Home Substantial portion VICTORIA’S SECRET & CO. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

VICTORIA’S SECRET & CO. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

0

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 the Victoria'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 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 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

————————————————– ——————————

Contents

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 of Victoria's Secret & Co. into an independent, publicly traded
company was completed on August 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 of August 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 the Victoria's Secret
business, and the statements of income include the historically reported results
of the Victoria's Secret business along with allocations of a portion of the
Former Parent's total corporate expenses. Our financial statements for the
period from August 3, 2021 through April 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 to Victoria's Secret & Co., and net
income per diluted share attributable to Victoria'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 $226

Reconciliation of Reported to Adjusted Net Income Attributable to Victoria'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 to Victoria's Secret & Co.                

$97 $174

Reconciliation of net income to adjusted net income per diluted share attributable to Victoria’s Secret & Co. reported net earnings per diluted share attributable to Victoria’s Secret & Co. – GAAP

                                                                 $        0.93          $  1.97
Occupancy-related Legal Matter (a)                                                  0.19                -
Adjusted Net Income Per Diluted Share Attributable to Victoria'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  %)

________________

(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
--------------------------------------------------------------------------------
  Table of Contents
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


________________

(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

————————————————– ——————————

Contents

Net sales

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 Chinaroyalties associated with franchise stores and wholesale sales.

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  %


________

(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, our North 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 of North 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 $100 millioni.e. 19%, at $421 millionmainly due to a decline in traffic and average unit sale.

Gross profit

For the first quarter of 2022, our gross profit decreased $150 million compared to the first quarter of 2021 at $522 millionand our gross margin rate (expressed as a percentage of net sales) increased from 43.2% to 35.1%.

                                       24

————————————————– ——————————

Contents

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 in July 2021
and entering into the Term Loan Facility upon Separation in August 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

————————————————– ——————————

Contents

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 of April 30, 2022 and
January 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      

257

Total Capitalization                                        $    1,204      $      1,235
Amounts Available Under the ABL Facility (b)                $      611      

$523

_______________

(a)The April 30, 2022 amounts represent a thirteen-week period and the
January 29, 2022 amounts represent a fifty-two-week period.
(b)For the reporting periods ending April 30, 2022 and January 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 of April 30, 2022 and $41 million as of January 29,
2022.

© Edgar Online, source Previews