The following discussion and analysis of financial condition and results of operations are based on our consolidated and combined financial statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and related notes included in Section 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 primarily through two brands,Victoria's Secret and PINK.Victoria's Secret is a category-defining global lingerie brand with a leading market position and a rich, 40-year history of serving women across the globe. PINK is a lifestyle brand for the college-oriented customer, built around a strong intimates core. We also sell beauty products under both theVictoria's Secret and PINK brands. Together,Victoria's Secret , PINK and Victoria's Secret Beauty support, inspire and celebrate women through every phase of their life.Victoria's Secret and PINK merchandise is sold online through our e-commerce platform, through retail stores located in theU.S. ,Canada andChina , and through international stores and websites operated by partners under franchise, license, wholesale and joint venture arrangements. We have a presence in over 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 2022, our operating income was$94 million as compared to$226 million in first quarter of 2021, and our operating income rate was 6.3% as compared to 14.5% last year. The operating income decrease in the first quarter of 2022 as compared to the first quarter of 2021 was primarily driven by a decrease in net sales and merchandise margin as compared to the first quarter of 2021. Merchandise margin in the quarter as compared to last year decreased approximately$80 million as a result of incremental supply chain and inflationary cost pressures. Additionally, the decrease in net sales and merchandise margin in the quarter was driven by incremental net sales and merchandise margin recognized in the first quarter last year as a result of federal stimulus benefits. Net sales decreased$70 million , or 5%, to$1.484 billion compared to$1.554 billion in the first quarter of 2021. Our North American store sales decreased$2 million , to$931 million compared to$933 million in the first quarter of 2021. In our North American stores, an increase in traffic in the first quarter of 2022 as compared to the first quarter of 2021 was offset by a decrease in conversion (which we define as the percentage of customers who visit our stores and make a purchase). Our direct channel sales decreased by 19%, or$100 million , to$421 million compared to$521 million in the first quarter of 2021, primarily due to a decline in traffic and average unit retail (which we define as the average price per unit purchased). 20
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We remain committed to our brand transformation focused on evolving our positioning and promoting inclusivity and diversity, which we believe will allow us to attract new customers while also deepening our connection with existing ones. We will continue our advocacy for women, our commitment to being best at bras, and our focus on enhancing the customer experience. We plan to continue to enhance our omni-channel capabilities and personalization, increase our "store of the future" footprint and expand internationally into new markets while growing our digital presence. We will continue to search for new growth opportunities, including new brands we develop as well as partnerships with existing brands that help us attract new customers and better meet the needs of existing ones. This will include continuing to partner and invest in women-led companies that are potential sources of growth, either in revenue or customer goodwill, or both. We continue to focus on maximizing our performance and leveraging the strength of our brands and connection to our customers. Despite the supply chain cost and macroeconomic pressures we expect to continue to face, we are confident in our opportunities and remain committed to delivering long-term sustainable value for our shareholders.
For more information on our first quarter 2022 financial performance, see “Operating Results”.
Impacts of the Victoria’s Secret spin-off
The spin-off ofVictoria's Secret & Co. into an independent, publicly traded company was completed onAugust 2, 2021 . We believe the spin-off will enable us to maximize management focus and financial flexibility to thrive in an evolving retail environment and deliver long-term profitable growth. In connection with the Separation, we expect incremental, future capital and expense related to the implementation of new information technology platforms. We currently estimate that our total incremental expenditures could be$100 million to$150 million over the next several years. These estimated costs will consist of internal and external labor, software licensing, networking, security and physical infrastructure required to separate the current information technology capabilities (systems and infrastructure) in support of two independent companies. Such estimates are subject to change as our work continues. We will provide technology services to the Former Parent under the transition services agreements while independent systems environments are created, which we believe will help to minimize dis-synergies. The above estimates are preliminary in nature, are based solely on information available to us as of the date of this quarterly report and are inherently uncertain and subject to change. Impacts of COVID-19 The coronavirus pandemic has created significant public health concerns as well as economic disruption, uncertainty and volatility. We remain focused on the safe operation of our business, including our stores, distribution, fulfillment and call centers. There remains the potential for COVID-19-related risks of closure or operating restrictions, as well as risks related to delays or disruptions in our supply chain and related pricing impacts, which could materially impact our operations and financial performance in future periods.
