Executive Summary / Key Takeaways

• Victoria's Secret & Co. is executing a multi-faceted "Path to Potential" strategy focused on revitalizing its core brands (Victoria's Secret, PINK), expanding high-growth lifestyle categories (Beauty, Sport, Swim, Apparel), and enhancing its omnichannel presence, aiming to recapture market share and drive sustainable growth.
• First quarter 2025 results exceeded guidance, demonstrating management's agility in responding to early macroeconomic softness through product and marketing adjustments, though net sales were flat year-over-year and operating income declined due to cost pressures.
• Key growth drivers include the consistently strong performance of the Beauty business, double-digit growth in VSX (Sport), positive momentum in PINK apparel, and continued expansion in the International segment.
• The company faces significant near-term challenges, including the impact of tariffs (expected $50 million net headwind in FY2025), costs and disruptions from a recent security incident, and a competitive retail environment, which have led to a lowered full-year operating income outlook.
• Strategic investments in technological product innovation (e.g., advanced fabric tech in VSX) and an evolved product development process aim to provide a competitive edge and improve speed to market, particularly in apparel, while disciplined expense management and strategic capital allocation are focused on enhancing profitability and liquidity.

Victoria's Secret & Co. operates as a specialty retailer deeply embedded in the women's intimates, apparel, and beauty markets. The company manages a portfolio of globally recognized brands, including its flagship Victoria's Secret, the youth-focused PINK, and the digitally native Adore Me. Its reach extends through a vast network of physical stores in North America and internationally via partners, complemented by robust digital channels.

The industry landscape is intensely competitive and subject to shifting consumer preferences and macroeconomic pressures. Recent trends indicate a softening in the overall intimates market, with consumers increasingly prioritizing value, comfort, and versatility in their purchases. Younger demographics, particularly Gen Z, are engaging with intimates differently, often favoring sports bras or bra tops and influenced by social commerce platforms like TikTok. Broader trends in the womenswear market, while showing growth in segments like activewear and fast fashion, underscore the need for retailers to be agile, culturally relevant, and offer compelling value propositions across channels.

Within this dynamic environment, Victoria's Secret holds a significant position, maintaining an estimated 20% market share in the North American intimates category. Its competitive standing is shaped by several factors. Compared to rivals like American Eagle's Aerie (AEO), VSCO benefits from a more extensive global supply chain, which can offer advantages in operating costs. However, Aerie has demonstrated strength in capturing younger consumer loyalty through its inclusive branding and faster product innovation cycles. Against mass-market players like Gap Inc. (GPS), VSCO positions itself as more premium, leveraging its brand heritage and focus on experiential retail, although GPS benefits from greater scale and cost leadership in value segments. In activewear, while Lululemon (LULU) leads in performance metrics and digital engagement, VSCO is expanding its VSX offering, aiming to differentiate through its bra expertise and broader category coverage. Hanesbrands (HBI) competes in basic intimates, where VSCO seeks to offer higher quality despite HBI's lower price points. The company appears to lack proprietary, quantifiable technology differentiators.

A foundational element of VSCO's strategy and competitive differentiation lies in its technological approach to product innovation. This is particularly evident in the VSX Sport line, where products incorporate advanced fabric technology and proprietary raw materials like Lycra's adaptive fibers and X REACT technology. These technologies are designed to dynamically adjust to the wearer's shape and sweat levels, offering tangible benefits such as custom fit, cooling effects, enhanced breathability, and anti-shear properties. Specific features like patented turbo wick liners for accelerated moisture wicking and injection molded pads for shape and comfort further highlight this focus. The Featherweight Max bra, for instance, features design-patented laser-cut perforations for targeted airflow, contributing to its success in everyday wear. The So Obsessed Wireless Bra, leveraging comfort technology, has seen significant growth, resonating particularly with millennial customers. The company is also evolving its product development process beyond a traditional bra-centric calendar to enable faster, more agile creation, especially for apparel, aiming for significantly shorter timelines. This technological and process innovation is critical for VSCO to remain competitive, potentially supporting higher average selling prices, improving margins through differentiated offerings, and strengthening its market position by meeting evolving consumer demands for comfort, performance, and style.

VSCO's recent history, marked by its spin-off from L Brands in 2021 and the acquisition of Adore Me in 2022, has been a period of transformation aimed at establishing a solid operational foundation and redefining its brand identities. The "Path to Potential" strategy, centered on recommitting to PINK, supercharging bras, fueling growth in lifestyle categories, and evolving the go-to-market approach, is the company's roadmap to unlock future growth by leveraging these foundational elements and addressing market dynamics.

