# Victoria's Secret & Co.: Form 10-Q for the period ended Oct 28, 2023

- Company: [Victoria's Secret & Co.](/companies/vsxy.md) (CIK 1856437)
- Form: 10-Q
- Filed: 2023-12-01
- Accepted by EDGAR: Dec 1, 2023, 16:17 ET
- Period: 2023-10-28
- Accession: 0001856437-23-000033
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1856437/000185643723000033/vsco-20231028.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1856437/000185643723000033/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-10-28.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-30 to 2023-10-28 | $1.26bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-29 to 2023-10-28 | $4.10bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-30 to 2023-10-28 | $838.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-29 to 2023-10-28 | $2.68bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-30 to 2023-10-28 | $427.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-29 to 2023-10-28 | $1.42bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-30 to 2023-10-28 | $494.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-29 to 2023-10-28 | $1.43bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-30 to 2023-10-28 | −$67.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-29 to 2023-10-28 | −$13.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-30 to 2023-10-28 | $26.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-29 to 2023-10-28 | $72.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-30 to 2023-10-28 | −$22.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-29 to 2023-10-28 | −$17.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-30 to 2023-10-28 | −$71.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-29 to 2023-10-28 | −$72.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-30 to 2023-10-28 | −$0.92 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-29 to 2023-10-28 | −$0.93 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-30 to 2023-10-28 | −$0.92 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-29 to 2023-10-28 | −$0.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-30 to 2023-10-28 | 77,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-29 to 2023-10-28 | 78,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-29 to 2023-10-28 | −$200.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-29 to 2023-10-28 | $224.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-29 to 2023-10-28 | $125.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-10-28 | $124.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-10-28 | $1.64bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-10-28 | $4.69bn | us-gaap:Assets |
| Current liabilities | at 2023-10-28 | $1.37bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-10-28 | $4.45bn | us-gaap:Liabilities |
| Long-term debt | at 2023-10-28 | $1.53bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-10-28 | $4.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-10-28 | $220.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,742 characters.

The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.

### Executive Overview

Victoria’s Secret is an iconic global brand of women’s intimate and other apparel, personal care and beauty products. We sell our products through three brands, Victoria’s Secret, PINK and Adore Me. Victoria’s Secret is a category-defining global lingerie brand with a leading market position and a rich, over 45-year history of serving women across the globe. PINK is a lifestyle brand for the college-oriented customer, built around a strong intimates core. We also sell beauty products under both the Victoria’s Secret and PINK brands. Adore Me is a technology-led, digital first innovative intimates brand serving women of all sizes and budgets at all phases of life. Together, Victoria’s Secret, PINK, Victoria’s Secret Beauty and Adore Me support, inspire and celebrate women through every phase of their life.

Victoria’s Secret, PINK and Adore Me merchandise is sold online through e-commerce platforms, through retail stores located in the U.S., Canada and China, and through international stores and websites operated by partners under franchise, license, wholesale and joint venture arrangements. We have a presence in nearly 70 countries and we believe we benefit from global brand awareness, a wide and compelling product assortment and a powerful, deep connection with our customers.

In the third quarter of 2023, our operating loss was $67 million compared to operating income of $43 million in the third quarter of 2022, and our operating income (loss) rate (expressed as a percentage of net sales) was (5.3%) compared to 3.2% last year. The operating income (loss) decrease in the third quarter of 2023 compared to the third quarter of 2022 was primarily driven by an increase in general, administrative and store operating expense and a decrease in net sales and gross profit. Net sales decreased $53 million, or 4%, to $1.265 billion compared to $1.318 billion in the third quarter of 2022 and comparable sales decreased 7% in the third quarter of 2023. Our North American store sales decreased $90 million, to $723 million compared to $813 million in the third quarter of 2022, primarily driven by a decrease in traffic, average unit retail (which we define as the average price per unit purchased) and conversion (which we define as the percentage of customers who visit our stores and make a purchase) in the quarter compared to the third quarter of 2022. Our direct channel sales increased by 12%, or $40 million, to $382 million compared to $342 million in the third quarter of 2022, driven by the inclusion of Adore Me sales in our results beginning in fiscal year 2023. On a comparable basis, our direct channel sales decrease was driven by a decrease in average unit retail and traffic compared to the third quarter of 2022.

Despite a macro environment that remained challenging on the customer, we continue to focus on our strategic growth plan and the three priorities of our strategy: accelerating our core, igniting growth and transforming the foundation. We are committed to optimizing our performance in the current challenging environment by focusing on what is within our control, and we are confident in our strategic growth plan and remain committed to delivering long-term sustainable value for our shareholders.

For additional information related to our third quarter of 2023 financial performance, see “Results of Operations.”

### Financial Impacts of the Adore Me Acquisition

We consolidate Adore Me's financial information on an approximate one-month reporting lag. Accordingly, given the acquisition closing date of December 30, 2022, the operating results of Adore Me for the period subsequent to the acquisition date are recorded in our results beginning in 2023.

In the third quarter and year-to-date 2023, we recognized the financial impact of purchase accounting items and additional acquisition-related costs, including recognition in gross profit of the fair value adjustment to acquired inventories as it is sold, recognition of changes in the estimated fair value of contingent consideration and Contingent Compensation Payments, as well as amortization of acquired intangible assets. For additional information, see Note 2, “Acquisition.”

### Non-GAAP Financial Information

In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided below are non-GAAP financial measures that present operating income (loss), net income (loss) attributable to Victoria's Secret & Co. and net income (loss) per diluted share attributable to Victoria's Secret & Co. on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. The intangible asset amortization excluded from these non-GAAP financial measures is excluded because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures.

