Victoria's Secret & Co.: Form 10-Q for the period ended Aug 3, 2024

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 market leading global lingerie brand with a history of serving women across the globe. PINK is a fashion and lifestyle brand for young women 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 and Adore Me strive to provide the best products to help women express their confidence, sexiness and power and use our platform to create connection and community while celebrating the extraordinary diversity of women's experiences.

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 second quarter of 2024, our operating income increased $36 million to $62 million compared to operating income of $26 million in the second quarter of 2023, and our operating income rate (expressed as a percentage of net sales) was 4.4% compared to 1.8% in the second quarter of 2023. The increase in operating income in the second quarter of 2024 compared to the second quarter of 2023 was primarily driven by a decrease in costs of goods sold and general, administrative and store operating expenses, partially offset by a decrease in net sales. Our net sales decreased $10 million, or 1%, to $1.417 billion compared to $1.427 billion in the second quarter of 2023 and comparable sales decreased 3% in the second quarter of 2024. Our North American store sales decreased by 2%, or $17 million, to $800 million compared to $817 million in the second quarter of 2023, as an increase in traffic was more than offset by decreases in conversion (which we define as the percentage of customers who visit our stores and make a purchase) and average unit retail (which we define as the average price per unit purchased) compared to the second quarter of 2023. Our direct channel sales decreased by 1%, or $4 million, to $430 million compared to $434 million in the second quarter of 2023, as increases in traffic and average unit retail were more than offset by a decrease in conversion compared to the second quarter of 2023.

We continue to focus on our strategic priorities: 1) Accelerate Our Core; 2) Ignite Growth; and 3) Transform the Foundation. We are committed to optimizing our performance by focusing on what is within our control, and we are confident in our strategic direction and remain committed to delivering long-term sustainable value for our stockholders.

For additional information related to our second quarter of 2024 financial performance, see “Results of Operations.”

Financial Impacts of the Adore Me Acquisition

In the second quarter and year-to-date 2024 and 2023, we recognized the financial impact of purchase accounting items, including recognition of changes in the estimated fair value of contingent consideration and Contingent Compensation Payments and amortization of acquired intangible assets. In addition, in both the second quarter and year-to-date 2023, we recognized the financial impact of additional acquisition-related costs and recognition in gross profit of the fair value adjustment to acquired inventories that were sold in the respective period. 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 Quarterly Report on Form 10-Q, provided below are non-GAAP financial measures that present operating income, 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 non-recurring, infrequent or unusual items that we believe are not indicative of the results 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 our 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 non-GAAP financial measures may differ from similarly titled measures used by other companies. The table below reconciles the most directly comparable GAAP financial measure to each non-GAAP financial measure.

(in millions, except per share amounts)

Reconciliation of Reported to Adjusted Operating Income

(a) In the second quarter of 2024 and 2023, we recognized pre-tax income of $5 million and pre-tax expense of $18 million (income of $5 million and expense of $16 million after-tax) within net income (loss) related to the financial impact of purchase accounting items related to the acquisition of Adore Me. These items include income of $6 million and expense of $10 million, respectively, included in general, administrative and store operating expense and $1 million of interest expense in both periods. Additionally, expense of $7 million is in costs of goods sold, buying and occupancy expense in the second quarter of 2023. Year-to-date 2024 and 2023, we recognized pre-tax expense of $3 million and $28 million ($3 million and $24 million after-tax) within net income (loss) related to the financial impact of purchase accounting items and professional service costs related to the acquisition of Adore Me. These items include expense of $1 million and $10 million, respectively, in general, administrative and store operating expense and $2 million of interest expense in both periods. Additionally, expense of $16 million is in costs of goods sold, buying and occupancy expense year-to-date 2023. For additional information, see Note 2, “Acquisition” included in Item 1. Financial Statements.

(b) In both the second quarter of 2024 and 2023, we recognized amortization expense of $6 million ($5 million after-tax) in general, administrative and store operating expense related to the acquisition of Adore Me. In both year-to-date 2024 and 2023, we recognized amortization expense of $13 million ($9 million after-tax) in general, administrative and store operating expense related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” and Note 7, “Long-Lived 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 in general, administrative and store operating expense and $3 million in buying and occupancy expense, related to restructuring activities to reorganize and improve our organizational structure. For additional information, see Note 4, “Restructuring Activities” included in Item 1. Financial Statements.

Store Data

The following table compares U.S. company-operated store data for the second quarter of 2024 to the second quarter of 2023 and year-to-date 2024 to year-to-date 2023:

(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 2024:

(a) Includes fourteen partner-operated stores as of August 3, 2024.

