Victoria’s Secret & (VSCO) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents the unaudited consolidated and combined financial statements, including statements of income, comprehensive income, balance sheets, equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and specific financial activities for the third quarter and year-to-date periods ended October 29, 2022, and October 30, 2021 Consolidated and Combined Statements of Income The company reported a significant decrease in net income for both the third quarter and year-to-date 2022 compared to 2021, primarily driven by lower net sales and gross profit | Metric | 3Q 2022 (millions) | 3Q 2021 (millions) | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,318 | $1,441 | $4,323 | $4,609 | | Gross Profit | $457 | $565 | $1,514 | $1,907 | | Operating Income | $43 | $108 | $234 | $536 | | Net Income Attributable to Victoria's Secret & Co. | $24 | $75 | $175 | $400 | | Net Income Per Diluted Share | $0.29 | $0.81 | $2.07 | $4.46 | Consolidated and Combined Statements of Comprehensive Income Total comprehensive income attributable to Victoria's Secret & Co. significantly decreased in both the third quarter and year-to-date 2022 compared to 2021, largely due to lower net income and negative foreign currency translation effects | Metric | 3Q 2022 (millions) | 3Q 2021 (millions) | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $22 | $75 | $166 | $400 | | Other Comprehensive Income (Loss), Net of Tax: Foreign Currency Translation | $(9) | $(1) | $(10) | $3 | | Total Comprehensive Income Attributable to Victoria's Secret & Co. | $18 | $74 | $170 | $403 | Consolidated Balance Sheets As of October 29, 2022, the company's total assets and equity decreased compared to January 29, 2022, primarily due to a significant reduction in cash and cash equivalents, partially offset by an increase in inventories. Long-term debt increased | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $126 | $490 | $331 | | Inventories | $1,242 | $949 | $1,019 | | Total Assets | $4,142 | $4,344 | $4,369 | | Total Liabilities | $3,890 | $4,087 | $4,117 | | Long-term Debt | $1,244 | $978 | $978 | | Total Equity | $252 | $257 | $252 | Consolidated and Combined Statements of Equity Victoria's Secret & Co.'s total equity remained relatively stable year-over-year but saw changes in components. Year-to-date 2022, equity was impacted by net income, share repurchases, and the sale of noncontrolling interest | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Total Victoria's Secret & Co. Shareholders' Equity | $235 | $257 | $252 | | Noncontrolling Interest | $17 | $0 | $0 | | Total Equity | $252 | $257 | $252 | - Year-to-date 2022, the company reported $175 million in net income, but also repurchased $214 million of common stock and received $45 million from the sale of noncontrolling interest[21] Consolidated and Combined Statements of Cash Flows Year-to-date 2022, the company experienced a significant shift from net cash provided by operating activities to net cash used, primarily due to increased inventory levels and higher income tax payments. Investing activities increased due to capital expenditures and an acquisition, while financing activities provided cash, mainly from ABL facility borrowings and noncontrolling interest proceeds, partially offset by share repurchases | Metric | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | | Net Cash Provided by (Used for) Operating Activities | $(279) | $378 | | Net Cash Used for Investing Activities | $(150) | $(117) | | Net Cash Provided by (Used for) Financing Activities | $67 | $(266) | | Net Decrease in Cash and Cash Equivalents | $(364) | $(4) | | Cash and Cash Equivalents, End of Period | $126 | $331 | - The decrease in operating cash flows year-to-date 2022 was driven by higher cash outflows for working capital changes (especially increased inventory levels) and lower net income[159] - Investing activities in YTD 2022 included $125 million in capital expenditures and an $18 million investment in Frankies Bikinis, LLC[160] - Financing activities in YTD 2022 included $267 million from ABL Facility borrowings and $55 million from a noncontrolling interest partner, offset by $214 million in share repurchases[162] Notes to Consolidated and Combined Financial Statements (Unaudited) These notes provide detailed explanations of the company's business, accounting policies, and specific financial activities, including the spin-off from L Brands, transactions with the former parent, revenue recognition, restructuring activities, earnings per share, inventory, long-lived assets, accrued expenses, income taxes, debt, fair value measurements, comprehensive income, retirement benefits, commitments, contingencies, and subsequent events Note 1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies Victoria's Secret & Co. is a specialty retailer of intimate apparel and beauty products under Victoria's Secret and PINK brands, operating globally through stores and online. The company completed its spin-off from L Brands in August 2021, becoming an independent public company. Financial statements for periods prior to the spin-off are presented on a "carve-out" basis - Victoria's Secret & Co. operates as a specialty retailer of women's intimate and other apparel and beauty products under the Victoria's Secret and PINK brand names, with approximately 900 stores in the U.S., Canada, and China, and over 450 stores internationally under various arrangements[26] - The company completed its spin-off from L Brands, Inc. on August 2, 2021, becoming an independent, publicly traded company (VSCO)[28] - In July 2022, the company restructured its corporate leadership, eliminating approximately 160 management roles (5% of home office headcount) to simplify structure and align with consumer landscape[27] Note 2. Transactions with Former Parent The company's financial statements prior to the Separation were prepared on a "carve-out" basis, including allocations of former parent corporate expenses. Post-Separation, the company entered into various agreements with the Former Parent for transition services, with the company both providing and receiving services | Metric | 3Q 2022 (millions) | 3Q 2021 (millions) | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | :--- | :--- | | Consideration Received (Transition Services) | $16 | $24 | $56 | $24 | | Costs Recognized (Transition Services) | $17 | $20 | $55 | $20 | | Costs Recognized (Domestic Transportation Services) | $23 | $18 | $62 | $18 | - Prior to the Separation, corporate expenses of $49 million were allocated to the company for year-to-date 2021[36] - The company made a cash payment of approximately $976 million to the Former Parent on August 2, 2021, in connection with the Separation[28] Note 3. Revenue Recognition Net sales for both the third quarter and year-to-date 2022 decreased compared to 2021, primarily driven by declines in North America stores and direct channels, partially offset by international growth | Channel | 3Q 2022 (millions) | 3Q 2021 (millions) | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | :--- | :--- | | Stores – North America | $813 | $920 | $2,712 | $2,890 | | Direct | $342 | $406 | $1,176 | $1,396 | | International | $163 | $115 | $435 | $323 | | Total Net Sales | $1,318 | $1,441 | $4,323 | $4,609 | - International net sales increased by 43% in Q3 2022 and 35% YTD 2022, driven by consolidated joint venture sales in China, royalties, and wholesale sales[61] - The company launched a new co-branded credit card in April 2022, in addition to its existing U.S. private label credit card[62] Note 4. Restructuring Activities The company completed a joint venture agreement in China in April 2022, retaining 51% ownership, and restructured its corporate leadership in July 2022, incurring $29 million in pre-tax severance and related costs - In April 2022, the company formed a joint venture with Regina Miracle International (Holdings) Limited to operate Victoria's Secret stores and online business in China, with the company owning 51%[65] - The company received $45 million in cash from Regina Miracle for its investment in the joint venture[65] - In July 2022, a corporate leadership restructuring resulted in $29 million in pre-tax severance and related costs, with $16 million in General, Administrative and Store Operating Expenses and $13 million in Costs of Goods Sold, Buying and Occupancy[67] Note 5. Earnings Per Share and Shareholders' Equity Earnings per share calculations reflect the company's standalone status post-Separation. The company executed share repurchases under a new $250 million program in March 2022, retiring 5.1 million shares year-to-date | Metric | 3Q 2022 (millions) | 3Q 2021 (millions) | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | :--- | :--- | | Basic Shares | 81 | 88 | 83 | 88 | | Diluted Shares | 83 | 92 | 85 | 90 | - In March 2022, the Board approved a new share repurchase program for up to $250 million of common stock, with $36 million remaining as of October 29, 2022[73][74] - Year-to-date 2022, 5.1 million shares were repurchased for $214 million under this program and immediately retired[74][75] Note 6. Inventories Total inventories increased significantly to $1,242 million as of October 29, 2022, compared to $949 million at January 29, 2022, primarily driven by finished goods merchandise | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Finished Goods Merchandise | $1,186 | $898 | $971 | | Raw Materials and Merchandise Components | $56 | $51 | $48 | | Total Inventories | $1,242 | $949 | $1,019 | Note 7. Long-Lived Assets Property and equipment, net, decreased to $855 million as of October 29, 2022, from $957 million at January 29, 2022, reflecting ongoing depreciation | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Property and Equipment, Net | $855 | $957 | $976 | - Depreciation expense was $68 million for 3Q 2022 (down from $75 million in 3Q 2021) and $208 million for YTD 2022 (down from $233 million in YTD 2021)[77] Note 8. Accrued Expenses and Other Total accrued expenses and other decreased to $618 million as of October 29, 2022, from $714 million at January 29, 2022, with notable decreases in deferred revenue on gift cards and accrued freight and other logistics | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Deferred Revenue on Gift Cards | $168 | $198 | $158 | | Compensation, Payroll Taxes and Benefits | $112 | $152 | $124 | | Accrued Freight and Other Logistics | $23 | $62 | $51 | | Total Accrued Expenses and Other | $618 | $714 | $696 | Note 9. Income Taxes The effective tax rate for 3Q 2022 was 25.0% (up from 22.2% in 3Q 2021) and 13.2% for YTD 2022 (down from 23.0% in YTD 2021). Both year-to-date rates were lower than the statutory rate due to excess tax benefits from share-based compensation - Effective tax rate for 3Q 2022 was 25.0% (vs. 22.2% in 3Q 2021)[82] - Effective tax rate for YTD 2022 was 13.2% (vs. 23.0% in YTD 2021), primarily due to excess tax benefits from share-based compensation awards[83] - Income taxes paid were $18 million for 3Q 2022 (vs. $6 million in 3Q 2021) and $158 million for YTD 2022 (vs. $21 million in YTD 2021)[84] Note 10. Long-term Debt and Borrowing Facilities Total long-term debt, net of current portion, increased to $1,244 million as of October 29, 2022, from $978 million at January 29, 2022, primarily due to borrowings from the ABL Facility. The company was in compliance with all debt covenants | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Term Loan Facility | $388 | $390 | $390 | | ABL Facility | $267 | $0 | $0 | | 2029 Notes | $593 | $592 | $592 | | Total Long-term Debt, Net of Current Portion | $1,244 | $978 | $978 | - During 3Q 2022, the company borrowed $267 million from the ABL Facility, which remained outstanding as of October 29, 2022[92][176] - As of October 29, 2022, the company had $441 million remaining availability under the ABL Facility and was in compliance with all covenants under its long-term debt and borrowing facilities[92][94][176][178] Note 11. Fair Value of Financial Instruments The estimated fair value of the company's publicly traded debt was $870 million as of October 29, 2022, lower than its principal value of $996 million, reflecting market conditions | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Principal Value (Publicly Traded Debt) | $996 | $999 | $1,000 | | Fair Value, Estimated (Publicly Traded Debt) | $870 | $975 | $1,003 | - The carrying values of accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturity[98][191] Note 12. Comprehensive Income (Loss) Accumulated other comprehensive income attributable to Victoria's Secret & Co. was reduced to zero as of October 29, 2022, from $5 million at January 29, 2022, primarily due to foreign currency translation losses and reclassifications related to the China joint venture | Metric | Jan 29, 2022 (millions) | Oct 29, 2022 (millions) | | :--- | :--- | :--- | | Balance of Accumulated Other Comprehensive Income (Loss) | $5 | $0 | - Accumulated other comprehensive income attributable to Victoria's Secret & Co. was reduced to zero as of October 29, 2022, from $5 million at January 29, 2022, primarily due to foreign currency translation losses and reclassifications related to the China joint venture[99] - A reclassification of $3 million of accumulated foreign currency translation adjustments related to the China joint venture into Paid-in Capital occurred in Q1 2022[99] Note 13. Retirement Benefits Total expense recognized for the tax-qualified defined contribution retirement plan was $9 million for 3Q 2022 (down from $11 million in 3Q 2021) and $32 million for YTD 2022 (up from $31 million in YTD 2021) | Metric | 3Q 2022 (millions) | 3Q 2021 (millions) | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | :--- | :--- | | Total Expense (Qualified Plan) | $9 | $11 | $32 | $31 | Note 14. Commitments and Contingencies The company is involved in various legal claims, including derivative lawsuits related to the Former Parent and an occupancy-related legal matter resulting in two judgments totaling $45 million, which are fully accrued and under appeal - The company is subject to various claims and contingencies, including commercial, tort, intellectual property, customer, employment, data privacy, and class action lawsuits[101][197] - The global settlement resolving derivative lawsuits against the Former Parent (including the company) requires the company to invest $45 million over at least five years to fund management and governance measures, including a Diversity, Equity, and Inclusion Council[103] - Two judgments totaling $45 million ($23 million in August 2021 and $22 million in May 2022) were entered against the company for treble holdover damages in an occupancy-related legal matter, both of which are fully accrued and under appeal[104] Note 15. Subsequent Events On November 1, 2022, the company announced a definitive agreement to acquire 100% of AdoreMe, Inc. for an initial $400 million cash payment and potential post-closing consideration of $80 million to $300 million, expected to close by January 2023 - On November 1, 2022, the company signed an agreement to acquire 100% of AdoreMe, Inc., a digitally-native intimates brand[105] - The acquisition includes an initial upfront $400 million cash payment and post-closing consideration of $80 million to $300 million (fixed and contingent payments)[105] - The transaction is expected to close by the end of January 2023 and will be financed with cash on hand[105] Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 This