Victoria's Secret & Co. (VSCO) Earnings

Management highlights

- Overall Business Momentum & Strategy: The company is just over one year into its 'Path to Potential' four-pillar strategy, and has delivered four consecutive quarters of positive comps. Q1 2026 results exceeded the top and bottom end of prior guidance, with momentum carrying into Q2. New customer acquisition accelerated to low double digits from mid-single digits in Q4 2025, with broad growth across all age and income cohorts, with the strongest growth from customers earning under $50K and over $200K annually. The company gained share in the intimates category, particularly among 18-24 year olds. The company began trading under a new ticker symbol VSXY to reflect its brand evolution. - Pillar 1: Supercharging Bra Authority: The core bra business saw broad-based strength across silhouettes and price tiers, with disciplined refinement of the top 10 core bra frames to improve fit, comfort and productivity. The company balances core improvement with new innovation, including launches of the refreshed Signature everyday bra collection and technically superior Invisible Strapless collection targeted to the innerwear as outerwear trend, which drove new customer acquisition and a halo effect across other categories like panties and sleep. - Pillar 2: Recommitting to Pink: The foundational reset of the Pink brand is delivering momentum, with a clear brand identity focused on a younger 18-24 year old consumer, frequent newness, cultural relevance, and expanded apparel offerings (denim, going-out tops, skirts) that drive new customer growth. The new Pink flagship store in SoHo, New York opened to strong demand, becoming the top performing Pink store after three weeks of operation. The company sees Pink as a full lifestyle brand with significant expansion opportunity across apparel, accessories and beauty. - Pillar 3: Fueling Growth in Beauty: Beauty accelerated to low double-digit growth, with strength in the top-selling Bombshell fragrance franchise, increased cadence of new product launches, and integrated marketing that pairs beauty with intimates brand storytelling. The company uses targeted, time-sensitive marketing around key gifting holidays (Valentine's Day, Mother's Day) to drive incremental sales and customer acquisition, and sees significant long-term runway for category expansion, including the upcoming launch of reinvented Pink Beauty in mid-2027. - Pillar 4: Evolving Brand Positioning & Go-To-Market: The company is executing 'world building' to create distinct, emotionally resonant brand identities: Victoria's Secret is positioned as sexy, glamorous and luxurious, while Pink is positioned as bold, playful and irreverent. It is executing a 'promo detox' strategy, reducing promotions and markdowns in favor of emotional brand storytelling, which has driven mid-single digit AUR growth. Key Q1 brand activations included the record-breaking Valentine's Day campaign (Victoria's Secret February growth for the first time in 8 years, the TWICE partnership for Pink delivered over 2 billion impressions, 3x 2025 levels) and the launch of the year-round 'Angels Among Us' nationwide search for new Victoria's Secret Angels, which drew over 100,000 applicants and generated 1.7 billion impressions. The company has improved performance marketing and analytics to drive more efficient customer acquisition and engagement. - International Business: International growth is broad-based, with strength across core bras, sleep and fine fragrance. China remains a key growth driver with strong social and digital engagement, and the company tailors marketing to local markets while scaling global core franchises, with international considered a major long-term growth opportunity.

Guidance

- Full Year 2026 guidance was raised across the top and bottom line, reflecting strong Q1 outperformance and continued momentum: * Net sales guidance raised to $7.03 billion to $7.13 billion, up from the prior range of $6.85 billion to $6.95 billion, representing 7% to 9% year-over-year growth (up from prior guidance of 5% to 6% growth). * Adjusted operating income guidance raised to $550 million to $580 billion, up from the prior range of $430 million to $460 million. The $120 million increase is split between $55 million from underlying business strength and $65 million from more favorable net tariff impacts than previously expected. This implies 170 to 200 basis points of year-over-year adjusted operating margin expansion. * Adjusted diluted EPS guidance raised to $4.35 to $4.60, up from the prior range of $3.20 to $3.45. * Capital expenditure guidance is maintained at $220 million to $240 million, approximately 3% of sales. Global store count is expected to be flat to slightly up year-over-year in North America, with 45% of the global store fleet converted to the new 'store of the future' design by year end. * Tariff assumptions: 10% Section 122 tariff rates are assumed through the end of July 2026, with rates returning to the prior 20% level for the back half of the year. No potential IEPA tariff refunds are included in guidance. - Q2 2026 guidance: * Net sales expected to be $1.59 billion to $1.615 billion, representing 9% to 11% year-over-year growth, with a 1% growth headwind from the timing shift of Pink Friday to Q3 offset by a 1% tailwind from lapping last year's digital outage. * Adjusted operating income expected to be $90 million to $100 million, up from $55 million in Q2 2025, with adjusted gross margin rate expected to expand ~290 basis points year-over-year to 38.5%. * Adjusted diluted EPS expected to be 65 cents to 75 cents, up from 33 cents in Q2 2025. * End-of-Q2 inventory is expected to be up high single digits year-over-year, driven in part by the shift from air freight to ocean freight that moves inventory ownership earlier, with this dynamic expected to normalize in the back half of the year.

