Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.47M
2: EX-10.1 Amendment No. 1 to L Brands to Vs Tsa Between Bbwi HTML 25K
and Vsco
3: EX-10.2 Amendment No. 1 to Vs to L Brands Tsa Between Bbwi HTML 25K
and Vsco
4: EX-31.1 Section 302 Certification of CEO HTML 22K
5: EX-31.2 Section 302 Certification of CFO HTML 23K
6: EX-32 Section 906 Certification of CEO and CFO HTML 21K
12: R1 Cover HTML 71K
13: R2 Consolidated and Combined Statements of Income HTML 92K
14: R3 Consolidated and Combined Statements of HTML 63K
Comprehensive Income
15: R4 Consolidated and Combined Balance Sheets HTML 149K
16: R5 Consolidated and Combined Balance Sheets HTML 35K
(Parenthetical)
17: R6 Consolidated and Combined Statements of Equity HTML 103K
18: R7 Consolidated and Combined Statements of Cash Flows HTML 96K
19: R8 Description of Business, Basis of Presentation and HTML 49K
Summary of Significant Accounting Policies
20: R9 Transactions with Former Parent HTML 38K
21: R10 Revenue Recognition HTML 40K
22: R11 Restructuring Activities HTML 25K
23: R12 Earnings Per Share and Shareholders' Equity HTML 51K
24: R13 Inventories HTML 29K
25: R14 Long-Lived Assets HTML 30K
26: R15 Accrued Expenses and Other HTML 42K
27: R16 Income Taxes HTML 28K
28: R17 Long-term Debt and Borrowing Facilities HTML 45K
29: R18 Fair Value of Financial Instruments HTML 30K
30: R19 Comprehensive Income (Loss) HTML 40K
31: R20 Retirement Benefits HTML 26K
32: R21 Commitments and Contingencies HTML 27K
33: R22 Description of Business, Basis of Presentation and HTML 81K
Summary of Significant Accounting Policies
(Policy)
34: R23 Transactions with Former Parent (Tables) HTML 31K
35: R24 Revenue Recognition (Tables) HTML 33K
36: R25 Earnings Per Share and Shareholders' Equity HTML 43K
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38: R27 Long-Lived Assets (Tables) HTML 29K
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40: R29 Long-term Debt and Borrowing Facilities (Tables) HTML 40K
41: R30 Fair Value of Financial Instruments (Tables) HTML 27K
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43: R32 Description of Business, Basis of Presentation and HTML 64K
Summary of Significant Accounting Policies
(Details)
44: R33 Transactions with Former Parent - Narrative HTML 50K
(Details)
45: R34 Transactions with Former Parent - Schedule of Net HTML 34K
Transfers from (to) Former Parent (Details)
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47: R36 Revenue Recognition - Schedule of Disaggregation HTML 32K
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49: R38 Earnings Per Share and Shareholders' Equity - HTML 84K
Narrative (Details)
50: R39 Earnings Per Share and Shareholders' Equity - HTML 34K
Shares Utilized for the Calculation of Basic and
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51: R40 Earnings Per Share and Shareholders' Equity - HTML 31K
Schedule of Repurchase of Common Stock (Details)
52: R41 Inventories (Details) HTML 26K
53: R42 Long-Lived Assets - Summary of Property And HTML 28K
Equipment, Net (Details)
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59: R48 Fair Value Measurements - Carrying Value and Fair HTML 26K
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Accumulated Other Comprehensive Income (Loss)
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(Exact name of registrant as specified in its charter)
_______________________________
iDelaware
i86-3167653
(State
or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
i4 Limited Parkway East
iReynoldsburg,
iOhio
i43068
(Address
of principal executive offices)
(Zip Code)
i(614)
i577-7000
(Registrant's Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 Par Value
iVSCO
iThe
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes i☐ No ☒
Victoria's
Secret & Co.'s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2022” and “second quarter of 2021” refer to the thirteen-week periods ended July 30, 2022 and July 31, 2021, respectively. “Year-to-date 2022” and “year-to-date 2021” refer to the twenty-six-week periods ended July 30, 2022 and July 31, 2021, respectively.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. iDescription
of Business, Basis of Presentation and Summary of Significant Accounting Policies
i
Description of Business
Victoria’s Secret & Co. (together with its subsidiaries unless the context otherwise requires, the “Company”) is a specialty retailer of women's intimate and other apparel and beauty products marketed under the Victoria’s Secret and PINK brand names. The
Company has more than i890 Victoria’s Secret and PINK stores in the U.S., Canada and China as well as online at www.VictoriasSecret.com and www.PINK.com and other online channels worldwide. Additionally, Victoria’s Secret and PINK have more than i440
stores in i70 countries operating under franchise, license and wholesale arrangements. The Company also includes the Victoria’s Secret and PINK merchandise sourcing and production function serving the Company and its international partners. The Company operates as a single segment designed to serve customers worldwide seamlessly
through stores and online channels.
/
In July 2022, the Company announced a new, simplified corporate leadership structure designed to unite the Company's brands, better align its teams with a shifting consumer landscape and enable better execution of its strategy. The restructuring eliminated approximately i160
management roles, or approximately i5% of the Company's home office headcount. For additional information, see Note 4, “Restructuring Activities.”
Victoria's Secret & Co. Spin-Off
On July 9, 2021, L Brands, Inc. (“L Brands” or the “Former Parent”) announced that its Board of Directors approved the previously announced separation of the Victoria’s Secret business,
including PINK, into an independent, publicly traded company (the “Separation”). Prior to the Separation, L Brands operated the Bath & Body Works, Victoria’s Secret and PINK retail brands.
On August 2, 2021 (the “Distribution Date”), after the New York Stock Exchange (“NYSE”) market closing, the Separation of the Victoria’s Secret business was completed. On August 3, 2021, Victoria’s Secret & Co. became an independent, publicly traded company trading on the NYSE under the stock symbol “VSCO.”
The Separation was achieved through the Former Parent’s distribution of i100%
of the shares of the Company’s common stock to holders of the Former Parent’s common stock as of the close of business on the record date of July 22, 2021. The Former Parent’s stockholders of record received one share of the Company’s common stock for every ithree shares of
the Former Parent’s common stock. In connection with the Separation, the Company made a cash payment of approximately $i976 million to the Former Parent on August 2, 2021 using cash proceeds from the issuances of certain debt (discussed in Note 10, “Long-term Debt and Borrowing Facilities”). The Former Parent retained ino
ownership interest in the Company following the Separation.
The Company entered into several agreements with the Former Parent that, among other things, effect the Separation and govern the relationship of the parties following the Separation, including a Separation and Distribution Agreement, a Tax Matters Agreement, an L Brands to VS Transition Services Agreement, a VS to L Brands Transition Services Agreement, an Employee Matters Agreement and a Domestic Transportation Services Agreement. For additional information, see Note 2, “Transactions with Former Parent.”
i
Fiscal
Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2022” and “second quarter of 2021” refer to the thirteen-week periods ended July 30, 2022 and July 31, 2021, respectively. “Year-to-date 2022” and “year-to-date 2021” refer to the twenty-six-week periods ended July 30, 2022 and July 31, 2021, respectively.
i
Basis
of Presentation - Unaudited Consolidated and Combined Financial Statements
The Company’s financial statements for periods through the Separation date of August 2, 2021 are combined financial statements prepared on a carve-out basis as discussed below. The Company’s financial statements for the period from August 3, 2021 through July 30, 2022 are consolidated financial statements based on the reported results of Victoria's Secret & Co. as a standalone company.
The Consolidated and Combined Financial Statements have been prepared in conformity with accounting principles
generally accepted in the United States (“GAAP”). The Consolidated and Combined Financial Statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during all of the periods presented.
Through the Separation date, the Company's
combined financial statements are prepared on a “carve-out” basis. The Combined Financial Statements have been derived from the consolidated financial statements and accounting records of the Former Parent in conformity with GAAP.
Intracompany transactions have been eliminated. Transactions between the Company and the Former Parent have been included in these financial statements. For those transactions between the Company and the Former Parent that were historically settled in cash, the Company reflected such balances in the Consolidated and Combined Balance Sheets in Other Current Assets for balances due from the Former Parent and in Accrued Expenses and Other
for balances due to the Former Parent. The aggregate net effect of transactions between the Company and the Former Parent that were historically settled other than in cash are reflected in the Consolidated and Combined Balance Sheets as Net Investment by Former Parent and in the Consolidated and Combined Statements of Cash Flows as Net Transfers to Former Parent. For additional information, see Note 2, “Transactions with Former Parent.”
The Consolidated and Combined Balance Sheets include certain of the Former Parent's assets and liabilities that were specifically identifiable or otherwise attributable to the Company. The Former Parent's third-party long-term notes payable and the related interest expense have not been allocated to the
Company for any of the periods presented as the Company was not the legal obligor of such debt. Except for Long-term Debt due to Former Parent, the debt reflected in the Consolidated and Combined Balance Sheets relate to third-party borrowings specifically attributable to, and legal obligations of, the Company.
The Former Parent utilized a centralized approach to cash management and financing its operations. The Cash and Cash Equivalents held by the Former Parent at the corporate level were not specifically identifiable to the Company and, therefore, were not reflected in the Company’s
Consolidated and Combined Balance Sheets. Cash transfers between the Former Parent and the Company were accounted for through Net Investment by Former Parent. Cash and Cash Equivalents in the Consolidated and Combined Balance Sheets represent cash and cash equivalents held by the Company at period-end prior to any potential transfer to the centralized cash management pool of the Former Parent.
The Consolidated and Combined Statements of Income include costs for certain functions, including information technology, human resources and store design and construction, that historically were provided and administered on a centralized basis by the Former Parent. Starting in the third quarter of 2020, as part of the steps to prepare the
Company to operate as a separate, standalone company, these functions were transitioned to the business and began to be operated and administered as part of Victoria’s Secret & Co. Costs applicable to the Company related to these functions are included in the Consolidated and Combined Statements of Income for all periods presented. Prior to the transition of these functions, these costs were directly charged to the Company by the Former Parent.