*(in millions, except per share amounts)*

*Reconciliation of Reported to Adjusted Operating Income (Loss)*

|  | Third Quarter 2023 | 2022 | Year-to-Date 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Reported Operating Income (Loss) - GAAP | $(67) | $43 | $(13) | $234 |
| Adore Me Acquisition-related Items (a) | 1 | — | 26 | — |
| Amortization of Intangible Assets (b) | 6 | — | 19 | — |
| Restructuring Charges (c) | — | — | 11 | 29 |
| Occupancy-related Legal Matter (d) | — | — | — | 22 |
| Adjusted Operating Income (Loss) | $(60) | $43 | $43 | $285 |
| **Reconciliation of Reported to Adjusted Net Income (Loss) Attributable to Victoria's Secret & Co.** |  |  |  |  |
| Reported Net Income (Loss) Attributable to Victoria's Secret & Co. - GAAP | $(71) | $24 | $(72) | $175 |
| Adore Me Acquisition-related Items (a) | 2 | — | 30 | — |
| Amortization of Intangible Assets (b) | 6 | — | 19 | — |
| Restructuring Charges (c) | — | — | 11 | 29 |
| Occupancy-related Legal Matter (d) | — | — | — | 22 |
| Tax Effect of Adjusted Items | (3) | — | (13) | (13) |
| Adjusted Net Income (Loss) Attributable to Victoria's Secret & Co. | $(66) | $24 | $(25) | $213 |
| **Reconciliation of Reported to Adjusted Net Income (Loss) Per Diluted Share Attributable to Victoria's Secret & Co.** |  |  |  |  |
| Reported Net Income (Loss) Per Diluted Share Attributable to Victoria's Secret & Co. - GAAP | $(0.92) | $0.29 | $(0.93) | $2.07 |
| Adore Me Acquisition-related Items (a) | — | — | 0.31 | — |
| Amortization of Intangible Assets (b) | 0.06 | — | 0.18 | — |
| Restructuring Charges (c) | — | — | 0.11 | 0.26 |
| Occupancy-related Legal Matter (d) | — | — | — | 0.19 |
| Adjusted Net Income (Loss) Per Diluted Share Attributable to Victoria's Secret & Co. | $(0.86) | $0.29 | $(0.33) | $2.52 |

(a) In the third quarter of 2023, we recognized a pre-tax charge of $2 million ($1 million after-tax) within net loss, $7 million included in costs of goods sold, buying and occupancy expense and $1 million included in interest expense, partially offset by $6 million income included in general, administrative and store operating expense, related to the financial impact of purchase accounting items related to the acquisition of Adore Me. Year-to-date 2023, we recognized pre-tax charges of $30 million ($24 million after-tax) within net loss, $22 million included in costs of goods sold, buying and occupancy expense, $5 million included in general, administrative and store operating expense and $3 million included in interest expense, related to the financial impact of purchase accounting items and professional service costs related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” included in Item 1. Financial Statements.

(b) In the third quarter of 2023, we recognized $6 million of amortization expense ($5 million after-tax) included in general, administrative and store operating expense related to the acquisition of Adore Me. Year-to-date 2023, we recognized $19 million ($14 million after-tax) included in general, administrative and store operating expense related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” and Note 8, “Intangible Assets” included in Item 1. Financial Statements.

(c) In the first quarter of 2023, we recognized a pre-tax charge of $11 million ($8 million after-tax), $8 million included in general, administrative and store operating expense and $3 million included in buying and occupancy expense, related to restructuring activities to continue to reorganize and improve our organizational structure. In the second quarter of 2022, we recognized a pre-tax charge of $29 million ($22 million after-tax), $16 million included in general, administrative and store operating expense and $13 million included in buying and occupancy expense, related to restructuring activities to reorganize our leadership structure. For additional information, see Note 4, “Restructuring Activities” included in Item 1. Financial Statements.

(d) In the first quarter of 2022, we recognized a pre-tax charge of $22 million ($16 million after-tax), included in buying and occupancy expense, related to a legal matter with a landlord regarding a high-profile store that we surrendered to the landlord prior to our separation from the Former Parent. For additional information, see Note 14, “Commitments and Contingencies” included in Item 1. Financial Statements.

### Store Data

The following table compares the third quarter of 2023 U.S. company-operated store data to the third quarter of 2022 and year-to-date 2023 to year-to-date 2022:

|  | Third Quarter 2023 | 2022 | % Change | Year-to-Date 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales per Average Selling Square Foot (a) | $122 | $136 | (10%) | $391 | $456 | (14%) |
| Sales per Average Store (in thousands) (a) | $833 | $945 | (12%) | $2,681 | $3,158 | (15%) |
| Average Store Size (selling square feet) | 6,833 | 6,919 | (1%) |  |  |  |
| Total Selling Square Feet (in thousands) | 5,610 | 5,618 | —% |  |  |  |

(a) Sales per average selling square foot and sales per average store, which are indicators of store productivity, are calculated based on store sales for the period divided by the average, including the beginning and end of period, of total square footage and store count, respectively.

