We allocating the appropriate.
Speaker Change: That amount of square footage for each line of business and with Pink specifically, how are we making pink feel like pink in those stores that are combined.
Speaker Change: What's on my mind and I.
Speaker Change: Left anything else TJ. Please feel free no I think you've covered most everything we've been thinking about in terms of the future I'd just say that to me into your question. The source that we are closing this year and the plans that we have for next year. There's really two buckets. There are situations, where we're actually just downsizing the store that already.
He has a victoria's secret and pink, but the store was just too big from origination.
Speaker Change: There are situations, where we're bringing a standalone store from Victoria's secret together with the Standalone store for pink and make it combined location in.
Speaker Change: In each of those situations, we are seeing not just a little bit of productivity improvement, we're seeing a significant amount of productivity improvement so.
Speaker Change: So we may be going from either standalone or combined situation, where we have 15 or 18000 square feet in a mall down to 10 or 12, and seeing again, a reduction in square footage of could be $25, 30% to 35% and our productivity improvement that is larger than that and our profit improvement means.
Speaker Change: <unk> four and an operational improvement that's also.
It shouldn't be overlooked in terms of how vacuum the teams can operate a combined location versus multiples. So theres a lot to like about it but to hillary's point, we do want to make sure that whatever we end up with in location in our store as both brands appropriately sized.
Thanks, a lot guys. Thanks best of luck for year end and happy holidays to you and your families.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Brooke Roach with Goldman Sachs. Your line is open.
Speaker Change: Good morning. Thank you so much for taking our question Hilary you spoke about elevating brand heat through creating a conversation and leaning into flex marketing opportunities. You've also mentioned take talk a few times here. This morning can you talk about what we should expect on the evolution of your marketing strategy, where might you spend those dollars and this person on.
Speaker Change: That you might spend on marketing over time, and then just as a follow up for T. J can you talk a little bit more about the promotion plans that you have for holiday. Thank you.
Speaker Change: Continue to outperform their plans.
Speaker Change: We see in promo plans on a go forward basis.
Speaker Change: Thanks Brook I'm sure I'll start so.
In terms of marketing spend I wouldn't expect I would expect consistent marketing spend as we go forward. So no change there, it's really how we spend and how we bring things to market and that looks different from Victoria's secret versus pink. The first thing that I would say as we need to be using the full funnel and we need to be meeting the customer where she is and that may be different for both brands.
Speaker Change: Victoria's secret is where the queen of the launch and that's not going to go away, but we also need to think about product evangelism and Victoria's secret and that's really more of a mid funnel idea and then on the lower funnel lots of segmentation and really thinking about our diverse audience of customers and how to reach them.
Speaker Change: First as it as it comes to Pink I talk about Tech talk a lot and I spend a lot of time on check talk myself and that has really changed to this customer base and the culture around her and when you think about the inception of pink.
Speaker Change: Kicked off it wasn't around and this customer is much more sophisticated than she was at the inception of tank and she has access to ideas fashion and movements and in real time, and we need to think about what that means to how we create content do we need campaigns in pink and how do we connect to her.
Speaker Change: Her in an authentic way, where she is living in that is online and so youll see youll see a shift over time and how we go to market and Pink and then I think you know we havent scratched the surface yet when it comes to collaborations and partnerships and that's something I'm really interested in doubling down on.
Speaker Change: And I think the second part of your question broke on the promo piece, maybe I'll take third quarter first I think from a promotional standpoint, we ran the promotions that we intended to from the beginning of the period through through Q3, So nothing really changed meaningfully in the plan, but what we saw was the customer response to those promotions was much.
Speaker Change: Stronger than originally forecasted and that contributed to the upside volume and the upside margin dollars, but it did mean that promotions were a little bit.
A little bit more of an impact to the rate, but again, our rate was still well within our range of guidance as we think about fourth quarter.