In addition, for purposes of preparing the combined financial statements on a “carve-out” basis prior to the Separation, a portion of the Former Parent's corporate expenses were allocated to the Company. These expense
allocations include the cost of corporate functions and resources provided by, or administered by, the Former Parent including, but not limited to, executive management and other corporate and governance functions, such as corporate finance, internal audit, tax and treasury. The related employee payroll and benefit costs associated with such functions, such as share-based compensation, were included in the expense allocations. Corporate expenses of $i30 million and $i49 million
in the second quarter of 2021 and year-to-date 2021, respectively, were allocated and included within General, Administrative and Store Operating Expenses in the Consolidated and Combined Statements of Income.
Costs were allocated to the Company based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net sales. Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, the Company during the periods presented. However, the allocations may not reflect the expenses the Company would have incurred if the
Company had been a standalone company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic or capital decisions. Going forward, the Company may perform these functions using its own resources or outsourced services. For a period following the Separation, however, some of these functions will continue to be provided by the Former Parent under a transition services agreement, and the Company will provide some services to the Former Parent under a transition services agreement. The
Company has also entered into certain commercial arrangements with the Former Parent in connection with the Separation. For more information, see Note 2, “Transactions with Former Parent.”
During the periods prior to the Separation that are presented in these Consolidated and Combined Financial Statements, the Company's income tax expense (benefit) and deferred tax balances were included in the Former Parent's income tax returns. Income tax expense (benefit) and deferred tax balances contained in these Consolidated and Combined Financial Statements for periods
prior to the Separation are presented on a separate return basis, as if the Company had filed its own income tax returns. As a result, actual tax transactions included in the consolidated financial statements of the Former Parent may or may not be included in the Consolidated and Combined Financial Statements of the Company. Similarly, the tax treatment of certain items reflected in the Consolidated and Combined Financial Statements of the Company may or may not be reflected in the consolidated financial statements and income tax returns of the Former Parent. The taxes recorded in the Consolidated and Combined Statement of Income for periods prior to the Separation are not necessarily representative of the taxes
that may arise in the future when the Company files its income tax returns independent from the Former Parent's returns.
i
Interim Financial Statements
The Consolidated and Combined Financial Statements as of and for the periods ended July 30, 2022 and July 31, 2021 are unaudited. These Consolidated and Combined Financial Statements should be read in conjunction
with the audited Consolidated and Combined Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 18, 2022.
In the opinion of management, the accompanying Consolidated and Combined Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods.
Ongoing iImpacts of COVID-19
Even
as the coronavirus pandemic (“COVID-19”) subsides, macroeconomic impacts related to the pandemic, including inflation, supply chain disruptions and labor shortages, are expected to continue. The Company remains focused on the safe operation of its business, including its stores, distribution, fulfillment and call centers. There remains the potential for COVID-19-related risks of closure or operating restrictions, as well as risks related to delays or disruptions in our supply chain and related pricing impacts, which could materially impact the Company's operations and financial performance in future periods.
i
Seasonality
of Business
Due to the seasonal variations in the retail industry, the results of operations for the thirteen-week and twenty-six-week periods ended July 30, 2022 are not necessarily indicative of the results expected for any other interim period or the full fiscal year ending January 28, 2023.
Restricted Cash
In July 2021, the Company issued $i600 million
of i4.625% notes due in July 2029 (the “2029 Notes”) in a transaction exempt from registration under the Securities Act of 1933, as amended. As of July 31, 2021, the proceeds were held in escrow for release to the Company upon satisfaction of certain conditions, including completion of the Separation. The $i600 million
initial gross proceeds were included in Cash in Escrow related to the Spin-Off on the July 31, 2021 combined balance sheet. For additional information, see Note 10, “Long-term Debt and Borrowing Facilities.”
As of July 31, 2021, the Company's Cash and Cash Equivalents and restricted cash totaled $i893
million.
iEquity Method Investments
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized
to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy in the Consolidated and Combined Statements of Income, and the Company's share of net income or loss from all other unconsolidated entities is included in General,
Administrative and Store Operating Expenses in the Consolidated and Combined Statements of Income. The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.
In March 2022, the Company acquired a minority interest in swimwear brand Frankies Bikinis, LLC (“Frankies Bikinis”) in exchange for $i18 million.
The investment in Frankies Bikinis is accounted for using the equity method of accounting.
The carrying values of equity method investments were $i57 million as of July 30, 2022, $i35 million
as of January 29, 2022 and $i32 million as of July 31, 2021. These investments are recorded in Other Assets on the Consolidated and Combined Balance Sheets.
The Company accounts for investments in entities where it has control over the entity by consolidating the entities' assets, liabilities and results of operations and including them in the Company's Consolidated and Combined Financial Statements. The share of the investment not owned by the Company is reflected in Noncontrolling Interest in the Consolidated and Combined Balance Sheets. The Company recognizes the share of net income or loss not attributable to the Company in Net Loss
Attributable to Noncontrolling Interest in the Consolidated and Combined Statements of Income. Noncontrolling interest represents the portion of equity interests in a joint venture in China that is not owned by the Company. For additional information, see Note 4, “Restructuring Activities.”
i
Net Investment by Former Parent
Net Investment by Former Parent in the Consolidated and Combined Balance Sheets represents
the Former Parent's historical investment in the Company, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from the Former Parent. All transactions reflected in Net Investment by Former Parent in the accompanying Consolidated and Combined Balance Sheets have been considered as financing activities for purposes of the Consolidated and Combined Statements of Cash Flows.
For additional information, see Basis of Presentation above and Note 2, “Transactions with Former Parent.”
i
Derivative
Financial Instruments
The Company from time to time uses derivative financial instruments to manage exposure to foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated and Combined Balance Sheets at fair value.
The earnings of the Company’s foreign operations are subject to exchange rate risk as substantially all the merchandise is sourced through U.S. dollar transactions. The Company from time to time utilizes foreign currency forward
contracts designated as cash flow hedges to mitigate this foreign currency exposure. Amounts for these designated cash flow hedges are reclassified from Accumulated Other Comprehensive Income (Loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated and Combined Statements of Income. During the second quarter of 2021, the Company terminated its foreign currency forward contracts designated as cash flow hedges that were used to mitigate foreign currency exposure for its Canadian operations. The fair value of designated cash flow hedges is not significant for any period presented.
i
Concentration
of Credit Risk
The Company maintains cash and cash equivalents with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts with and limits the amount of credit exposure with any one entity. As of July 30, 2022, the Company's investment portfolio is primarily comprised of bank deposits. Prior to the Separation, cash generated by the Company was invested by the
Former Parent in U.S. government obligations and U.S. Treasury and AAA-rated money market funds.
The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company determines the required allowance for expected credit losses using information such as customer credit history and financial condition. Amounts are recorded to the allowance when it is determined that expected credit losses may occur.
i
Use
of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.
i
Recently
Issued Accounting Pronouncements
The Company did not adopt any new accounting standards during the second quarter of 2022 that had a material impact on the Company's results of operations, financial position or cash flows. In addition, there are no new accounting standards not yet adopted that are expected to have a material impact on the Company's results of operations, financial position or cash flows.
2. iTransactions
with Former Parent
Prior to the Separation, the Company's financial statements were prepared on a “carve-out” basis and were derived from the consolidated financial statements and accounting records of the Former Parent. The following discussion summarizes activity between the Company and the Former Parent.
Prior to the Separation, for purposes of preparing
the financial statements on a “carve-out” basis, the Company was allocated a portion of the Former Parent's total corporate expenses. See Note 1 for a discussion of the methodology used to allocate corporate-related costs for purposes of preparing the financial statements on a “carve-out” basis.
Balances Between the Company and the Former Parent Prior to the Separation
Balances between the Company and the Former Parent or its affiliates prior to the Separation, that are derived from transactions that historically were cash settled, are reflected in the Consolidated and Combined Balance Sheets in Other Current Assets for
balances due from the Former Parent and in Accrued Expenses and Other for balances due to the Former Parent for periods prior to the Separation.
Balances between the Company and the Former Parent or its affiliates prior to the Separation, that are derived from transactions that were historically settled other than in cash, are included in Net Investment by Former Parent within Shareholders' Equity on the Consolidated and Combined Balance Sheets for periods prior to the Separation.
Long-term Debt due to Former Parent
Prior to the Separation, during 2020, the Company borrowed $i97 million
from the Former Parent to pay down outstanding debt with external parties. This borrowing was due in September 2025 and had a variable interest rate based on the China Loan Prime Rate. As a result of the Separation, the Company no longer has this Long-term Debt due to Former Parent. Prior to the Separation, the Company recognized $i2 million of interest expense year-to-date 2021 related to this borrowing.
Net
Transfers from (to) Former Parent
i
The following table presents the components of Net Transfers from (to) Former Parent prior to the Separation in the second quarter and year-to-date 2021 Consolidated and Combined Statements of Equity:
Second
Quarter
Year-to-Date
2021
2021
Cash Pooling and General Financing Activities, Net
$
(i322)
$
(i431)
Long-lived
Assets (a)
(i4)
i16
Corporate
Expense Allocations
i30
i49
Share-based
Compensation Expense
i8
i15
Assumed
Income Tax Payments
i13
i15
Total
Net Transfers to Former Parent
$
(i275)
$
(i336)
_______________
(a)Represents
long-lived assets transferred between the Company and the Former Parent as a result of asset allocation decisions made during the period.
/
Agreements with Former Parent
The Company entered into several agreements with the Former Parent that, among other things, effect the Separation and govern the relationship of the parties following the Separation, including a Separation and Distribution Agreement, a Tax Matters Agreement, an L Brands to VS Transition Services Agreement, a VS to L Brands Transition Services Agreement, an Employee Matters Agreement and a Domestic Transportation
Services Agreement.