The following table represents store data for year-to-date 2023:

| Company-Operated: | Stores at January 28, 2023 | Opened | Closed | Stores at October 28, 2023 |
| --- | ---: | ---: | ---: | ---: |
| U.S. | 812 | 12 | (9) | 815 |
| Canada | 25 | — | (1) | 24 |
| Subtotal Company-Operated | 837 | 12 | (10) | 839 |
| **China Joint Venture:** |  |  |  |  |
| Beauty & Accessories (a) | 39 | 2 | (6) | 35 |
| Full Assortment | 33 | 2 | (1) | 34 |
| Subtotal China Joint Venture | 72 | 4 | (7) | 69 |
| **Partner-Operated:** |  |  |  |  |
| Beauty & Accessories | 308 | 13 | (24) | 297 |
| Full Assortment | 135 | 23 | (9) | 149 |
| Subtotal Partner-Operated | 443 | 36 | (33) | 446 |
| **Adore Me** | 6 | — | — | 6 |
| **Total** | **1,358** | **52** | **(50)** | **1,360** |

(a) Includes fourteen partner-operated stores as of October 28, 2023.

The following table represents store data for year-to-date 2022:

| Company-Operated: | Stores at January 29, 2022 | Opened | Closed | Reclassed to Joint Venture | Stores at October 29, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| U.S. | 808 | 11 | (7) | — | 812 |
| Canada | 26 | — | — | — | 26 |
| Subtotal Company-Operated | 834 | 11 | (7) | — | 838 |
| **China Joint Venture:** |  |  |  |  |  |
| Beauty & Accessories (a) | 35 | 2 | (6) | 8 | 39 |
| Full Assortment | 30 | 2 | (1) | — | 31 |
| Subtotal China Joint Venture | 65 | 4 | (7) | 8 | 70 |
| **Partner-Operated:** |  |  |  |  |  |
| Beauty & Accessories | 335 | 10 | (30) | (8) | 307 |
| Full Assortment | 128 | 16 | (8) | — | 136 |
| Subtotal Partner-Operated | 463 | 26 | (38) | (8) | 443 |
| **Total** | **1,362** | **41** | **(52)** | **—** | **1,351** |

(a) Includes nine partner-operated stores as of October 29, 2022.

### Results of Operations

### Third Quarter of 2023 Compared to Third Quarter of 2022

### Operating Income (Loss)

For the third quarter of 2023, operating income (loss) decreased $110 million, to an operating loss of $67 million, compared to operating income of $43 million in the third quarter of 2022, and the operating income (loss) rate (expressed as a percentage of net sales) decreased to (5.3%) from 3.2%. The drivers of the operating income (loss) results are discussed in the following sections.

### Net Sales

The following table provides net sales for the third quarter of 2023 in comparison to the third quarter of 2022:

*(in millions)*

| Third Quarter | 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Stores – North America (a) | $723 | $813 | (11%) |
| Direct (a) | 382 | 342 | 12% |
| International (b) | 160 | 163 | (2%) |
| **Total Net Sales** | **$1,265** | **$1,318** | **(4%)** |

(a) Results for the third quarter of 2023 include Adore Me sales.

(b) Results include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.

The following table provides a reconciliation of net sales from the third quarter of 2022 to the third quarter of 2023:

*(in millions)*

|  |  |
| --- | ---: |
| **2022 Net Sales** | $1,318 |
| Comparable Store Sales | (78) |
| Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net (a) | (3) |
| Direct Channels (a)(b) | 56 |
| Credit Card Programs | (9) |
| International Wholesale, Royalty and Sourcing | (17) |
| Foreign Currency Translation | (2) |
| **2023 Net Sales** | **$1,265** |

(a) Results for the third quarter of 2023 include Adore Me sales.

(b) Results include consolidated joint venture direct sales in China.

The following table compares the third quarter of 2023 comparable sales to the third quarter of 2022:

|  | 2023 | 2022 |
| --- | ---: | ---: |
| Comparable Sales (Stores and Direct) (a) | (7%) | (11%) |
| Comparable Store Sales (a) | (11%) | (10%) |

(a) The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.

Net sales in the third quarter of 2023 decreased $53 million, or 4%, to $1.265 billion compared to $1.318 billion in the third quarter of 2022.

In the stores channel, our North America net sales decreased $90 million, or 11%, to $723 million compared to the third quarter of 2022 driven by a decrease in traffic, average unit retail and conversion in the quarter compared to the third quarter of 2022.

In the direct channel, net sales increased $40 million, or 12%, to $382 million, driven by the inclusion of Adore Me sales in our results beginning in fiscal year 2023. On a comparable basis, our direct channel sales decrease was driven by a decrease in average unit retail and traffic compared to the third quarter of 2022.

In the international channel, net sales decreased $3 million, or 2%, to $160 million compared to the third quarter of 2022. Increases in net sales in the third quarter of 2023 compared to the third quarter of 2022 related to net sales in China and royalties earned associated with franchised stores and online sales in many countries outside of North America were offset by a decrease in net sales related to sourcing sales to our partners.

### Gross Profit

For the third quarter of 2023, our gross profit decreased $30 million compared to the third quarter of 2022 to $427 million, and our gross profit rate (expressed as a percentage of net sales) decreased to 33.8% from 34.7%.

The decrease in gross profit dollars was primarily due to the decrease in merchandise margin dollars driven by the decrease in net sales and the increase in targeted promotional activity, partially offset by a decrease in supply chain costs compared to the third quarter of 2022. Buying and occupancy expenses were higher compared to the third quarter of 2022, primarily driven by the inclusion of Adore Me buying and occupancy expenses in the current year. Additionally, the decrease in gross profit dollars was driven by the partial recognition in gross profit of the inventory fair value step-up adjustment related to acquired inventory from Adore Me.

The gross profit rate decrease was driven by deleverage in buying and occupancy expenses in the quarter as a result of the decrease in sales compared to the third quarter of 2022.