presentation basis
Our financial statements for periods through the Separation date ofAugust 2, 2021 are combined financial statements prepared on a "carve-out" basis, which reflects the business as historically managed within the Former Parent. The balance sheets and cash flows for the periods prior to the Separation include only those assets and liabilities directly related to theVictoria's Secret business, and the statements of income include the historically reported results of theVictoria's Secret business along with allocations of a portion of the Former Parent's total corporate expenses. Our financial statements for the period fromAugust 3, 2021 throughApril 30, 2022 are consolidated financial statements based on our reported results as a standalone company. For additional information on the "carve-out" basis of accounting, see Note 1, "Description of Business, Basis of Presentation and Summary of Significant Accounting Policies." 21 -------------------------------------------------------------------------------- Table of Contents Adjusted Financial Information In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided below are non-GAAP financial measures that present operating income, net income attributable toVictoria's Secret & Co., and net income per diluted share attributable toVictoria's Secret & Co. on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of 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 adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures. First Quarter (in millions, except per share amounts) 2022 2021
Reconciliation of Reported Operating Earnings to Adjusted Operating Earnings Reported Operating Earnings – GAAP
$ 94$ 226 Occupancy-related Legal Matter (a) 22 - Adjusted Operating Income
$116
Reconciliation of Reported to Adjusted Net Income Attributable toVictoria's Secret & Co. Reported Net Income Attributable to Victoria's Secret & Co. - GAAP $ 81$ 174 Occupancy-related Legal Matter (a) 22 - Tax Effect of Adjusted Items (6) - Adjusted Net Income Attributable toVictoria's Secret & Co.
$97
Reconciliation of net income to adjusted net income per diluted share attributable to
$ 0.93 $ 1.97 Occupancy-related Legal Matter (a) 0.19 - Adjusted Net Income Per Diluted Share Attributable toVictoria's Secret & Co.$ 1.11 $ 1.97 ________________ (a)In the first quarter of 2022, we recognized a pre-tax charge of$22 million ($16 million after-tax), included in buying and occupancy expense, related to a legal matter with a landlord regarding a high-profile store that we surrendered to the landlord prior to the Separation. For additional information see Note 14, "Commitments and Contingencies" included in Item 1. Financial Statements.
Store data
The following table compares company-operated store data from the first quarter of 2022 in the United States to the first quarter of 2021:
First
Trimester
2022 2021 % Change
Sales per Average Selling Square Foot (a) $ 158 $ 154 3 %
Sales per Average Store (in thousands) (a) $ 1,096 $ 1,064 3 %
Average Store Size (selling square feet) 6,943 6,885 1 %
Total Selling Square Feet (in thousands) 5,589 5,790 (3 %)
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(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.
22
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The following table represents store data for the first quarter of 2022:
Stores at Reclassed to Stores at
January 29, 2022 Opened Closed Joint Venture (a) April 30, 2022
Company-Operated:
U.S. 808 - (3) - 805
Canada 26 - - - 26
Subtotal Company-Operated 834 - (3) - 831
China Joint Venture:
Beauty & Accessories (a) 35 - (2) 8 41
Full Assortment 30 - - - 30
Subtotal China Joint Venture 65 - (2) 8 71
Partner-Operated:
Beauty & Accessories 335 1 (4) (8) 324
Full Assortment 128 3 - - 131
Subtotal Partner-Operated 463 4 (4) (8) 455
Total 1,362 4 (9) - 1,357
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(a) Includes eight stores operated by partners.
The following table represents store data for the first quarter of 2021:
Stores at Stores at
January 30, 2021 Opened Closed May 1, 2021
Company-Operated:
U.S. 846 - (5) 841
Canada 25 1 - 26
China - Beauty & Accessories 36 1 (1) 36
China - Full Assortment 26 - - 26
Subtotal Company-Operated 933 2 (6) 929
Partner-Operated:
Beauty & Accessories 338 2 (3) 337
Full Assortment 120 1 - 121
Subtotal Partner-Operated 458 3 (3) 458
Total 1,391 5 (9) 1,387
Results of Operations
First quarter of 2022 versus first quarter of 2021
Operating result
For the first quarter of 2022, operating income decreased$132 million , to$94 million , compared to operating income of$226 million in the first quarter of 2021, and the operating income rate (expressed as a percentage of net sales) decreased to 6.3% from 14.5%. The drivers of the operating income results are discussed in the following sections. 23
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The following table presents net sales for the first quarter of 2022 compared to the first quarter of 2021:
2022 2021 % Change First Quarter (in millions) Stores - North America$ 931 $ 933 - % Direct 421 521 (19 %) International (a) 132 100 32 % Total Net Sales$ 1,484 $ 1,554 (5 %) _______________
(a) Results include consolidated sales of joint ventures in
The following table provides a reconciliation of net sales from the first quarter of 2022 to the first quarter of 2021:
(in millions) 2021 Net Sales$ 1,554 Comparable Store Sales (24)
Sales associated with non-comparable new, closed and renovated stores, net
12 Direct Channel (93) Credit Card Programs (2) International Wholesale, Royalty and Other 35 Foreign Currency Translation 2 2022 Net Sales$ 1,484
The following table compares comparable revenue for the first quarter of 2022 to the first quarter of 2021:
2022 2021
Comparable store sales (a) (8%) 25% Comparable store sales (a)
(3 %) 3 %
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(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. Therefore, comparable sales results exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. 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 2022 as compared to the first quarter of 2021 were impacted by incremental net sales recognized in the first quarter last year as a result of federal stimulus benefits. In the stores channel, ourNorth America net sales decreased$2 million to$931 million as compared to the first quarter of 2021 as an increase in traffic was offset by a decrease in conversion. Net sales in stores outside ofNorth America increased in the first quarter of 2022 compared to the first quarter of 2021 as a result of fewer COVID-19-related store restrictions.
