SEC Form 10-Q filed by Victorias Secret & Co.
$VSCO
Clothing/Shoe/Accessory Stores
Consumer Discretionary
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended May 4, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-40515
_________________________________
(Exact name of registrant as specified in its charter)
_______________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
| (Registrant's Telephone Number, Including Area Code) | |||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 31, 2024, the number of outstanding shares of the Registrant’s common stock was 78,299,234 shares.
VICTORIA'S SECRET & CO.
TABLE OF CONTENTS
| Page No. | |||||
Item 1. Financial Statements* | |||||
Item 4. Controls and Procedures | |||||
Item 1. Legal Proceedings | |||||
Item 1A. Risk Factors | |||||
Item 3. Defaults Upon Senior Securities | |||||
Item 4. Mine Safety Disclosures | |||||
Item 5. Other Information | |||||
Item 6. Exhibits | |||||
| * | Victoria's Secret & Co.'s fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2024” and “first quarter of 2023” refer to the thirteen-week periods ended May 4, 2024 and April 29, 2023, respectively, and “fiscal year 2024” and “fiscal year 2023” refer to the fifty-two-week period ending February 1, 2025 and the fifty-three-week period ended February 3, 2024, respectively. | ||||
2
PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions except per share amounts)
(Unaudited)
| First Quarter | |||||||||||
| 2024 | 2023 | ||||||||||
| Net Sales | $ | $ | |||||||||
| Costs of Goods Sold, Buying and Occupancy | ( | ( | |||||||||
| Gross Profit | |||||||||||
| General, Administrative and Store Operating Expenses | ( | ( | |||||||||
| Operating Income | |||||||||||
| Interest Expense | ( | ( | |||||||||
| Other Income | |||||||||||
| Income Before Income Taxes | |||||||||||
| Provision for Income Taxes | |||||||||||
| Net Income (Loss) | ( | ||||||||||
| Less: Net Income Attributable to Noncontrolling Interest | |||||||||||
| Net Income (Loss) Attributable to Victoria's Secret & Co. | $ | ( | $ | ||||||||
| Net Income (Loss) Per Basic Share Attributable to Victoria's Secret & Co. | $ | ( | $ | ||||||||
| Net Income (Loss) Per Diluted Share Attributable to Victoria's Secret & Co. | $ | ( | $ | ||||||||
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
| First Quarter | |||||||||||
| 2024 | 2023 | ||||||||||
| Net Income (Loss) | $ | ( | $ | ||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||
| Foreign Currency Translation | ( | ||||||||||
| Total Other Comprehensive Loss, Net of Tax | ( | ||||||||||
| Total Comprehensive Income (Loss) | ( | ||||||||||
| Less: Net Income Attributable to Noncontrolling Interest | |||||||||||
| Less: Foreign Currency Translation Attributable to Noncontrolling Interest | |||||||||||
| Comprehensive Loss Attributable to Victoria's Secret & Co. | $ | ( | $ | ( | |||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
VICTORIA'S SECRET & CO.
CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||||
| ASSETS | |||||||||||||||||
| Current Assets: | |||||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | ||||||||||||||
| Accounts Receivable, Net | |||||||||||||||||
| Inventories | |||||||||||||||||
| Other | |||||||||||||||||
| Total Current Assets | |||||||||||||||||
| Property and Equipment, Net | |||||||||||||||||
| Operating Lease Assets | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Trade Names | |||||||||||||||||
| Other Intangible Assets, Net | |||||||||||||||||
| Deferred Income Taxes | |||||||||||||||||
| Other Assets | |||||||||||||||||
| Total Assets | $ | $ | $ | ||||||||||||||
| LIABILITIES AND EQUITY | |||||||||||||||||
| Current Liabilities: | |||||||||||||||||
| Accounts Payable | $ | $ | $ | ||||||||||||||
| Accrued Expenses and Other | |||||||||||||||||
| Current Debt | |||||||||||||||||
| Current Operating Lease Liabilities | |||||||||||||||||
| Income Taxes | |||||||||||||||||
| Total Current Liabilities | |||||||||||||||||
| Deferred Income Taxes | |||||||||||||||||
| Long-term Debt | |||||||||||||||||
| Long-term Operating Lease Liabilities | |||||||||||||||||
| Other Long-term Liabilities | |||||||||||||||||
| Total Liabilities | |||||||||||||||||
| Shareholders' Equity: | |||||||||||||||||
Preferred Stock — $ | |||||||||||||||||
Common Stock — $ | |||||||||||||||||
| Paid-in Capital | |||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) | ( | ||||||||||||||||
| Retained Earnings | |||||||||||||||||
| Total Victoria's Secret & Co. Shareholders' Equity | |||||||||||||||||
| Noncontrolling Interest | |||||||||||||||||
| Total Equity | |||||||||||||||||
| Total Liabilities and Equity | $ | $ | $ | ||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
(Unaudited)
First Quarter 2024
| Common Stock | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total Victoria's Secret & Co. Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Par Value | Paid-in Capital | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, February 3, 2024 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Comprehensive Income (Loss) | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Compensation Expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax Payments related to Share-based Awards | ( | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, May 4, 2024 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
First Quarter 2023
| Common Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Victoria's Secret & Co. Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Par Value | Paid-in Capital | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 28, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total Comprehensive Income (Loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of Common Stock | ( | — | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury Share Retirements | — | — | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Compensation Expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax Payments related to Share-based Awards | ( | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 29, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
| First Quarter | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating Activities: | |||||||||||
| Net Income (Loss) | $ | ( | $ | ||||||||
| Adjustments to Reconcile Net Income (Loss) to Net Cash Used for Operating Activities: | |||||||||||
| Depreciation and Amortization of Long-lived Assets | |||||||||||
| Share-based Compensation Expense | |||||||||||
| Deferred Income Taxes | |||||||||||
| Amortization of Fair Value Adjustment to Acquired Inventories | |||||||||||
| Changes in Assets and Liabilities: | |||||||||||
| Accounts Receivable | |||||||||||
| Inventories | ( | ||||||||||
| Accounts Payable, Accrued Expenses and Other | ( | ( | |||||||||
| Income Taxes | ( | ( | |||||||||
| Other Assets and Liabilities | ( | ( | |||||||||
| Net Cash Used for Operating Activities | ( | ( | |||||||||
| Investing Activities: | |||||||||||
| Capital Expenditures | ( | ( | |||||||||
| Net Cash Used for Investing Activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Borrowings from Asset-based Revolving Credit Facility | |||||||||||
| Repayments of Borrowings from Asset-based Revolving Credit Facility | ( | ( | |||||||||
| Payments for Contingent Consideration related to Adore Me Acquisition | ( | ||||||||||
| Tax Payments related to Share-based Awards | ( | ( | |||||||||
| Payments of Long-term Debt | ( | ( | |||||||||
| Repurchases of Common Stock | ( | ||||||||||
| Proceeds from Stock Option Exercises | |||||||||||
| Other Financing Activities | |||||||||||
| Net Cash Used for Financing Activities | ( | ( | |||||||||
| Effects of Exchange Rate Changes on Cash and Cash Equivalents | |||||||||||
| Net Decrease in Cash and Cash Equivalents | ( | ( | |||||||||
| Cash and Cash Equivalents, Beginning of Period | |||||||||||
| Cash and Cash Equivalents, End of Period | $ | $ | |||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
6
VICTORIA'S SECRET & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Victoria’s Secret & Co. (together with its subsidiaries unless the context otherwise requires, the “Company”) is a specialty retailer of women's intimate and other apparel and beauty products marketed under the Victoria’s Secret, PINK and Adore Me brand names. The Company has approximately 910 stores in the United States (“U.S.”), Canada and China as well as its own websites, www.VictoriasSecret.com, www.PINK.com and www.AdoreMe.com, and other digital channels worldwide. Additionally, the Company has more than 470 stores in nearly 70 countries operating under franchise, license and wholesale arrangements. The Company also includes the merchandise sourcing and production function serving the Company and its international partners. The Company operates as a single segment designed to serve customers worldwide seamlessly through stores and digital channels.
Fiscal Year
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended May 4, 2024 and April 29, 2023 are unaudited. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 22, 2024.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods.
Seasonality of Business
Due to the seasonal variations in the retail industry, the results of operations for the thirteen-week period ended May 4, 2024 are not necessarily indicative of the results expected for any other interim period or the full fiscal year ending February 1, 2025.
