Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Second-quarter results exceeded or met expectations on all key financial metrics.
- Year-over-year quarterly operating income growth for the first time since 2021.
- Continued sequential improvement in quarterly sales results in North America for the fourth consecutive quarter.
- Digital market share increased in both bras and panties, along with an overall increase in sports bra market share for the second consecutive quarter.
- International business and Adore Me experienced high-single-digit sales growth.
Negative Points
- Second-quarter sales were $1.4 billion, a decrease of 1% compared to last year.
- Conversion rates in digital channels were down during the semi-annual sale period.
- The overall insurance market in North America softened in the second quarter.
- Promotional environment remains competitive, potentially impacting gross margins.
- Transportation rates have spiked recently, turning from a tailwind to a headwind for the back half of the year.
Q & A Highlights
Q: Hi, good morning, TJ. Congrats on the results. Can you tell us what you're expecting from the international segment in the back half of the year? Also, could you elaborate on the promo environment and gross margin outlook for the fourth quarter?
A: We've continued to be very excited about our international business. Travel retail and franchise businesses were the strongest in the second quarter. In China, the consumer is more pressured, but we expect more of the same from our travel retail and franchise partners in the third quarter. Regarding promotions, we expect it to remain competitive. Our guidance assumes similar promotional levels as the first half of the year, with gross margins guided to be up in the third quarter but potentially down in the fourth quarter due to the extra week of selling last year.
Q: On the sales guidance raised for the year, can you talk about where you've grown more optimistic? Also, do you feel like you are at the right promotional levels?
A: The sales guidance raise is predominantly due to spring outperforming expectations. The most encouraging part is the early product acceptance in both Victoria's Secret and PINK brands. Regarding promotions, our discount rate is up year-on-year, but we don't believe it should be at this level forever. Promotions are currently accretive to sales and margin dollars, but we aim to be less promotional in the future.
Q: Can you talk about what you feel is working with the PINK segment and what the trajectory might look like into the back half?
A: Tees, tanks, dresses, and the PINK bra have been early winners. We also introduced backpacks for back-to-school, which have been well-received. Encouragingly, we saw a younger customer demographic returning to PINK stores in late July and August.
Q: Could you speak to the drivers of the better SG&A cost control that you saw in the quarter? How are you thinking about SG&A dollar growth in the back half of the year?
A: The cost outperformance in the second quarter was due to disciplined cost management across various areas, including travel, headcount, and store payroll. For the back half of the year, we expect SG&A dollars to be relatively flat year-over-year, with potential growth in the fourth quarter due to incentive compensation.
Q: The third-quarter guidance calls for a sequential improvement. What segments are driving that improvement? Also, what are your expectations for the North America intimates industry growth for the second half of the year?
A: The improvement is driven by newness and product acceptance, particularly in the VS and PINK brands. We expect North America business trends to continue improving. While the overall market may remain challenging, our business is showing sequential improvement.
Q: Could you elaborate on the impact of transportation costs on Q3 gross margin? Is this a one-time issue or something to consider for Q4 and beyond?
A: Transportation rates were down significantly earlier in the year but have started to spike recently. We expect this to be a headwind in the back half of the year. This is a change from our initial expectations and will likely impact Q4 as well.
Q: Could you quantify the puts and takes behind the gross margin improvement this quarter and how you're thinking about those drivers going forward? What do you expect buying and occupancy dollars to look like going forward?
A: The gross margin improvement was driven by lower average unit costs and favorable transportation rates. Buying and occupancy dollars were down year-over-year and are expected to remain flat or down in the third and fourth quarters.
Q: You mentioned Adore Me grew high-single digits this quarter. What were the drivers behind it, and what are you assuming for the back half for the brand?
A: The growth was driven by the Daily Look business, which focuses on apparel. We expect high-single-digit growth and profitability for Adore Me in the third quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
