Investor Info:
Our second quarter earnings per share of 36 cents exceeded our initial earnings guidance of 30 to 35 cents, and benefitted by about 2 cents from a favorable tax rate. Absent the impact of the lower than forecasted tax rate, we delivered an earnings per share result toward the high end of our range, as strong performance at Bath & Body Works and Victoria’s Secret Beauty offset weak results at PINK and Victoria’s Secret Lingerie.
We are not satisfied with this result and are very focused on improving performance at Victoria’s Secret.
VICTORIA’S SECRET •
Second quarter results at Victoria’s Secret were below our expectations. Comps decreased 1% and the merchandise margin rate was down significantly across all major merchandise categories as we increased promotional activity to drive traffic and successfully clear inventory.
• Second quarter sales for the Victoria’s Secret segment increased 5% to $1.725 billion, and comp sales decreased 1%, including a 5% decline in store comps. Total digital sales increased by 22%. The spread between comps and total sales was driven by the adoption of the new accounting standard for revenue recognition and the calendar shift resulting from the extra week last year.
• The total segment gross margin rate decreased significantly, driven by a decline in the merchandise margin rate as mentioned above.
• SG&A expense deleveraged, driven principally by the reclassification of Angel card income and incremental wage investments.
Operating income declined 38% to $114.2 million, and the rate decreased by 450 basis points.
• In the lingerie business, second quarter comps were down low-single digits and the merchandise margin rate decreased significantly. The comp decline was driven by a decline in bras, partially offset by growth in panties and sleepwear.
• We continue to see strong customer response to recent bra launches, including Sexy Illusions and the T-shirt bra. However, this growth was offset by softness in products we are working to reset, including Body by Victoria.
• Lingerie is currently focused on newness in bras across key franchises throughout the Fall. We recently mailed another magalogue after seeing a positive customer response from the first one in May.
• We also are investing in and expanding the sleepwear business for Fall, where we believe we have a significant growth opportunity. Customers have been responding well to our sleepwear assortment, and it is a key category for Holiday.
• Turning to PINK, comps decreased in the mid-single digit range for the second quarter, driven by declines in both lingerie and loungewear. Swim, which we are exiting, had a negative impact of about 2 points to the total comp. The total PINK merchandise margin rate was down significantly to LY.
• PINK introduced a new loungewear assortment for back-to-school at the beginning of August which included an investment in embellishment, detailing and bling. This helped drive record sales on PINK Friday on August 3rd, which was also supported by broad promotions.
• August-to-date performance, however, has been soft driven by loungewear. We are applying learnings from the back-to-school timeframe and are leveraging speed models in our supply chain to make adjustments to the goforward assortment.
• Beauty delivered a strong second quarter performance in sales and margin dollar growth … comps increased in the high-teens range. The customer responded to focus, fashion and newness in the assortment and we remained agile, chasing into what’s working.
• In Beauty, we will continue to build on the momentum in the business through the launch of new fragrances … the current focus is on Tease. PINK Beauty has done very well, and we will continue to invest in that business.