Victoria's Secret & Co. (VSCO) Earnings

Management highlights

- **Strategic Progress**: The 'Path to Potential' strategy is delivering results, with five consecutive quarters of positive comps and significant market share gains in intimates. - **Bra Authority**: Bras are the primary growth driver, growing in the mid-teens. Innovation such as the 'Flex Factor Balcony' and 'Very Sexy Envy' has resonated strongly, creating a halo effect across other categories. - **PINK Identity**: PINK has sharpened its distinct brand identity, achieving high-single-digit growth. New innovations like the 'Marshmallow' bra and strong apparel performance (8 consecutive quarters of growth) highlight renewed customer resonance. - **Beauty Growth**: Beauty continues steady growth with high-single-digit regular price selling. Strategies include integrating fragrance into broader brand moments (e.g., Mother’s Day), leveraging nostalgia via archive drops (Pink Square Bottle), and expanding shimmer offerings. - **Customer Acquisition & Retention**: The customer file grew mid-single digits, with new customer acquisition outpacing total file growth (high-single digits). Retention and spending per customer have improved due to better digital engagement and owned-channel strategies. - **International Expansion**: International sales grew 20%, led by China (both digital and store channels) and European digital sales. Strategic priorities are translating globally with new flagship openings and localized marketing. - **Marketing Evolution**: Marketing investment is shifting toward a digital-first, social-centric approach, increasing influencer collaborations and experimenting with formats like TikTok Live. The Fashion Show is evolving into an ongoing franchise supported by the 'Angels Among Us' docuseries.

Guidance

- **Full Year 2026 Net Sales**: Raised to $7.1 billion – $7.18 billion (previously $7.03B – $7.13B), representing 8-10% YoY growth. - **Full Year 2026 Adjusted Operating Income**: Raised to $560 million – $590 million (previously $550M – $580M). - **Full Year 2026 Adjusted EPS**: Raised to $4.45 – $4.70 (previously $4.35 – $4.60). - **Q3 2026 Net Sales**: Forecast at $1.57 billion – $1.6 billion, implying 7-9% YoY growth (16-18% on a 2-year basis). - **Q3 2026 Adjusted Operating Income**: Forecast at $10 million – $20 million, compared to breakeven in Q3 2025. - **Q3 2026 Adjusted Gross Margin**: Expected to be approximately 38%, reflecting ~150 bps expansion YoY. - **Q3 2026 Adjusted SG&A Rate**: Expected to be approximately 37.5%, up 100 bps YoY due to increased marketing investments (Fashion Show/Angels Among Us) and incentive compensation. - **Tariff Assumptions**: Q3 assumes tariff rates of 10-12.5%; Q4 assumes a return to ~20%. Full-year guidance factors in mitigation efforts.

Segment performance

The company reported net sales of $1.611 billion, a 10% year-over-year increase. Performance was broad-based across all segments: - Victoria’s Secret: Retail sales grew in the mid-teens, driven by bra innovation and core franchise strength. - PINK: Retail sales grew in the high-single digits (or mid-teens excluding a timing shift of Pink Friday from Q2 to Q3), with strength in bras, panties, and apparel. - Beauty: Sales grew in the mid-single digits for its 12th consecutive quarter, led by fine fragrance and mists.

Risks & headwinds

- **Promotional Dependency**: The semiannual sale strategy was adjusted due to lower inventory pressuring June top lines; management is balancing clearance needs with regular-price growth. - **Tariff Volatility**: Future gross margins face headwinds from rising transportation costs and potential increases in tariff rates (assumed to return to ~20% in Q4), though mitigation efforts provide partial offset. - **International Mix Shift**: A deceleration in international growth was partially driven by lower-margin wholesale/franchise partner shipments timing, which may impact margin flow-through if not balanced by direct-to-consumer growth. - **Marketing ROI Sustainability**: Significant reinvestment in marketing (increasing spend from low 7% toward high single digits) carries execution risk; success depends on continued ability to convert this spend into new customer acquisition and retention.

Analyst Q&A

• Q: Analyst asked about PINK's promotional usage and whether apparel promotions are elevated versus other categories. /

  A: Management confirmed that PINK, like other brands, continues to pull back on promotions, even in apparel. Growth is primarily driven by regular price selling, particularly within PINK icon styles, indicating healthy demand without discount reliance.

• Q: Analyst requested details on the quality of new customers acquired, specifically regarding initial Average Unit Retail (AUR), repeat purchase rates, and cross-category buying. /

  A: Management highlighted that new customer acquisition is outpacing total file growth, especially among 18-24 year olds. By leveraging owned and paid digital channels, the company is successfully driving higher retention, faster return rates, and increased spending among these new cohorts, moving beyond one-time transactions.

• Q: Analyst inquired about product innovation cadence, retail store strategy (specifically standalone PINK stores), and sustainable marketing spend levels. /

  A: Management stated that innovation engines are fully active, with successful launches like the Flex Factor Balcony and Marshmallow bra. The SoHo PINK store serves as a laboratory for community building and cultural connectivity, with selective expansion planned. Marketing spend is currently ~7% of sales but is expected to rise to high single digits sustainably, backed by strong ROI from digital-first strategies.

• Q: Analyst asked about the drivers behind the expected profitability in Q3 despite heavy marketing investments and tougher comparisons. /

  A: Management attributed Q3 profitability to strong sell-through of regular-price core products, which drove high-quality flow-through. While units are accelerating (mid-to-high single digit growth), the mix shift toward regular price allows the company to absorb increased marketing costs for initiatives like the Fashion Show while maintaining profit margins.

• Q: Analyst sought clarification on why back-half margin expansion slows compared to the first half, specifically regarding gross margin and SG&A puts/takes. /

  A: Management explained that Q3/Q4 leverage on buying and occupancy is lower due to tougher comps and flatter promotional reductions in the heavily promotional Q4. Additionally, Q3 SG&A rate increases reflect targeted investments in marketing and higher incentive compensation tied to improved forecasts, partially offsetting gross margin benefits from tariff mitigation.