Equity Method Investments
The carrying values of equity method investments were $60 million as of May 4, 2024, $60 million as of February 3, 2024 and $58 million as of April 29, 2023. These investments are recorded in Other Assets on the Consolidated Balance Sheets.
7
Noncontrolling Interest
Concentration of Credit Risk
The Company maintains cash and cash equivalents with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts with and limits the amount of credit exposure with any one entity. As of May 4, 2024, the Company's investment portfolio is primarily comprised of bank deposits.
The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company determines the required allowance for expected credit losses using information such as customer credit history and financial condition. Amounts are recorded to the allowance when it is determined that expected credit losses may occur.
Supplier Finance Programs
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.
Recently Issued Accounting Pronouncements
The Company did not adopt any new accounting standards during the first quarter of 2024 that had a material impact on the Company’s results of operations, financial position or cash flows.
Income Taxes
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision-usefulness of income tax disclosures, primarily by requiring enhanced disclosure for income taxes paid and the effective tax rate reconciliation. This standard will be effective for annual reporting periods beginning in fiscal year 2025 and for interim periods beginning in fiscal year 2026, with early adoption permitted. The updates required by this standard should be applied prospectively, but retroactive application is permitted. The Company does not expect this standard to have a material impact on its results of operations, financial position or cash flows.
Segment Reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, Segment Reporting, including the significant segment expense disclosures. This standard will be effective for annual reporting periods beginning in fiscal year 2024 and interim periods beginning in fiscal year 2025, with early adoption permitted. The updates required by this standard should be applied retrospectively to all periods presented in the financial statements. The Company does not expect this standard to have a material impact on its results of operations, financial position or cash flows.
8
2. Acquisition
On December 30, 2022, the Company completed its acquisition of 100 % of the equity interests of AdoreMe, Inc. (“Adore Me”). Under the terms of the definitive agreement setting forth the terms and conditions of the acquisition (the “Merger Agreement”), the Company made an upfront cash payment of $391 million at closing and agreed to pay further cash consideration in an aggregate amount of at least $80 million, consisting of a fixed payment to be made on or prior to January 15, 2025, and up to $300 million based on the performance of Adore Me and achievement of specified strategic objectives and certain EBITDA and net revenue goals within the two-year period following closing of the transaction. Under the terms of the Merger Agreement, up to $60 million of the further cash consideration is subject to the continued employment of a certain Adore Me employee (“Contingent Compensation Payments”). These Contingent Compensation Payments are not included as consideration when applying the acquisition method of accounting and are recognized as compensation expense within General, Administrative and Store Operating Expenses in the Consolidated Statements of Income (Loss) if and when earned in future periods.
During the first quarter of 2024, the Company made payments of $20 million for the achievement of a specified strategic objective under the terms of the Merger Agreement, including $16 million for contingent consideration classified as financing cash outflows and $4 million of Contingent Compensation Payments classified as operating cash outflows in the Consolidated Statement of Cash Flows.
In both the first quarter of 2024 and 2023, the Company recognized the financial impact of purchase accounting items, including recognition of changes in the estimated fair value of contingent consideration and Contingent Compensation Payments and amortization of acquired intangible assets. In addition, in the first quarter of 2023, the Company recognized the financial impact of additional acquisition-related costs and recognition in gross profit of the fair value adjustment to acquired inventories that were sold in the first quarter of 2023.
The following table provides a summary by line item in the Consolidated Statements of Income (Loss) of the financial impact of purchase accounting items and additional acquisition-related costs for the first quarter of 2024 and 2023:
| First Quarter | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Income Statement Line Item | (in millions) | |||||||||||||
| Costs of Goods Sold, Buying and Occupancy | $ | $ | ||||||||||||
| General, Administrative and Store Operating Expenses | ||||||||||||||
| Interest Expense | ||||||||||||||
The deferred consideration liability for the future fixed payment was $77 million and $76 million as of May 4, 2024 and February 3, 2024, respectively, and is included within Accrued Expenses and Other in the Consolidated Balance Sheets. As of April 29, 2023, the deferred consideration liability for the future fixed payment was $72 million and is included within Other Long-term Liabilities in the Consolidated Balance Sheet. See Note 11, “Fair Value of Financial Instruments” for further information regarding the liability recognized at fair value for the contingent consideration.
3. Revenue Recognition
Accounts receivable, net from revenue-generating activities were $113 million as of May 4, 2024, $103 million as of February 3, 2024 and $99 million as of April 29, 2023. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days.
The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue was $298 million as of May 4, 2024, $310 million as of February 3, 2024 and $284 million as of April 29, 2023. The Company recognized $64 million as revenue in the first quarter of 2024 from amounts recorded as deferred revenue at the beginning of the year. As of May 4, 2024, the Company recorded deferred revenue of $284 million within Accrued Expenses and Other, and $14 million within Other Long-term Liabilities on the Consolidated Balance Sheet.
9
The following table provides a disaggregation of Net Sales for the first quarter of 2024 and 2023:
| First Quarter | |||||||||||
| 2024 | 2023 | ||||||||||
| (in millions) | |||||||||||
Stores – North America | $ | $ | |||||||||
| Direct | |||||||||||
| International (a) | |||||||||||
| Total Net Sales | $ | $ | |||||||||
_______________
The Company has a Victoria's Secret and PINK multi-tender loyalty program along with a co-branded credit card and U.S. private label credit card through which customers can earn points on purchases of Victoria's Secret and PINK product and through the co-branded credit card can earn points on purchases outside of the Company. A third-party financing company is the sole owner of the credit card accounts and underwrites the credit issued under the credit card programs. Revenue earned in connection with the Company's credit card arrangements with the third-party is primarily recognized based on credit card sales and usage.
The Company recognized Net Sales of $17 million and $23 million in the first quarter of 2024 and 2023, respectively, related to revenue earned in connection with its credit card arrangements.
The Company’s international net sales include sales from Company-operated stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s net sales outside of the U.S. totaled $221 million and $200 million for the first quarter of 2024 and 2023, respectively.
4. Restructuring Activities
Organizational Restructuring
In the first quarter of 2023, the Company implemented restructuring actions to continue to reorganize and improve its organizational structure. As a result, pre-tax severance and related costs of $11 million, of which $8 million are included in General, Administrative and Store Operating Expenses and $3 million are included in Costs of Goods Sold, Buying and Occupancy, are included in the 2023 Consolidated Statement of Income.
The Company made payments of $2 million and $5 million related to severance and related costs associated with these restructuring actions during the first quarter of 2024 and the first quarter of 2023, respectively. Liabilities, after accrual adjustments, related to the restructuring actions of $3 million are included in the May 4, 2024 Consolidated Balance Sheet.
5. Earnings (Loss) Per Share and Shareholders' Equity
Earnings (Loss) Per Share
10
The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings (loss) per share for the first quarter of 2024 and 2023:
| First Quarter | |||||||||||
| 2024 | 2023 | ||||||||||
| (in millions) | |||||||||||
| Common Shares | |||||||||||
| Treasury Shares | |||||||||||
| Basic Shares | |||||||||||
| Effect of Dilutive Awards (a)(b) | |||||||||||
| Diluted Shares | |||||||||||
| Anti-dilutive Awards (a) | |||||||||||
(a)Shares underlying certain restricted stock units, performance share units and options were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
(b)For the first quarter of 2024, shares underlying outstanding restricted stock units, performance share units and options were excluded from dilutive shares as a result of the Company's net loss for the period.
Shareholders' Equity
Common Stock Share Repurchases & Treasury Stock Retirements
March 2024 Share Repurchase Program
In March 2024, the Company's Board of Directors approved a share repurchase program (“March 2024 Share Repurchase Program”), authorizing the repurchase of up to $250 million of the Company's common stock, subject to market conditions and other factors, through open market, accelerated share repurchase or privately negotiated transactions, including pursuant to one or more Rule 10b5-1 trading plans. The March 2024 Share Repurchase Program is open-ended in term and will continue until exhausted.
The Company did not repurchase any shares of its common stock under the March 2024 Share Repurchase Program during the first quarter of 2024. As of May 4, 2024, the Company was authorized to repurchase up to $250 million of the Company's common stock under the March 2024 Share Repurchase Program.
January 2023 Share Repurchase Program
In January 2023, the Company's Board of Directors approved a share repurchase program (“January 2023 Share Repurchase Program”), authorizing the repurchase of up to $250 million of the Company's common stock. The authorization, which expired at the end of fiscal year 2023, was utilized in fiscal year 2023 to repurchase shares in the open market and under the accelerated share repurchase agreement described below.