Speaker Change: We actually think the promotional environment for us to be pretty flat year over year, meaning the dollars, we put towards the promotions the events, we put towards promotions.
Speaker Change: Recognizing we've got a compressed calendar even.
When we put our put that all in the mix, we came into the quarter thinking the promotions will be relatively flat.
Speaker Change: In terms of impact no.
Speaker Change: Strong business in the month of November.
Speaker Change: Friday cyber Monday, the follow on after cyber Monday, we've been very encouraged by as we get closer and closer to December 2005, and as we get closer and closer to ship cut off in the next 11 days, obviously, we're going to be looking very closely at promotions and is there an opportunity maybe to do a little.
Speaker Change: But less than originally forecast so just based on the strength of the business, but obviously, we want to be very diligent about that we want to test our way into that where possible, but I think from a promotional standpoint relatively flat year over year in the in the fourth quarter here.
Speaker Change: Having said that too I, just want to I want to speak just a moment to fourth quarter margin because I know that.
Speaker Change: Some might look at it and say this is the first time that we guided the margin rate down a little bit in the quarter for several quarters first time in several quarters.
Speaker Change: What I want to say on that topic is first off the selling margin to what the customer sees what the customer pays are selling margin will actually be up for the quarter. So the initial markup on goods less the promotions are selling margin rate will be higher year over year in the fourth quarter, what's pressuring our gross margin rate a little bit and.
Speaker Change: Fourth quarter is really three things first off the transportation environment, both ocean and air rates are up meaningfully year over year last year in the holiday season, we benefited we all benefited as retailers from early trough pricing in transportation rates rates in Ocean and air are both up year over year.
The second piece Thats impacting margin the outperformance of the business.
Speaker Change: Has us in a place where we think that our incentives for our bonus expense in fourth quarter will actually be higher than last year and higher than our plans, which is a good thing for all of those people who've been working incredibly hard to get us to this point and the third piece Thats pressuring margin a little bit in the quarter just remind that.
Last year in the fourth quarter, we had an extra week of selling.
Speaker Change: And that deleveraging impact on really BMO.
Speaker Change: Is a challenge this year, so transportation rates higher incentive comp and the deleveraging impact of last year. All are offsetting the selling margin. Good guy so to speak so feel very comfortable with how the teams are executing all of this again, we've done a significant amount of testing, particularly for broad Friday, and cyber Monday, which proved.
Speaker Change: To be very insightful and it works.
Speaker Change: So I feel like the teams are managing both inventory and margin here really effectively as we point towards the end of fourth quarter and holiday hopefully that helps.
Great. Thanks, so much best of luck as you got to a holiday.
Speaker Change: Thanks.
Thank you. Our next question comes from Alex <unk> with Morgan Stanley. Your line is open.
Speaker Change: Okay. Thanks, so much congrats on a great quarter I wanted to focus on the digital business. It seems like that had some real standout momentum. So curious what you attribute that to.
Speaker Change: That percentage of the business can be over time and then one quick secondary question is just on the recent momentum is that driven by like a new customer or existing customer or a combination of both I love some thoughts on that as well thanks a lot.
Speaker Change: Yes, I'll take the first part of that and then escalated chime in I think from a digital perspective, Alex I think whether it's digital or stores. It all starts with product and as Hilary mentioned in her opening comments the strength of assortment year over year that the team has created.
You know from following us for a while we've been really really looking forward to third quarter. When a lot of those newness, which showed up and it showed up in a meaningful way drove results more newness in terms of what the new team has delivered in the fourth quarter. Obviously it is working for us. So it all starts with product I think additionally from a digital purse.
Speaker Change: <unk>.
We've made multiple quarters in a row now of investments in people and process and technology to help drive the digital business.
Speaker Change: Just in the last quarter, a couple big engagement opportunities that went live for US was really badging on our site keeping these signed in on our site things like that that it both improve.
Speaker Change: Not just the conversion on the site, but drove an average basket size and then I'd be remiss, if I didnt mentioned from a traffic perspective.
