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Here’s How Much Freight and Supply Disruption Cost Victoria’s Secret

In its first full quarter post-Bath & Body Works spinoff, Victoria’s Secret & Co. (VSCO) reported net sales of $1.44 billion in its third quarter, an increase of 6.5 percent compared to net sales of $1.35 billion a year ago, but slightly missing Wall Street analyst estimates. The company reported net income of $75.2 million, on diluted earnings per share of 81 cents in the third quarter of 2021, beating analyst estimates of 70 cents per share and sending the company’s stock up more than 12 percent in after-hours trading.

In a Nutshell: Third quarter sales were still down 8.6 percent compared to sales of $1.58 billion two years ago, as the retailer has closed approximately 260 stores in that time span.

VSCO estimates sales growth was potentially impacted by approximately 1 to 2 percent due to the ongoing supply chain disruption and corresponding impacts on inventory receipts.

Total inventories ended the quarter at $1.02 billion, up 4 percent compared to last year’s $981 million and down 16 percent compared to 2019. Stores and digital inventories combined were down in the high-single digits compared to last year, the company said, while in-transit inventory levels were up “significantly” to last year driven by the supply chain delays.

“We estimate the Covid-19-related disruption to our base of supply will increase our freight and product costs by as much as an incremental $100 million in Q4 (or $150 million in total for Q3/Q4 combined versus our previous guidance of a total $100 million),” the retailer wrote. “In addition to higher costs, we know these challenges will minimize our flexibility to chase winners and deliver increased sales versus our forecast, which in turn may inhibit our ability to accelerate sales growth year-over-year beyond what we are forecasting for the quarter.”

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As a company now independent from the former L Brands, Victoria’s Secret is hoping for a turnaround of sorts, both financially and in the public eye. Long known for its risqué marketing campaigns focused on the brands’ models, called Angels, the company is shifting to a more body-positive narrative with its VS Collective brand ambassadors at the center. Hours ahead of the earnings report, Victoria’s Secret unveiled the collective’s newest member: top tennis star Naomi Osaka.

Over the next three-to-five years, Victoria’s Secret targets mid-single digit revenue growth and a “mid-teens” operating income rate.

In the quarter, all three lines of the Victoria’s Secret business, Lingerie, Pink and Beauty, had positive sales and margin rates, with the company’s margin comparisons outpacing sales comparisons.

VSCO’s gross margin rate increased 250 basis points (2.5 percentage points) to 39.2 percent compared to 2020, and had an even bigger 900-basis-point (nine-percentage-point) bump over 2019. The improvements came even as VSCO estimated gross margin dollars were negatively impacted by approximately $50 million due to supply chain cost pressures, some of which were one-time in nature and some of which reflect the inflationary nature of the environment.

The retailer, known for its lingerie and intimates, is forecasting fourth quarter 2021 sales to be in the range of flat to up 3 percent from last year’s $2.1 billion sales, while decreasing in the low to mid-double digits compared to 2019 sales of $2.5 billion.

VSCO also projects diluted earnings per share in the range of $2.35 to $2.65, below 2020’s $3.20 per share total. Operating income is anticipated to be between $295 million and $335 million.

The company, named the “most searched fashion brand” early this year, expects gross margin to be about 40 percent, down compared to last year’s margin of 42.9 percent, driven by merchandise margin declines due to the supply chain cost pressures and lapping one-time rent abatements last year.

Victoria’s Secret and Co. has cash and cash equivalents of $330.5 million, and says it has begun to build up cash reserves in the holiday season. The retailer did not borrow any money through its ABL facility in the quarter, and continues to estimate capital expenditures for the full year to be approximately $170 million.

Net Sales: Net sales for the quarter were $1.44 billion, an increase of 6.5 percent compared to the $1.35 billion taken in the year prior.

Third quarter comparable sales were flat compared to 2020 and increased 4 percent compared to 2019. The retailer said that result compared to 2019 was in line with the first half of 2021 after normalizing for the estimated stimulus benefit in the first quarter.

Net Earnings: Victoria’s Secret & Co. reported net income of $75.2 million, or diluted earnings per share of 81 cents in the third quarter of 2021. This result compares to net income of $143.4 million, or earnings per share of $1.62 and adjusted net income of $72.6 million, or adjusted earnings per share of 82 cents for the 2020 period.

Third quarter operating income was $107.9 million compared to operating income of $127.4 million and adjusted operating income of $97.5 million in last year’s third quarter.

CEO’s Take: “Our work to transform our brand, deepen our customer connections and improve our operational fundamentals is gaining positive traction. We continue to improve our merchandise assortment and expand our already strong customer file,” CEO Martin Waters said in a statement. “I’m proud of the commitment and resilience demonstrated by our teams, who delivered these results in challenging circumstances, and in doing so are demonstrating the power of a healthy culture. We continue to monitor global supply chain issues and believe our close partnerships with our vendors and our work to get ahead of the curve will help mitigate those challenges.”