### General, Administrative and Store Operating Expenses

For the third quarter of 2023, our general, administrative and store operating expenses increased $80 million, or 19%, compared to the third quarter of 2022 to $494 million. The increase in general, administrative and store operating expenses compared to the third quarter of 2022 was primarily due to strategic marketing investments including the Victoria’s Secret World Tour, the inclusion of Adore Me general, administrative and store operating expenses beginning in fiscal year 2023 and technology investments to enhance our digital business.

The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 39.1% from 31.5% due to strategic marketing investments including the Victoria’s Secret World Tour, deleverage driven by the decrease in sales compared to the third quarter of 2022 and the inclusion of Adore Me general, administrative and store operating expenses beginning in fiscal year 2023.

### Interest Expense

For the third quarter of 2023, our interest expense increased $11 million to $26 million compared to the third quarter of 2022, primarily driven by the increase in our outstanding debt due to the borrowings from the ABL Facility and a higher average borrowing rate for our Term Loan Facility.

### Provision (Benefit) for Income Taxes

For the third quarter of 2023, the Company’s effective tax rate was 24.1% compared to 25.0% in the third quarter of 2022. The third quarter of 2023 rate differed from the Company’s combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a lower rate than the Company’s combined federal and state statutory rate. The third quarter of 2022 rate was consistent with the Company’s combined federal and state statutory rate.

### Results of Operations

### Year-to-Date 2023 Compared to Year-to-Date 2022

### Operating Income (Loss)

For year-to-date 2023, operating income (loss) decreased $247 million, to an operating loss of $13 million, compared to operating income of $234 million year-to-date 2022, and the operating income (loss) rate (expressed as a percentage of net sales) decreased to (0.3%) from 5.4%. The drivers of the operating income (loss) results are discussed in the following sections.

### Net Sales

The following table provides net sales for year-to-date 2023 in comparison to year-to-date 2022:

*(in millions)*

| Year-to-Date | 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Stores – North America (a) | $2,326 | $2,712 | (14%) |
| Direct (a) | 1,281 | 1,176 | 9% |
| International (b) | 492 | 435 | 13% |
| **Total Net Sales** | **$4,099** | **$4,323** | **(5%)** |

(a) Results for year-to-date 2023 include Adore Me sales.

(b) Results include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.

The following table provides a reconciliation of net sales from year-to-date 2022 to year-to-date 2023:

*(in millions)*

|  |  |
| --- | ---: |
| **2022 Net Sales** | $4,323 |
| Comparable Store Sales | (322) |
| Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net (a) | (36) |
| Direct Channels (a)(b) | 158 |
| Credit Card Programs | (19) |
| International Wholesale, Royalty and Sourcing | 5 |
| Foreign Currency Translation | (10) |
| **2023 Net Sales** | **$4,099** |

(a) Results for year-to-date 2023 include Adore Me sales.

(b) Results include consolidated joint venture direct sales in China.

The following table compares year-to-date 2023 comparable sales to year-to-date 2022:

|  | 2023 | 2022 |
| --- | ---: | ---: |
| Comparable Sales (Stores and Direct) (a) | (10%) | (9%) |
| Comparable Store Sales (a) | (13%) | (7%) |

(a) The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Additionally, stores are excluded if total selling square footage in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.

Net sales year-to-date 2023 decreased $224 million, or 5%, to $4.099 billion compared to $4.323 billion year-to-date 2022.

In the stores channel year-to-date 2023, our North America net sales decreased $386 million, or 14%, to $2.326 billion, compared to year-to-date 2022 driven by a decrease in traffic which was down compared to year-to-date 2022. Our North American store sales were also impacted by decreases in average unit retail and conversion compared to year-to-date 2022.

In the direct channel, net sales increased $105 million, or 9%, to $1.281 billion, driven by the inclusion of Adore Me sales in our results beginning in fiscal year 2023. On a comparable basis, our direct channel sales decrease was driven by a decrease in average unit retail, conversion and traffic compared to year-to-date 2022.

In the international channel, net sales increased $57 million, or 13%, to $492 million compared to year-to-date 2022, as stores and online sales increased in many countries outside of North America driven by new full assortment store growth, comparable store sales growth driven in part by increased traffic and strong e-commerce performance, as well as positive customer acceptance of our product assortment.

### Gross Profit

For year-to-date 2023, our gross profit decreased $98 million to $1.416 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 34.6% from 35.0%.

The decrease in gross profit dollars was primarily due to the decrease in merchandise margin dollars driven by the decrease in net sales and the increase in promotional activity, partially offset by a decrease in supply chain costs compared to year-to-date 2022. Buying and occupancy expenses were down compared to year-to-date 2022, primarily driven by a legal reserve of $22 million related to a landlord matter in the first quarter of 2022 and restructuring charges of $13 million in the second quarter of 2022, partially offset by the inclusion of Adore Me buying and occupancy expenses beginning in fiscal year 2023. Additionally, the decrease in gross profit dollars was driven by the partial recognition in gross profit of the inventory fair value step-up adjustment related to acquired inventory from Adore Me.

The gross profit rate decrease was primarily driven by increased promotional activity and deleverage in buying and occupancy expenses as a result of the decrease in net sales compared to year-to-date 2022, partially offset by a decrease in supply chain costs compared to year-to-date 2022.