Under the terms of the transition services agreements, as amended, the Company provides its Former Parent, on a transitional basis, certain services or functions, including information technology, certain logistics functions, customer marketing and customer call center services. Additionally, the Former Parent provides to the Company various services or functions, many of which currently use a shared technology platform, including human resources, payroll and certain
logistics functions. Generally, these services will be provided for a period of up to itwo years following the Separation, except for information technology services, which will be provided for a period of up to ithree
years following the Separation and may be extended for a maximum of itwo additional ione-year
periods subject to increased administrative charges. Consideration and costs for the transition services will be determined using several billing methodologies as described in the agreements, including customary billing, pass-through billing, percent of sales billing or fixed fee billing. Costs for transition services provided by the Former Parent are recorded within the Consolidated and Combined Statements of Income based on the nature of the services. Consideration for transition services provided to the Former Parent are recorded within the Consolidated and Combined Statements of Income based on the nature of the services and as an offset to expenses incurred to provide the services. The Company recognized consideration of $i20
million and $i40 million for services provided to the Former Parent and recognized costs of $i19 million
and $i38 million for services provided by the Former Parent in the second quarter of 2022 and year-to-date 2022, respectively, pursuant to the transition services agreements.
Under the terms of the Domestic Transportation Services Agreement, the Former Parent will continue to provide transportation services to the Company for certain beauty and apparel merchandise in the United States and Canada for an initial term
of ithree years following the Separation, which term will thereafter continuously renew unless and until either party elects to terminate the arrangement upon written prior notice. Costs for the transportation services will be determined using customary billing and fixed billing methodologies, which are described in the agreement, and are subject to an administrative charge. Costs for transition services are recorded within Costs of Goods Sold, Buying and Occupancy in the Consolidated and Combined Statements of Income. The
Company recognized costs of $i21 million and $i39 million pursuant
to the Domestic Transportation Services Agreement during the second quarter of 2022 and year-to-date 2022, respectively.
Prior to the Separation, certain Company employees participated in the stock option and performance incentive plan of the Former Parent. Under the terms of the Employee Matters Agreement, in connection with the Separation, restricted stock and stock option equity awards held by Company employees were converted to awards representing approximately i6.0 million
shares of the Company's common stock under the Company's 2021 Stock Option and Performance Incentive Plan.
3. iRevenue Recognition
Accounts receivable, net from revenue-generating activities
were $i101 million as of July 30, 2022, $i101 million
as of January 29, 2022 and $i73 million as of July 31, 2021. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically i60
to i90 days.
The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue was $i238
million as of July 30, 2022, $i258 million as of January 29, 2022 and $i219
million as of July 31, 2021. The Company recognized $i105 million as revenue year-to-date 2022 from amounts recorded as deferred revenue at the beginning of the year. As of July 30, 2022, the Company recorded deferred revenue of $i218
million within Accrued Expenses and Other, and $i20 million within Other Long-term Liabilities on the Consolidated and Combined Balance Sheet.
i
The
following table provides a disaggregation of Net Sales for the second quarter and year-to-date 2022 and 2021:
Second Quarter
Year-to-Date
2022
2021
2022
2021
(in millions)
Stores
– North America
$
i968
$
i1,037
$
i1,900
$
i1,970
Direct
i414
i469
i834
i990
International
(a)
i139
i108
i271
i208
Total
Net Sales
$
i1,521
$
i1,614
$
i3,005
$
i3,168
_______________
/
(a)Results
include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.
In April 2022, the Company launched a new co-branded credit card through which customers can earn points on purchases of Company product as well as on purchases outside of the Company. The co-branded credit card is in addition to the Company's existing U.S. private label credit card.
The
Company recognized Net Sales of $i30 million and $i31 million
for the second quarter of 2022 and 2021, respectively, related to revenue earned in connection with its credit card arrangements. The Company recognized Net Sales of $i57 million and $i59 million
year-to-date 2022 and 2021, respectively, related to revenue earned in connection with its credit card arrangements.
The Company’s international net sales include sales from Company-operated stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s net sales outside of the U.S. totaled $i199 million
and $i167 million for the second quarter of 2022 and 2021, respectively. The Company’s net sales outside of the U.S. totaled $i383 million
and $i330 million year-to-date 2022 and 2021, respectively.
4. iRestructuring
Activities
Victoria's Secret China
In April 2022, the Company announced the completion of the joint venture agreement with Regina Miracle International (Holdings) Limited (“Regina Miracle”), a company listed on the Hong Kong Stock Exchange, related to its existing Company-owned business in China. The Company and Regina Miracle formed a joint venture to operate Victoria's Secret stores and the related online business in China. Under the terms of the agreement, the Company owns i51%
of the joint venture and Regina Miracle owns the remaining i49%. The Company received $i45 million
in cash from Regina Miracle during the first quarter of 2022 as consideration for its investment in the joint venture. In connection with the execution of the agreement, the Company and Regina Miracle each contributed $ii10/ million
in cash to the joint venture. The cash received from Regina Miracle is reflected within Cash Received from Noncontrolling Interest Partner in the 2022 Consolidated and Combined Statement of Cash Flows.
Since the Company has retained control over the joint venture, the joint venture's assets, liabilities and results of operations will continue to be consolidated in the Company's consolidated financial statements. Regina Miracle's interest in the joint venture is now reflected in Noncontrolling Interest in the consolidated balance sheet and in Net Loss Attributable to Noncontrolling Interest in the consolidated statements of income.
Corporate Leadership Restructuring
In
July 2022, the Company announced a new, simplified corporate leadership structure designed to unite the Company's brands, better align its teams with a shifting consumer landscape and enable better execution of its strategy. As a result of the restructuring, pre-tax severance and related costs of $i29 million, of which $i16 million
are included in General, Administrative and Store Operating Expenses and $i13 million are included in Costs of Goods Sold, Buying and Occupancy, are included in the 2022 consolidated statements of income.
During the second quarter of 2022, the Company made payments of $i2 million
related to severance and related costs associated with these reductions. As of July 30, 2022, liabilities related to the restructuring of $i27 million are included in the consolidated balance sheet.
5. iEarnings
Per Share and Shareholders' Equity
iEarnings Per Share
Earnings per basic share is computed based on the weighted-average number of common shares outstanding. Earnings per diluted share include the weighted-average effect of dilutive restricted stock and options on the weighted-average shares outstanding.
On August 2, 2021, the Separation was achieved through the Former Parent's distribution
of i100% of the shares of the Company's common stock to holders of the Former Parent's common stock as of the close of business on the record date of July 22, 2021. The Former Parent's stockholders of record received one share of the Company's common stock for every ithree
shares of the Former Parent's common stock. As a result, on August 3, 2021, the Company had i88 million shares of common stock outstanding. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation. After the Separation, actual outstanding shares are used to calculate both basic and diluted weighted-average number of common shares outstanding.
The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings per share for the second quarter and year-to-date 2022 and 2021:
Second
Quarter
Year-to-Date
2022
2021
2022
2021
(in millions)
Common Shares
i83
i88
i83
i88
Treasury
Shares
i—
i—
i—
i—
Basic
Shares
i83
i88
i83
i88
Effect
of Dilutive Options and Restricted Stock Awards
i1
i—
i3
i—
Diluted
Shares
i84
i88
i86
i88
Anti-dilutive
Options and Restricted Stock Awards (a)
i2
i—
i1
i—
_______________
/
(a)These
options and restricted stock awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Shareholders' Equity
Common Stock Share Repurchases & Treasury Stock Retirements
In February 2022, upon final settlement of the Company's December 2021 accelerated share repurchase agreement (“ASR Agreement”) with Goldman Sachs & Co. LLC (“Goldman Sachs”), the Company received an additional i0.3 million
shares of the Company's common stock from Goldman Sachs. The delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share. In connection with the settlement of the ASR Agreement, $i50 million previously recorded in Paid-in Capital as of January 29, 2022, was reclassified
to Treasury Stock in the first quarter of 2022. In February 2022, the Company immediately retired the additional i0.3 million shares repurchased in connection with the settlement of the ASR Agreement. The retirement resulted in a reduction of $i50 million
in Treasury Stock, less than $i1 million in the par value of Common Stock, less than $i1 million
in Paid-in Capital and nearly $i50 million in Retained Earnings.
In March 2022, the Company's Board of Directors approved a new share repurchase program (“March 2022 Share Repurchase Program”), providing for the repurchase of up to $i250 million
of the Company's common stock. The $i250 million authorization is expected to be utilized to repurchase shares in the open market, subject to market conditions and other factors. Shares acquired through the March 2022 Share Repurchase Program will be available to meet obligations under equity compensation plans and for general corporate purposes. The March 2022 Share Repurchase Program will continue until exhausted, but no later than January
28, 2023.
i
The Company repurchased the following shares of its common stock under its March 2022 Share Repurchase Program during year-to-date 2022:
Amount
Authorized
Shares Repurchased
Amount Repurchased
Average Stock Price
(in millions)
(in thousands)
(in millions)
March 2022 Share Repurchase Program
$
i250
i3,879
$
i171
$
i44.06
/
The
March 2022 Share Repurchase Program has $i79 million remaining as of July 30, 2022. There were $i2
million of share repurchases reflected in Accounts Payable on the July 30, 2022 consolidated balance sheet.
Subsequent to July 30, 2022, the Company repurchased an additional i0.7 million shares for $i27 million
through September 7, 2022 under the March 2022 Share Repurchase Program.
In accordance with the Board of Directors' resolution, shares of the Company's common stock repurchased under the March 2022 Share Repurchase Program will be retired and cancelled upon repurchase. As a result, year-to-date 2022 the Company retired i3.8 million
shares repurchased under the March 2022 Share Repurchase Program, which resulted in reductions of less than $i1 million in the par value of Common Stock, $i7 million
in Paid-in Capital and $i162 million in Retained Earnings.
iInventories
are principally valued at the lower of cost or net realizable value, on an average cost basis. The above amounts are net of valuation adjustments for inventory where the cost exceeds the amount the Company expects to realize from the ultimate sale or disposal of the inventory and net of loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory.
Depreciation
expense was $i70 million and $i78 million for the second quarter of 2022 and 2021, respectively. Depreciation expense was $i140 million
and $i158 million for year-to-date 2022 and 2021, respectively.