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

(a) Includes fifteen partner-operated stores as of July 29, 2023.

Results of Operations

Second Quarter of 2024 Compared to Second Quarter of 2023

Operating Income

For the second quarter of 2024, operating income increased $36 million, to $62 million, compared to operating income of $26 million in the second quarter of 2023, and the operating income rate (expressed as a percentage of net sales) increased to 4.4% from 1.8%. The drivers of the operating income results are discussed in the following sections.

Net Sales

The following table provides net sales for the second quarter of 2024 in comparison to the second quarter of 2023:

(in millions)

(a) 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 second quarter of 2023 to the second quarter of 2024:

(in millions)

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

The following table compares the second quarter of 2024 comparable sales to the second quarter of 2023:

(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 second quarter of 2024 decreased $10 million, or 1%, to $1.417 billion compared to $1.427 billion in the second quarter of 2023.

In the stores channel, our North America net sales decreased $17 million, or 2%, to $800 million compared to the second quarter of 2023, as an increase in traffic was more than offset by decreases in conversion and average unit retail.

In the direct channel, net sales decreased $4 million, or 1%, to $430 million, as increases in traffic and average unit retail were more than offset by a decrease in conversion compared to the second quarter of 2023.

In the international channel, net sales increased $11 million, or 6%, to $187 million compared to the second quarter of 2023. Increases in net sales in the second quarter of 2024 compared to the second quarter of 2023 were driven by royalties earned associated with franchise sales in many countries outside of North America and our wholesale arrangements.

Gross Profit

For the second quarter of 2024, our gross profit increased by $14 million compared to the second quarter of 2023 to $501 million, and our gross profit rate (expressed as a percentage of net sales) increased to 35.4% from 34.1%.

The increase in gross profit dollars was primarily due to the increase in merchandise margin dollars driven by reductions in costs of goods sold related to our supply chain initiative, partially offset by the decrease in net sales and the increase in promotional activity. Additionally, the increase in gross profit dollars compared to the second quarter of 2023 was driven by the recognition in gross profit of $7 million in the second quarter of 2023 related to the fair value step-up adjustment on the acquired inventory from Adore Me and $6 million in the second quarter of 2024 related to the gain on sale of certain non-store corporate-related assets.

The gross profit rate increase was driven by reductions in costs of goods sold related to our supply chain initiative, the gain on sale of certain non-store corporate-related assets and the expense recorded in the second quarter of 2023 as noted above, partially offset by increased promotional activity.

General, Administrative and Store Operating Expenses

For the second quarter of 2024, our general, administrative and store operating expenses decreased $22 million, or 5%, to $439 million compared to the second quarter of 2023. The decrease in general, administrative and store operating expenses compared to the second quarter of 2023 was due to the decrease in charges related to Adore Me purchase accounting items and marketing expenses.

The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased to 31.0% from 32.3% primarily due to the decrease in charges related to Adore Me purchase accounting items and marketing expenses.

Interest Expense

For the second quarter of 2024, our interest expense decreased $3 million to $21 million compared to the second quarter of 2023 primarily due to our lower average outstanding debt, partially offset by higher average borrowing rates for our ABL Facility and Term Loan Facility.

Provision for Income Taxes

For the second quarter of 2024, the Company’s effective tax rate was 22.4% compared to 144.2% in the second quarter of 2023. The second quarter of 2024 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 estimated federal and state statutory rate. The second quarter of 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 under the terms of the Merger Agreement.

Results of Operations

Year-to-Date 2024 Compared to Year-to-Date 2023

Operating Income

For year-to-date 2024, operating income increased $35 million, to $89 million, compared to operating income of $54 million year-to-date 2023, and the operating income rate (expressed as a percentage of net sales) increased to 3.2% from 1.9%. The drivers of the operating income results are discussed in the following sections.

Net Sales

The following table provides net sales for year-to-date 2024 in comparison to year-to-date 2023:

(in millions)

(a) 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 2023 to year-to-date 2024:

(in millions)

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

The following table compares year-to-date 2024 comparable sales to year-to-date 2023:

(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 2024 decreased $57 million, or 2%, to $2.777 billion compared to $2.834 billion year-to-date 2023.

In the stores channel, our North America net sales decreased $74 million, or 5%, to $1.529 billion, compared to year-to-date 2023 driven by decreases in average unit retail and conversion.

In the direct channel, net sales decreased $19 million, or 2%, to $879 million, as an increase in traffic was more than offset by decreases in conversion and average unit retail compared to year-to-date 2023.

In the international channel, net sales increased $36 million, or 11%, to $369 million compared to year-to-date 2023. Increases in net sales year-to-date 2024 compared to year-to-date 2023 were driven by royalties earned associated with franchise sales in many countries outside of North America and our wholesale arrangements.