In February 2023, as part of the January 2023 Share Repurchase Program, the Company entered into an accelerated share repurchase agreement (“ASR Agreement”) with Goldman Sachs & Co. LLC (“Goldman Sachs”) to repurchase $125 million of the Company's common stock. In February 2023, the Company made an initial payment of $125 million to Goldman Sachs and received an initial delivery of 2.4 million shares of the Company's common stock. The final number of shares received was based on the volume-weighted average price of the Company’s common stock during the term of the ASR Agreement, less a discount and subject to adjustments pursuant to the terms of the ASR Agreement. The final settlement of the ASR Agreement occurred in May 2023 subsequent to the end of the first quarter of 2023. At final settlement, the Company received an additional 1.3 million shares of the Company's common stock from Goldman Sachs.
As of April 29, 2023, the $125 million payment to Goldman Sachs was recognized as a reduction to shareholders’ equity, consisting of a $100 million increase in Treasury Stock, which reflected the value of the initial 2.4 million shares received upon initial settlement, and a $25 million decrease in Paid-in Capital, which reflected the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement. The $25 million recorded in Paid-in Capital as of April 29, 2023 was reclassified to Treasury Stock in the second quarter of 2023 in connection with the final settlement of the ASR Agreement. As a result of the initial share delivery, there was an additional $1 million increase in Treasury Stock, which reflected the excise tax liability recorded related to the share repurchase in accordance with the Inflation Reduction Act of 2022.
Shares repurchased under the January 2023 Share Repurchase Program were retired upon repurchase. As a result, the Company retired the 2.4 million shares repurchased in connection with the settlement of the ASR Agreement during the first quarter of 2023. The retirement resulted in a reduction of $101 million in Treasury Stock, less than $1 million in the par value of Common Stock, $6 million in Paid-in Capital and $95 million in Retained Earnings during the first quarter of 2023.
11
6. Inventories
The following table provides details of Inventories as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Finished Goods Merchandise | $ | $ | $ | ||||||||||||||
| Raw Materials and Merchandise Components | |||||||||||||||||
| Total Inventories | $ | $ | $ | ||||||||||||||
Inventories are principally valued at the lower of cost or net realizable value, on an average cost basis. The above amounts are net of valuation adjustments for inventory where the cost exceeds the amount the Company expects to realize from the ultimate sale or disposal of the inventory and net of loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory.
7. Long-Lived Assets
The following table provides details of Property and Equipment, Net as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Property and Equipment, at Cost | $ | $ | $ | ||||||||||||||
| Accumulated Depreciation and Amortization | ( | ( | ( | ||||||||||||||
| Property and Equipment, Net | $ | $ | $ | ||||||||||||||
Depreciation expense was $59 million and $67 million for the first quarter of 2024 and 2023, respectively. Amortization expense for intangible assets was $6
In the first quarter of 2024, the Company classified certain non-store corporate-related assets that are expected to be sold within the next twelve months as held for sale within Other Current Assets on the Consolidated Balance Sheet. As of May 4, 2024, the carrying value of these assets held for sale was $18 million.
8. Accrued Expenses and Other
The following table provides additional information about the composition of Accrued Expenses and Other as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Deferred Revenue on Gift Cards and Merchandise Credits | $ | $ | $ | ||||||||||||||
| Compensation, Payroll Taxes and Benefits | |||||||||||||||||
| Contingent Consideration Related to Adore Me Acquisition | |||||||||||||||||
| Future Fixed Payment Related to Adore Me Acquisition | |||||||||||||||||
| Deferred Revenue on Loyalty and Credit Card Programs | |||||||||||||||||
| Taxes, Other than Income | |||||||||||||||||
| Accrued Marketing | |||||||||||||||||
| Accrued Interest | |||||||||||||||||
| Returns Reserve | |||||||||||||||||
| Deferred Revenue on Direct Shipments not yet Delivered | |||||||||||||||||
| Accrued Claims on Self-insured Activities | |||||||||||||||||
| Accrued Freight and Other Logistics | |||||||||||||||||
| Rent | |||||||||||||||||
| Other | |||||||||||||||||
| Total Accrued Expenses and Other | $ | $ | $ | ||||||||||||||
12
9. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events.
For the first quarter of 2024, the Company’s effective tax rate was 151.1 % compared to 34.0 % in the first quarter of 2023. The first quarter of 2024 rate differed from the Company’s combined estimated federal and state statutory rate primarily due to additional tax expense from the vesting of share-based compensation awards. The first quarter of 2023 rate differed from the Company's combined estimated federal and state statutory rate primarily due to non-deductible liabilities related to contingent consideration and Contingent Compensation Payments under the terms of the Merger Agreement.
The Company paid income taxes in the amount of $6 million and $16 million for the first quarter of 2024 and 2023, respectively.
10. Long-term Debt and Borrowing Facilities
The following table provides the Company’s outstanding Long-term Debt balance, net of unamortized debt issuance costs and discounts and any current portion, as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Senior Secured Debt with Subsidiary Guarantee | |||||||||||||||||
$ | $ | $ | $ | ||||||||||||||
Asset-based Revolving Credit Facility due August 2026 (“ABL Facility”) | |||||||||||||||||
| Total Senior Secured Debt with Subsidiary Guarantee | |||||||||||||||||
| Senior Debt with Subsidiary Guarantee | |||||||||||||||||
$ | |||||||||||||||||
| Total Senior Debt with Subsidiary Guarantee | |||||||||||||||||
| Total | |||||||||||||||||
| Current Debt | ( | ( | ( | ||||||||||||||
| Total Long-term Debt, Net of Current Portion | $ | $ | $ | ||||||||||||||
Cash paid for interest was $12 million and $13 million for the first quarter of 2024 and 2023, respectively.
Credit Facilities
On August 2, 2021, the Company entered into a term loan B credit facility in an aggregate principal amount of $400 million, which will mature in August 2028. The discounts and issuance costs from the Term Loan Facility are being amortized through the maturity date and are included within Long-term Debt on the Consolidated Balance Sheets. Commencing in December 2021, the Company is required to make quarterly principal payments on the Term Loan Facility in an amount equal to 0.25 % of the original principal amount of $400 million. The Company made principal payments for the Term Loan Facility of $1
In May 2023, the Company amended its Term Loan Facility to allow for an early transition to using the Term Secured Overnight Financing Rate (“Term SOFR”) as the applicable reference rate to calculate interest instead of the London Interbank Offered Rate (“LIBOR”). Prior to the amendment, interest under the Term Loan Facility was calculated by reference to LIBOR or an alternative base rate, plus an interest rate margin equal to (i) in the case of LIBOR loans, 3.25 % and (ii) in the case of alternate base rate loans, 2.25 %. The LIBOR rate applicable to the Term Loan Facility was subject to a floor of 0.50 %. In accordance with the amendment, interest on Term SOFR loans under the Term Loan Facility is now calculated by reference to Term SOFR, plus an interest rate margin ranging from 3.36 % to 3.68 %. The obligation to pay principal and interest on the loans under the Term Loan Facility is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's wholly-owned domestic subsidiaries. The loans under the Term Loan Facility are secured on a first-priority lien basis by certain assets of the Company and guarantors that do not constitute priority collateral of the ABL Facility and on a second-priority lien basis by priority collateral of the ABL Facility, subject to customary exceptions. As of May 4, 2024, the interest rate on the loans under the Term Loan Facility was 8.84 %.
13
On August 2, 2021, the Company also entered into a senior secured asset-based revolving credit facility. The ABL Facility allows for borrowings and letters of credit in U.S. dollars or Canadian dollars and has aggregate commitments of $750 million and an expiration date of August 2026. The availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on the Company's eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property, and (ii) the aggregate commitment. In May 2023, the Company amended its ABL Facility to allow for an early transition to using Term SOFR as the applicable reference rate to calculate interest instead of LIBOR. Prior to the amendment, interest on the loans under the ABL Facility was calculated by reference to (i) LIBOR or an alternative base rate and (ii) in the case of loans denominated in Canadian dollars, Canadian Dollar Offered Rate (“CDOR”) or a Canadian base rate, plus an interest rate margin based on average daily excess availability ranging from (x) in the case of LIBOR and CDOR loans, 1.50 % to 2.00 % and (y) in the case of alternate base rate loans and Canadian base rate loans, 0.50 % to 1.00 %. In accordance with the amendment, interest on Term SOFR loans under the ABL Facility is now calculated by reference to Term SOFR, plus an interest rate margin based on average daily excess availability ranging from 1.60 % to 2.10 %. Unused commitments under the ABL Facility accrue an unused commitment fee ranging from 0.25 % to 0.30 %. The obligation to pay principal and interest on the loans under the ABL Facility is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's wholly-owned domestic and Canadian subsidiaries. The loans under the ABL Facility are secured on a first-priority lien basis by the Company's eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property and on a second-priority lien basis on substantially all other assets of the Company, subject to customary exceptions.