Prior to the Separation, the Company's U.S. operations and certain of its non-U.S. operations were historically included in the income tax returns of the Former Parent or its subsidiaries that may not be part of the
Company. For the periods prior to the Separation, the income tax expense (benefit) and all tax liabilities that are presented in these financial statements were calculated on a “carve-out” basis, which applied the accounting guidance as if we filed income tax returns for the Company on a standalone, separate return basis. The Company believes the assumptions supporting its allocation and presentation of income taxes on a separate return basis are reasonable. However, the Company's tax results, as presented in these financial statements for periods prior to the Separation, may not be reflective of the results that the Company
expects to generate in the future.
Post-Separation, the Company is filing a consolidated U.S. federal income tax return as well as separate and combined income tax returns in numerous state, local and international jurisdictions. Income tax expense (benefit) for the period prior to the Separation is based on the combined financial statements prepared on a “carve-out” basis. Income tax expense (benefit) for the period after the Separation is based on the consolidated results of the Company on a standalone basis.
The provision for income taxes is based on the current estimate of the annual effective tax rate and adjusted as necessary for quarterly events.
For the second
quarter of 2022, the Company’s effective tax rate was i19.2% compared to i24.1%
in the second quarter of 2021. The second quarter of 2022 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined statutory rate. The second quarter of 2021 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the respective quarter.
For year-to-date 2022, the Company’s effective tax rate was i11.1%
compared to i23.2% for year-to-date 2021. Both rates were lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the respective period.
The Company paid income taxes in the amount of
$i130 million and $i13 million for the second quarter of 2022 and 2021, respectively. Year-to-date income taxes paid were $i140
million and $i15 million for 2022 and 2021, respectively.
On August 2, 2021, in connection with the Separation, the Company and the Former Parent entered into a Tax Matters Agreement. Under the agreement, the Former Parent will generally be responsible for all U.S. federal, state, local and non-U.S. income taxes of the
Company for any taxable period, or portion of such period, ending on or before the Distribution Date. As such, the net liabilities associated with uncertain tax positions that were presented in the financial statements in prior periods on a carve-out basis were not transferred to the Company as part of the Separation.
In July 2021, the Company issued $i600 million
of i4.625% notes due in July 2029 in a transaction exempt from registration under the Securities Act of 1933, as amended. The obligation to pay principal and interest on the 2029 Notes is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's wholly-owned subsidiaries. As of July 31, 2021, the proceeds were held
in escrow for release to the Company upon satisfaction of certain conditions, including completion of the Separation. If the conditions for the release from escrow of the proceeds of this offering were not satisfied, the 2029 Notes would have been subject to mandatory redemption. The $i600 million initial gross proceeds were included in Cash in Escrow related to the Spin-Off on the July 31, 2021 combined balance sheet.
On
August 2, 2021, the Company used cash proceeds of $i592 million, which were net of issuance costs of $i8 million,
from the 2029 Notes, to partially fund the approximately $i976 million cash payment to the Former Parent in connection with the Separation. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the Consolidated and Combined Balance Sheets.
Credit Facilities
On August 2, 2021, the Company
entered into a term loan B credit facility in an aggregate principal amount of $i400 million (the “Term Loan Facility”), which will mature in August 2028. Commencing in December 2021, the Company is required to make quarterly principal payments on the Term Loan Facility in an amount equal to i0.25%
of the original principal amount of $i400 million. The Company made a principal payment of $i1 million
and $i2 million for the Term Loan Facility during the second quarter of 2022 and year-to-date 2022, respectively.
Interest under the Term Loan Facility is calculated by reference to the London Interbank Offered Rate (“LIBOR”) or an alternative base rate, plus an interest rate margin equal to (i) in the case of LIBOR loans, i3.25%
and (ii) in the case of alternate base rate loans, i2.25%. The LIBOR rate applicable to the Term Loan Facility will be subject to a floor of i0.50%. The obligation
to pay principal and interest on the loans under the Term Loan Facility is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's wholly-owned domestic subsidiaries. The loans under the Term Loan Facility are secured on a first-priority lien basis by certain assets of the Company and guarantors that do not constitute priority collateral of the asset-based revolving credit facility and on a second-priority lien basis by priority collateral of the asset-based revolving credit facility, subject to customary exceptions.
On August 2, 2021, the
Company also entered into a senior secured asset-based revolving credit facility (the “ABL Facility”). The ABL Facility allows for borrowings and letters of credit in U.S. dollars or Canadian dollars and has aggregate commitments of $i750 million and an expiration date of August 2026. The availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on the Company's eligible U.S. and Canadian credit
card receivables, eligible accounts receivable, eligible inventory and eligible real property, and (ii) the aggregate commitment. Interest on the loans under the ABL Facility is calculated by reference to (i) LIBOR or an alternative base rate and (ii) in the case of loans denominated in Canadian dollars, Canadian Dollar Offered Rate (“CDOR”) or a Canadian base rate, plus an interest rate margin based on average daily excess availability ranging from (x) in the case of LIBOR and CDOR loans, i1.50% to i2.00%
and (y) in the case of alternate base rate loans and Canadian base rate loans, i0.50% to i1.00%. Unused commitments under the ABL Facility accrue an unused commitment
fee ranging from i0.25% to i0.30%.
For the
reporting period ended July 30, 2022, the Company's borrowing base was $i585 million and there were ino
borrowings outstanding under the ABL Facility. The Company had $i40 million of outstanding letters of credit as of July 30, 2022 that reduced its availability under the ABL Facility.
On August 2, 2021, the Company used the net cash proceeds from the credit facilities of $i384
million, which were net of issuance and financing costs of $i10 million for the Term Loan Facility and $i6 million for the ABL Facility, to partially fund the approximately $i976 million
cash payment to the Former Parent in connection with the Separation. The discounts and issuance costs from the Term Loan Facility are being amortized through the maturity date and are included within Long-term Debt on the July 30, 2022 and January 29, 2022 Consolidated and Combined Balance Sheets.
The Company's long-term debt and borrowing facilities contain certain financial and other covenants, including, but not limited to, the maintenance of financial ratios. The 2029 Notes and the Term Loan Facility include the maintenance of a consolidated coverage ratio and a consolidated total leverage ratio, and the ABL Facility includes the maintenance of a fixed charge coverage ratio and a debt to earnings before interest, income taxes, depreciation,
amortization and rent (“EBITDAR”) ratio. The financial covenants could, within specific predefined circumstances, limit the Company's ability to incur additional indebtedness, make certain investments, pay dividends or repurchase shares. As of July 30, 2022, the Company was in compliance with all covenants under its long-term debt and borrowing facilities.
Certain of
the Company's China subsidiaries previously utilized revolving and term loan bank facilities to support their operations (“Foreign Facilities”). During the second quarter of 2021, with no borrowings outstanding, the Company terminated the Foreign Facilities.
Long-term Debt due to Former Parent
During 2020, the Company borrowed $i97 million
from the Former Parent to pay down outstanding debt with external parties. This borrowing was due in September 2025 and had a variable interest rate based on the China Loan Prime Rate. As a result of the Separation, the Company no longer has this Long-term Debt due to Former Parent. Prior to the Separation, the Company recognized $i2 million of interest expense year-to-date 2021 related to this borrowing.
11.
iFair Value of Financial Instruments
iCash and Cash Equivalents and restricted cash include cash on hand, deposits with financial institutions and highly liquid investments with original maturities
of 90 days or less. The Company's Cash and Cash Equivalents and restricted cash are considered Level 1 fair value measurements as they are valued using unadjusted quoted prices in active markets for identical assets.
(a)The
estimated fair value of the Company’s publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
/
Management believes that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity.
12.
iComprehensive Income (Loss)
i
The following table provides the rollforward of accumulated
other comprehensive income attributable to Victoria's Secret & Co. for year-to-date 2022:
As
a result of the China joint venture agreement completed in April 2022, the Company reclassified $i3 million of accumulated foreign currency translation adjustments related to the joint venture out of accumulated other comprehensive income and into Paid-in Capital in the first quarter of 2022 in order to reflect the amount attributable to the noncontrolling
interest partner. For additional information see Note 4, “Restructuring Activities.”
The Company sponsors a tax-qualified defined contribution retirement plan for employees who meet certain age and service requirements. The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches
associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates' eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $i12 million and $i9
million for the second quarter of 2022 and 2021, respectively. Total expense recognized related to the qualified plan was $i24 million and $i19 million
for year-to-date 2022 and 2021, respectively.
The Former Parent previously sponsored a non-qualified supplemental retirement plan. The non-qualified plan was an unfunded plan which provided benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. On June 27, 2020, the Human Capital and Compensation Committee of the Former Parent's Board of Directors authorized the termination of the non-qualified plan. All benefits and obligations due under the non-qualified plan were fully paid during the second quarter of 2021. Total expense recognized related to the non-qualified plan was not significant for any period presented.
14. iCommitments
and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Former Parent Derivative
Lawsuits
As previously disclosed by the Former Parent, on May 19, 2020 and January 12, 2021, the Former Parent's shareholders filed derivative lawsuits in the Court of Common Pleas for Franklin County, Ohio (subsequently removed to the United States District Court for the Southern District of Ohio) and the Delaware Court of Chancery, respectively, naming as defendants certain current and former directors and officers of the Former Parent and alleging, among other things, breaches of fiduciary duty through asserted violations of law and failures to monitor workplace conduct (the “Lawsuits”). In addition, the Former Parent also received litigation and books-and-records demands from other shareholders related to the same matters (together with the Lawsuits, the “Actions”).
In
July 2021, the Former Parent announced the global settlement resolving the Actions. The settlement resolves all derivative claims that have been or could have been asserted in the Actions or that involve in any way the allegations referred to in the Actions and releases all such claims against the Former Parent (and its subsidiaries, including the Company) and past and present employees, officers and directors, among others. As part of the settlement, the Former Parent (and its subsidiaries, including the Company) has agreed to implement certain management and governance measures, including the maintenance of a Diversity,
Equity, and Inclusion Council. Following the Separation, the settlement terms apply to both the Former Parent and the Company. Each company has committed to invest $ii45/ million
over at least iifive years/ to fund the management and governance measures. The settlement was preliminarily approved on August 25, 2021, and a fairness
hearing occurred on January 18, 2022. On May 16, 2022, the United States District Court of the Southern District of Ohio granted final approval of the settlement.
