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Victoria’s Secret Expects Weak Q1 After Strong Holiday Sales

Victoria’s Secret & Co. wrapped up its first year as a standalone business with a 3.6 percent sales uptick in the 2021 holiday season on net income of $246.1 million.

Global supply chain headwinds are putting the heat on the company’s first-quarter outlook, with the lingerie seller anticipating a 4 percent to 8 percent sales decline.

In a Nutshell: The post-L Brands Victoria’s Secret continues to refurbish its brick-and-mortar footprint, planning 15 new off-mall stores largely following its “store of the future” format offering both Victoria’s Secret and Pink merchandise, an open floor plan, gender-neutral products and tech-driven fitting rooms. Over the next three years, the company expects to open 100 new stores worldwide.

Victoria’s Secret expects to close 10 to 30 stores this year, and renovate approximately 20 locations with the new format. Nearly half of the renovations will reduce square footage or consolidate co-located stores.

Supply chain cost pressures in the second half of 2021 totaled approximately $160 million, with $110 million coming in the fourth quarter alone and $10 million above what the retailer initially forecasted. These pressures, alongside rising raw materials expenses, are expected to cost approximately $140 million in the first half of 2022.

In an earnings call, chief financial officer Tim Johnson said he was “encouraged” by the freight rate movement into spring 2022.

Inventories ended the quarter up 35 percent to $948.8 million compared to last year’s $701.1 million, primarily driven by higher cost of goods due to inflation, longer in-transit times as the company began shifting its transportation mix back to ocean freight, and focused efforts to improve merchandise availability for customers.

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CEO Martin Waters said the company had gotten out in front of supply chain delays by pulling merchandise forward ahead of the spring.

“We feel good about where we are,” Waters said. “It’s not perfect by any stretch of the imagination, but we’re in a much better inventory position than we were six months ago.”

Victoria’s Secret and Co. expects inventory growth rates to begin moderating in the second half.

“Our merchant and planning teams have made progress in starting to move more merchandise back toward ocean and less toward air, but it’s a fluid and gradual process,” Johnson said. “As we look into the fall season, I think our hope and goal would be to try to get back to historical rates. Maybe its 50 to 60 percent ocean and the rest of the balance being air, to give us some level of flexibility or relief on the cost side of the business. This is heavily dependent on how fluid the supply chain will be at that time.”

Gross margin decreased 370 basis points year over year (3.7 percentage points) to 39.2 percent from the 2020 holiday’s 42.9 percent margin due to the supply chain expenses.

Victoria’s Secret is forecasting first quarter 2022 sales in the range of $1.43 billion to $1.5 billion for a comparable decline of 4 percent to 8 percent from $1.55 billion a year ago.

Under this guidance, operating income is expected to be in the range of $80 million to $110 million compared to $225.7 million in 2021. The decrease is predominantly due to incremental supply chain cost pressures and federal stimulus-driven spending, which drove higher sales and operating income last year. Victoria’s Secret expects operating profit growth to return in the third quarter.

Cost pressures will hit gross margin in the first quarter, with the metric expected to drop to approximately 37 percent from the year-ago period’s 43.2 percent.

The company projects full-year 2022 sales to range between flat and up low-single digits versus 2021 sales of $6.79 billion. It estimates operating income of $869.5 million.

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

Capital expenditures will see a major uptick this year to approximately $225 million, or approximately 3 percent of projected sales, versus $169 million in 2021.

For the second time in three months, Victoria’s Secret & Co. has approved a new share repurchase program enabling the company to buy back up to $250 million of its own common stock.

Cash and cash equivalents total $489.8 million, with anticipated 2022 free cash flow expected at $640 million.

Net Sales: Fourth quarter net sales came in at $2.18 billion, an increase of 3.6 percent compared to net sales of $2.1 billion in the prior-year period. Total comparable sales for the quarter increased 1 percent year over year, while comparable brick-and-mortar sales improved 12 percent.

For the quarter ended Jan. 29, Victoria’s Secret’s North American stores saw sales growth of 12.2 percent to $1.3 billion, while the company’s direct sales declined 13.6 percent to $718.3 million. International sales, including results from Greater China, and royalties associated with wholesale sales, franchised stores and company-operated stores in the U.K., jumped 43.9 percent.

The retailer reported net sales of $6.79 billion for the full year 2021, an increase of 25.3 percent compared to net sales of $5.41 billion for 2020. Total comparable sales for the full year 2021 increased 3 percent compared to 2020, while comparable store sales saw a 10 percent boost.

For the full year, North American stores saw sales jump 50.1 percent to $4.19 billion. Direct sales decreased 4.9 percent to $2.11 billion in 2021, while international sales jumped 20.5 percent to $476.2 million. 

Net Earnings: Victoria’s Secret & Co. reported net income of $246.1 million, or diluted earnings per share of $2.70 in the fourth quarter, down from the company’s net income of $282.4 million, or earnings per share of $3.20 for the fourth quarter of 2020.

Operating income was $333.2 million, a decline from the 2020 period’s $387.9 million generated. The decrease reflects incremental supply chain cost pressures and last year’s federal stimulus-related spending.

The company generated net income of $646.4 million for all of 2021, or diluted earnings per share of $7.18. This result compares to a net loss of $72.3 million, or loss per share of 82 cents and adjusted net income of $43 million, or adjusted earnings per share of 49 cents for the full year 2020.

Full-year 2021 operating income was $869.5 million compared to an operating loss of $101.5 million and adjusted operating income of $97.5 million in 2020. EBITDA for the year totaled $1.2 billion.

CEO’s Take: Waters highlighted how sales growth was driven by strength in the company’s core intimates and beauty categories, and gave some insight into the transition between the 2021 fourth quarter and 2022 first quarter.

“January was a little slower than we would have liked, and that continued into early February, but the back half of February has been strong,” Waters said. “The key driver of that was the Love Cloud bra launch. We’ve seen strong momentum in the bra business and good increases year over year, so that’s really the foundation.”

The Love Cloud collection, designed for all-day comfort and 100 percent inclusivity, launched in February and is another extension of the company’s brand overhaul.