Gross Profit

For year-to-date 2024, our gross profit increased $14 million to $1.003 billion, and our gross profit rate (expressed as a percentage of net sales) increased to 36.1% from 34.9%.

The increase in gross profit dollars was primarily due to reductions in costs of goods sold related to our supply chain initiative and a decrease in buying and occupancy expenses, partially offset by the decrease in net sales and an increase in promotional activity. Additionally, the increase in gross profit dollars compared to year-to-date 2023 was driven by the recognition in gross profit of $15 million year-to-date 2023 related to the fair value step-up adjustment on the acquired inventory from Adore Me.

The gross profit rate increase was primarily driven by reductions in costs of goods sold related to our supply chain initiative and the expense recorded year-to-date 2023 as noted above, partially offset by increased promotional activity.

General, Administrative and Store Operating Expenses

For year-to-date 2024, our general, administrative and store operating expenses decreased $21 million, or 2%, to $914 million. The decrease in general, administrative and store operating expenses compared to year-to-date 2023 was primarily due to the decrease in marketing expenses and charges related to Adore Me purchase accounting items, partially offset by increases in certain other administrative expenses. Additionally, the decrease in general, administrative and store operating expenses compared to year-to-date 2023 was due to a restructuring charge of $8 million in the first quarter of 2023.

The general, administrative and store operating expense rate (expressed as a percentage of net sales) decreased slightly to 32.9% from 33.0% due to the decrease in marketing expenses, charges related to Adore Me purchase accounting items and the restructuring charge recognized in 2023, partially offset by increases in certain other administrative expenses compared to year-to-date 2023.

Interest Expense

For year-to-date 2024, our interest expense decreased $3 million to $43 million compared to year-to-date 2023 primarily due to our lower average outstanding debt, partially offset by higher average borrowing rates for our ABL Facility and Term Loan Facility.

Provision for Income Taxes

For year-to-date 2024, the Company’s effective tax rate was 35.9% compared to 62.0% year-to-date 2023. The year-to-date 2024 rate differed from the Company’s combined estimated federal and state statutory rate primarily due to additional tax expense from the vesting of share-based compensation awards. 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 under the terms of the Merger Agreement.

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. Net cash provided by (used for) operating activities 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 assurance 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, capabilities, and strategic initiatives 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 cash provided by our 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 August 3, 2024, February 3, 2024 and July 29, 2023:

(in millions)

(a) The August 3, 2024 and July 29, 2023 amounts represent twenty-six-week periods and the February 3, 2024 amounts represent a fifty-three-week period.

(b) For the reporting period ended August 3, 2024, the availability under the ABL Facility was limited by our borrowing base of $647 million, less outstanding borrowings of $145 million and letters of credit of $19 million. For the reporting period ended February 3, 2024, the availability was limited by our borrowing base of $587 million, less outstanding borrowings of $145 million and letters of credit of $19 million. For the reporting period ended July 29, 2023, the availability under the ABL Facility was limited by our borrowing base of $579 million, less outstanding borrowings of $295 million and letters of credit of $30 million.

Cash Flow

The following table provides a summary of our cash flow activity for year-to-date 2024 and 2023:

(in millions)

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, gain on sale of assets and deferred tax expense, as well as changes in working capital. Net cash used for operating activities year-to-date 2024 was $1 million, a decrease in net cash flows used for operating activities of $18 million compared to year-to-date 2023. The decrease in net cash flows used for operating activities in year-to-date 2024 was primarily driven by an increase in net income of $27 million and lower net operating cash outflows associated with working capital changes of $28 million compared to year-to-date 2023, partially offset by a decrease in depreciation and amortization of long-lived assets of $16 million and the $15 million amortization of the fair value adjustment on the acquired inventory from Adore Me year-to-date 2023. The most significant working capital driver resulting in the decrease in net operating cash outflows this year compared to last year is related to income taxes paid of $37 million year-to-date 2024 compared to $59 million paid year-to-date 2023.

Investing Activities

Net cash used for investing activities year-to-date 2024 was $83 million, consisting of $99 million of capital expenditures, partially offset by $16 million of proceeds on the sale of certain non-store corporate-related assets. The capital expenditures were primarily related to our store capital program and investments in technology related to our strategic initiatives to drive growth.

Net cash used for investing activities year-to-date 2023 was $143 million, consisting primarily of capital expenditures. 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 Bath & Body Works, Inc.

We are estimating capital expenditures to be approximately $200 million for fiscal year 2024. We expect that our capital expenditures will continue to be focused on our store capital program along with investments in technology related to our strategic initiatives to drive growth.