The Company was a tenant of portions of a building known as Two Herald Square, New York, New York (the “Premises”) pursuant to an Agreement of Lease dated August 22, 2001 (the “Lease”)
with Herald Square Owner LLC (the “Landlord”). On February 20, 2021, the Company surrendered the Premises to the Landlord. On February 16, 2021, the Landlord filed a Motion for Partial Summary Judgment seeking treble holdover damages against the Company for the period commencing June 9, 2020 through February 20, 2021, the date on which the Company vacated and surrendered the Premises. By an order dated July 21, 2021, the court granted the Landlord’s motion and
awarded it damages in an amount equal to ithree times the aggregate of the rents and charges payable under the Lease during the last month of the term of the Lease. On August 6, 2021, judgment was entered against the Company in the amount of $i23 million.
On September 15, 2021, the Landlord filed a Motion for Partial Summary Judgment seeking treble holdover damages against the Company for the period commencing February 21, 2021 through September 30, 2021. By an order dated April 22, 2022, the court granted the Landlord’s motion and awarded it damages in an amount equal to ithree
times the aggregate amount of the rents and charges payable under the Lease during the last month of the term of the Lease. On May 9, 2022, judgment was entered against the Company in the amount of $i22 million. The Company has appealed both judgments; the appeals have not yet been decided by the appellate
court. As of the end of the second quarter of 2022, we remain fully accrued for both judgments.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We caution that any forward-looking statements (as such term is defined in the U.S. Private Securities Litigation Reform Act of 1995) contained in this report
or made by the Company, our management, or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements include, without limitation, statements regarding our future operating results, the implementation and impact of our strategic plans, and our ability to meet environmental, social, and governance goals. Words such as “estimate,”“commit,”“target,”“goal,”“project,”“plan,”“believe,”“seek,”“strive,”“expect,”“anticipate,”“intend,”“potential” and any similar expressions may identify forward-looking statements. Risks associated with
the following factors, among others, could affect our financial performance and cause actual results to differ materially from those expressed or implied in any forward-looking statements:
• the spin-off from our Former Parent may not be tax-free for U.S. federal income tax purposes;
• a loss of synergies from separating the businesses that could negatively impact our balance sheet, profit margins or earnings;
•we may not realize all of the expected benefits of the spin-off;
• general economic conditions, inflation, consumer confidence, consumer spending patterns and market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises or other major events, or
the prospect of these events;
• the novel coronavirus (COVID-19) global pandemic has had and may continue to have an adverse effect on our business and results of operations;
• the seasonality of our business;
• difficulties arising from turnover in company leadership or other key positions;
• our ability to attract, develop and retain qualified associates and manage labor-related costs;
• our dependence on mall traffic and the availability of suitable store locations on appropriate terms;
• our ability to grow through new store openings and existing store remodels;
• our ability to successfully operate and expand internationally and related risks;
• our
independent franchise, license, wholesale, and joint venture partners;
• our direct channel business;
• our ability to protect our reputation and the image of our brands;
• our ability to attract customers with marketing, advertising and promotional programs;
• our ability to maintain, enforce and protect our trade names, trademarks and patents;
• the highly competitive nature of the retail industry and the segments in which we operate;
• consumer acceptance of our products and our ability to manage the life cycle of our brands, keep up with fashion trends, develop new merchandise and launch new product lines successfully;
• our ability to source,
distribute and sell goods and materials on a global basis, including risks related to:
• political instability, environmental hazards or natural disasters;
• significant health hazards or pandemics, which could result in closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in impacted areas;
• duties, taxes and other charges;
• legal and regulatory matters;
• volatility in currency exchange rates;
• local business practices and political issues;
• delays or disruptions in shipping and transportation and related pricing impacts;
• disruption due
to labor disputes; and
• changing expectations regarding product safety due to new legislation;
• our geographic concentration of vendor and distribution facilities in central Ohio and Southeast Asia;
• the ability of our vendors to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
• fluctuations in freight, product input and energy costs, including those caused by inflation;
• our ability to adequately protect
our assets from loss and theft;
• claims arising from our self-insurance;
• our and our third-party service providers' ability to implement and maintain information technology systems and to protect associated data and system availability;
• our ability to maintain the security of customer, associate, third-party and company information;
• stock price volatility;
• shareholder activism matters;
• our ability to maintain our credit rating;
• our ability to service or refinance our debt and maintain compliance with our restrictive covenants;
• our ability to comply with laws, regulations and technology
platform rules or other obligations related to data privacy and security;
• our ability to comply with regulatory requirements;
• legal and compliance matters; and
• tax, trade and other regulatory matters.
Except as may be required by law, we assume no obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March
18, 2022.
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated and Combined Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.
Executive Overview
Victoria’s Secret is an iconic global brand of women’s intimate and other apparel, personal care and beauty products. We sell our products primarily through two brands,
Victoria’s Secret and PINK. Victoria’s Secret is a category-defining global lingerie brand with a leading market position and a rich, 40-year history of serving women across the globe. PINK is a lifestyle brand for the college-oriented customer, built around a strong intimates core. We also sell beauty products under both the Victoria’s Secret and PINK brands. Together, Victoria’s Secret, PINK and Victoria’s Secret Beauty support, inspire and celebrate women through every phase of their life.
Victoria’s Secret and PINK merchandise is sold online through e-commerce platforms, through retail stores located in the U.S., Canada and China, and through international stores and websites operated by partners under franchise, license, wholesale and joint venture arrangements. We have a presence in 70 countries and we
believe we benefit from global brand awareness, a wide and compelling product assortment and a powerful, deep connection with our customers.
In the second quarter of 2022, our operating income was $98 million as compared to $203 million in the second quarter of 2021, and our operating income rate (expressed as a percentage of net sales) was 6.4% as compared to 12.6% last year. The operating income decrease in the second quarter of 2022 as compared to the second quarter of 2021 was primarily driven by a decrease in net sales and merchandise margin. We experienced slowing customer traffic sequentially throughout the quarter as our customers and the broader retail environment were impacted by increasing inflationary pressures. Net sales decreased $93 million, or 6%, to $1.521 billion compared to $1.614 billion in the second quarter of 2021. Our North American store sales decreased $69 million, to $968 million compared to $1.037 billion
in the second quarter of 2021. In our North American stores, although traffic slowed sequentially throughout the quarter and compared to the first quarter of 2022, traffic in the quarter increased as compared to the second quarter of 2021. The increase in traffic in the quarter as compared to last year was more than offset by a decrease in conversion (which we define as the percentage of customers who visit our stores and make a purchase) and a decrease in average unit retail (which we define as the average price per unit purchased). Our direct channel sales decreased by 12%, or $55 million, to $414 million compared to $469 million in the second quarter of 2021, primarily due to a decline in average unit retail and traffic.
In the second quarter of 2022, we announced a new, simplified corporate leadership structure designed to unite our brands, better align our teams with a shifting consumer landscape and enable better execution of our strategy. The restructuring eliminated approximately 160 management roles, or approximately 5% of our home office headcount. As a result of the restructuring, pre-tax severance and related costs of $29 million were recognized in the second quarter.
We are committed to optimizing our performance by focusing on our brand transformation, being best at bras and enhancing the customer experience. We will continue to search for growth vehicles to help us attract new customers and better meet the needs of existing ones, including developing new brands as well as pursuing partnerships with existing brands. Despite the inflationary pressures we continue to face,
we are confident in our ability to navigate this shifting consumer landscape and remain committed to delivering long-term sustainable value for our shareholders.
For additional information related to our second quarter of 2022 financial performance, see “Results of Operations.”
Impacts of Victoria's Secret Spin-Off
The spin-off of Victoria’s Secret & Co. into an independent, publicly traded company was completed on August 2, 2021. We believe the spin-off will enable us to maximize management focus and financial flexibility to thrive in an evolving retail environment and deliver long-term profitable growth.
In connection with the Separation, we have incurred, and expect to continue to incur, incremental capital and expense related to the implementation
of new information technology platforms. We currently estimate that our total incremental expenditures could be $100 million to $150 million over the transition period, with the majority of costs being incurred by the end of 2023. These estimated costs consist of internal and external labor, software licensing, networking, security and infrastructure required to separate the current information technology capabilities (systems and infrastructure) in support of two independent companies. Such estimates are subject to change as our work continues. We provide technology services to the Former Parent under the transition services agreements while independent systems environments are created, which we believe help to minimize dis-synergies.The above estimates are preliminary in nature, are based solely on information available to us as of the date of this quarterly report and are
inherently uncertain and subject to change.
Ongoing Impacts of COVID-19
Even as the COVID-19 pandemic subsides, macroeconomic impacts related to the pandemic, including inflation, supply chain disruptions and labor shortages, are expected to continue. We remain focused on the safe operation of our business, including our stores, distribution, fulfillment and call centers. There remains the potential for COVID-19-related risks of closure or operating restrictions, as well as risks related to delays or disruptions in our supply chain and related pricing impacts, which could materially impact our operations and financial performance in future periods.
Basis of Presentation
Our financial statements for periods through the Separation date of August 2, 2021 are combined
financial statements prepared on a “carve-out” basis, which reflects the business as historically managed within the Former Parent.The balance sheets and cash flows for the periods prior to the Separation include only those assets and liabilities directly related to the Victoria’s Secret business, and the statements of income include the historically reported results of the Victoria’s Secret business along with allocations of a portion of the Former Parent's total corporate expenses. Our financial statements for the period from August 3, 2021 through July 30, 2022 are consolidated financial statements based on our reported results as a standalone company. For additional information on the “carve-out” basis of accounting, see Note 1, “Description of Business, Basis of Presentation and Summary of Significant
Accounting Policies.”
In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided below are non-GAAP financial measures that present operating income, net income attributable to Victoria's Secret & Co., and net income per diluted share attributable to Victoria's Secret & Co. on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of results of operations for
the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures.
Second
Quarter
Year-to-Date
(in millions, except per share amounts)
2022
2021
2022
2021
Reconciliation of Reported to Adjusted Operating Income
Reported Operating Income - GAAP
$
98
$
203
$
192
$
428
Occupancy-related
Legal Matter (a)
—
—
22
—
Restructuring Charge (b)
29
—
29
—
Adjusted Operating Income
$
127
$
203
$
243
$
428
Reconciliation
of Reported to Adjusted Net Income Attributable to Victoria's Secret & Co.