We don't talk a lot about this but we brought some of our media buying and media operations in house. So we brought it back from a third party provider brought it in house, we believe we're seeing a much more efficient spend and better traffic results as a result of that and then obviously at the end of October traffic from.
From the holidays and the fashion show both.
Speaker Change: Our meaningful strong moments for the digital business as well as the stores.
Speaker Change: I don't I don't want to short change at all we're seeing is Hilary mentioned significant traffic in our stores.
Speaker Change: Our outperforming mall traffic on a meaningful basis day after day week after we see that data.
Speaker Change: Live as its happening so we know we're getting better traffic off the mall than the balance of the mall.
So a lot to like about the digital business, which was your original question.
Speaker Change: But also from a stores perspective, I guess from a customer point of view, whether it's new versus existing customers.
You may recall last year around June 1st we launched our loyalty program.
And we now have over 35 million members in that program. So in a very short period of time, we've built a very large base of customers.
Speaker Change: That make up over 80% of our sales on any given week.
Speaker Change: Seeing that customer so thats more of an existing customer at the moment shop, more often and spend more when she comes.
Good good.
Speaker Change: Good formula for <unk>.
Speaker Change: Successful launch of the loyalty program and then most recently some of the market data.
Speaker Change: The insights that we get back from the team, particularly in the month of October suggests that we saw new customer growth for really the first time in several months so.
Long way of getting there, but what I'm trying to paint for you Alex is a picture of breadth across multiple things that the business is doing well not just one thing.
Speaker Change: Just one thing I would add there.
I've been very anxious to get our our.
Our customer and brand helps data I think it's going to take a little bit of time for us to get a very clear picture on that but.
Speaker Change: I personally I'm seeing a lot of younger customers shopping in our stores, particularly in the Victoria's secret store and we just received our brand equity our results for the month of November and we saw a very clear uptake uptick with Gen Z on both consideration in brand equity not to me is just incredibly exciting and we will be <unk>.
Speaker Change: Monitoring this and reporting on this as we move forward.
Alex: Thanks, Alex.
Speaker Change: Thank you good luck.
Speaker Change: Thank you. Our next question comes from Ike <unk> with Wells Fargo. Your line is open.
Speaker Change: Hey, good morning, everyone. Let me add my congrats too.
Speaker Change: Two questions first for Hilary you talked about a lot of change over the last four months and apparel all the Holston Kubala impulses and can you just give us a little bit more info on what changes in <unk>, you've seen all thats, giving you renewed confidence and normal T J real quick.
Understand the Dormie payments that are being made this year I think it's right.
Speaker Change: $200 million 40, I was trying to make sure I understood is that because of the business is outperforming how should we think about that impacting cash flow and then is there more payments in future years, if the business continues to outperform.
Hi, you're a little hard to hear I think you asked me about apparel and what we're learning there.
Speaker Change: I would point to a couple of things in the Victoria's Secret brand I would point to the launch of the Sx.
Speaker Change: Incredibly successful launch I think a very.
Modern go to market strategy, and I would say, we know that when we have great complementary apparel product increases frequency and engagement with the brand. So that's something whether it's a swim adjacent apparel, whether its lounge lounge adjacent apparel, whether its sport, it's something we're very interested and die.
Speaker Change: Filling up and really complementing the rest of the assortment to drive that frequency and engagement and pink.
Speaker Change: Apparel of certain apparel categories are doing very well and I would say when you look back to the real Heydays of Pink. It was it was apparel led.
Speaker Change: And over time, we have become more intimate sled in apparel and I think we have extraordinary opportunity in pink to broaden our lens and apparel and not just be singularly collegiate and so that's something I'm very interested in moving forward and then I think beyond apparel, we have a huge accessory and beauty opportunity and pink so.
Speaker Change: So really diversifying our assortment.
