“We’re in for a tough December all around across retail and we need to be prepared to sharpen our elbows and fight as hard as we can,” Martin Waters, chief executive officer of Victoria’s Secret & Co., told analysts during Thursday morning’s conference call.
The lingerie and beauty retailer’s game plan includes increased promotions, an expanded assortment, more Stores of the Future and the recent addition of Adore Me to the company’s portfolio, all with an emphasis that shoppers may have less money to spend this year.
“We remain mindful of the continued economic headwinds and pressure on our customer that will likely drive a highly promotional retail environment,” Waters explained. “As such, we expect continued sales and margin volatility. We made the decision that it was appropriate to be more promotional than we had been in the previous year, to be more promotional than we have been in the balance of Q3 in order to make sure that we were fighting as hard as we possibly could. And we feel good about that choice.
“In these difficult times, she is looking for a deal and she’s looking for help; she’s looking at the best brands in the market to recognize that times are difficult and to give her a helping hand,” he continued. “[But] since Black Friday, our customers have responded positively and we’ve been very pleased with an uptick in the trend and our level of performance. Customers were out over Black Friday weekend and they’re stocking up, looking to buy Christmas gifts.”
The CEO spoke with analysts just one day after releasing quarterly earnings results that fell short on both top and bottom lines thanks to consistent inflation and price-conscious shoppers.
Waters was quick to point out additional obstacles, too, such as inventory challenges and a more rigid-than-normal future purchasing budget.
“But where [pressure] really bites is in our ability to enter a new season open,” Waters said, referring to the firm’s ability to purchase inventory in advance. “When the business is at its best, we would start the fall season about 60 percent bought and about 40 percent open. We didn’t get quite back to that level this fall. We were more like 70 percent bought, 30 percent open. But we don’t get to spend. That 30 percent is open because with the economic outlook, the way that it is, and sales being pressured, it would be unwise to spend those open dollars. So we’re more like 80-20, 80 percent committed, 20 percent open.”
The company guided its current quarter and full-year outlook down as a result. Victoria’s Secret is now anticipating fourth-quarter net sales to be down in the high-single digit range, compared with 2021’s fourth-quarter net sales of $2.1 billion, while the firm expects full-year net sales will decline 6 percent to 7 percent, compared with 2021’s full-year net sales of $6.78 billion.
“Our guidance for the quarter reflects our results to date and the expectations that we’ll need to be aggressive in December to get our fair share and more of consumer spending this holiday season,” Waters said. “Because as I said before, it’s not just about winning within our category, it’s about taking dollars to our category rather than to somebody else’s. We’re committed to optimizing our performance in the current challenging environment by focusing on what’s within our control: our brand transformation being best at bras, enhancing the customer experience and a relentless focus on costs and inventory management.”
But Waters also pointed to several potential tailwinds on the horizon, such as the likelihood of lowered freight costs next spring, fewer supply chain bottlenecks, the firm’s beauty business and the international segment.
“I think we’re holding our own,” he said. “December is the most important month of the year. We feel very well set up in terms of inventory, in terms of promotions, in terms of the activity we’ve got in the pipe. So it’s all focused on execution right now. That’s what we get paid to do and that’s what we’re focused on.”
In regards to the Adore Me acquisition, Waters said: “It’s a terrific company. [Internally], we talk about [the acquisition] as being a 2-for-1 deal. It’s a stand-alone business that is incredibly successful and growing. And [it is] pointing at the value sector of the market that we don’t currently compete in and that gives us a great source of growth. And secondly, it’s a technology company where we can leverage some of their great capability and skill set inside of our larger base of customers. And so there are two very good reasons for us to be a good owner for that brand.”
The transaction is expected to close in January.
Despite Waters’ bullishness, investors were not convinced. Shares of Victoria’s Secret closed down 6.28 percent Thursday to $43.11 apiece. The company’s stock is down more than 20 percent, year-over-year.
Analysts, however, were a little bit more optimistic.
“[Third-quarter earnings-per-share] beat on better-than-consensus [gross margins], with management flagging improving traffic [and] conversion over the Black Friday-Cyber Monday period, while still suggesting willingness ‘to be aggressive in getting our fair share of consumer spending’ across what they expect will prove a competitive rest of 4Q,” Simeon Siegel, managing director at BMO Capital Markets, wrote in a note. “Bottom line: we continue to see self-help opportunity on [gross margins] and believe shares are cheap.”
His firm rated the stock “outperform” and set a $53 price target.
Ike Boruchow, senior retail analyst at Wells Fargo, rated Victoria’s Secret’s stock “overweight” and set a price target of $55.
“With management indicating that momentum into holiday was picking up (and 70 percent of 4Q sales to still be booked), inventory still headed in the right direction (guiding +MSDs exiting the year), we continue to see value out of VSCO,” Boruchow wrote in a note. “Following 3Q’s [negative] 11 percent comp trend, business persisted at that level ahead of Black Friday week, with the trend accelerating (traffic and conversion) in stores and online over that key holiday kickoff, giving VSCO more confidence in their 4Q plan as the consumer responded to Black Friday/Cyber Monday promotions (i.e., 4Q [average unit retail] planned down [year-over-year]). While there’s a lot of business yet to come (70 percent of quarter yet to be booked), we’re encouraged at the building momentum, especially with better in-stocks in key holiday categories [year-over-year], boding better for conversion and basket building.”