Recent Performance and Operations

In the first quarter of fiscal year 2025, Victoria's Secret & Co. reported net sales of $1.353 billion, essentially flat compared to $1.359 billion in the prior year period. Despite exceeding the company's initial guidance, this performance reflects a challenging start to the year, particularly in February, before momentum improved in March and April. Operating income for the quarter decreased by $6 million to $20 million, resulting in an operating margin of 1.5%, down from 1.9% in Q1 2024. The company reported a net loss attributable to Victoria's Secret Co. of $2 million, an improvement from a $4 million net loss in the prior year. On an adjusted basis, which excludes certain non-recurring items, operating income was $32 million, and net income attributable to VSCO was $7 million, or $0.09 per diluted share.

The decline in operating income was primarily driven by a decrease in gross profit, which fell by $27 million to $474 million, with the gross margin rate decreasing by 170 basis points to 35.1%. This margin pressure stemmed mainly from increased transportation costs and tariff-related order adjustments. Partially offsetting this was a reduction in buying and occupancy expenses, reflecting disciplined cost management. General, administrative, and store operating expenses decreased by $21 million to $454 million, leveraging 130 basis points as a percentage of sales to 33.6%. This reduction was attributed to a strategic shift in marketing spend to the second quarter, ongoing expense management initiatives, and lower Adore Me acquisition-related charges, though partially offset by costs associated with executive leadership restructuring. Interest expense decreased by $5 million to $17 million, benefiting from lower average debt levels and borrowing rates.

Performance varied across channels. North America stores saw a 1% decrease in net sales to $721 million, as lower traffic and conversion offset an increase in average unit retail. The Direct channel experienced a 3% sales decrease to $433 million, with lower traffic outweighing improved conversion. In contrast, the International channel continued its strong trajectory, with net sales increasing by 9% to $199 million, driven by growth in China, sourcing sales, and royalties from franchise partners.

Operationally, inventory levels ended Q1 2025 up 6% year-over-year at $1.043 billion, primarily to support growth in the international business, the European distribution center, and expanding lifestyle categories. Net cash used for operating activities was $150 million in Q1 2025, an increase from $116 million used in Q1 2024, largely due to the working capital impact of higher inventory. Capital expenditures were $43 million, focused on the store capital program and investments in technology and logistics. The company ended the quarter with $138 million in cash and cash equivalents. Liquidity remains supported by the Asset-Based Revolving Credit Facility, with $105 million outstanding and $509 million of remaining availability as of May 3, 2025. Subsequent to the quarter, the ABL Facility was amended, extending its maturity and securing more favorable terms. The company remains in compliance with its debt covenants.

Outlook and Strategic Execution

Looking ahead, Victoria's Secret & Co. is maintaining its full-year fiscal 2025 net sales guidance in the range of $6.2 billion to $6.3 billion, which is relatively flat compared to fiscal year 2024 sales of $6.204 billion (excluding a gift card benefit). However, the company has revised its outlook for adjusted operating income, lowering the range to $270 million to $320 million. This revised profit outlook primarily incorporates the expected net impact of tariffs, estimated at $50 million for the year after planned mitigation efforts. The company anticipates a gross tariff impact of approximately $120 million (assuming 30% on China imports and 10% elsewhere), with mitigation strategies expected to offset about $70 million. These mitigation levers include cost optimization with vendors, diversifying sourcing away from China (which is now in the low-single digits for imports), improving freight mix, and implementing strategic pricing adjustments through targeted promotions and price modifications.

For the second quarter of 2025, the company forecasts net sales between $1.38 billion and $1.41 billion, compared to $1.417 billion in Q2 2024. This outlook includes an estimated $20 million net sales impact from a recent security incident. Adjusted operating income for Q2 is projected to be in the range of $15 million to $35 million, significantly lower than $62 million in Q2 2024. This quarter's profit outlook is impacted by an estimated $10 million operating income hit from the security incident, a $10 million tariff headwind (primarily due to timing before mitigation fully takes effect), and the strategic shift of marketing spend from Q1. These headwinds are expected to be partially offset by ongoing expense management and a slight improvement in selling margin.