Speaker Change: Building, a full lifestyle brand and creating that emotive interesting content for the Gen Z customer I think will be very important as we move forward.
Speaker Change: And the second part to your question.
Dormie payments.
Speaker Change: Contingent payment structure, you may recall, there were three contingent payment items, one based on technology synergies one more of a fixed component.
Speaker Change: Around continuation of employment in the third around actual performance against.
Speaker Change: Two different targets sales and EBITDA over the two year period, So 'twenty three and 'twenty four.
Speaker Change: What I think your question is referring to the roughly $200 million that is included in our cash flow forecast for the fourth quarter and for the full year.
Speaker Change: That will go out in January those two payments are based on a.
The fixed component, which I mentioned, which is more continuation of employment and be the completion of the technology synergies that were originally set out at the beginning of the acquisition or <unk>.
Speaker Change: Close on acquisition.
Speaker Change: So that's the $200 million fourth quarter and.
Included in our guidance included in our forecast the performance aspect against sales and EBITDA targets that payment.
Speaker Change: Would occur in first quarter of 2025 in or around the month of March and the reason for that is really we do need yearend results from the business and we do need a chance to review those audit those.
Speaker Change: However, we proceed there.
Speaker Change: To evaluate how the business ultimately did against the targets. So that's why the timing on that payment could be different.
Speaker Change: January included in our forecast on the first two synergies the third synergy would be in first quarter, depending on the final outcome of performance.
Speaker Change: Thanks, so much.
Speaker Change: Yep.
Speaker Change: Thank you. Our next question comes from Matthew Boss with Jpmorgan. Your line is open.
Matthew Boss: Great. Thanks.
Matthew Boss: Hillary can you elaborate on driving the balance between topline growth and gross margin expansion or with promotions expected flat to slightly down in the fourth quarter on 2% to 3% top line growth do you see this as a potential multiyear inflection in the model and to that point T. J, what do you see as the potential markdowns.
Speaker Change: Recapture opportunity as we think about maybe next year or any change to the 39% to 40% gross margin by FY 'twenty six as a target.
Speaker Change: Sure I'll start there.
Speaker Change: We are absolutely looking for opportunities anywhere we can to be less promotional and more brand forward and I think we are getting to a place where the product is starting to stand on its own and the storytelling is starting to stand on its own particularly in the Victoria's secret brand.
Speaker Change: We will be looking for any opportunity possible and I passionately want to lead this brand as a brand. These brands as brand first brands and that will take some time and that will take some experimentation if I think about the third quarter into the fourth quarter. There was a lot of unknown.
Speaker Change: For the past few months, we had an election, we had a shorter selling season and we made some choices to keep our promotion promotional strategy flat to last year.
Speaker Change: I'm really thinking that we wanted to bank, what we could as early as we could and what we found was that we banked more than we expected and we found that the big days were bigger than we expected and that we didn't fall off in between so as we move into December and into January we will be looking for opportunities to be less promotional I think are seasonal.
Speaker Change: Our semi annual sale, we will have opportunities there and as we strengthen our messaging as we strengthening our as we strengthen our cultural relevance we will absolutely be looking for that opportunity and I think it will be a journey and we all know this isn't easy work.
Speaker Change: But it's something we're very committed to and I am quite frankly I'm excited about.
Speaker Change: Yes, I think the second part of your question, Matt Hill, or just kind of touched on it I think we all believe that there is an opportunity as we look to 2025.
Speaker Change: To test our way into more effective promotions and what could end up being certainly better margin dollars better margin rate, we see that as an opportunity I think historically, we've talked about when the business was.
Hitting on all cylinders the discount rate was in the high Thirty's.
Speaker Change: And when the business was more challenged and has to be more promotional it can be in the low <unk> or mid forties. So.
I'm not forecasting where I think we are going to end up for this year or will go for next year, but just to kind of dimensionalize. It for you there is a meaningful difference.
Speaker Change: I also want to underline what Hillary mentioned around the big days being bigger and that really was a benefit to us in the third quarter.