Reported Net Income Attributable to Victoria's Secret & Co. - GAAP
$
70
$
151
$
151
$
325
Occupancy-related Legal Matter (a)
—
—
22
—
Restructuring
Charge (b)
29
—
29
—
Tax Effect of Adjusted Items
(7)
—
(13)
—
Adjusted Net Income Attributable
to Victoria's Secret & Co.
$
92
$
151
$
189
$
325
Reconciliation of Reported to Adjusted Net Income Per Diluted Share Attributable to Victoria's
Secret & Co.
Reported Net Income Per Diluted Share Attributable to Victoria's Secret & Co. - GAAP
$
0.83
$
1.71
$
1.76
$
3.68
Occupancy-related Legal Matter (a)
—
—
0.19
—
Restructuring
Charge (b)
0.26
—
0.26
—
Adjusted Net Income Per Diluted Share Attributable to Victoria's Secret & Co.
$
1.09
$
1.71
$
2.21
$
3.68
________________
(a)In
the first quarter of 2022, we recognized a pre-tax charge of $22 million ($16 million after-tax), included in buying and occupancy expense, related to a legal matter with a landlord regarding a high-profile store that we surrendered to the landlord prior to the Separation. For additional information see Note 14, “Commitments and Contingencies” included in Item 1. Financial Statements.
(b)In the second quarter of 2022, we recognized a pre-tax charge of $29 million ($22 million after-tax), $16 million included in general, administrative and store operating expense and $13 million included in buying and occupancy expense, related to restructuring activities to reorganize our leadership structure. For additional information see Note 4, “Restructuring Activities” included in Item 1. Financial Statements.
The following table compares the second quarter of 2022 U.S. company-operated store data to the second quarter of 2021 and year-to-date 2022 to year-to-date 2021:
Second
Quarter
Year-to-Date
2022
2021
% Change
2022
2021
% Change
Sales per Average Selling Square Foot (a)
$
163
$
172
(5
%)
$
321
$
325
(1
%)
Sales
per Average Store (in thousands) (a)
$
1,133
$
1,183
(4
%)
$
2,228
$
2,245
(1
%)
Average Store Size (selling square feet)
6,949
6,888
1
%
Total
Selling Square Feet (in thousands)
5,580
5,772
(3
%)
________________
(a)Sales per average selling square foot and sales per average store, which are indicators of store productivity, are calculated based on store sales for the period divided by the average, including the beginning and end of period, of total square footage and store count, respectively.
The
following table represents store data for year-to-date 2022:
Second Quarter of 2022 Compared to Second Quarter of 2021
Operating Income
For the second quarter of 2022, operating income decreased $105 million, to $98 million, compared to operating income of $203 million in the second quarter of 2021, and the operating income rate (expressed as a percentage of net sales) decreased to 6.4% from 12.6%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the second quarter of 2022 in comparison to the second quarter of 2021:
2022
2021
% Change
Second
Quarter
(in millions)
Stores – North America
$
968
$
1,037
(7
%)
Direct
414
469
(12
%)
International
(a)
139
108
28
%
Total Net Sales
$
1,521
$
1,614
(6
%)
_______________
(a)Results
include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.
The following table provides a reconciliation of net sales from the second quarter of 2021 to the second quarter of 2022:
(in millions)
2021 Net Sales
$
1,614
Comparable Store Sales
(75)
Sales Associated with New, Closed and Non-comparable
Remodeled Stores, Net
4
Direct Channel
(48)
Credit Card Programs
(1)
International Wholesale, Royalty and Other
30
Foreign Currency Translation
(3)
2022 Net Sales
$
1,521
The
following table compares the second quarter of 2022 comparable sales to the second quarter of 2021:
2022
2021
Comparable Sales (Stores and Direct) (a)
(8
%)
(9
%)
Comparable Store Sales (a)
(7
%)
16
%
________
(a)The
percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Therefore, comparable sales results exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the
opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
Net sales in the second quarter of 2022 decreased $93 million, or 6%, to $1.521 billion compared to $1.614 billion in the second quarter of 2021. We experienced slowing customer traffic sequentially throughout the second quarter as our customers and the broader retail environment were impacted by increasing inflationary pressures.
In the stores channel, our North
America net sales decreased $69 million, or 7%, to $968 million as compared to the second quarter of 2021. Although traffic slowed sequentially throughout the quarter and compared to the first quarter of 2022 in our stores, traffic in the quarter increased as compared to the second quarter of 2021. The increase in traffic in the quarter as compared to last year was more than offset by a decrease in conversion and a decrease in average unit retail. Net sales in stores outside of North America increased in the second quarter of 2022 compared to the second quarter of 2021 driven by fewer COVID-19-related store restrictions this year.
In the direct channel, net sales decreased $55 million, or 12%, to $414 million, primarily due to a decrease in average unit retail and traffic.
Gross Profit
For the second quarter of 2022, our gross profit decreased $135
million compared to the second quarter of 2021 to $535 million, and our gross profit rate (expressed as a percentage of net sales) decreased to 35.2% from 41.5%.
The gross profit decrease was due to the decrease in merchandise margin dollars related to the decrease in net sales, increased promotional activity primarily driven by the longer semi-annual sale period this year and incremental supply chain and inflationary cost pressures compared to the second quarter of 2021 of approximately $60 million. The gross profit decrease was also due to pre-tax severance and related costs of $13 million associated with the restructuring activities in the second quarter of 2022. Partially offsetting these decreases was lower buying and occupancy expenses this year compared to last year driven by lower landlord-related expenses this year, an asset write-off last year related to the Separation and lower management compensation expense this
year.
The gross profit rate decrease was driven by a decrease in the merchandise margin rate reflecting increased promotional activity and increased supply chain and inflationary cost pressures, as well as the severance and related costs associated with the restructuring activities, partially offset by buying and occupancy leverage driven by the lower landlord-related expenses this year, the asset write-off last year related to the Separation and lower management compensation expense this year.
General, Administrative and Store Operating Expenses
For the second quarter of 2022, our general, administrative and store operating expenses decreased $30 million, or 6%, compared to the second quarter of 2021 to $437 million. The decrease in general, administrative and store operating expenses compared to the second quarter of 2021 was due to lower management
compensation expense and lower selling expenses driven by our disciplined and proactive expense management, partially offset by the pre-tax severance and related costs of $16 million associated with the restructuring activities in the second quarter of 2022.
The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased slightly to 28.8% from 28.9% due to the lower management compensation and selling expenses, partially offset by the severance and related costs associated with the restructuring activities.
Interest Expense
For the second quarter of 2022, our interest expense increased $10 million to $13 million compared to the second quarter of 2021, driven by the increase in our outstanding debt due to the issuance of the 2029 Notes and the Term Loan Facility that we entered into upon the
Separation in August 2021.
Provision for Income Taxes
For the second quarter of 2022, the Company's effective tax rate was 19.2% compared to 24.1% in the second quarter of 2021. The second quarter of 2022 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined statutory rate. The second quarter of 2021 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based
compensation awards that vested in the respective quarter.
Results of Operations
Year-to-Date 2022 Compared to Year-to-Date 2021
Operating Income
For year-to-date 2022, operating income decreased $236 million, to $192 million, from $428 million year-to-date 2021, and the operating income rate (expressed as a percentage of net sales) decreased to 6.4% from 13.5%. The drivers of the operating income results are discussed in the following sections.
The following table provides net sales for year-to-date 2022 in comparison to year-to-date 2021:
2022
2021
% Change
Year-to-Date
(in millions)
Stores
– North America
$
1,900
$
1,970
(4
%)
Direct
834
990
(16
%)
International (a)
271
208
30
%
Total
Net Sales
$
3,005
$
3,168
(5
%)
_______________
(a)Results include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.
The following table provides a reconciliation of net sales from year-to-date 2021 to year-to-date 2022:
(in
millions)
2021 Net Sales
$
3,168
Comparable Store Sales
(99)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
16
Direct Channel
(141)
Credit Card Programs
(2)
International
Wholesale, Royalty and Other
65
Foreign Currency Translation
(2)
2022 Net Sales
$
3,005
The following table compares year-to-date 2022 comparable sales to year-to-date 2021:
2022
2021
Comparable
Sales (Stores and Direct) (a)
(8
%)
6
%
Comparable Store Sales (a)
(5
%)
9
%
________
(a)The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change
in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Therefore, comparable sales results exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
Net
sales year-to-date 2022 decreased $163 million, or 5%, to $3.005 billion compared to $3.168 billion year-to-date 2021.
In the stores channel year-to-date 2022, our North America net sales decreased $70 million, or 4%, to $1.900 billion, as compared to year-to-date 2021 as an increase in traffic was more than offset by a decrease in conversion and a decrease in average unit retail. Net sales in stores outside of North America increased year-to-date 2022 compared to year-to-date 2021 driven by fewer COVID-19-related store restrictions this year.
In the direct channel, net sales decreased $156 million, or 16%, to $834 million, primarily due to a decrease in average unit retail and traffic.
Additionally, net sales year-to-date 2022 as compared to year-to-date 2021 were impacted by incremental net sales recognized in the first quarter last year
as a result of federal stimulus benefits.
Gross Profit
For year-to-date 2022, our gross profit decreased $285 million to $1.057 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 35.2% from 42.3%.
The gross profit decrease was primarily due to the decrease in merchandise margin dollars related to the decrease in net sales, incremental supply chain and inflationary cost pressures compared to last year of approximately $140 million and increased promotional activity primarily driven by the longer semi-annual sale period this year. Additionally, the
decrease in net sales and merchandise margin was due to incremental net sales and merchandise margin recognized in the first quarter last year as a result of federal stimulus benefits. Partially offsetting these decreases was lower buying and occupancy expenses this year compared to last year driven by lower management compensation expense and an asset write-off last year related to the Separation.
The gross profit rate decrease was primarily driven by a decrease in the merchandise margin rate reflecting increased supply chain and inflationary cost pressures and increased promotional activity, partially offset by slight buying and occupancy leverage driven by the lower management compensation expense and the asset write-off last year related to the Separation.