Financing Activities

Net cash used for financing activities year-to-date 2024 was $17 million, consisting primarily of a $16 million payment for contingent consideration related to the acquisition of Adore Me and offsetting borrowings and repayments of $145 million under the ABL Facility.

Net cash used for financing activities year-to-date 2023 was $133 million, consisting primarily of $125 million of share repurchases and offsetting borrowings and repayments of $115 million from the ABL Facility.

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, and restrictions placed upon us by our borrowing arrangements, as well as financial and other conditions existing at the time. We use cash flows generated from operating activities to fund any share repurchases. 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.

March 2024 Share Repurchase Program

In March 2024, our Board of Directors approved the March 2024 Share Repurchase Program, authorizing the repurchase of up to $250 million of our common stock, subject to market conditions and other factors, through open market, accelerated share repurchase or privately negotiated transactions, including pursuant to one or more Rule 10b5-1 trading plans. The March 2024 Share Repurchase Program is open-ended in term and will continue until exhausted.

We did not repurchase any shares of our common stock under the March 2024 Share Repurchase Program during the second quarter or year-to-date 2024. As of August 3, 2024, we were authorized to repurchase up to $250 million of our common stock under the March 2024 Share Repurchase Program.

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 authorization, which expired at the end of fiscal year 2023, was utilized in fiscal year 2023 to repurchase shares in the open market and under the accelerated share repurchase agreement described below.

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 reflected 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. In connection with the final settlement of the ASR Agreement, the $25 million previously recorded in Paid-in Capital as of April 29, 2023 was reclassified to Treasury Stock in the second quarter of 2023.

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)

Shares repurchased under the January 2023 Share Repurchase Program were retired upon repurchase. 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 year-to-date 2023.

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 August 3, 2024, February 3, 2024 and July 29, 2023:

(in millions)

Cash paid for interest was $38 million and $44 million for year-to-date 2024 and year-to-date 2023, respectively.

Credit Facilities

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 second quarter of 2024 and 2023 and $2 million during both year-to-date 2024 and 2023.

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 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 August 3, 2024, the interest rate on the loans under the Term Loan Facility was 8.85%.

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.

We borrowed and made repayments of $145 million and $115 million under the ABL Facility year-to-date 2024 and 2023, respectively. As of August 3, 2024, there were borrowings of $145 million outstanding under the ABL Facility and the interest rate on the borrowings was 7.18%. We had $19 million of outstanding letters of credit as of August 3, 2024 that further reduced our availability under the ABL Facility. As of August 3, 2024, our remaining availability under the ABL Facility was $483 million.

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 August 3, 2024, we were in compliance with all covenants under our long-term debt and borrowing facilities.

Credit Ratings

The following table provides our credit ratings as of August 3, 2024:

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, deferred cash consideration related to the acquisition of Adore Me and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since February 3, 2024, as discussed in “Contingent Liabilities and Contractual Obligations” in our 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024. 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 second quarter of 2024 that had a material impact on our results of operations, financial position or cash flows.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision-usefulness of income tax disclosures, primarily by requiring enhanced disclosure for income taxes paid and the effective tax rate reconciliation. This standard will be effective for annual reporting periods beginning in fiscal year 2025 and for interim periods beginning in fiscal year 2026, with early adoption permitted. The updates required by this standard should be applied prospectively, but retroactive application is permitted. We do not expect this standard to have a material impact on our results of operations, financial position or cash flows.

Segment Reporting

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, Segment Reporting, including the significant segment expense disclosures. This standard will be effective for annual reporting periods beginning in fiscal year 2024 and interim periods beginning in fiscal year 2025, with early adoption permitted. The updates required by this standard should be applied retrospectively to all periods presented in the financial statements. We do not expect this standard 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 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024.

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, 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 August 3, 2024, our investment portfolio is primarily comprised of money market funds and 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 outstanding long-term debt as of August 3, 2024 consists of the 2029 Notes, which have a fixed interest rate, the $389 million in outstanding borrowing under the Term Loan Facility, which has a variable interest rate based on Term SOFR, and the $145 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 August 3, 2024, February 3, 2024 and July 29, 2023:

(in millions)

(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 August 3, 2024, 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 August 3, 2024 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 August 3, 2024, our investment portfolio is primarily comprised of money market funds and 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.

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 Interim 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 Interim 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 Interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the second quarter of 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The risk factors that affect our business and financial results are set forth under “Item 1A. Risk Factors” in our 2023 Annual Report on Form 10-K filed with the SEC on March 22, 2024. There have been no material changes to the risk factors from those described in the 2023 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2023 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.