In the direct channel, net sales declined
Gross profit
For the first quarter of 2022, our gross profit decreased
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The gross profit decrease was due to the decrease in merchandise margin dollars related to the decrease in net sales and incremental supply chain and inflationary cost pressures of approximately$80 million . Additionally, the decrease in net sales and merchandise margin in the quarter was driven by incremental net sales and merchandise margin recognized in the first quarter last year as a result of federal stimulus benefits.
The lower gross margin rate was due to a lower merchandise margin rate reflecting lower net sales and increased supply chain pressures and inflationary costs, as well as a slight deleveraging of capital expenditures. buying and occupancy driven by lower net sales.
Store general, administrative and operating expenses
For the first quarter of 2022, our general, administrative and store operating expenses decreased$18 million , or 4%, compared to the first quarter of 2021 to$428 million due to lower incentive compensation and selling expenses. The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 28.8% from 28.7% due to slight deleverage driven by the decrease in net sales.
Interest charges
For the first quarter of 2022, our interest expense increased$11 million to$12 million compared to the first quarter of 2021, driven by the increase in our outstanding debt during 2021 due to the issuance of the 2029 Notes inJuly 2021 and entering into the Term Loan Facility upon Separation inAugust 2021 .
Provision for income taxes
For the first quarter of 2022, the Company's effective tax rate was 2.4% compared to 22.5% in the first quarter of 2021. Both rates were lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based awards that vested in the respective quarter. FINANCIAL CONDITION
Cash 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. Our cash provided from operations is impacted by our net income and working capital changes. Our net income 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. Prior to the Separation, we generated annual cash flow from operating activities. However, we were operating within the Former Parent's cash management structure, which used a centralized approach to cash management and financing of our operations. As a result, a substantial portion of our cash was transferred to the Former Parent. This arrangement was not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods presented prior to the Separation. The cash and cash equivalents held by the Former Parent at the corporate level prior to the Separation were not specifically identifiable to us and, therefore, were not reflected in the Consolidated and Combined Balance Sheets. The Former Parent's third-party long-term debt and the related interest expense were not allocated to us for any of the periods presented prior to the Separation as we were not the legal obligor of such debt. Following the Separation from the Former Parent, our capital structure and sources of liquidity changed from the historical capital structure because we no longer participate in the Former Parent's centralized cash management program. Our ability to fund our operating needs is dependent upon our ability to continue to generate positive cash flow from operations, and on our ability to maintain our debt financing on acceptable terms. Based upon our history of generating positive cash flows, we believe we will be able to meet our short-term liquidity needs. Management believes that our cash balances and funds provided by operating activities, along with borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we incurred in connection with the Separation, (ii) adequate liquidity to fund capital expenditures, and (iii) flexibility to meet investment opportunities that may arise. However, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future. We expect to utilize our cash flows to continue to invest in our brands, talent and capabilities, and growth strategies 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 requirements over the next 12 months. 25
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Working capital and capitalization
Prior to the Separation, we generated annual cash flow from operating activities to support our working capital needs. However, we were operating within the Former Parent's cash management structure, which used a centralized approach to cash management and financing of our operations. As a result, a substantial portion of our cash was transferred to the Former Parent. This arrangement was not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods presented prior to the Separation. Based upon our history of generating positive cash flows, we believe we will be able to continue to meet our working capital needs. The following table provides a summary of our working capital position and capitalization for the periods post-Separation as ofApril 30, 2022 andJanuary 29, 2022 : April 30, January 29, 2022 2022 (in millions) Net Cash Provided by (Used for) Operating Activities (a)$ (146) $ 851 Capital Expenditures (a) 21 169 Working Capital 63 (7) Capitalization: Long-term Debt 977 978 Victoria's Secret & Co. Shareholders' Equity 227
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Total Capitalization$ 1,204 $ 1,235 Amounts Available Under the ABL Facility (b)$ 611
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(a)TheApril 30, 2022 amounts represent a thirteen-week period and theJanuary 29, 2022 amounts represent a fifty-two-week period. (b)For the reporting periods endingApril 30, 2022 andJanuary 29, 2022 , our borrowing base was$651 million and$564 million , respectively, and there were no borrowings outstanding under the ABL Facility for either period. We had outstanding letters of credit, which reduce our availability under the ABL Facility, of$40 million as ofApril 30, 2022 and$41 million as ofJanuary 29, 2022 .
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