The Company borrowed and made repayments of $90 15 145 million outstanding under the ABL Facility and the interest rate on the borrowings was 7.17 %. The Company had $19 million of outstanding letters of credit as of May 4, 2024 that further reduced its availability under the ABL Facility. As of May 4, 2024, the Company's remaining availability under the ABL Facility was $482 million.
The Company's long-term debt and borrowing facilities contain certain financial and other covenants, including, but not limited to, the maintenance of financial ratios. The 2029 Notes and the Term Loan Facility include the maintenance of a consolidated coverage ratio and a consolidated total leverage ratio, and the ABL Facility includes the maintenance of a fixed charge coverage ratio and a debt to earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) ratio. The financial covenants could, within specific predefined circumstances, limit the Company's ability to incur additional indebtedness, make certain investments, pay dividends or repurchase shares. As of May 4, 2024, the Company was in compliance with all covenants under its long-term debt and borrowing facilities.
11. Fair Value of Financial Instruments
Cash and Cash Equivalents include cash on hand, deposits with financial institutions and highly liquid investments with original maturities of 90 days or less. The Company's Cash and Cash Equivalents are considered Level 1 fair value measurements as they are valued using unadjusted quoted prices in active markets for identical assets.
The following table provides a summary of the principal value and estimated fair value of the Company's outstanding debt as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Principal Value | $ | $ | $ | ||||||||||||||
| Fair Value, Estimated (a) | |||||||||||||||||
(a)The estimated fair value of the Company’s publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Management believes that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity. Management further believes the principal value of the outstanding debt under the ABL Facility approximates its fair value as of May 4, 2024 based on the terms of the borrowings from the ABL Facility.
14
Recurring Fair Value Measurements
The following tables provide a summary of the Company's contingent consideration recognized at fair value related to the Adore Me acquisition as of May 4, 2024, February 3, 2024, April 29, 2023 and January 28, 2023 (in millions):
| Balance Sheet Location | Measurement Level | May 4, 2024 | February 3, 2024 | April 29, 2023 | January 28, 2023 | |||||||||||||||||||||||||||
| Accrued Expenses and Other | Level 3 | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Other Long-term Liabilities | Level 3 | |||||||||||||||||||||||||||||||
The estimated fair value of the contingent consideration is valued using a Scenario-Based method and a Monte Carlo simulation which utilize inputs including discount rates, estimated probability of achievement of certain milestones, forecasted revenues, forecasted EBITDA and volatility rates. These are considered Level 3 inputs in accordance with ASC 820, Fair Value Measurement. Changes in the fair value of the contingent consideration are recorded within General, Administrative and Store Operating Expenses on the Consolidated Statements of Income (Loss). For additional information regarding the contingent consideration, see Note 2, “Acquisition.”
12. Comprehensive Income (Loss)
The following table provides the rollforward of accumulated other comprehensive income attributable to Victoria's Secret & Co. for the first quarter of 2024:
| Foreign Currency Translation | Accumulated Other Comprehensive Income | ||||||||||
| (in millions) | |||||||||||
| Balance as of February 3, 2024 | $ | $ | |||||||||
| Other Comprehensive Income Before Reclassifications | |||||||||||
Tax Effect | |||||||||||
| Current-period Other Comprehensive Income | |||||||||||
| Balance as of May 4, 2024 | $ | $ | |||||||||
The following table provides the rollforward of accumulated other comprehensive income (loss) attributable to Victoria's Secret & Co. for the first quarter of 2023:
| Foreign Currency Translation | Accumulated Other Comprehensive Income (Loss) | ||||||||||
| (in millions) | |||||||||||
| Balance as of January 28, 2023 | $ | $ | |||||||||
| Other Comprehensive Loss Before Reclassifications | ( | ( | |||||||||
Tax Effect | |||||||||||
| Current-period Other Comprehensive Loss | ( | ( | |||||||||
| Balance as of April 29, 2023 | $ | ( | $ | ( | |||||||
13. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
15
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We caution that any forward-looking statements (as such term is defined in the U.S. Private Securities Litigation Reform Act of 1995) contained in this report or made by us, our management, or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements, and any future performance or financial results expressed or implied by such forward-looking statements are not guarantees of future performance. Forward-looking statements include, without limitation, statements regarding our future operating results, the implementation and impact of our strategic plans, and our ability to meet environmental, social, and governance goals. Words such as “estimate,” “commit,” “will,” “target,” “goal,” “project,” “plan,” “believe,” “seek,” “strive,” “expect,” “anticipate,” “intend,” “continue,” “potential” and any similar expressions are intended to identify forward-looking statements. Risks associated with the following factors, among others, could affect our results of operations and financial performance and cause actual results to differ materially from those expressed or implied in any forward-looking statements:
•we may not realize all of the expected benefits of the spin-off from Bath & Body Works, Inc. (f/k/a L Brands, Inc.);
• general economic conditions, inflation and changes in consumer confidence and consumer spending patterns;
• market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
• our ability to successfully implement our strategic plan;
• difficulties arising from turnover in company leadership or other key positions;
• our ability to attract, develop and retain qualified associates and manage labor-related costs;
• our dependence on traffic to our stores and the availability of suitable store locations on satisfactory terms;
• our ability to successfully operate and expand internationally and related risks;
• the operations and performance of our franchisees, licensees, wholesalers, and joint venture partners;
• our ability to successfully operate and grow our direct channel business;
• our ability to protect our reputation and the image and value of our brands;
• our ability to attract customers with marketing, advertising and promotional programs;
• the highly competitive nature of the retail industry and the segments in which we operate;
• consumer acceptance of our products and our ability to manage the life cycle of our brands, remain current with fashion trends, and develop and launch new merchandise, product lines and brands successfully;
• our ability to realize the potential benefits and synergies sought with the acquisition of Adore Me;
• our ability to incorporate artificial intelligence into our business operations successfully and ethically while effectively managing the associated risks;
• our ability to source materials and produce, distribute and sell merchandise on a global basis, including risks related to:
• political instability and geopolitical conflicts;
• environmental hazards and natural disasters;
• significant health hazards and pandemics;
• delays or disruptions in shipping and transportation and related pricing impacts; and
• disruption due to labor disputes;
• our geographic concentration of production and distribution facilities in central Ohio and Southeast Asia;
• the ability of our vendors to manufacture and deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
• fluctuations in freight, product input and energy costs;
• our and our third-party service providers’ ability to implement and maintain information technology systems and to protect associated data and system availability;
• our ability to maintain the security of customer, associate, third-party and company information;
• stock price volatility;
• shareholder activism matters;
• our ability to maintain our credit rating;
• our ability to comply with regulatory requirements; and
16
• legal, tax, trade and other regulatory matters.
Except as may be required by law, we assume no obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in “Item 1A. Risk Factors” in our 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.
Executive Overview
Victoria’s Secret is an iconic global brand of women’s intimate and other apparel, personal care and beauty products. We sell our products through three brands: Victoria’s Secret, PINK and Adore Me. Victoria’s Secret is a market leading global lingerie brand with a history of serving women across the globe. PINK is a fashion and lifestyle brand for young women built around a strong intimates core. We also sell beauty products under both the Victoria’s Secret and PINK brands. Adore Me is a technology-led, digital first innovative intimates brand serving women of all sizes and budgets at all phases of life. Together, Victoria’s Secret, PINK and Adore Me strive to provide the best products to help women express their confidence, sexiness and power and use our platform to create connection and community while celebrating the extraordinary diversity of women's experiences.
Victoria’s Secret, PINK and Adore Me merchandise is sold online through e-commerce platforms, through retail stores located in the U.S., Canada and China, and through international stores and websites operated by partners under franchise, license, wholesale and joint venture arrangements. We have a presence in nearly 70 countries and we believe we benefit from global brand awareness, a wide and compelling product assortment and a powerful, deep connection with our customers.