section provides a cautionary statement regarding forward-looking statements, highlighting various risks and uncertainties that could cause actual results to differ materially from projections, including general economic conditions, the impact of the spin-off, supply chain issues, and the pending Adore Me acquisition - Forward-looking statements involve risks and uncertainties, and future performance may differ materially from expectations[108] - Key risks include general economic conditions, inflation, consumer confidence, the COVID-19 pandemic's effects, leadership turnover, dependence on mall traffic, international expansion risks, brand reputation, competition, product acceptance, global sourcing issues, IT system security, stock price volatility, and regulatory compliance[109] - The pending acquisition of Adore Me is subject to transaction-related risks, and the company may not realize all potential benefits and synergies[109][199] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's financial performance, including a detailed analysis of results of operations for the third quarter and year-to-date periods, financial condition, liquidity, and capital resources. It also covers non-GAAP financial measures, store data, and critical accounting policies Executive Overview Victoria's Secret & Co. is an iconic global brand of women's intimate apparel and beauty products, operating through Victoria's Secret and PINK brands. In Q3 2022, operating income significantly decreased due to lower net sales and merchandise margin, impacted by inflationary pressures. The company is focused on brand transformation, product excellence, customer experience, and cost/inventory management - Victoria's Secret and PINK are global brands for women's intimate apparel, personal care, and beauty products, with a presence in approximately 70 countries[112][113] - In 3Q 2022, operating income decreased to $43 million (3.2% of net sales) from $108 million (7.5% of net sales) in 3Q 2021, driven by a 9% decrease in net sales to $1.318 billion[114] - The decrease in sales was attributed to lower conversion rates and units per transaction, as customers and the retail environment were impacted by persistent inflationary pressures, despite increases in average unit retail and customer traffic[114] Basis of Presentation Financial statements for periods through August 2, 2021, are "carve-out" combined statements reflecting the business within the Former Parent, while subsequent periods are consolidated statements of Victoria's Secret & Co. as a standalone company - Financial statements through August 2, 2021, are "carve-out" combined statements, reflecting the business as historically managed within the Former Parent[116] - Financial statements from August 3, 2021, onwards are consolidated statements of Victoria's Secret & Co. as a standalone company[116] Non-GAAP Financial Information The company provides adjusted non-GAAP financial measures (operating income, net income, and diluted EPS) to exclude certain special items like occupancy-related legal matters and restructuring charges, believing these provide a better view of ongoing operations | Metric | 3Q 2022 (GAAP) | 3Q 2022 (Adjusted) | YTD 2022 (GAAP) | YTD 2022 (Adjusted) | | :--- | :--- | :--- | :--- | :--- | | Operating Income | $43 | $43 | $234 | $285 | | Net Income Attributable to Victoria's Secret & Co. | $24 | $24 | $175 | $213 | | Net Income Per Diluted Share Attributable to Victoria's Secret & Co. | $0.29 | $0.29 | $2.07 | $2.52 | - Adjustments for YTD 2022 include a $22 million pre-tax charge for an occupancy-related legal matter and a $29 million pre-tax restructuring charge[118][119] Store Data U.S. company-operated store productivity metrics (sales per average selling square foot and sales per average store) decreased in 3Q 2022 and YTD 2022 compared to the prior year. The total number of stores decreased slightly year-to-date 2022, with openings and closures across company-operated and partner-operated formats | Metric | 3Q 2022 | 3Q 2021 | % Change (3Q) | YTD 2022 | YTD 2021 | % Change (YTD) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Sales per Average Selling Square Foot | $136 | $151 | (10 %) | $476 | $456 | (4 %) | | Sales per Average Store (in thousands) | $945 | $1,040 | (9 %) | $3,158 | $3,291 | (4 %) | - As of October 29, 2022, total stores were 1,351 (down from 1,362 at Jan 29, 2022), including 838 company-operated, 70 China Joint Venture, and 443 partner-operated stores[121] Results of Operations - Third Quarter of 2022 Compared to Third Quarter of 2021 Operating income for 3Q 2022 decreased significantly to $43 million (3.2% of net sales) from $108 million (7.5% of net sales) in 3Q 2021, driven by lower net sales and gross profit - Operating income decreased by $65 million to $43 million in 3Q 2022, with the operating income rate falling to 3.2% from 7.5% in 3Q 2021[124] Net Sales Total net sales for 3Q 2022 decreased by 9% to $1.318 billion, primarily due to declines in North America stores (-12%) and direct channels (-16%), partially offset by a 43% increase in international sales | Channel | 3Q 2022 (millions) | 3Q 2021 (millions) | % Change | | :--- | :--- | :--- | :--- | | Stores – North America | $813 | $920 | (12 %) | | Direct | $342 | $406 | (16 %) | | International | $163 | $115 | 43 % | | Total Net Sales | $1,318 | $1,441 | (9 %) | - Comparable sales (stores and direct) decreased by 11% in 3Q 2022, while comparable store sales decreased by 10%[126] - Sales were impacted by lower conversion rates and units per transaction due to inflationary pressures, despite increased average unit retail and customer traffic[127] Gross Profit Gross profit for 3Q 2022 decreased by $108 million to $457 million, with the gross profit rate falling to 34.7% from 39.2% in 3Q 2021, primarily due to lower net sales, increased promotional activity, and higher inventory shrink expense - Gross profit decreased by $108 million to $457 million in 3Q 2022, and the gross profit rate decreased to 34.7% from 39.2%[131] - The decrease was driven by lower merchandise margin dollars (due to decreased net sales and increased promotional activity) and an increase in inventory shrink expense[132] - Partially offsetting these decreases were lower buying and occupancy expenses during the third quarter of 2022 compared to the third quarter of 2021 driven primarily by lower depreciation expense due to store closures[132] General, Administrative and Store Operating Expenses General, administrative, and store operating expenses for 3Q 2022 decreased by $43 million, or 9%, to $414 million, primarily due to lower store selling expenses (improved labor model, disciplined expense management) and reduced marketing expenses. The expense rate slightly decreased to 31.5% - Expenses decreased by $43 million to $414 million in 3Q 2022, driven by lower store selling expenses and marketing expenses[134] - The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased slightly to 31.5% from 31.7%[135] Interest Expense Interest expense for 3Q 2022 increased by $3 million to $15 million, driven by a higher average borrowing rate for the Term Loan Facility and increased outstanding debt from ABL Facility borrowings - Interest expense increased by $3 million to $15 million in 3Q 2022, due to higher borrowing rates and increased outstanding debt from ABL Facility borrowings[136] Provision for Income Taxes The effective tax rate for 3Q 2022 was 25.0%, up from 22.2% in 3Q 2021. The 2022 rate was consistent with the statutory rate, while the 2021 rate was lower due to excess tax benefits from share-based compensation - The effective tax rate for 3Q 2022 was 25.0%, compared to 22.2% in 3Q 2021[137] - The 3Q 2021 rate was lower than the statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the quarter[137] Results of Operations - Year-to-Date 2022 Compared to Year-to-Date 2021 Operating income for year-to-date 2022 decreased significantly to $234 million (5.4% of net sales) from $536 million (11.6% of net sales) in year-to-date 2021, primarily due to lower net sales and gross profit - Operating income decreased by $302 million to $234 million year-to-date 2022, with the operating income rate falling to 5.4% from 11.6% in year-to-date 2021[138] Net Sales Total net sales for year-to-date 2022 decreased by 6% to $4.323 billion, driven by declines in North America stores (-6%) and direct channels (-16%), partially offset by a 35% increase in international sales | Channel | YTD 2022 (millions) | YTD 2021 (millions) | % Change | | :--- | :--- | :--- | :--- | | Stores – North America | $2,712 | $2,890 | (6 %) | | Direct | $1,176 | $1,396 | (16 %) | | International | $435 | $323 | 35 % | | Total Net Sales | $4,323 | $4,609 | (6 %) | - Comparable sales (stores and direct) decreased by 9% year-to-date 2022, while comparable store sales decreased by 7%[140] - Sales were impacted by a decrease in traffic, average unit retail, and conversion in the direct channel, and by incremental net sales in Q1 2021 due to federal stimulus benefits[142] Gross Profit Gross profit for year-to-date 2022 decreased by $393 million to $1.514 billion, with the gross profit rate falling to 35.0% from 41.4% in year-to-date 2021, primarily due to lower net sales, increased supply chain/inflationary costs, and higher promotional activity - Gross profit decreased by $393 million to $1.514 billion year-to-date 2022, and the gross profit rate decreased to 35.0% from 41.4%[143] - The decrease was primarily due to lower merchandise margin dollars (decreased net sales, increased promotional activity) and approximately $140 million in incremental supply chain and inflationary cost pressures[144] - Partially offsetting these decreases was lower buying and occupancy expenses this year compared to last year driven by lower landlord-related expenses, lower management compensation expense and lower depreciation expense due to store closures[144] General, Administrative and Store Operating Expenses General, administrative, and store operating expenses for year-to-date 2022 decreased by $91 million, or 7%, to $1.280 billion, mainly due to lower store selling expenses (improved labor model, disciplined expense management) and reduced management compensation. The expense rate slightly decreased to 29.6% - Expenses decreased by $91 million to $1.280 billion year-to-date 2022, driven by lower store selling expenses