### General, Administrative and Store Operating Expenses

For year-to-date 2023, our general, administrative and store operating expenses increased $149 million, or 12%, to $1.429 billion. The increase in general, administrative and store operating expenses compared to year-to-date 2022 was primarily due to the inclusion of Adore Me general, administrative and store operating expenses beginning in fiscal year 2023 and strategic marketing investments including the Victoria’s Secret World Tour in fiscal year 2023. The increase in general, administrative and store operating expenses in 2023 was also due to the amortization of intangible assets acquired from Adore Me of $19 million, recognition of $8 million of restructuring charges to continue to reorganize and improve our organizational structure in the first quarter of 2023, partially offset by restructuring charges of $16 million in the second quarter of 2022 and lower store selling expenses in the current year due to improvements in our labor model.

The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 34.9% from 29.6% due to the inclusion of Adore Me general, administrative and store operating expenses beginning in fiscal year 2023, deleverage driven by the decrease in sales compared to 2022 and strategic marketing investments including the Victoria’s Secret World Tour.

### Interest Expense

For year-to-date 2023, our interest expense increased $31 million to $72 million compared to year-to-date 2022, primarily driven by the increase in our outstanding debt due to the borrowings from the ABL Facility and a higher average borrowing rate for our Term Loan Facility.

### Provision (Benefit) for Income Taxes

For year-to-date 2023, the Company’s effective tax rate was 20.6% compared to 13.2% year-to-date 2022. The year-to-date 2023 rate differed from the Company’s combined estimated federal and state statutory rate primarily due to non-deductible liabilities related to contingent consideration and Contingent Compensation Payments. The year-to-date 2022 rate was lower than the Company’s combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the respective period.

### FINANCIAL CONDITION

### Liquidity and Capital Resources

Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided by (used for) operations is impacted by our net income (loss) and working capital changes. Our net income (loss) is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins and income taxes. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.

Our ability to fund our operating needs is primarily dependent upon our ability to continue to generate positive cash flow from operations, as well as borrowing capacity under our ABL Facility, which we rely on to supplement cash generated by our operating activities, particularly when our need for working capital peaks in the summer and fall months as discussed above. Management believes that our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, taken as a whole, provide (i) adequate liquidity to meet all of our current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures, and (iii) flexibility to consider investment opportunities that may arise. However, certain investment opportunities or seasonal funding requirements may require us to seek additional debt or equity financing, and there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms, if at all, in the future.

We expect to utilize our cash flows to continue to invest in our brands, talent and capabilities, and growth strategies as well as to repay our indebtedness over time. We believe that our available short-term and long-term capital resources are sufficient to fund our working capital and other cash flow requirements over the next 12 months.

### Working Capital and Capitalization

Based upon our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, we believe we will be able to continue to meet our working capital needs.

The following table provides a summary of our working capital position and capitalization as of October 28, 2023, January 28, 2023 and October 29, 2022:

*(in millions)*

|  | October 28, 2023 | January 28, 2023 | October 29, 2022 |
| --- | ---: | ---: | ---: |
| Net Cash Provided by (Used for) Operating Activities (a) | $(200) | $437 | $(279) |
| Capital Expenditures (a) | 224 | 164 | 125 |
| Working Capital | 268 | 158 | 377 |
| Capitalization: |  |  |  |
| Long-term Debt | 1,530 | 1,271 | 1,244 |
| Victoria's Secret & Co. Shareholders' Equity | 220 | 383 | 235 |
| Total Capitalization | $1,750 | $1,654 | $1,479 |
| Amounts Available Under the ABL Facility (b) | $176 | $259 | $441 |

(a) The October 28, 2023 and October 29, 2022 amounts represent thirty-nine-week periods and the January 28, 2023 amounts represent a fifty-two-week period.

(b) For the reporting period ended October 28, 2023, the availability under the ABL Facility was limited to the maximum aggregate commitment amount of $750 million, less outstanding borrowings of $555 million and letters of credit of $19 million. For the reporting period ended January 28, 2023, the availability was limited by our borrowing base of $596 million, less outstanding borrowings of $295 million and letters of credit of $42 million. For the reporting period ended October 29, 2022, the availability under the ABL Facility was limited to the maximum aggregate commitment amount of $750 million, less outstanding borrowings of $267 million and letters of credit of $42 million.

### Cash Flow

The following table provides a summary of our cash flow activity for year-to-date 2023 and 2022:

*(in millions)*

|  | Year-to-Date 2023 | 2022 |
| --- | ---: | ---: |
| Cash and Cash Equivalents, Beginning of Period | $427 | $490 |
| Net Cash Flows Used for Operating Activities | (200) | (279) |
| Net Cash Flows Used for Investing Activities | (223) | (150) |
| Net Cash Flows Provided by Financing Activities | 122 | 67 |
| Effects of Exchange Rate Changes on Cash and Cash Equivalents | (2) | (2) |
| Net Decrease in Cash and Cash Equivalents | (303) | (364) |
| Cash and Cash Equivalents, End of Period | $124 | $126 |

### Operating Activities

Net cash used for operating activities reflects net income (loss) adjusted for non-cash items, including depreciation and amortization, share-based compensation expense and deferred tax expense, as well as changes in working capital. Net cash used for operating activities year-to-date 2023 was $200 million, an increase in net cash flows from operating activities of $79 million compared to year-to-date 2022. The increase in net cash flows from operating activities year-to-date 2023 was primarily driven by lower operating cash outflows associated with working capital changes, partially offset by lower net income (loss). The most significant working capital driver resulting in the increase in operating cash flows this year compared to last year was the timing of payments related to the increased inventory levels last year, which were primarily driven by modal mix changes and longer in-transit shipment times. The other significant working capital driver resulting in the increase in operating cash flows this year is related to income taxes paid of $65 million year-to-date 2023 compared to $158 million paid year-to-date 2022.