In the first quarter of 2024, our net sales decreased $48 million, or 3%, to $1.359 billion compared to $1.407 billion in the first quarter of 2023 and comparable sales decreased 5% in the first quarter of 2024. Our North American store sales decreased by 7%, or $57 million, to $729 million compared to $786 million in the first quarter of 2023, primarily driven by a decrease in average unit retail (which we define as the average price per unit purchased), traffic and conversion (which we define as the percentage of customers who visit our stores and make a purchase) in the quarter compared to the first quarter of 2023. Our direct channel sales decreased by 3%, or $15 million, to $449 million compared to $464 million in the first quarter of 2023, as an increase in conversion was more than offset by decreases in average unit retail and traffic compared to the first quarter of 2023. Our operating income was $26 million in the first quarter of 2024 compared to operating income of $28 million in the first quarter of 2023, and our operating income rate (expressed as a percentage of net sales) was 1.9% compared to 2.0% last year. The slight decrease in operating income in the first quarter of 2024 compared to the first quarter of 2023 was primarily driven by the decrease in net sales partially offset by a decrease in costs of goods sold, buying and occupancy expenses.
We continue to focus on our strategic priorities: 1) Accelerate Our Core; 2) Ignite Growth; and 3) Transform the Foundation. We are committed to optimizing our performance by focusing on what is within our control, and we are confident in our strategic direction and remain committed to delivering long-term sustainable value for our stockholders.
For additional information related to our first quarter of 2024 financial performance, see “Results of Operations.”
Financial Impacts of the Adore Me Acquisition
In both the first quarter of 2024 and 2023, we recognized the financial impact of purchase accounting items, including recognition of changes in the estimated fair value of contingent consideration and Contingent Compensation Payments and amortization of acquired intangible assets. In addition, in the first quarter of 2023, we recognized the financial impact of additional acquisition-related costs and recognition in gross profit of the fair value adjustment to acquired inventories that were sold in the first quarter of 2023. For additional information, see Note 2, “Acquisition.”
17
Non-GAAP Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Quarterly Report on Form 10-Q, provided below are non-GAAP financial measures that present operating income, net income (loss) attributable to Victoria's Secret & Co. and net income (loss) per diluted share attributable to Victoria's Secret & Co. on an adjusted basis, which remove certain non-recurring, infrequent or unusual items that we believe are not indicative of the results of our ongoing operations due to their size and nature. The intangible asset amortization excluded from these non-GAAP financial measures is excluded because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. We use adjusted financial information as key performance measures of our results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of non-GAAP financial measures may differ from similarly titled measures used by other companies. The table below reconciles the most directly comparable GAAP financial measure to each non-GAAP financial measure.
| First Quarter | |||||||||||
| (in millions, except per share amounts) | 2024 | 2023 | |||||||||
| Reconciliation of Reported to Adjusted Operating Income | |||||||||||
| Reported Operating Income - GAAP | $ | 26 | $ | 28 | |||||||
| Adore Me Acquisition-related Items (a) | 7 | 10 | |||||||||
| Amortization of Intangible Assets (b) | 6 | 6 | |||||||||
| Restructuring Charge (c) | — | 11 | |||||||||
| Adjusted Operating Income | $ | 40 | $ | 55 | |||||||
| Reconciliation of Reported to Adjusted Net Income (Loss) Attributable to Victoria's Secret & Co. | |||||||||||
| Reported Net Income (Loss) Attributable to Victoria's Secret & Co. - GAAP | $ | (4) | $ | 1 | |||||||
| Adore Me Acquisition-related Items (a) | 8 | 11 | |||||||||
| Amortization of Intangible Assets (b) | 6 | 6 | |||||||||
| Restructuring Charge (c) | — | 11 | |||||||||
| Tax Effect of Adjusted Items | (1) | (7) | |||||||||
| Adjusted Net Income Attributable to Victoria's Secret & Co. | $ | 9 | $ | 22 | |||||||
| Reconciliation of Reported to Adjusted Net Income (Loss) Per Diluted Share Attributable to Victoria's Secret & Co. | |||||||||||
| Reported Net Income (Loss) Per Diluted Share Attributable to Victoria's Secret & Co. - GAAP | $ | (0.05) | $ | 0.01 | |||||||
| Adore Me Acquisition-related Items (a) | 0.10 | 0.10 | |||||||||
| Amortization of Intangible Assets (b) | 0.06 | 0.06 | |||||||||
| Restructuring Charge (c) | — | 0.10 | |||||||||
| Adjusted Net Income Per Diluted Share Attributable to Victoria's Secret & Co. | $ | 0.12 | $ | 0.28 | |||||||
________________
(a)In the first quarter of 2024, we recognized an $8 million pre-tax charge ($8 million after-tax) within net loss, $7 million included in general, administrative and store operating expense and $1 million included in interest expense, related to the financial impact of purchase accounting items related to the acquisition of Adore Me. In the first quarter of 2023, we recognized an $11 million pre-tax charge ($8 million after-tax) within net income, $9 million included in costs of goods sold, buying and occupancy expense, $1 million included in interest expense and $1 million included in general, administrative and store operating expense, related to the financial impact of purchase accounting items and professional service costs related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” included in Item 1. Financial Statements.
(b)In both the first quarter of 2024 and 2023, we recognized $6 million of amortization expense ($5 million after-tax) included in general, administrative and store operating expense related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” and Note 7, “Long-Lived Assets” included in Item 1. Financial Statements.
(c)In the first quarter of 2023, we recognized an $11 million pre-tax charge ($8 million after-tax), $8 million included in general, administrative and store operating expense and $3 million included in buying and occupancy expense, related to restructuring activities to continue to reorganize and improve our organizational structure. For additional information, see Note 4, “Restructuring Activities” included in Item 1. Financial Statements.
18
Store Data
The following table compares the first quarter of 2024 U.S. company-operated store data to the first quarter of 2023:
| First Quarter | |||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||
| Sales per Average Selling Square Foot (a) | $ | 125 | $ | 133 | (6 | %) | |||||||||||
| Sales per Average Store (in thousands) (a) | $ | 856 | $ | 915 | (6 | %) | |||||||||||
| Average Store Size (selling square feet) | 6,849 | 6,891 | (1 | %) | |||||||||||||
| Total Selling Square Feet (in thousands) | 5,555 | 5,600 | (1 | %) | |||||||||||||
________________
(a)Sales per average selling square foot and sales per average store, which are indicators of store productivity, are calculated based on store sales for the period divided by the average, including the beginning and end of period, of total square footage and store count, respectively.
The following table represents store data for the first quarter of 2024:
| Stores at | Stores at | ||||||||||||||||||||||
| February 3, 2024 | Opened | Closed | May 4, 2024 | ||||||||||||||||||||
| Company-Operated: | |||||||||||||||||||||||
| U.S. | 808 | 2 | (5) | 805 | |||||||||||||||||||
| Canada | 23 | — | — | 23 | |||||||||||||||||||
| Subtotal Company-Operated | 831 | 2 | (5) | 828 | |||||||||||||||||||
| China Joint Venture: | |||||||||||||||||||||||
| Beauty & Accessories (a) | 34 | 1 | — | 35 | |||||||||||||||||||
| Full Assortment | 36 | — | — | 36 | |||||||||||||||||||
| Subtotal China Joint Venture | 70 | 1 | — | 71 | |||||||||||||||||||
| Partner-Operated: | |||||||||||||||||||||||
| Beauty & Accessories | 307 | 7 | (4) | 310 | |||||||||||||||||||
| Full Assortment | 156 | 11 | (4) | 163 | |||||||||||||||||||
| Subtotal Partner-Operated | 463 | 18 | (8) | 473 | |||||||||||||||||||
| Adore Me | 6 | — | — | 6 | |||||||||||||||||||
| Total | 1,370 | 21 | (13) | 1,378 | |||||||||||||||||||
________________
(a)Includes fourteen partner-operated stores as of May 4, 2024.