Segment performance

Total company net sales for Q1 2026 were $1.56 billion, a 15% year-over-year increase, with total comp sales up 13%. All three core product segments achieved low double-digit year-over-year retail sales growth: 1) Victoria's Secret: Grew low double digits, with the core bra business growing low double digits, panties and sleep growing mid-teens, contributing significantly to overall company growth. 2) Pink: Grew low double digits, driven by strength in core apparel and intimates and improved regular price selling, with strong new customer growth led by the 18-24 age cohort. 3) Beauty: Grew low double digits, with continued strength in fine fragrance and mist collections, driven by increased newness and integrated marketing. Regionally, North America delivered low double-digit growth in the total intimates business across Victoria's Secret and Pink, accelerating from Q4 2025. International sales grew 45% reported (36% adjusting for a European sales reporting shift), with retail comp sales up mid-teens, led by strong digital channel performance in China driven by social selling.

Risks & headwinds

- Macro consumer uncertainty, with the company acknowledging ongoing volatility but noting its business has shown resilience to date. - Tariff uncertainty following the July 2026 expiration of current 10% Section 122 tariff rates, with the base guidance assuming a return to 20% rates which creates a material gross margin headwind for the back half of the year. - Ongoing proxy contest initiated by shareholder VBRC, which management describes as a distraction from the company's strategic progress and growth momentum. - Moderate disruption to the company's royalty-based franchise business in the Middle East, though management notes impacts are already included in current guidance and the business model is largely shielded from direct disruption. - Potential shifts in consumer size distributions related to GLP-1 adoption, though management notes only minimal impact has been observed to date, with only a small 3% or less downward shift in size for some existing customers.

Analyst Q&A

• Q: What drove traffic acceleration during Q1 despite the promo detox, and is there any trend moderation at the start of Q2? What assortment opportunities exist for the back half of 2026? /

  A: Management attributes traffic growth to resonating creator and talent content, optimized media mix with strong growth in paid social and search, 50% higher app downloads, and four times more organic customer word-of-mouth testimonials than last year, with all channels working together to drive engagement. No trend moderation was cited, and the back half has a full pipeline including more bra launches for both brands, a new Pink franchise launch, multiple new partnerships, and the scaling of the Angels Among Us program leading into the fall fashion show.

• Q: What is driving strong growth across both low-income (<$50K) and high-income (>$200K) customer cohorts, and where are these share gains coming from? /

  A: Growth across both income cohorts, plus strong gains among 18-24 year olds, demonstrates broad brand health and relevance. Low-income customers are choosing to spend with the brand over other discretionary options, while high-income customers actively choose Victoria's Secret and Pink over competing brands due to improved fashion, product quality, and brand positioning. The shift from transactional promotional messaging to emotional brand storytelling has created an engaging ecosystem that customers want to participate in, driving broad share gains across segments.

• Q: How much upside remains for continued promotional reduction and gross margin expansion, even after multiple years of promo detox? /

  A: Management describes promotional pullback as a multi-year journey, with continued room to reduce the number of promotional events, promotional days, and discount levels. New customers are already acquiring at higher average unit retail (AUR), proving that growth does not rely on promotions, so further pullback is sustainable. Gross margins are expected to return to the 40% range long-term; the only reason they are not there today is existing tariff headwinds, giving the company confidence in continued margin expansion.

• Q: How is the company thinking about retaining newly acquired customers to increase lifetime value, and what was Q1 AUR performance? /

  A: Retention and reactivation are performing strongly alongside accelerated new customer acquisition. The brand maintains engagement via a dynamic content ecosystem on the app and digital channels, meeting customers where they already are, with ongoing investment to evolve as consumer discovery behavior changes. Q1 AUR grew mid-single digits year-over-year, with mid-single digit AUR growth expected to continue for the full year (with a slight moderation expected in the typically more promotional Q4), with unit growth concentrated in the regular price segment rather than discount, which is a very favorable mix shift.

• Q: Will the company increase marketing reinvestment to capitalize on current momentum, and what is the flow-through of future top-line outperformance to operating income? /

  A: Management confirmed it is actively evaluating increased marketing investment for the back half of 2026 and for 2027, given the strong returns the company is seeing from current marketing spend. For any top-line outperformance relative to current guidance, management expects approximately 30% flow-through to operating income, after accounting for variable costs and planned incremental reinvestment in growth.