### Investing Activities

Net cash used for investing activities year-to-date 2023 was $223 million, consisting primarily of capital expenditures of $224 million. The capital expenditures were primarily related to our store capital program and investments in technology related to our strategic initiatives to drive growth and technology investments relating to separation activities from our Former Parent.

Net cash used for investing activities year-to-date 2022 was $150 million, consisting primarily of capital expenditures of $125 million and our $18 million investment in Frankies Bikinis. The capital expenditures were primarily related to our store capital program, along with investments in technology, distribution and logistics to support our retail capabilities.

We are estimating capital expenditures to be approximately $255 million for fiscal year 2023. We expect that capital expenditures during fiscal year 2023 will be primarily focused on our store capital program along with investments in technology related to our strategic initiatives to drive growth and technology investments relating to separation activities from our Former Parent.

### Financing Activities

Net cash provided by financing activities year-to-date 2023 was $122 million, consisting primarily of borrowings of $405 million from the ABL Facility, partially offset by $145 million of repayments under the ABL Facility and $125 million of share repurchases.

Net cash provided by financing activities year-to-date 2022 was $67 million, consisting primarily of $267 million of borrowings from the ABL Facility and $55 million of cash received from Regina Miracle in connection with the joint venture agreement completed in the first quarter of 2022. Those proceeds were partially offset by $214 million of share repurchases and $40 million of payments for taxes on share-based compensation awards issued.

### Common Stock Share Repurchases & Treasury Stock Retirements

Our Board of Directors determines share repurchase authorizations, giving consideration to our levels of profit and cash flows, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements and the Tax Matters Agreement with the Former Parent, as well as financial and other conditions existing at the time. We use cash flows generated from operating activities to fund our share repurchase programs. Once authorized by our Board of Directors, the timing and amount of any share repurchases are made at our discretion, taking into account a number of factors, including market conditions.

#### Fiscal Year 2023

### January 2023 Share Repurchase Program

In January 2023, our Board of Directors approved the January 2023 Share Repurchase Program, authorizing the repurchase of up to $250 million of our common stock. The $250 million authorization is expected to be utilized to repurchase shares in the open market or as otherwise authorized by the Board of Directors, subject to market conditions and other factors. The January 2023 Share Repurchase Program began upon completion of the March 2022 Share Repurchase Program and will continue until exhausted, but no later than the end of fiscal year 2023.

In February 2023, as part of the January 2023 Share Repurchase Program, we entered into the ASR Agreement with Goldman Sachs to repurchase $125 million of our common stock. In February 2023, we made an initial payment of $125 million to Goldman Sachs and received an initial delivery of 2.4 million shares of our common stock. As a result of the initial share delivery, there was an additional $1 million increase in Treasury Stock, which reflects the excise tax liability recorded related to the share repurchase in accordance with the Inflation Reduction Act of 2022.

In May 2023, upon final settlement of the ASR Agreement, we received an additional 1.3 million shares of our common stock from Goldman Sachs. The final number of shares received was based on the volume-weighted average price of our common stock during the term of the ASR Agreement, less a discount and subject to adjustments pursuant to the terms of the ASR Agreement.

We repurchased the following shares of our common stock under the January 2023 Share Repurchase Program during year-to-date 2023:

*(in millions)*

*(in thousands)*

*(in millions)*

|  | Amount Authorized | Shares Repurchased | Amount Repurchased | Average Stock Price |
| --- | ---: | ---: | ---: | ---: |
| January 2023 Share Repurchase Program | $250 | 3,652 | $125 | $34.22 |

As of October 28, 2023, we were authorized to repurchase up to $125 million of our common stock under the January 2023 Share Repurchase Program.

In accordance with the Board of Directors' resolution, shares repurchased under the January 2023 Share Repurchase Program were immediately retired. As a result, we retired the 3.7 million shares repurchased in connection with the settlement of the ASR Agreement year-to-date 2023. The retirement resulted in a reduction of $126 million in Treasury Stock, less than $1 million in the par value of Common Stock, $9 million in Paid-in Capital and $117 million in Retained Earnings (Accumulated Deficit) year-to-date 2023.

#### Fiscal Year 2022

### March 2022 Share Repurchase Program

In March 2022, our Board of Directors approved the March 2022 Share Repurchase Program, providing for the repurchase of up to $250 million of our common stock. The $250 million authorization was utilized in fiscal year 2022 to repurchase shares in the open market, subject to market conditions and other factors.

We repurchased the following shares of its common stock under the March 2022 Share Repurchase Program during year-to-date 2022:

*(in millions)*

*(in thousands)*

*(in millions)*

|  | Amount Authorized | Shares Repurchased | Amount Repurchased | Average Stock Price |
| --- | ---: | ---: | ---: | ---: |
| March 2022 Share Repurchase Program | $250 | 5,104 | $214 | $41.91 |

In accordance with the Board of Directors' resolution, shares of our common stock repurchased under the March 2022 Share Repurchase Program were retired upon repurchase. As a result, year-to-date 2022 we retired 5.1 million shares repurchased under the March 2022 Share Repurchase Program, which resulted in reductions of less than $1 million in the par value of Common Stock, $10 million in Paid-in Capital and $204 million in Retained Earnings.

### December 2021 ASR Agreement

In February 2022, upon final settlement of our December 2021 ASR Agreement with Goldman Sachs, we received an additional 0.3 million shares of our common stock from Goldman Sachs. The delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share. In connection with the settlement of the December 2021 ASR Agreement, $50 million previously recorded in Paid-in Capital as of January 29, 2022, was reclassified to Treasury Stock in the first quarter of 2022. In February 2022, we immediately retired the additional 0.3 million shares repurchased in connection with the settlement of the December 2021 ASR Agreement. The retirement resulted in a reduction of $50 million in Treasury Stock, less than $1 million in the par value of Common Stock, less than $1 million in Paid-in Capital and nearly $50 million in Retained Earnings.