19
The following table represents store data for the first quarter of 2023:
| Stores at | Stores at | ||||||||||||||||||||||
| January 28, 2023 | Opened | Closed | April 29, 2023 | ||||||||||||||||||||
| Company-Operated: | |||||||||||||||||||||||
| U.S. | 812 | 1 | (6) | 807 | |||||||||||||||||||
| Canada | 25 | — | (1) | 24 | |||||||||||||||||||
| Subtotal Company-Operated | 837 | 1 | (7) | 831 | |||||||||||||||||||
| China Joint Venture: | |||||||||||||||||||||||
| Beauty & Accessories (a) | 39 | 1 | (2) | 38 | |||||||||||||||||||
| Full Assortment | 33 | 1 | — | 34 | |||||||||||||||||||
| Subtotal China Joint Venture | 72 | 2 | (2) | 72 | |||||||||||||||||||
| Partner-Operated: | |||||||||||||||||||||||
| Beauty & Accessories | 308 | 2 | (5) | 305 | |||||||||||||||||||
| Full Assortment | 135 | 4 | (6) | 133 | |||||||||||||||||||
| Subtotal Partner-Operated | 443 | 6 | (11) | 438 | |||||||||||||||||||
| Adore Me | 6 | — | — | 6 | |||||||||||||||||||
| Total | 1,358 | 9 | (20) | 1,347 | |||||||||||||||||||
________________
(a)Includes fourteen partner-operated stores as of April 29, 2023.
Results of Operations
First Quarter of 2024 Compared to First Quarter of 2023
Operating Income
For the first quarter of 2024, operating income decreased slightly by $2 million, to operating income of $26 million, compared to operating income of $28 million in the first quarter of 2023, and the operating income rate (expressed as a percentage of net sales) decreased slightly to 1.9% from 2.0%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the first quarter of 2024 in comparison to the first quarter of 2023:
| 2024 | 2023 | % Change | |||||||||||||||
| First Quarter | (in millions) | ||||||||||||||||
Stores – North America | $ | 729 | $ | 786 | (7 | %) | |||||||||||
| Direct | 449 | 464 | (3 | %) | |||||||||||||
| International (a) | 181 | 157 | 16 | % | |||||||||||||
| Total Net Sales | $ | 1,359 | $ | 1,407 | (3 | %) | |||||||||||
_______________
(a)Results include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.
20
The following table provides a reconciliation of net sales from the first quarter of 2023 to the first quarter of 2024:
| (in millions) | |||||
| 2023 Net Sales | $ | 1,407 | |||
| Sales Associated with Stores Included in the Comparable Stores Calculation | (56) | ||||
| Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net | 4 | ||||
| Direct Channels (a) | (6) | ||||
| Credit Card Programs | (5) | ||||
| International Wholesale, Royalty and Sourcing | 18 | ||||
| Foreign Currency Translation | (3) | ||||
| 2024 Net Sales | $ | 1,359 | |||
_______________
(a)Results include consolidated joint venture direct sales in China.
The following table compares the first quarter of 2024 comparable sales to the first quarter of 2023:
| 2024 | 2023 | ||||||||||
| Comparable Sales (Stores and Direct) (a) | (5 | %) | (11 | %) | |||||||
| Comparable Store Sales (a) | (8 | %) | (14 | %) | |||||||
_______________
(a)The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
Net sales in the first quarter of 2024 decreased $48 million, or 3%, to $1.359 billion compared to $1.407 billion in the first quarter of 2023.
In the stores channel, our North America net sales decreased $57 million, or 7%, to $729 million compared to the first quarter of 2023 driven by a decrease in average unit retail, traffic and conversion.
In the direct channel, net sales decreased $15 million, or 3%, to $449 million, as an increase in conversion was more than offset by decreases in average unit retail and traffic compared to the first quarter of 2023.
In the international channel, net sales increased $24 million, or 16%, to $181 million compared to the first quarter of 2023. Increases in net sales in the first quarter of 2024 compared to the first quarter of 2023 related to increases in net sales in China and from our wholesale arrangements, as well as royalties earned associated with franchised stores and online sales in many countries outside of North America.
Gross Profit
For the first quarter of 2024, our gross profit decreased slightly by $1 million compared to the first quarter of 2023 to $501 million, and our gross profit rate (expressed as a percentage of net sales) increased to 36.9% from 35.7%.
The slight decrease in gross profit dollars was primarily due to the decrease in merchandise margin dollars driven by the decrease in net sales and the increase in promotional activity, partially offset by reductions in costs of goods sold related to our supply chain initiative and a decrease in buying and occupancy expenses. Additionally, gross profit dollars were slightly lower compared to the first quarter of 2023, primarily driven by the recognition in gross profit of $9 million in the first quarter of 2023 related to the fair value step-up adjustment on the acquired inventory from Adore Me and a restructuring charge of $3 million in the first quarter of 2023.
The gross profit rate increase was driven by reductions in costs of goods sold related to our supply chain initiative and the expenses recorded in the first quarter of 2023 as noted above, partially offset by increased promotional activity.
21
General, Administrative and Store Operating Expenses
For the first quarter of 2024, our general, administrative and store operating expenses increased slightly by $1 million compared to the first quarter of 2023, to $475 million. The slight increase in general, administrative and store operating expenses compared to the first quarter of 2023 was due to increases in charges related to Adore Me purchase accounting items and certain other administrative expenses, partially offset by a restructuring charge of $8 million that was recognized in the first quarter of 2023.
The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 34.9% from 33.7% primarily due to deleverage driven by the decrease in sales compared to the first quarter of 2023.
Interest Expense
For the first quarter of 2024, our interest expense remained flat at $22 million compared to the first quarter of 2023, as our lower average outstanding debt was offset by higher average borrowing rates for our ABL Facility and Term Loan Facility.
Provision for Income Taxes
For the first quarter of 2024, the Company’s effective tax rate was 151.1% compared to 34.0% in the first quarter of 2023. The first quarter of 2024 rate differed from the Company’s combined estimated federal and state statutory rate primarily due to additional tax expense from the vesting of share-based compensation awards. The first quarter of 2023 rate differed from the Company's combined estimated federal and state statutory rate primarily due to non-deductible liabilities related to contingent consideration and Contingent Compensation Payments under the terms of the Merger Agreement.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Net cash provided by (used for) operating activities is impacted by our net income (loss) and working capital changes. Our net income (loss) is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins and income taxes. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.
Our ability to fund our operating needs is primarily dependent upon our ability to continue to generate positive cash flow from operations, as well as borrowing capacity under our ABL Facility, which we rely on to supplement cash generated by our operating activities, particularly when our need for working capital peaks in the summer and fall months as discussed above. Management believes that our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures, and (iii) flexibility to consider investment opportunities that may arise. However, certain investment opportunities or seasonal funding requirements may require us to seek additional debt or equity financing, and there can be no assurance that we will be able to obtain additional debt or equity financing on acceptable terms, if at all, in the future.
We expect to utilize our cash flows to continue to invest in our brands, talent, capabilities, and strategic initiatives as well as to repay our indebtedness over time. We believe that our available short-term and long-term capital resources are sufficient to fund our working capital and other cash flow requirements over the next 12 months.
Working Capital and Capitalization
Based upon our cash balances and cash provided by our operating activities, along with the borrowing capacity under our ABL Facility, we believe we will be able to continue to meet our working capital needs.
22
The following table provides a summary of our working capital position and capitalization as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net Cash Provided by (Used for) Operating Activities (a) | $ | (116) | $ | 389 | $ | (108) | |||||||||||
| Capital Expenditures (a) | 39 | 256 | 55 | ||||||||||||||
| Working Capital | (42) | (81) | 66 | ||||||||||||||
| Capitalization: | |||||||||||||||||
| Long-term Debt | 1,119 | 1,120 | 1,271 | ||||||||||||||
| Victoria's Secret & Co. Shareholders' Equity | 423 | 417 | 265 | ||||||||||||||
| Total Capitalization | $ | 1,542 | $ | 1,537 | $ | 1,536 | |||||||||||
| Amounts Available Under the ABL Facility (b) | $ | 482 | $ | 423 | $ | 308 | |||||||||||
(a)The May 4, 2024 and April 29, 2023 amounts represent thirteen-week periods and the February 3, 2024 amounts represent a fifty-three-week period.
(b)For the reporting period ended May 4, 2024, the availability under the ABL Facility was limited by our borrowing base of $646 million, less outstanding borrowings of $145 million and letters of credit of $19 million. For the reporting period ended February 3, 2024, the availability was limited by our borrowing base of $587 million, less outstanding borrowings of $145 million and letters of credit of $19 million. For the reporting period ended April 29, 2023, the availability under the ABL Facility was limited by our borrowing base of $633 million, less outstanding borrowings of $295 million and letters of credit of $30 million.