General, Administrative and Store Operating Expenses
For year-to-date 2022, our general,
administrative and store operating expenses decreased $49 million, or 5%, to $865 million primarily due to lower management compensation expense and lower selling expenses driven by our disciplined and proactive expense management.
The general, administrative and store operating expense rate (expressed as a percentage of net sales) remained unchanged at 28.8% for both years.
Interest Expense
For year-to-date 2022, our interest expense increased $21 million to $25 million compared to year-to-date 2021, primarily driven by the increase in our outstanding debt due to the issuance of the 2029 Notes and the Term Loan Facility that we entered into upon the Separation in August 2021.
Provision for Income Taxes
For year-to-date 2022, the
Company's effective tax rate was 11.1% compared to 23.2% year-to-date 2021. The effective tax rate for both years was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the respective periods.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides
the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins and income taxes. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.
Prior to the Separation, we generated annual cash flow from operating activities. However, we were operating within the Former Parent's cash management structure, which used a centralized approach to cash management and financing of our operations. As a result, a substantial portion of our
cash was transferred to the Former Parent. This arrangement was not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods prior to the Separation.
The cash and cash equivalents held by the Former Parent at the corporate level prior to the Separation were not specifically identifiable to us and, therefore, were not reflected in the Consolidated and Combined Balance Sheets. The Former Parent's third-party long-term debt and the related interest expense were not allocated to us for any of the periods presented prior to the Separation as we were not the legal obligor of such debt.
Following the Separation from the Former Parent, our capital structure and sources of liquidity changed from the historical capital structure because we no longer participate in the Former Parent's centralized cash management
program. Our ability to fund our operating needs is primarily dependent upon our ability to continue to generate positive cash flow from operations, as well as borrowing capacity under our ABL Facility, which we rely on to supplement cash generated by our operating activities, particularly when our need for working capital peaks in the summer and fall months as discussed above. Management believes that our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we incurred in connection with the Separation, (ii) adequate liquidity to fund capital expenditures, and (iii) flexibility to consider investment opportunities that may arise. However, certain investment opportunities may require us to seek additional debt or equity financing, and there can be no assurances that
we will be able to obtain additional debt or equity financing on acceptable terms, if at all, in the future.
We expect to utilize our cash flows to continue to invest in our brands, talent and capabilities, and growth strategies as well as to repay our indebtedness over time. We believe that our available short-term and long-term capital resources are sufficient to fund requirements over the next 12 months.
Working Capital and Capitalization
Prior to the Separation, we generated annual cash flow from operating activities to support our working capital needs. However,
we were operating within the Former Parent’s cash management structure, which used a centralized approach to cash management and financing of our operations. As a result, a substantial portion of our cash was transferred to the Former Parent. This arrangement was not reflective of the manner in which we would have financed our operations had we been an independent, publicly traded company during the periods presented prior to the Separation. Based upon our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, we believe we will be able to continue to meet our working capital needs.
The following table provides a summary of our working capital position and capitalization for the periods post-Separation as of July 30, 2022 and January 29, 2022:
Net Cash Provided by (Used for) Operating Activities (a)
$
(51)
$
851
Capital Expenditures (a)
58
169
Working
Capital
107
(7)
Capitalization:
Long-term Debt
977
978
Victoria's Secret & Co. Shareholders' Equity
247
257
Total
Capitalization
$
1,224
$
1,235
Amounts Available Under the ABL Facility (b)
$
545
$
523
_______________
(a)The July 30, 2022 amounts represent a twenty-six-week period and the January 29, 2022 amounts represent a fifty-two-week
period.
(b)For the reporting periods ended July 30, 2022 and January 29, 2022, our borrowing base was $585 million and $564 million, respectively, and there were no borrowings outstanding under the ABL Facility for either period. We had outstanding letters of credit, which reduce our availability under the ABL Facility, of $40 million as of July 30, 2022 and $41 million as of January 29, 2022.
Cash Flow
The following table provides a summary of our cash flow activity for year-to-date 2022 and 2021:
Year-to-Date
2022
2021
(in
millions)
Cash and Cash Equivalents and Restricted Cash, Beginning of Period
$
490
$
335
Net Cash Flows Provided by (Used for) Operating Activities
(51)
389
Net Cash Flows Used for Investing Activities
(83)
(66)
Net
Cash Flows Provided by (Used for) Financing Activities
(153)
233
Effects of Exchange Rate Changes on Cash and Cash Equivalents and Restricted Cash
(2)
2
Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash
(289)
558
Cash and Cash Equivalents and
Restricted Cash, End of Period
Net cash provided by (used for) operating activities reflects net income adjusted for non-cash items, including depreciation, share-based compensation expense and deferred tax expense, as well as changes in working capital. Net cash used for operating activities year-to-date 2022 was $51 million,
a decrease in net cash flows from operating activities of $440 million compared to year-to-date 2021. The decrease in net cash from operating activities year-to-date 2022 was primarily driven by higher cash outflows associated with working capital changes and lower net income. The most significant working capital driver resulting in the decrease in operating cash flows this year compared to last year is our increased inventory levels, primarily driven by higher cost of goods due to supply chain cost pressures and longer in-transit shipment times which we began to experience in the third and fourth quarter of 2021, and the associated impact on accounts payable due to the timing of payments for inventory. The other significant working capital driver resulting in the decrease in operating cash flows this year is related to income taxes paid of $140 million year-to-date 2022 as compared to $15 million paid year-to-date 2021. In 2021, the income tax provision assumed the
utilization of certain tax benefits that only existed on a “carve-out” basis from the Former Parent.
Investing Activities
Net cash used for investing activities year-to-date 2022 was $83 million, consisting primarily of capital expenditures of $58 million and our $18 million investment in Frankies Bikinis. The capital expenditures were primarily related to our store capital program, along with investments in technology, distribution and logistics to support our retail capabilities.
Net cash used for investing activities for year-to-date 2021 was $66 million for capital expenditures. The capital expenditures were primarily related to spending on technology and logistics to support our digital business and other retail capabilities.
We estimate 2022 capital expenditures of approximately $200 million
for the year. Capital investments during 2022 are focused on our store capital program, along with investments in technology, distribution and logistics capabilities.
Financing Activities
Net cash used for financing activities year-to-date 2022 was $153 million, consisting primarily of $169 million of share repurchases and $39 million of payments for taxes on share-based compensation awards issued, partially offset by $55 million of cash received from Regina Miracle in connection with the joint venture agreement completed in the first quarter of 2022.
Net cash provided by financing activities year-to-date 2021 was $233 million consisting primarily of $600 million in proceeds from the issuance of the 2029 Notes, partially offset by net transfers to the Former Parent of $367 million.
Common Stock Share Repurchases
& Treasury Stock Retirements
Our Board of Directors will determine share repurchase authorizations, giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements and the Tax Matters Agreement with the Former Parent, as well as financial and other conditions existing at the time. We use cash flow generated from operating activities to fund our share repurchase programs. The timing and amount of any repurchases will be made at our discretion, taking into account a number of factors, including market conditions.
In February 2022, upon final settlement of our December 2021 ASR Agreement with Goldman Sachs, we received an additional 0.3 million shares of our common stock from Goldman Sachs. The delivery of shares resulted in an immediate reduction of the outstanding shares
used to calculate the weighted-average common shares outstanding for basic and diluted net income per share. In connection with the settlement of the ASR Agreement, $50 million previously recorded in Paid-in Capital as of January 29, 2022, was reclassified to Treasury Stock in the first quarter of 2022. In February 2022, we immediately retired the additional 0.3 million shares repurchased in connection with the settlement of the ASR Agreement. The retirement resulted in a reduction of $50 million in Treasury Stock, less than $1 million in the par value of Common Stock, less than $1 million in Paid-in Capital and nearly $50 million in Retained Earnings.
In March 2022, our Board of Directors approved a new share repurchase program, providing for the repurchase of up to $250 million of our common stock. The $250 million authorization is expected to be utilized to repurchase shares
in the open market, subject to market conditions and other factors. Shares acquired through the March 2022 Share Repurchase Program will be available to meet obligations under equity compensation plans and for general corporate purposes. The March 2022 Share Repurchase Program will continue until exhausted, but no later than January 28, 2023.
We repurchased the following shares of our common stock under our March 2022 Share Repurchase Program during year-to-date 2022:
Amount
Authorized
Shares Repurchased
Amount Repurchased
Average Stock Price
(in millions)
(in thousands)
(in millions)
March 2022 Share Repurchase Program
$
250
3,879
$
171
$
44.06
The
March 2022 Share Repurchase Program has $79 million remaining as of July 30, 2022. There were $2 million of share repurchases reflected in Accounts Payable on the July 30, 2022 consolidated balance sheet.
Subsequent to July 30, 2022, we repurchased an additional 0.7 million shares for $27 million through September 7, 2022 under the March 2022 Share Repurchase Program.
In accordance with the Board of Directors' resolution, shares of our common stock repurchased under the March 2022 Share Repurchase Program will be retired and cancelled upon repurchase. As a result, year-to-date 2022 we retired 3.8 million shares repurchased under the March 2022 Share Repurchase Program, which resulted
in reductions of less than $1 million in the par value of Common Stock, $7 million in Paid-in Capital and $162 million in Retained Earnings.
Dividend Policy and Procedures
We have not paid any cash dividends since the Separation. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the Board of Directors deems relevant. We would use cash flow generated from operating and financing activities to fund our dividends.
Long-term
Debt and Borrowing Facilities
The following table provides our outstanding debt balance, net of unamortized debt issuance costs and discounts, as of July 30, 2022, January 29, 2022 and July 31, 2021:
$397 million Term Loan due August 2028 (“Term Loan Facility”)
$
388
$
390
$
—
Total
Senior Secured Debt with Subsidiary Guarantee
388
390
—
Senior Debt with Subsidiary Guarantee
$600 million, 4.625% Fixed Interest Rate Notes due July 2029 (“2029 Notes”)
593
592
592
Total
Senior Debt with Subsidiary Guarantee
593
592
592
Long-term Debt due to Former Parent
—
—
97
Total
981
982
689
Current
Debt
(4)
(4)
—
Total Long-term Debt, Net of Current Portion
$
977
$
978
$
689
Cash paid for interest was $21 million year-to-date 2022.