### Dividend Policy and Procedures

We have not paid any cash dividends since becoming an independent, publicly traded company. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the Board of Directors deems relevant. We would use cash flow generated from operating and financing activities to fund our dividends.

### Long-term Debt and Borrowing Facilities

The following table provides our outstanding Long-term Debt balance, net of unamortized debt issuance costs and discounts and any current portion, as of October 28, 2023, January 28, 2023 and October 29, 2022:

*(in millions)*

| Senior Secured Debt with Subsidiary Guarantee | October 28, 2023 | January 28, 2023 | October 29, 2022 |
| --- | ---: | ---: | ---: |
| $392 million Term Loan due August 2028 (“Term Loan Facility”) | $385 | $387 | $388 |
| Asset-based Revolving Credit Facility due August 2026 (“ABL Facility”) | 555 | 295 | 267 |
| Total Senior Secured Debt with Subsidiary Guarantee | 940 | 682 | 655 |
| **Senior Debt with Subsidiary Guarantee** |  |  |  |
| $600 million, 4.625% Fixed Interest Rate Notes due July 2029 (“2029 Notes”) | 594 | 593 | 593 |
| Total Senior Debt with Subsidiary Guarantee | 594 | 593 | 593 |
| Total | 1,534 | 1,275 | 1,248 |
| Current Debt | (4) | (4) | (4) |
| **Total Long-term Debt, Net of Current Portion** | **$1,530** | **$1,271** | **$1,244** |

Cash paid for interest was $54 million and $29 million for year-to-date 2023 and year-to-date 2022, respectively.

### Credit Facilities

In September 2023, we entered into a delayed draw term loan, secured by certain real estate assets owned by us, to increase available liquidity in consideration of potential seasonal working capital needs. The delayed draw term loan has a maximum borrowing capacity of $75 million and any amounts borrowed will mature in December 2023. As of December 1, 2023, we have not drawn any amounts under this term loan. During the third quarter of 2023 and year-to-date 2023, fees incurred in relation to this delayed draw term loan were $1 million and are being amortized over the life of the delayed draw term loan through the maturity date.

On August 2, 2021, we entered into a term loan B credit facility in an aggregate principal amount of $400 million, which will mature in August 2028. The discounts and issuance costs from the Term Loan Facility are being amortized through the maturity date and are included within Long-term Debt on the Consolidated Balance Sheets. Commencing in December 2021, we are required to make quarterly principal payments on the Term Loan Facility in an amount equal to 0.25% of the original principal amount of $400 million. We made principal payments for the Term Loan Facility of $1 million during both the third quarter of 2023 and the third quarter of 2022 and $3 million during both year-to-date 2023 and year-to-date 2022.

In May 2023, we amended our Term Loan Facility to allow for an early transition to using Term SOFR as the applicable reference rate to calculate interest instead of LIBOR. Prior to the amendment, interest under the Term Loan Facility was calculated by reference to the LIBOR or an alternative base rate, plus an interest rate margin equal to (i) in the case of LIBOR loans, 3.25% and (ii) in the case of alternate base rate loans, 2.25%. The LIBOR rate applicable to the Term Loan Facility was subject to a floor of 0.50%. In accordance with the amendment, interest on Term SOFR loans under the Term Loan Facility is now calculated by reference to Term SOFR, plus an interest rate margin ranging from 3.36% to 3.68%. The obligation to pay principal and interest on the loans under the Term Loan Facility is jointly and severally guaranteed on a full and unconditional basis by certain of our wholly-owned domestic subsidiaries. The loans under the Term Loan Facility are secured on a first-priority lien basis by certain assets of ours and guarantors that do not constitute priority collateral of the ABL Facility and on a second-priority lien basis by priority collateral of the ABL Facility, subject to customary exceptions. As of October 28, 2023, the interest rate on the loans under the Term Loan Facility was 8.90%.

On August 2, 2021, we also entered into a senior secured asset-based revolving credit facility. The ABL Facility allows for borrowings and letters of credit in U.S. dollars or Canadian dollars and has aggregate commitments of $750 million and an expiration date of August 2026. The availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on our eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property, and (ii) the aggregate commitment. In May 2023, we amended our ABL Facility to allow for an early transition to using Term SOFR as the applicable reference rate to calculate interest instead of LIBOR. Prior to the amendment, interest on the loans under the ABL Facility was calculated by reference to (i) LIBOR or an alternative base rate and (ii) in the case of loans denominated in Canadian dollars, CDOR or a Canadian base rate, plus an interest rate margin based on average daily excess availability ranging from (x) in the case of LIBOR and CDOR loans, 1.50% to 2.00% and (y) in the case of alternate base rate loans and Canadian base rate loans, 0.50% to 1.00%. In accordance with the amendment, interest on Term SOFR loans under the ABL Facility is now calculated by reference to Term SOFR, plus an interest rate margin based on average daily excess availability ranging from 1.60% to 2.10%. Unused commitments under the ABL Facility accrue an unused commitment fee ranging from 0.25% to 0.30%. The obligation to pay principal and interest on the loans under the ABL Facility is jointly and severally guaranteed on a full and unconditional basis by certain of our wholly-owned domestic and Canadian subsidiaries. The loans under the ABL Facility are secured on a first-priority lien basis by our eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property and on a second-priority lien basis on substantially all other assets of ours, subject to customary exceptions.