and management compensation[146] - The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased slightly to 29.6% from 29.7%[147] Interest Expense Interest expense for year-to-date 2022 increased by $25 million to $41 million, primarily due to the increase in outstanding debt from the issuance of the 2029 Notes and the Term Loan Facility following the Separation in August 2021 - Interest expense increased by $25 million to $41 million year-to-date 2022, primarily due to increased outstanding debt from the 2029 Notes and Term Loan Facility[148] Provision for Income Taxes The effective tax rate for year-to-date 2022 was 13.2%, down from 23.0% in year-to-date 2021. Both rates were lower than the statutory rate due to excess tax benefits from share-based compensation awards - The effective tax rate for YTD 2022 was 13.2%, compared to 23.0% in YTD 2021[149] - Both rates were lower than the statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the respective periods[149] FINANCIAL CONDITION The company's liquidity is primarily supported by operating cash flows and its ABL Facility. Post-Separation, the capital structure changed, and the company relies on its own resources. It plans to invest in brands, talent, growth strategies, debt repayment, and the Adore Me acquisition - Liquidity is primarily dependent on cash generated from operating activities and borrowing capacity under the ABL Facility[153] - The company believes its cash balances, operating activities, and ABL facility provide adequate liquidity for current and long-term obligations, capital expenditures, and investment opportunities[153] - The company plans to finance the Adore Me acquisition at closing with cash on hand[154] Liquidity and Capital Resources The company relies on cash from operations and its ABL Facility for liquidity, especially during seasonal peaks. Post-Separation, it manages its own capital structure and expects sufficient resources for the next 12 months, including funding for the Adore Me acquisition - Cash generated from operating activities and borrowing capacity under the ABL Facility are primary liquidity sources[150][153] - The company's need for working capital typically peaks during summer and fall in anticipation of the holiday period[150] - Management believes available short-term and long-term capital resources are sufficient to fund requirements over the next 12 months, including the Adore Me transaction[154] Working Capital and Capitalization Working capital improved to $377 million as of October 29, 2022, from a deficit of $7 million at January 29, 2022. Total capitalization increased to $1,479 million, driven by an increase in long-term debt | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Working Capital | $377 | $(7) | $11 | | Long-term Debt | $1,244 | $978 | $978 | | Victoria's Secret & Co. Shareholders' Equity | $235 | $257 | $252 | | Total Capitalization | $1,479 | $1,235 | $1,230 | | Amounts Available Under the ABL Facility | $441 | $523 | $701 | - The availability under the ABL Facility was $441 million as of October 29, 2022, reduced by $267 million in outstanding borrowings and $42 million in letters of credit[157] Cash Flow Year-to-date 2022, net cash used for operating activities was $279 million (compared to $378 million provided in 2021), primarily due to higher inventory levels and increased income tax payments. Net cash used for investing activities increased to $150 million, while net cash provided by financing activities was $67 million | Metric | YTD 2022 (millions) | YTD 2021 (millions) | | :--- | :--- | :--- | | Net Cash Flows Provided by (Used for) Operating Activities | $(279) | $378 | | Net Cash Flows Used for Investing Activities | $(150) | $(117) | | Net Cash Flows Provided by (Used for) Financing Activities | $67 | $(266) | | Net Decrease in Cash and Cash Equivalents | $(364) | $(4) | | Cash and Cash Equivalents, End of Period | $126 | $331 | - The $657 million decrease in operating cash flows YTD 2022 was driven by higher cash outflows for working capital changes (increased inventory) and lower net income, including $158 million in income taxes paid (vs. $21 million in 2021)[159] - Investing activities included $125 million in capital expenditures and an $18 million investment in Frankies Bikinis[160] - Financing activities included $267 million from ABL Facility borrowings and $55 million from the China joint venture, offset by $214 million in share repurchases[162] Common Stock Share Repurchases & Treasury Stock Retirements The company repurchased 5.1 million shares for $214 million year-to-date 2022 under its March 2022 Share Repurchase Program, with $36 million remaining authorization. All repurchased shares are retired - In March 2022, a new share repurchase program for up to $250 million was approved, with $36 million remaining as of October 29, 2022[166][167] - Year-to-date 2022, 5.1 million shares were repurchased for $214 million under this program and immediately retired[167][168] | Program | Amount Authorized (millions) | Shares Repurchased (thousands) | Amount Repurchased (millions) | Average Stock Price | | :--- | :--- | :--- | :--- | :--- | | March 2022 Share Repurchase Program | $250 | 5,104 | $214 | $41.91 | Dividend Policy and Procedures The company has not paid cash dividends since its Separation and does not guarantee future dividends. Any future dividend declarations will be at the discretion of the Board of Directors, considering financial condition, earnings, cash flows, capital requirements, debt covenants, and legal/regulatory factors - The company has not paid any cash dividends since the Separation[169] - Future dividend declarations are at the discretion of the Board of Directors and depend on financial condition, earnings, cash flows, capital requirements, debt obligations, and other factors[169] Long-term Debt and Borrowing Facilities Total long-term debt, net of current portion, increased to $1,244 million as of October 29, 2022, primarily due to $267 million in borrowings from the ABL Facility. The company remains in compliance with all debt covenants | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Term Loan Facility | $388 | $390 | $390 | | ABL Facility | $267 | $0 | $0 | | 2029 Notes | $593 | $592 | $592 | | Total Long-term Debt, Net of Current Portion | $1,244 | $978 | $978 | - During the third quarter of 2022, the company borrowed $267 million from the ABL Facility, all of which remains outstanding as of October 29, 2022[176] - As of October 29, 2022, the company had $441 million remaining availability under the ABL Facility and was in compliance with all covenants under its long-term debt and borrowing facilities[176][178] Credit Ratings As of October 29, 2022, the company's credit ratings were Ba3 (Moody's) and BB (S&P) for corporate, with a stable outlook from both agencies | Rating Type | Moody's | S&P | | :--- | :--- | :--- | | Corporate | Ba3 | BB | | Senior Secured Debt with Subsidiary Guarantee | Ba2 | BB+ | | Senior Unsecured Debt with Subsidiary Guarantee | B1 | BB | | Outlook | Stable | Stable | Contingent Liabilities and Contractual Obligations The company's contractual obligations primarily include long-term debt, operating leases, and purchase orders. There have been no material changes since January 29, 2022, other than $267 million in ABL Facility borrowings - Contractual obligations consist primarily of long-term debt, related interest payments, operating leases, and merchandise inventory purchase orders[181] - No material changes to contractual obligations since January 29, 2022, except for $267 million in ABL Facility borrowings[181] RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS No new accounting standards adopted in 3Q 2022 had a material impact, and none are expected to have a material impact in the future - No new accounting standards adopted in 3Q 2022 had a material impact[182] - No new accounting standards not yet adopted are expected to have a material impact[182] CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management evaluates accounting policies, estimates, and judgments related to inventories, long-lived assets, claims, income taxes, and revenue recognition. There have been no material changes to critical accounting policies and estimates since the 2021 Annual Report on Form 10-K - Management makes estimates and assumptions for inventories, long-lived assets, claims and contingencies, income taxes, and revenue recognition[183] - No material changes to critical accounting policies and estimates since the 2021 Annual Report on Form 10-K[184] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily from foreign currency exchange rates and interest rates, and outlines its strategies for managing these risks, including the use of derivative financial instruments and monitoring credit risk - The company is exposed to market risk from foreign currency exchange rates and interest rates[185] - Derivative financial instruments (e.g., foreign currency forward contracts) may be used to manage foreign currency exposure, but not for trading[185][186] Market Risk The company's market risk stems from potential losses in fair value, earnings, or cash flows due to adverse changes in foreign currency exchange rates or interest rates. Derivative financial instruments are used to manage these exposures, but not for trading - Market risk represents potential loss from adverse changes in foreign currency exchange rates or interest rates[185] - Derivative financial instruments (foreign currency forward contracts, cross-currency swaps, interest rate swaps) may be used to manage market risks, but not for trading[185] Foreign Exchange Rate Risk The company faces foreign exchange rate risk due to foreign operations and investments, particularly with Canadian dollar and Chinese Yuan denominated earnings, as merchandise is primarily sourced through U.S. dollar transactions. Royalty arrangements with international partners also expose the company to currency fluctuations - Foreign operations and investments expose the company to foreign currency exchange rate fluctuations[186] - Canadian dollar and Chinese Yuan denominated earnings are subject to exchange rate risk as merchandise is sourced via U.S. dollar transactions[186] - Royalty arrangements with international partners, calculated based on local currency sales, are also exposed to foreign currency exchange rate fluctuations[187] Interest