Victoria’s Secret & Co. Q3 2022 Earnings Call Transcript
Victoria's Secret & Co. (NYSE:VSCO) Q3 2022 Earnings Call Transcript December 1, 2022
Victoria's Secret & Co. beats earnings expectations. Reported EPS is $0.29, expectations were $0.23.
Operator: 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 & Company's Third Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. All parties will remain in a listen-only mode until the question-and-answer session of today's call. I would now like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria's Secret & Company. Kevin, you may begin.
Kevin Wynk: Thank you, Amanda. Good morning, and welcome to Victoria's Secret & Co.'s third quarter earnings conference call for the period ending October 29, 2022. As a matter of formality, I would like to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statement found in our SEC filings and in our press releases. Joining me on the call today is CEO, Martin Waters; and CFO, TJ Johnson. We are available today for up to 45 minutes to answer any questions. Certain results we discuss on the call today are adjusted results and exclude the special items described in our press release in our SEC filings. Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are also included in our press release our SEC filings, the investor presentation posted on the Investors section of our website. Thanks. And now, I'll turn the call over to Martin.
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Martin Waters: Thanks, Kevin, and good morning, everyone. Before we dive right into the quarter, I want to first share my gratitude during this holiday season for our associates and partners around the world for their hard work and dedication. I'm especially thankful for the team's continued commitment to the revolution of our brand and our strategy, and I'm delighted by the connections we're making and deepening with our customers as we aspire to become a Victoria's Secret where everyone feels seen respected and valued. After nearly 1.5 years as an independent company, we continue to make significant progress towards our transformation. We've created a solid financial platform with our new, more agile operating structure, driven by our two category-defining brands and merchandise leadership positions in intimates and Beauty.
For the third consecutive quarter, we've seen growth compared to last year in our domestic market share for the intimates category. We remain energized by our customers' response to our brand repositioning, but of course, recognize that this transformation is a journey and there's still more to do. For the third quarter in what continued to be a very challenging macroeconomic environment, we were able to deliver operating income and earnings per diluted share results above our guidance. This represents our fifth consecutive quarter since the separation that we've delivered adjusted operating income and adjusted earnings per share with results within or above guidance. We believe this type of performance continues to demonstrate the strength of our brand repositioning, our domestic share, market share leadership and growth in the intimates category.
In addition, the financial platform that we've created, supported by our team's relentless focus on execution, allow us to deliver better-than-expected results even in this challenging environment. We remain steadfast in our belief that we've stabilized our business model to weather difficult times and are positioned for significant operating leverage in more normal economic times. Turning to our third quarter results. Our operating income of $43 million and earnings per diluted share of $0.29 were both, as I said, above our guidance range. Sales declined 9% in the quarter compared to last year, which was in line with our expectation. Traffic was up in our stores in the quarter, and AURs remained healthy and at or near record highs in most categories, enabling us to drive profitable sales.
However, average basket sizes and conversion rates were down in the quarter, highlighting our customer who's very cautious and cost-conscious in this current environment. From a merchandise category perspective, Beauty was our best-performing category and significantly outperformed the balance of the business, followed by bras, whose performance was in line with the overall business. Panties and apparel performance in the quarter lagged behind the balance of the business amidst an extremely promotional environment in those categories. Our international business continues to be a bright spot with sales up more than 40% in the quarter compared to last year. The international business has been profitable in each of the last three quarters with most lines of business and countries performing well.
I'm encouraged with the rate of progress we're making in all parts of our international business, and we continue to be optimistic about growth for our partners around the world. TJ and I recently visited and spent a few days with our teams, partners and vendors in the Far East, including our partners in the China joint venture business, Regina Miracle. We've made substantial progress stabilizing our business and growing digital sales in China with Regina. After years of significant losses, I'm expecting the China business will breakeven in spring '23. Aside from our financials over the last 90 days, we've executed several key actions in support of our strategy and positioning for the long term, including: We signed a definitive agreement to acquire Adore Me, a digitally native technology-first intimates brand.
We believe the deal will strategically position us for growth by allowing us to leverage Adore Me's expertise and technology to continue to improve the Victoria's Secret and PINK shopping experience and accelerate the modernization of the VS & Co digital platform. Secondly, we launched our Undefinable campaign to cement the brand's continued commitment to welcoming and championing all women. We delivered newness and innovation with the launch of So Obsessed, our new push-up bra, which provides the fit and shaping of a traditional wide bra in an extremely comfortable wireless frame. We further enhanced the shopping experience by expanding our bra fit services with the launch of a new bra fit technology that will help customers more easily find their right size when shopping in the Victoria's Secret app.
We continue to expand our channels of distribution and began featuring a portion of our PINK apparel assortment in our Amazon storefront. We expanded our Store of the Future fleet to 23 stores, 12 in the U.S. and 11 internationally, and we continue to make progress on our ESG journey by publishing in November, our ESG materiality assessment and strategy. Looking at the balance of the year, we remain mindful of the continued economic headwinds and pressure on our customer that will likely drive a highly promotional retail environment. As such, we expect continued sales and margin volatility. We believe we are well positioned for the holiday season, and we're confident in our ability to navigate this shifting landscape by aggressively pursuing our share of customer spending to optimize sales and margin and at the same time being extremely diligent on costs and on inventory management.
For the fourth quarter, we expect sales to decrease in the high single-digit range compared to the fourth quarter last year, and we're forecasting operating income to be in the range of $240 million to $290 million. I expect you're all likely to hear my take on our holiday performance thus far. Well, here's my take. The start of November up until the Black Friday weekend seemed to be very much a continuation of the trend from the third quarter, a reflection of a very cautious customer in a challenging economic environment. However, since Black Friday, our customers have responded positively, and we've been very pleased with an uptick in the trend and our level of performance. Our stores have been some of the busiest in the mall, and our promotional levels were appropriately aggressive with increased traffic and conversion both in stores and online.
That being said, there are still many very important days ahead in the month of December, where we make the overwhelming majority of our profits for the fourth quarter. Our guidance for the quarter reflects our results to-date and the expectations that we'll need to be aggressive in December to get our fair share and more of consumer spending this holiday season. For the full year, we expect sales to decrease 6% to 7%, and forecast adjusted operating income to be in the range of $525 million to $575 million or approximately 8% to 9% of retail sales. Given today's challenging macroeconomic environment, we believe an adjusted operating income rate in the high single digits demonstrates stabilization of our business and represents a solid base.
We will leverage more when normal macro trends return in North America. We're committed to optimizing our performance in the current challenging environment by focusing on what's within our control: Our brand transformation being best at bras, enhancing the customer experience and a relentless focus on costs and inventory management. At our Investor Day in October, we discussed our strategic growth plan, which we believe outlined significant runway ahead guided by our three principles: Number one, to strengthen the core; number two, to ignite growth; number three, to transform the foundation of our company. Led by our two category-defining brands, a merchandise leadership position in intimates and Beauty and a global business position to increase market share, our goal is clear, to be the world's leading fashion retailer of intimate apparel.
Our focus as leaders and as a company is on ensuring we're a future-facing business that becomes more and more culturally relevant in this shifting consumer environment. We're confident in our opportunities and remain committed to delivering long-term sustainable value for our shareholders. That concludes our prepared remarks, and we'd be more than happy to take any questions that you might have.
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