Cash Flow
The following table provides a summary of our cash flow activity for the first quarter of 2024 and 2023:
| First Quarter | |||||||||||
| 2024 | 2023 | ||||||||||
| (in millions) | |||||||||||
| Cash and Cash Equivalents, Beginning of Period | $ | 270 | $ | 427 | |||||||
| Net Cash Used for Operating Activities | (116) | (108) | |||||||||
| Net Cash Used for Investing Activities | (39) | (55) | |||||||||
| Net Cash Used for Financing Activities | (10) | (132) | |||||||||
| Effects of Exchange Rate Changes on Cash and Cash Equivalents | — | — | |||||||||
| Net Decrease in Cash and Cash Equivalents | (165) | (295) | |||||||||
| Cash and Cash Equivalents, End of Period | $ | 105 | $ | 132 | |||||||
Operating Activities
Net cash used for operating activities reflects net income (loss) adjusted for non-cash items, including depreciation and amortization, share-based compensation expense and deferred tax expense, as well as changes in working capital. Net cash used for operating activities in the first quarter of 2024 was $116 million, an increase in net cash flows used for operating activities of $8 million compared to the first quarter of 2023. The increase in net cash flows used for operating activities in the first quarter of 2024 was primarily driven by lower net income (loss), partially offset by lower net operating cash outflows associated with working capital changes of $19 million compared to the first quarter of 2023. The most significant working capital driver resulting in the decrease in net operating cash outflows this year compared to last year is related to income taxes paid of $6 million in the first quarter of 2024 compared to $16 million paid in the first quarter of 2023.
Investing Activities
Net cash used for investing activities in the first quarter of 2024 was $39 million, consisting solely of capital expenditures. The capital expenditures were primarily related to our store capital program and investments in technology related to our strategic initiatives to drive growth.
Net cash used for investing activities in the first quarter of 2023 was $55 million, consisting solely of capital expenditures. The capital expenditures were primarily related to our store capital program, along with investments in technology, distribution and logistics to support our retail capabilities.
23
We are estimating capital expenditures to be approximately $230 million for fiscal year 2024. We expect that our capital expenditures will continue to be focused on our store capital program along with investments in technology related to our strategic initiatives to drive growth.
Financing Activities
Net cash used for financing activities in the first quarter of 2024 was $10 million, consisting primarily of a $16 million payment for contingent consideration related to the acquisition of Adore Me and offsetting borrowings and repayments of $90 million under the ABL Facility.
Net cash used for financing activities in the first quarter of 2023 was $132 million, consisting primarily of $125 million of share repurchases and $9 million of payments for taxes on share-based compensation awards issued, partially offset by $3 million of proceeds from stock option exercises.
Common Stock Share Repurchases & Treasury Stock Retirements
Our Board of Directors determines share repurchase authorizations, giving consideration to our levels of profit and cash flows, capital requirements, current and forecasted liquidity, and restrictions placed upon us by our borrowing arrangements, as well as financial and other conditions existing at the time. We use cash flows generated from operating activities to fund any share repurchases. Once authorized by our Board of Directors, the timing and amount of any share repurchases are made at our discretion, taking into account a number of factors, including market conditions.
March 2024 Share Repurchase Program
In March 2024, our Board of Directors approved the March 2024 Share Repurchase Program, authorizing the repurchase of up to $250 million of our common stock, subject to market conditions and other factors, through open market, accelerated share repurchase or privately negotiated transactions, including pursuant to one or more Rule 10b5-1 trading plans. The March 2024 Share Repurchase Program is open-ended in term and will continue until exhausted.
We did not repurchase any shares of our common stock under the March 2024 Share Repurchase Program during the first quarter of 2024. As of May 4, 2024, we were authorized to repurchase up to $250 million of our common stock under the March 2024 Share Repurchase Program.
January 2023 Share Repurchase Program
In January 2023, our Board of Directors approved the January 2023 Share Repurchase Program, authorizing the repurchase of up to $250 million of our common stock. The authorization, which expired at the end of fiscal year 2023, was utilized in fiscal year 2023 to repurchase shares in the open market and under the accelerated share repurchase agreement described below.
In February 2023, as part of the January 2023 Share Repurchase Program, we entered into the ASR Agreement with Goldman Sachs to repurchase $125 million of our common stock. In February 2023, we made an initial payment of $125 million to Goldman Sachs and received an initial delivery of 2.4 million shares of our common stock. The final number of shares received was based on the volume-weighted average price of our common stock during the term of the ASR Agreement, less a discount and subject to adjustments pursuant to the terms of the ASR Agreement. The final settlement of the ASR Agreement occurred in May 2023 subsequent to the end of the first quarter of 2023. At final settlement, we received an additional 1.3 million shares of our common stock from Goldman Sachs.
As of April 29, 2023, the $125 million payment to Goldman Sachs was recognized as a reduction to shareholders’ equity, consisting of a $100 million increase in Treasury Stock, which reflected the value of the initial 2.4 million shares received upon initial settlement, and a $25 million decrease in Paid-in Capital, which reflected the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement. The $25 million recorded in Paid-in Capital as of April 29, 2023 was reclassified to Treasury Stock in the second quarter of 2023 in connection with the final settlement of the ASR Agreement. As a result of the initial share delivery, there was an additional $1 million increase in Treasury Stock, which reflected the excise tax liability recorded related to the share repurchase in accordance with the Inflation Reduction Act of 2022.
Shares repurchased under the January 2023 Share Repurchase Program were retired upon repurchase. As a result, we retired the 2.4 million shares repurchased in connection with the settlement of the ASR Agreement during the first quarter of 2023. The retirement resulted in a reduction of $101 million in Treasury Stock, less than $1 million in the par value of Common Stock, $6 million in Paid-in Capital and $95 million in Retained Earnings during the first quarter of 2023.
24
Dividend Policy and Procedures
We have not paid any cash dividends since becoming an independent, publicly traded company. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the Board of Directors deems relevant. We would use cash flow generated from operating and financing activities to fund our dividends.
Long-term Debt and Borrowing Facilities
The following table provides our outstanding Long-term Debt balance, net of unamortized debt issuance costs and discounts and any current portion, as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Senior Secured Debt with Subsidiary Guarantee | |||||||||||||||||
$390 million Term Loan due August 2028 (“Term Loan Facility”) | $ | 384 | $ | 385 | $ | 387 | |||||||||||
Asset-based Revolving Credit Facility due August 2026 (“ABL Facility”) | 145 | 145 | 295 | ||||||||||||||
| Total Senior Secured Debt with Subsidiary Guarantee | 529 | 530 | 682 | ||||||||||||||
| Senior Debt with Subsidiary Guarantee | |||||||||||||||||
$600 million, 4.625% Fixed Interest Rate Notes due July 2029 (“2029 Notes”) | 594 | 594 | 593 | ||||||||||||||
| Total Senior Debt with Subsidiary Guarantee | 594 | 594 | 593 | ||||||||||||||
| Total | 1,123 | 1,124 | 1,275 | ||||||||||||||
| Current Debt | (4) | (4) | (4) | ||||||||||||||
| Total Long-term Debt, Net of Current Portion | $ | 1,119 | $ | 1,120 | $ | 1,271 | |||||||||||
Cash paid for interest was $12 million and $13 million for the first quarter of 2024 and 2023, respectively.
Credit Facilities
On August 2, 2021, we entered into a term loan B credit facility in an aggregate principal amount of $400 million, which will mature in August 2028. The discounts and issuance costs from the Term Loan Facility are being amortized through the maturity date and are included within Long-term Debt on the Consolidated Balance Sheets. Commencing in December 2021, we are required to make quarterly principal payments on the Term Loan Facility in an amount equal to 0.25% of the original principal amount of $400 million. We made principal payments for the Term Loan Facility of $1 million during both the first quarter of 2024 and 2023.
In May 2023, we amended our Term Loan Facility to allow for an early transition to using Term SOFR as the applicable reference rate to calculate interest instead of LIBOR. Prior to the amendment, interest under the Term Loan Facility was calculated by reference to LIBOR or an alternative base rate, plus an interest rate margin equal to (i) in the case of LIBOR loans, 3.25% and (ii) in the case of alternate base rate loans, 2.25%. The LIBOR rate applicable to the Term Loan Facility was subject to a floor of 0.50%. In accordance with the amendment, interest on Term SOFR loans under the Term Loan Facility is now calculated by reference to Term SOFR, plus an interest rate margin ranging from 3.36% to 3.68%. The obligation to pay principal and interest on the loans under the Term Loan Facility is jointly and severally guaranteed on a full and unconditional basis by certain of our wholly-owned domestic subsidiaries. The loans under the Term Loan Facility are secured on a first-priority lien basis by certain assets of ours and guarantors that do not constitute priority collateral of the ABL Facility and on a second-priority lien basis by priority collateral of the ABL Facility, subject to customary exceptions. As of May 4, 2024, the interest rate on the loans under the Term Loan Facility was 8.84%.