Rate Risk The company's investment portfolio, primarily bank deposits, is short-term and high-quality, limiting principal risk from interest rate changes. Its long-term debt includes fixed-rate notes and variable-rate Term Loan and ABL Facilities, but the overall impact of interest rate changes on earnings or cash flows is not considered material - Investment portfolio consists primarily of short-term bank deposits, limiting principal risk from interest rate changes[188] - Long-term debt includes fixed-rate 2029 Notes and variable-rate Term Loan and ABL Facilities[189] - The exposure to interest rate changes is not expected to have a material impact on earnings or cash flows[189] Fair Value of Financial Instruments The estimated fair value of the company's publicly traded debt was $870 million as of October 29, 2022, below its principal value of $996 million. Carrying values of short-maturity financial instruments like accounts receivable and payable approximate fair value | Metric | Oct 29, 2022 (millions) | Jan 29, 2022 (millions) | Oct 30, 2021 (millions) | | :--- | :--- | :--- | :--- | | Principal Value (Publicly Traded Debt) | $996 | $999 | $1,000 | | Fair Value, Estimated (Publicly Traded Debt) | $870 | $975 | $1,003 | - Carrying values of accounts receivable, accounts payable, and accrued expenses approximate fair value due to short maturity[191] Concentration of Credit Risk The company manages credit risk by monitoring financial institutions for cash and cash equivalents, and by reviewing the credit standing of franchise, license, and wholesale partners - The company monitors the credit standing of financial institutions for cash and cash equivalents[192] - Credit standing of franchise, license, and wholesale partners is periodically reviewed[192] Item 4. Controls and Procedures As of October 29, 2022, the company's disclosure controls and procedures were evaluated as effective. There were no material changes in internal control over financial reporting during the third quarter of 2022 - Disclosure controls and procedures were effective as of October 29, 2022[193] - No material changes in internal control over financial reporting occurred during 3Q 2022[194] Part II. Other Information Item 1. Legal Proceedings The company is a defendant in various lawsuits arising in the ordinary course of business, but management believes current legal proceedings are not expected to have a material adverse effect on financial position or results of operations - The company is a defendant in various lawsuits, including commercial, tort, intellectual property, customer, employment, data privacy, securities, and class action claims[197] - Management believes current legal proceedings are not expected to have a material adverse effect on financial position or results of operations[197] Item 1A. Risk Factors No material changes to previously disclosed risk factors from the 2021 Annual Report on Form 10-K, except for new risks related to the pending acquisition of Adore Me, including potential failure to realize benefits and integration difficulties - No material changes to risk factors from the 2021 Annual Report on Form 10-K, except for those related to the Adore Me acquisition[198] - Risks associated with the Adore Me acquisition include potential failure to realize benefits and synergies, integration difficulties, disruption of operations, and loss of key employees[199][200][201] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During 3Q 2022, the company repurchased 1.255 million shares of common stock, including 1.225 million under publicly announced programs, with an average price of $35.08 per share. $36.106 million remained authorized under the March 2022 Share Repurchase Program as of October 2022 | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | Total Shares Purchased (Publicly Announced Programs, thousands) | Maximum Remaining (millions) | | :--- | :--- | :--- | :--- | :--- | | August 2022 | 528 | $38.68 | 516 | $59.130 | | September 2022 | 712 | $32.49 | 709 | $36.106 | | October 2022 | 15 | $33.36 | — | $36.106 | | Total (3Q 2022) | 1,255 | | 1,225 | | - The March 2022 Share Repurchase Program authorizes up to $250 million, with $36.106 million remaining as of October 2022[203] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - This item is not applicable to the company[204] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company[205] Item 5. Other Information No other information to report - No other information is reported under this item[206] Item 6. Exhibits This section lists the exhibits filed with the 10-Q report, including the merger agreement for AdoreMe, Inc., amended organizational documents, and certifications - Exhibits include the Agreement and Plan of Merger for AdoreMe, Inc. (Exhibit 2.1), Amended and Restated Certificate of Incorporation and Bylaws (Exhibits 3.1, 3.2), and Section 302 and 906 Certifications (Exhibits 31.1, 31.2, 32)[208] Signature The report is signed by Timothy Johnson, Chief Financial and Administrative Officer of Victoria's Secret & Co., on December 2, 2022 - The report was signed by Timothy Johnson, Chief Financial and Administrative Officer, on December 2, 2022[211]