Year-to-date 2023, we borrowed $405 million and made payments of $145 million under the ABL Facility. As of October 28, 2023, there were borrowings of $555 million outstanding under the ABL Facility and the interest rate on the borrowings was 7.58%. We had $19 million of outstanding letters of credit as of October 28, 2023 that further reduced our availability under the ABL Facility. As of October 28, 2023, our remaining availability under the ABL Facility was $176 million.

Subsequent to the end of the third quarter of 2023 and as of November 30, 2023, borrowings of $464 million remained outstanding under the ABL Facility.

Our long-term debt and borrowing facilities contain certain financial and other covenants, including, but not limited to, the maintenance of financial ratios. The 2029 Notes and the Term Loan Facility include the maintenance of a consolidated coverage ratio and a consolidated total leverage ratio, and the ABL Facility includes the maintenance of a fixed charge coverage ratio and a debt to EBITDAR ratio. The financial covenants could, within specific predefined circumstances, limit our ability to incur additional indebtedness, make certain investments, pay dividends or repurchase shares. As of October 28, 2023, we were in compliance with all covenants under our long-term debt and borrowing facilities.

We elected the optional expedient under Accounting Standards Update No. 2020-04, *Reference Rate Reform*, in connection with amending our Term Loan Facility and ABL Facility agreements to replace the reference rate from LIBOR to Term SOFR to consider the amendments as a continuation of the existing contract without having to perform an assessment that would otherwise be required under GAAP.

### Credit Ratings

The following table provides our credit ratings as of October 28, 2023:

|  | Moody’s | S&P |
| --- | --- | --- |
| Corporate | Ba3 | BB- |
| Senior Secured Debt with Subsidiary Guarantee | Ba2 | BB+ |
| Senior Unsecured Debt with Subsidiary Guarantee | B1 | BB- |
| Outlook | Stable | Stable |

### Contingent Liabilities and Contractual Obligations

#### Contractual Obligations

Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. Except with respect to the additional $260 million of outstanding borrowings under the ABL Facility, there have been no material changes in our contractual obligations since January 28, 2023, as discussed in “Contingent Liabilities and Contractual Obligations” in our 2022 Annual Report on Form 10-K filed with the SEC on March 17, 2023. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations).

### RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

We did not adopt any new accounting standards during the third quarter of 2023 that had a material impact on our results of operations, financial position or cash flows. In addition, there are no new accounting standards not yet adopted that are expected to have a material impact on our results of operations, financial position or cash flows.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

There have been no material changes to the critical accounting policies and estimates disclosed in our 2022 Annual Report on Form 10-K filed with the SEC on March 17, 2023.

## Market risk

As filed, 4,659 characters.

### Market Risk

The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We may use derivative financial instruments like foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.

### Foreign Exchange Rate Risk

We have operations and investments in unconsolidated entities in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations. Our Canadian dollar and Chinese Yuan denominated earnings are subject to exchange rate risk as substantially all our merchandise sold in Canada and China is sourced through U.S. dollar transactions. From time to time we may adjust our exposure to foreign exchange rate risk by entering into foreign currency forward contracts, however, these measures may not succeed in offsetting all the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.

Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange rate fluctuations.

### Interest Rate Risk

Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities is the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. As of October 28, 2023, our investment portfolio is primarily comprised of bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.

Our long-term debt as of October 28, 2023 consists of the 2029 Notes, which have a fixed interest rate, the $392 million in outstanding borrowing under the Term Loan Facility, which has a variable interest rate based on Term SOFR, and the $555 million in outstanding borrowing under the ABL Facility, which has a variable interest rate based on Term SOFR. Our exposure to interest rate changes is limited to the fair value of the debt outstanding as well as the interest we pay on the Term Loan Facility and ABL Facility, which we believe would not have a material impact on our earnings or cash flows.

### Fair Value of Financial Instruments

The following table provides a summary of the principal value and estimated fair value of our outstanding debt as of October 28, 2023, January 28, 2023 and October 29, 2022:

*(in millions)*

|  | October 28, 2023 | January 28, 2023 | October 29, 2022 |
| --- | ---: | ---: | ---: |
| Principal Value | $992 | $995 | $996 |
| Fair Value, Estimated (a) | 830 | 894 | 870 |

(a) The estimated fair value of our publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC 820, *Fair Value Measurement*. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.

As of October 28, 2023, we believe that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity. We further believe the principal value of the outstanding debt under the ABL Facility approximates its fair value as of October 28, 2023 based on the terms of the borrowings from the ABL Facility.

### Concentration of Credit Risk

We maintain cash and cash equivalents with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. As of October 28, 2023, our investment portfolio is primarily comprised of bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.

## Controls and procedures

As filed, 1,555 characters.

*Evaluation of disclosure controls and procedures.* As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

*Changes in internal control over financial reporting.* We are integrating Adore Me into our internal controls over financial reporting beginning in fiscal year 2023. Other than the changes with regard to Adore Me, there were no changes in our internal control over financial reporting that occurred during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 586 characters.

The risk factors that affect our business and financial results are set forth under “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K filed with the SEC on March 17, 2023. There have been no material changes to the risk factors from those described in the 2022 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K and those described in this report or other SEC filings could cause actual results to differ materially from those stated in any forward-looking statements.

Filed Dec 1, 2023.
Source: SEC EDGAR, the filing index for accession 0001856437-23-000033. Last ingested by Listed: Oct 27, 2026, 16:18 ET. No prices; not investment advice.