The company's strategic execution is focused on driving growth despite these near-term pressures. The "Path to Potential" strategy is being accelerated through recent executive leadership appointments, including dedicated Brand Presidents for Victoria's Secret, PINK, and Beauty, and an Executive Creative Director. These leaders are tasked with clarifying brand identities, driving product innovation, and optimizing the go-to-market strategy. Key initiatives include reestablishing PINK as a full lifestyle brand, leveraging VSCO's expertise to supercharge the bra business and expand lifestyle categories like Beauty, Sport, and Swim. The company plans to open approximately 16 new stores in North America in 2025, primarily off-mall Store of the Future locations, while closing 30 to 40 stores, mostly through consolidations of co-located formats. Around 40 renovations are also planned, focusing on square footage reductions and consolidations. Capital expenditures of $220 million are prioritized for these store investments and technology/logistics to support strategic growth and productivity.

Risks and Challenges

Victoria's Secret & Co. faces several significant risks and challenges that could impact its ability to execute its strategic plan and achieve its financial objectives. The uncertain macroeconomic environment, characterized by fluctuating consumer confidence and inflationary pressures, continues to pose a headwind to consumer spending patterns, potentially impacting sales and traffic across channels.

The imposition of U.S. tariffs on imports, particularly from China, presents a direct cost pressure. While the company is implementing mitigation strategies such as sourcing diversification and cost optimization, the net $50 million impact expected in fiscal year 2025 represents a material headwind to profitability, specifically anticipated to shave over 100 basis points off the gross margin rate. The timing of these impacts, with a notable portion hitting the second quarter before mitigation fully takes effect, adds complexity to near-term performance.

A recent security incident involving the company's information technology systems caused temporary disruptions to its e-commerce site and some in-store services. While critical systems have been restored and the incident is not expected to materially impact the full fiscal year results, the investigation is ongoing, and the company has incurred, and may continue to incur, expenses related to the incident. This highlights the inherent cybersecurity risk in retail operations and the potential for disruptions to impact sales and profitability.

The competitive landscape remains intense, with rivals actively competing on price, product innovation, and brand positioning. The shift in consumer preferences towards value and different product categories, particularly among younger consumers, requires VSCO to effectively differentiate its brands and offerings to maintain or grow market share. The company's strategy to reduce promotional activity in certain areas while competitors remain promotional, as seen in the panties category in Q1 2025, presents a delicate balance between protecting margins and driving traffic/market share.

Furthermore, the company is currently facing scrutiny from activist investors, including Barington Capital Group and BBRC International. These investors are calling for significant changes, including a board overhaul and questioning the strategic direction and leadership experience. Barington specifically cites concerns about declining revenue, shrinking gross margins, growing inventory, management turnover, and a perceived lack of focus on the core business and international growth. The company's adoption of a limited-duration shareholder rights plan ("poison pill") in response to stock accumulation by BBRC indicates a potential for ongoing shareholder activism, which could distract management and impact strategic decision-making or share price volatility.

Execution risk associated with the "Path to Potential" strategy is also pertinent. Successfully revitalizing the PINK brand, supercharging the bra business through innovation, and effectively expanding lifestyle categories require significant operational focus, marketing effectiveness, and product acceptance in a rapidly evolving market.

Conclusion

Victoria's Secret & Co. is navigating a complex period marked by strategic transformation and external pressures. The first quarter 2025 results, while exceeding internal expectations amidst early macro headwinds, underscore the ongoing challenges, particularly cost pressures from transportation and tariffs. The company's strategic priorities, centered on revitalizing its core brands, expanding high-growth categories like Beauty and VSX, and enhancing its omnichannel capabilities, are showing early signs of traction in specific areas like PINK apparel and international markets. Investments in technological product innovation, particularly in the VSX line, offer a tangible competitive advantage in performance and fit, which is crucial in a market increasingly focused on comfort and versatility.

However, the path forward is not without significant obstacles. The impact of tariffs, the costs associated with the recent security incident, and intense competition in a shifting market are expected to weigh on profitability in fiscal year 2025, as reflected in the lowered operating income guidance. Shareholder activism adds another layer of uncertainty, potentially influencing the pace and direction of strategic changes. The success of the "Path to Potential" strategy hinges on effective execution, particularly in clarifying brand identities, accelerating product development speed, and optimizing marketing spend to drive customer acquisition and loyalty. Investors will need to closely monitor the company's progress in mitigating tariff impacts, managing operational risks, and demonstrating sustained improvement in sales trends and profitability as it works to unlace its full potential in a challenging retail environment.