25
On August 2, 2021, we also entered into a senior secured asset-based revolving credit facility. The ABL Facility allows for borrowings and letters of credit in U.S. dollars or Canadian dollars and has aggregate commitments of $750 million and an expiration date of August 2026. The availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on our eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property, and (ii) the aggregate commitment. In May 2023, we amended our ABL Facility to allow for an early transition to using Term SOFR as the applicable reference rate to calculate interest instead of LIBOR. Prior to the amendment, interest on the loans under the ABL Facility was calculated by reference to (i) LIBOR or an alternative base rate and (ii) in the case of loans denominated in Canadian dollars, CDOR or a Canadian base rate, plus an interest rate margin based on average daily excess availability ranging from (x) in the case of LIBOR and CDOR loans, 1.50% to 2.00% and (y) in the case of alternate base rate loans and Canadian base rate loans, 0.50% to 1.00%. In accordance with the amendment, interest on Term SOFR loans under the ABL Facility is now calculated by reference to Term SOFR, plus an interest rate margin based on average daily excess availability ranging from 1.60% to 2.10%. Unused commitments under the ABL Facility accrue an unused commitment fee ranging from 0.25% to 0.30%. The obligation to pay principal and interest on the loans under the ABL Facility is jointly and severally guaranteed on a full and unconditional basis by certain of our wholly-owned domestic and Canadian subsidiaries. The loans under the ABL Facility are secured on a first-priority lien basis by our eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property and on a second-priority lien basis on substantially all other assets of ours, subject to customary exceptions.
We borrowed and made repayments of $90 million and $15 million under the ABL Facility during the first quarter of 2024 and 2023, respectively. As of May 4, 2024, there were borrowings of $145 million outstanding under the ABL Facility and the interest rate on the borrowings was 7.17%. We had $19 million of outstanding letters of credit as of May 4, 2024 that further reduced our availability under the ABL Facility. As of May 4, 2024, our remaining availability under the ABL Facility was $482 million.
Our long-term debt and borrowing facilities contain certain financial and other covenants, including, but not limited to, the maintenance of financial ratios. The 2029 Notes and the Term Loan Facility include the maintenance of a consolidated coverage ratio and a consolidated total leverage ratio, and the ABL Facility includes the maintenance of a fixed charge coverage ratio and a debt to EBITDAR ratio. The financial covenants could, within specific predefined circumstances, limit our ability to incur additional indebtedness, make certain investments, pay dividends or repurchase shares. As of May 4, 2024, we were in compliance with all covenants under our long-term debt and borrowing facilities.
Credit Ratings
The following table provides our credit ratings as of May 4, 2024:
| Moody’s | S&P | ||||||||||
| Corporate | Ba3 | BB- | |||||||||
| Senior Secured Debt with Subsidiary Guarantee | Ba2 | BB+ | |||||||||
| Senior Unsecured Debt with Subsidiary Guarantee | B1 | BB- | |||||||||
| Outlook | Negative | Negative | |||||||||
Contingent Liabilities and Contractual Obligations
Contractual Obligations
Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory, deferred cash consideration related to the acquisition of Adore Me and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since February 3, 2024, as discussed in “Contingent Liabilities and Contractual Obligations” in our 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We did not adopt any new accounting standards during the first quarter of 2024 that had a material impact on our results of operations, financial position or cash flows.
26
Income Taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision-usefulness of income tax disclosures, primarily by requiring enhanced disclosure for income taxes paid and the effective tax rate reconciliation. This standard will be effective for annual reporting periods beginning in fiscal year 2025 and for interim periods beginning in fiscal year 2026, with early adoption permitted. The updates required by this standard should be applied prospectively, but retroactive application is permitted. We do not expect this standard to have a material impact on our results of operations, financial position or cash flows.
Segment Reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, Segment Reporting, including the significant segment expense disclosures. This standard will be effective for annual reporting periods beginning in fiscal year 2024 and interim periods beginning in fiscal year 2025, with early adoption permitted. The updates required by this standard should be applied retrospectively to all periods presented in the financial statements. We do not expect this standard to have a material impact on our results of operations, financial position or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to the critical accounting policies and estimates disclosed in our 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We may use derivative financial instruments like foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rate Risk
We have operations and investments in unconsolidated entities in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations. Our Canadian dollar and Chinese Yuan denominated earnings are subject to exchange rate risk as substantially all our merchandise sold in Canada and China is sourced through U.S. dollar transactions. From time to time we may adjust our exposure to foreign exchange rate risk by entering into foreign currency forward contracts, however, these measures may not succeed in offsetting all the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.
Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange rate fluctuations.
27
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities is the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. As of May 4, 2024, our investment portfolio is primarily comprised of bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.
Our outstanding long-term debt as of May 4, 2024 consists of the 2029 Notes, which have a fixed interest rate, the $390 million in outstanding borrowing under the Term Loan Facility, which has a variable interest rate based on Term SOFR, and the $145 million in outstanding borrowing under the ABL Facility, which has a variable interest rate based on Term SOFR. Our exposure to interest rate changes is limited to the fair value of the debt outstanding as well as the interest we pay on the Term Loan Facility and ABL Facility, which we believe would not have a material impact on our earnings or cash flows.
Fair Value of Financial Instruments
The following table provides a summary of the principal value and estimated fair value of our outstanding debt as of May 4, 2024, February 3, 2024 and April 29, 2023:
| May 4, 2024 | February 3, 2024 | April 29, 2023 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Principal Value | $ | 990 | $ | 991 | $ | 994 | |||||||||||
| Fair Value, Estimated (a) | 867 | 897 | 873 | ||||||||||||||
(a)The estimated fair value of our publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.
As of May 4, 2024, we believe that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity. We further believe the principal value of the outstanding debt under the ABL Facility approximates its fair value as of May 4, 2024 based on the terms of the borrowings from the ABL Facility.
Concentration of Credit Risk
We maintain cash and cash equivalents with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. As of May 4, 2024, our investment portfolio is primarily comprised of bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the first quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
28
PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against us from time to time may include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.
Item 1A. RISK FACTORS
The risk factors that affect our business and financial results are set forth under “Item 1A. Risk Factors” in our 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024. There have been no material changes to the risk factors from those described in the 2023 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2023 Annual Report on Form 10-K and those described in this report or other SEC filings could cause actual results to differ materially from those stated in any forward-looking statements.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides our repurchases of shares of our common stock during the first quarter of 2024:
| Period | Total Number of Shares Purchased (a) | Average Price Paid per Share (b) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Plans or Programs (c) | |||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
February 4, 2024 - March 2, 2024 (“February 2024”) | 4 | $ | 30.01 | — | $ | — | |||||||||||||||||
March 3, 2024 - April 6, 2024 (“March 2024”) | 346 | $ | 18.65 | — | 250,000 | ||||||||||||||||||
April 7, 2024 - May 4, 2024 (“April 2024”) | 4 | $ | 17.44 | — | 250,000 | ||||||||||||||||||
| Total | 354 | — | |||||||||||||||||||||
(a)The total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax withholding payments due upon vesting of employee restricted stock awards and the use of shares of our common stock to pay the exercise price on employee stock options.
(b)The average price paid per share includes any broker commissions.
(c)The March 2024 Share Repurchase Program, which was publicly announced on March 6, 2024, authorizes the purchase of up to $250 million of our common stock, subject to market conditions and other factors. The March 2024 Share Repurchase Program will continue until exhausted.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
None.
29
Item 6. EXHIBITS
| Exhibits | ||||||||
| Amended and Restated Certificate of Incorporation of Victoria’s Secret & Co. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on August 3, 2021). | ||||||||
| Second Amended and Restated Bylaws of Victoria’s Secret & Co. (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K filed on March 17, 2023). | ||||||||
| Executive Severance Agreement by and between VS Service Company, LLC and Melinda McAfee, dated as of June 29, 2021. | ||||||||
| Section 302 Certification of CEO. | ||||||||
| Section 302 Certification of CFO. | ||||||||
| Section 906 Certification (by CEO and CFO). | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
________________________
* Previously filed.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VICTORIA'S SECRET & CO. | ||||||||
| (Registrant) | ||||||||
| By: | /s/ Timothy Johnson | |||||||
| Timothy Johnson Chief Financial and Administrative Officer * | ||||||||
Date: June 7, 2024
* Mr. Johnson is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.
31