Victoria’s Secret & (VSCO) - 2024 Q1 - Quarterly Report

Part I. Financial Information Financial Statements Victoria's Secret & Co. experienced a significant decline in Q1 2023 profitability, with net income attributable to the company dropping to $1 million due to decreased net sales and higher operating expenses Consolidated Statements of Income (Q1 2023 vs Q1 2022) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :--- | :--- | :--- | | Net Sales | $1,407 | $1,484 | | Gross Profit | $502 | $522 | | Operating Income | $28 | $94 | | Net Income Attributable to Victoria's Secret & Co. | $1 | $81 | | Diluted EPS | $0.01 | $0.93 | Consolidated Balance Sheet Highlights | Metric (in millions) | April 29, 2023 | January 28, 2023 | April 30, 2022 | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $132 | $427 | $204 | | Inventories | $1,041 | $1,052 | $1,046 | | Total Assets | $4,405 | $4,711 | $4,065 | | Long-term Debt | $1,271 | $1,271 | $977 | | Total Liabilities | $4,118 | $4,310 | $3,814 | | Total Equity | $287 | $401 | $251 | Consolidated Statements of Cash Flows (Q1 2023 vs Q1 2022) | Metric (in millions) | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash Used for Operating Activities | ($108) | ($146) | | Net Cash Used for Investing Activities | ($55) | ($48) | | Net Cash Used for Financing Activities | ($132) | ($91) | | Net Decrease in Cash and Cash Equivalents | ($295) | ($286) | Notes to Consolidated Financial Statements The notes detail significant accounting events including the $537 million Adore Me acquisition, $11 million in restructuring costs, ongoing share repurchases, and the company's debt structure Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the Q1 2023 net sales decline and operating income drop to a challenging macro environment, while focusing on strategic pillars and planned capital expenditures - Q1 2023 operating income was $28 million, a significant decrease from $94 million in Q1 2022, primarily due to a 5% decrease in net sales and higher general, administrative, and store operating expenses[103] - Comparable sales (stores and direct) decreased by 11% in Q1 2023, following an 8% decrease in Q1 2022[121] - The company is focused on three strategic pillars: strengthening the core, igniting growth, and transforming the foundation to navigate the challenging environment[104] Reconciliation of Reported to Adjusted Operating Income (in millions) | Description | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Reported Operating Income - GAAP | $28 | $94 | | Restructuring Charge | $11 | — | | Adore Me Acquisition-related Items | $10 | — | | Amortization of Intangible Assets | $6 | — | | Occupancy-related Legal Matter | — | $22 | | Adjusted Operating Income | $55 | $116 | Results of Operations Net sales decreased by 5% to $1.407 billion in Q1 2023, driven by North America store sales decline, partially offset by direct and international channel growth Net Sales by Channel (Q1 2023 vs Q1 2022) | Channel | 2023 (in millions) | 2022 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Stores – North America | $786 | $931 | (16%) | | Direct | $464 | $421 | 10% | | International | $157 | $132 | 19% | | Total Net Sales | $1,407 | $1,484 | (5%) | - The gross profit rate increased to 35.7% from 35.1% YoY, driven by lower supply chain costs, but partially offset by increased promotional activity and deleverage in buying and occupancy expenses[125][127] - General, administrative, and store operating expenses increased by $46 million (11%) primarily due to the inclusion of Adore Me expenses, $8 million in restructuring charges, and $6 million in amortization of intangible assets[128] Financial Condition, Liquidity, and Capital Resources The company's liquidity tightened with $132 million cash, $108 million net cash used in operations, and $1.271 billion total long-term debt, while executing share repurchases and planning capital expenditures - Net cash used for operating activities was $108 million in Q1 2023, an improvement from $146 million used in Q1 2022, mainly due to working capital changes[139] - As of April 29, 2023, the company had $295 million in borrowings outstanding under its ABL Facility, with remaining availability of $308 million[84][158] - In February 2023, the company entered into a $125 million Accelerated Share Repurchase (ASR) agreement, receiving an initial 2.4 million shares[63][147] - Capital expenditures are estimated to be approximately $275 million for fiscal year 2023, focusing on store capital programs and technology[142] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency exchange rates and variable interest rates on its debt, which recently transitioned from LIBOR to SOFR - The company is exposed to foreign currency exchange rate fluctuations from its operations in Canada and China, and from international royalty arrangements[167][168] - Interest rate risk exists due to variable-rate debt under the Term Loan Facility and ABL Facility. As of April 29, 2023, the interest rate on the Term Loan was 8.24% and on the ABL borrowings was 6.71%[155][158][170] - Subsequent to the quarter-end, in May 2023, the company amended its credit facilities to transition from LIBOR to the Secured Overnight Financing Rate (SOFR) for interest calculations[156][159] Controls and Procedures Management concluded the company's disclosure controls were effective as of April 29, 2023, with ongoing integration of Adore Me into internal controls over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the first quarter of 2023[174] - The company is integrating Adore Me into its internal controls over financial reporting, which is the only notable change to internal controls during the quarter[175] Part II. Other Information Legal Proceedings The company is involved in various lawsuits, but management does not expect them to materially affect its financial position or results of operations - The company states that current legal proceedings are not expected to have a material adverse effect on its financial position or results of operations[179] Risk Factors No material changes to the company's risk factors have occurred since the 2022 Annual Report on Form 10-K filing - No material changes to risk factors have occurred since the filing of the 2022 Annual Report on Form 10-K[180] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, the company repurchased 2.651 million shares, including an initial delivery under an ASR agreement, with $150 million remaining for future repurchases Common Stock Repurchases in Q1 2023 | Period (2023) | Total Shares Purchased (in thousands) | Average Price Paid per Share | Maximum Value for Future Purchases (in thousands) | | :--- | :--- | :--- | :--- | | February | 2,380 | (b) | $150,000 | | March | 255 | $31.01 | $150,000 | | April | 16 | $31.60 | $150,000 | | Total | 2,651 | | | - The February 2023 repurchases included 2.372 million shares delivered under an Accelerated Share Repurchase (ASR) agreement. The final average price for the ASR was $34.22 per share[182] Exhibits The report includes various exhibits such as corporate governance documents, an executive severance agreement, and required CEO/CFO certifications - Filed exhibits include corporate governance documents, an executive severance agreement for Christine Rupp, and CEO/CFO certifications (Sections 302 and 906)[184]