Speaker Change: At the cost of a little bit of rate.
Speaker Change: But the outcome at plus seven and the margin dollar growth at plus eight or plus nine and leveraging the good cost work. That's been done obviously the flow through was quite strong in the third age so.
Speaker Change: Really really good tradeoffs that we're missing and I think too just to go a little bit deeper when we say big days being bigger.
Speaker Change: What we're also seeing is when we get outside of those big days that our base business is solid and getting stronger and that's very encouraging as we move forward and I think really goes back to product really goes back to strength of execution.
Speaker Change: It wasn't that long ago, and prior quarters, where we would have moments, where we were promotional and we got a result only to give it back in the weeks following that's not what's happening in our business today and that might be one of the more encouraging parts of what we're seeing here.
Speaker Change: Here in the holiday season so.
I'll have to come but.
Speaker Change: Encouraged that we have this opportunity in front of us.
Speaker Change: Does that conclude your question Matthew.
Great. Thanks best of luck.
Matthew Boss: Yes, Thanks, Matt.
Speaker Change: Thank you. Our next question comes from Dana Telsey with Telsey Group. Your line is open.
Speaker Change: Hi, good morning, nice to see the progress Hillary in your assessment of the stores as you've gone around the country as you look at the classification the space allocation.
Speaker Change: What do you see as the opportunities going forward and with the store of the future.
Speaker Change: Any new vision that you have to enhance whats been there already and just lastly can you remind us about China manufacturing and sourcing given what could be tariffs coming up thank you.
Speaker Change: Hi, Dana Thanks, I'll start and then pass it to T J.
Speaker Change: I've been in lots and lots of stores and multiple states over the past.
Speaker Change: Weeks and months.
Speaker Change: I think store of the future overall looks great and it's a proud brand moment, it really lets products, saying I think that some of the things that we're talking about really is around space allocation.
Speaker Change: Called Pink back pretty aggressively and we did that because the trend wasn't there but.
Speaker Change: But what we know about Gen Z is that she likes and in real life experience, sometimes and so I think there is an opportunity to ensure that as we're condensing, particularly in the locations where theres a shop in shop, rather than a side by side that we're really scrutinizing that and as I think about the product assortment for pink in the future it will.
Speaker Change: It will be more balanced towards apparel, and we will need some space for that and we will need a different experience for that.
Speaker Change: So that is work that we need to do.
Speaker Change: And I think we're all pretty excited to do that work as it relates to the rest of the assortment I think the us feels good in the store I think beauty.
Speaker Change: Could feel a little more elevated in our store of the future when I think about our positioning of accessible luxury and beauty really being a big piece of that.
Speaker Change: I think I think we can do some tweaks there to make that feel like a more elevated experience.
Speaker Change: And then I just think the two brands when they are in the side by side, they need to feel different and yet connected and I think theres a little bit of work to do there and it's something that we're all really excited to do and I would say that we're really thinking about is the pace of remodeled the right pace or not can we accelerated are there places where we can go faster those are all question.
Speaker Change: We're asking ourselves right now as we think about future budgets.
Speaker Change: The second part of your question Dana the large large large majority of our product comes from three countries Vietnam, Sri Lanka in Indonesia, specifically your question on China, That's a single digit number for us.
Speaker Change: Which includes some apparel and some beauty. It also includes some China for China product. So even all of that product is being made in China isn't necessarily even coming to the U S and all occasions.
Speaker Change: A couple of other countries that have been topic, we mentioned, both Canada and Mexico are less than 1% for us. So I think the teams over time the teams have done a very effective job of.
Deemphasizing.
Speaker Change: The impact of where product comes from China, and putting it in other locations around the world. So hopefully that helps with your question.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Adrienne <unk> with Barclays. Your line is open.
Great. Thank you very much.