Issuance of Notes
In
July 2021, we issued $600 million of 4.625% notes due in July 2029 in a transaction exempt from registration under the Securities Act of 1933, as amended. The obligation to pay principal and interest on the 2029 Notes is jointly and severally guaranteed on a full and unconditional basis by certain of our wholly-owned subsidiaries. As of July 31, 2021, the proceeds were held in escrow for release to us upon satisfaction of certain conditions, including completion of the Separation. If the conditions for the release from escrow of the proceeds of this offering were not satisfied, the 2029 Notes would have been subject to mandatory redemption. The $600 million initial gross proceeds were included in Cash in Escrow related to the Spin-Off on the July 31, 2021 combined balance sheet.
On August 2, 2021, we used cash proceeds of $592 million, which were net of issuance costs of $8 million, from the 2029 Notes, to partially fund the approximately $976 million cash payment to the Former Parent in connection with the Separation. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the Consolidated and Combined Balance Sheets.
On August 2, 2021, we entered into a term loan B credit facility
in an aggregate principal amount of $400 million, which will mature in August 2028. Commencing in December 2021, we are required to make quarterly principal payments on the Term Loan Facility in an amount equal to 0.25% of the original principal amount of $400 million. We made a principal payment of $1 million and $2 million for the Term Loan Facility during the second quarter of 2022 and year-to-date 2022, respectively.
Interest under the Term Loan Facility is calculated by reference to the LIBOR or an alternative base rate, plus an interest rate margin equal to (i) in the case of LIBOR loans, 3.25% and (ii) in the case of alternate base rate loans, 2.25%. The LIBOR rate applicable to the Term Loan Facility will be subject to a floor of 0.50%. The obligation to pay principal and interest on the loans under the Term Loan Facility is jointly and severally guaranteed on a full and unconditional basis by certain of our wholly-owned
domestic subsidiaries. The loans under the Term Loan Facility are secured on a first-priority lien basis by certain assets of ours and guarantors that do not constitute priority collateral of the asset-based revolving credit facility and on a second-priority lien basis by priority collateral of the asset-based revolving credit facility, subject to customary exceptions.
On August 2, 2021, we also entered into a senior secured asset-based revolving credit facility. The ABL Facility allows for borrowings and letters of credit in U.S. dollars or Canadian dollars and has aggregate commitments of $750 million and an expiration date of August 2026. The availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on our eligible U.S. and Canadian credit
card receivables, eligible accounts receivable, eligible inventory and eligible real property, and (ii) the aggregate commitment. Interest on the loans under the ABL Facility is calculated by reference to (i) LIBOR or an alternative base rate and (ii) in the case of loans denominated in Canadian dollars, CDOR or a Canadian base rate, plus an interest rate margin based on average daily excess availability ranging from (x) in the case of LIBOR and CDOR loans, 1.50% to 2.00% and (y) in the case of alternate base rate loans and Canadian base rate loans, 0.50% to 1.00%. Unused commitments under the ABL Facility accrue an unused commitment fee ranging from 0.25% to 0.30%.
For the reporting period ended July 30, 2022, our borrowing base was $585 million and there were no borrowings outstanding under the ABL Facility. We had $40 million of outstanding letters of credit as of July 30,
2022 that reduced our availability under the ABL Facility.
On August 2, 2021, we used the net cash proceeds from the credit facilities of $384 million, which were net of issuance and financing costs of $10 million for the Term Loan Facility and $6 million for the ABL Facility, to partially fund the approximately $976 million cash payment to the Former Parent in connection with the Separation. The discounts and issuance costs from the Term Loan Facility are being amortized through the maturity date and are included within Long-term Debt on the July 30, 2022 and January 29, 2022 Consolidated and Combined Balance Sheets.
Our long-term debt and borrowing facilities contain certain financial and other covenants, including, but not limited
to, the maintenance of financial ratios. The 2029 Notes and the Term Loan Facility include the maintenance of a consolidated coverage ratio and a consolidated total leverage ratio, and the ABL Facility includes the maintenance of a fixed charge coverage ratio and a debt to EBITDAR ratio. The financial covenants could, within specific predefined circumstances, limit our ability to incur additional indebtedness, make certain investments, pay dividends or repurchase shares. As of July 30, 2022, we were in compliance with all covenants under our long-term debt and borrowing facilities.
Foreign Facilities
Certain of our China subsidiaries previously utilized revolving and term loan bank facilities to support their operations (“Foreign Facilities”).
During the second quarter of 2021, with no borrowings outstanding, we terminated the Foreign Facilities.
Long-term Debt due to Former Parent
During 2020, we borrowed $97 million from the Former Parent to pay down outstanding debt with external parties. This borrowing was due in September 2025 and had a variable interest rate based on the China Loan Prime Rate. As a result of the Separation, we no longer have this Long-term Debt due to Former Parent. Prior to the Separation, we recognized $2 million of interest expense year-to-date 2021 related to this borrowing.
Credit Ratings
The following table provides our credit ratings as of July 30, 2022:
Contingent
Liabilities and Contractual Obligations
Contractual Obligations
Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since January 29, 2022, as discussed in “Contingent Liabilities and Contractual Obligations” in our Annual Report on Form 10-K filed with the SEC on March 18, 2022. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations, which fluctuate throughout
the year as a result of the seasonal nature of our operations).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We did not adopt any new accounting standards during the second quarter of 2022 that had a material impact on our results of operations, financial position or cash flows. In addition, there are no new accounting standards not yet adopted that are expected to have a material impact on our results of operations, financial position or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K filed with the SEC on March 18, 2022.
Item 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We may use derivative financial instruments like foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rate Risk
We have operations and investments in unconsolidated entities in foreign countries which expose us to market risk associated with foreign currency exchange
rate fluctuations. Our Canadian dollar and Chinese Yuan denominated earnings are subject to exchange rate risk as substantially all our merchandise sold in Canada and China is sourced through U.S. dollar transactions. From time to time we may adjust our exposure to foreign exchange rate risk by entering into foreign currency forward contracts, however, these measures may not succeed in offsetting all the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.
Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign
currency exchange rate fluctuations.
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities is the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. As of July 30, 2022, our investment portfolio is primarily comprised of bank deposits. Prior to the Separation, cash generated by us was invested by the Former Parent in U.S. government obligations and U.S. Treasury and AAA-rated
money market funds. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.
Our long-term debt as of July 30, 2022 consists of the 2029 Notes, which have a fixed interest rate, and $397 million in outstanding borrowing under the Term Loan Facility, which has a variable interest rate based on either the LIBOR or an alternate base rate. Our exposure to interest rate changes is limited to the fair value of the debt issued as well as the interest we pay on the Term Loan Facility,
which would not have a material impact on our earnings or cash flows.
Fair Value of Financial Instruments
The following table provides a summary of the principal value and estimated fair value of our outstanding publicly traded debt as of July 30, 2022, January 29, 2022 and July 31, 2021:
(a)The estimated fair value of our publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.
As of July 30, 2022, we believe that the carrying values of accounts receivable, accounts payable and accrued expenses
approximate fair value because of their short maturity.
Concentration of Credit Risk
We maintain cash and cash equivalents with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. As of July 30, 2022, our investment portfolio is primarily comprised of bank deposits. Prior to the Separation, cash generated by us was invested by the Former Parent in U.S. government obligations and U.S. Treasury and AAA-rated money market funds. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.
Item 4. CONTROLS
AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the second quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against us from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.
As previously disclosed by the Former Parent, on May
19, 2020 and January 12, 2021, the Former Parent's shareholders filed derivative lawsuits in the Court of Common Pleas for Franklin County, Ohio (subsequently removed to the United States District Court for the Southern District of Ohio) and the Delaware Court of Chancery, respectively, naming as defendants certain current and former directors and officers of the Former Parent and alleging, among other things, breaches of fiduciary duty through asserted violations of law and failures to monitor workplace conduct (the “Lawsuits”). In addition, the Former Parent also received litigation and books-and-records demands from other shareholders related to the same matters (together with the Lawsuits, the “Actions”).
In July 2021, the Former Parent announced the global settlement resolving the Actions. The settlement resolves all derivative claims that have been or could have
been asserted in the Actions or that involve in any way the allegations referred to in the Actions and releases all such claims against the Former Parent (and its subsidiaries, including us) and past and present employees, officers and directors, among others. As part of the settlement, the Former Parent (and its subsidiaries, including us) has agreed to implement certain management and governance measures, including the maintenance of a Diversity, Equity, and Inclusion Council. Following the Separation, the settlement terms apply to both the Former Parent and us. Each company has committed to invest $45 million over at least five years to fund the management and governance measures. The settlement was preliminarily approved on August 25, 2021,
and a fairness hearing occurred on January 18, 2022. On May 16, 2022, the United States District Court of the Southern District of Ohio granted final approval of the settlement.
Item 1A. RISK FACTORS
The risk factors that affect our business and financial results are set forth under “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K filed with the SEC on March 18, 2022. There have been no material changes to the risk factors from those described in the 2021 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed
in “Item 1A. Risk Factors” in our 2021 Annual Report on Form 10-K and those described in this report or other SEC filings could cause actual results to differ materially from those stated in any forward-looking statements.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides our repurchases of our common stock during the second quarter of 2022:
Period
Total Number of Shares Purchased
(a)
Average Price Paid per Share (b)
Total Number of Shares Purchased as Part of Publicly Announced Programs
Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Program
(in thousands)
(in thousands)
May 2022
439
$
46.28
432
$
121,012
June
2022
664
35.22
652
98,125
July 2022
638
30.01
633
79,120
Total
1,741
1,717
_______________
(a)The
total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options.
(b)The average price paid per share includes any broker commissions.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
** Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5)
of Regulation S-K. The registrant hereby undertakes to furnish supplementally a copy of any omitted exhibit or schedule upon request by the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
* Mr. Johnson is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.
39
Dates Referenced Herein and Documents Incorporated by Reference