Speaker Change: Hello, I was wondering if you can talk to us about customer reactivation is I'm really interested what you had said that you were seeing a younger customer come in and I think thats the key to kind of consumer in this day and agent that Gen Z. So reactivation of existing customers and then what source are you getting the new customers from.
Speaker Change: And then.
Speaker Change: T J just a clarification on the comment that you made on discount rate I think that there's a huge differential between the normalized and when you are highly promotion does that include clearance Barbara you're only talking about the percent at Reg price to promo. Thank you so much.
Speaker Change: Hi, Adrienne customer reactivation are probably largely not gen Z Gen Z or mostly new customers and when I stand back and look at it I think that the fashion show introduced us to a new generation of consumers. We werent on their radar we hadn't been in the cultural conversation and I think we came in.
Speaker Change: We came in and surprised her and she was like Oh, I'm going to pay attention to this and so we are engaging with an entirely new generation.
Speaker Change: Of young women, who are saying to us we want big hair, we want more glamour, we want more shine, we want more of it we want all of it and that's exciting because we know how to do that.
So for me and what I've seen so far and I do think we have a lot more work to do on this as we start to read some of the data over the next quarter.
Speaker Change: It's the new customer and the reactivated customer just is a more millennial or even <unk>, but we are focused on this gen Z customer in particular.
Speaker Change: And it and it really thrills me that she is noticing us.
I think Adrian on the second part of your question I would just say the discount rate callout is more general in nature I'm not going to go into the kind of components of that.
Speaker Change: But that would include our promotional events and store it would include.
Speaker Change: Box promotions meeting, we've run it by to get to or something like that it would include.
Speaker Change: Our SaaS per for our semiannual sale performance, our mid season sale performance things like that so it's more of an all inclusive number now having said that I think we believe there might be a little bit of opportunity in all of those areas. So I think it's the appropriate compare.
Speaker Change: Fantastic and then one last one.
Speaker Change: Historically.
Speaker Change: Back in the day.
Speaker Change: Victoria's secret with known for to see systematic bra launch bra franchise launches.
Speaker Change: The newness and kind of really having.
Almost a seasonal kind of cadence to that can you talk about kind of what you've learned.
Speaker Change: When you kind of go back into the archives and are thinking about kind of how to execute that going forward.
Speaker Change: Thank you yeah, I'm actually glad you asked about that innovation was.
Speaker Change: The core core core of our business in those days and I think over the past few years. It hasnt been as big of a focus and so that is something that we are.
Speaker Change: Absolutely doubling down on something that and our head merchant talks a lot about and rightly so and I think the way that works is different in today's world I think there's a lot more co creation. There is a lot more driven with factory partnerships.
Speaker Change: And the way we get worked on is different but bringing innovation back to the center of how we work is critical in these bra launches are critical to our business and we are committed to that and committed to be the leaders in the intimate global intimate space.
Speaker Change: And to be first to market on these new ideas and so youll see youll see that.
In the years to come.
Speaker Change: Great. Thank you congratulations.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Jonna, Kim with TD Cowen Your line is open.
Speaker Change: Thank you for taking my question just wanted to get more thoughts around the beauty business. How large is beauty now and where you think that business could evolve over time and also would love any comments outdoor me how that has performed and where you see that particular brand going forward. Thank you so much.
Speaker Change: Much.
Speaker Change: Sure I'll start I'll start with beauty beauty is is it's our strongest business. We just had our largest quarter to date on record for Q3, So incredible incredible results incredible brand love there I watched customers.
Speaker Change: Over Black Friday engaging in beauty in a way that was just incredible to see.
Speaker Change: It is primarily driven by the Victoria's secret brand and yet I still think there's tons of opportunity to think about beauty differently and add on lots of new ideas and pincus is relatively young in its beauty journey and I think tons of opportunity. There if I think about beauty and I'll go back to social commerce, and the tick tock generation.
Speaker Change: There is so much that happened in beauty on social Commerce, and I think that's very important for tank as we move forward. So while the beauty business is super healthy.
Speaker Change: Lots of brand equity there I think there is still a very long runway.
Speaker Change: The second part of your question during the <unk> business.
We did have growth in the <unk> business during the third quarter topline revenue mid to high single digits.
Speaker Change: The daily look brand, which is more focused on home trial and in apparel outperformed the <unk> or the laundry and instruments brand.
Speaker Change: But that is the flexibility of the model that they have created to be able to move marketing dollars between the two channels and whatever is working best so volume up.
Speaker Change: Mid to high single digits.
Speaker Change: Profitable for the quarter.
Speaker Change: And I think well positioned as we move into the.
Speaker Change: The holiday selling season.
Speaker Change: Here in October and November for that business.
Speaker Change: Thank you so much.
Speaker Change: Yes.
Speaker Change: Thank you our last question comes from Mauricio Serna with UBS. Your line is open.
Mauricio Serna: Great. Good morning, Thanks for taking my question and congratulations on the result.
Mauricio Serna: Could you talk.
Mauricio Serna: Curious if you can talk about what you're seeing in the sport bra category.
Mauricio Serna: What are your opportunities are in that segment and also your overall view on the.
Speaker Change: Our Canada team started being down.
Mauricio Serna: Yes.
Mauricio Serna: Just wondering if youre seeing.
Mauricio Serna: I mean <unk> been in the next couple.
A couple of quarters and then also could you give us what you're seeing in China just kidding.
Speaker Change: Microenvironment. Thank you.
Speaker Change: Sure I'll start and then and then T J can finish up.
Speaker Change: Our sports Bra launch launched we launched the share was very successful we've picked up some market share of the share and we're really happy with that but we think we've just scratched the surface. We pulled back as a brand on on sports Raws when sports Bras were taking off and so we have some market share that they do to us and we intend to claim it.
Speaker Change: Sports browse, our just one option in her bra library, and she's wearing them more frequently and sort of like non active capacities. So we intend to go after that business.
The insurance market is a little soft and I think the way women engaged with raws, specifically is a little bit differently. We're hearing from the younger generation that she is.
Speaker Change: Wearing them more selectively she's wearing different kinds of them she's wearing sports bras and so it's our job to create such compelling emotional product and storytelling that she must have our bras and I think we're on our way to doing that we have proof points throughout our business right now where we are doing that and then I think that's also where the complementary.
Speaker Change: Eight categories come in with frequency and excitement and emotion and it's really the whole experience of our brand that brings that her to us and I feel like the team is very well positioned to deliver on all of those things.
Speaker Change: And I think the last part to your question Mauricio if I understood. It correctly, China. So we continue to be very excited about our opportunities in the market in China.
We believe we have the right team, we believe we have the right partner.
Speaker Change: Regina Miracle team, we did see growth in China in the third quarter.
Speaker Change: More so on digital but we're also seeing some very encouraging trends of late that stores are in stores. The digital growth as we mentioned in our prepared comments.
Speaker Change: The major major event of singles day actually moved into largely moved into third quarter. This year.
Speaker Change: Our fourth quarter last year, so that was certainly a helper in that regard but.
Speaker Change: I think the market continues we will continue to be a challenge maybe for the foreseeable future.
Speaker Change: But.
Speaker Change: I have a lot of visibility into what's happening with our joint venture there in China and I'm confident we're on the right issues.
Speaker Change: And as I mentioned before doing a lot of product that is China for China, and having the right partner in the region is certainly a help her as well.
Speaker Change: Scott Best of luck. Thank you.
Speaker Change: Thanks for ACO, Okay. So that concludes our call. This morning. Thank you for your continued interest and time and BS have a great day. Thanks, everyone.
Speaker Change: Thank you for participating in the Victoria's Secret <unk> Company's third quarter 2024 earnings Conference call that concludes today's conference. Please disconnect at this time and enjoy the rest of your day.