SEC Filing | Victoria's Secret & Co.

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vsco-20220730

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________

FORM 10-Q

_________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-40515

_________________________________

VICTORIA'S SECRET & CO.

(Exact name of registrant as specified in its charter)

_______________________________

Delaware

86-3167653

(State or other jurisdiction of
incorporation or organization)

(IRS Employer Identification No.)

4 Limited Parkway East

Reynoldsburg,

Ohio

43068

(Address of principal executive offices)

(Zip Code)

(614)

577-7000

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 Par Value	VSCO	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

As of September 2, 2022, the number of outstanding shares of the Registrant’s common stock was 81,245,512 shares.

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VICTORIA'S SECRET & CO.

TABLE OF CONTENTS


			Page No.
Part I. Financial Information

Item 1. Financial Statements *

Consolidated and Combined Statements of Income for the Thirteen-Weeks and Tw enty -Six-Weeks Ended July 30, 2022 and July 3 1, 2021 (Unaudited)			3

Consolidated and Combined Statements of Comprehensive Income for the Thirteen-Weeks and Tw enty-Six-We eks Ended July 30, 2022 and July 3 1, 2021 (Unaudited)			3

Consolidated and Combined Balance Sheets as of July 30, 2022 (Unaudited), January 29, 2022 and July 3 1, 2021 (Unaudited)			4

Consolidated and Combined Statements of Equity for the Thirteen-Weeks and Twenty-Six-We eks Ended July 30, 2022 and July 3 1, 2021 (Unaudited)			5

Consolidated and Combined Statements of Cash Flows for the T wenty-Six -Weeks Ended July 30, 2022 and July 3 1, 2021 (Unaudited)			7

Notes to Consolidated and Combined Financial Statements (Unaudited)			8

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995			22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23

Item 3. Quantitative and Qualitative Disclosures About Market Risk			35

Item 4. Controls and Procedures			36

Part II. Other Information			37

Item 1. Legal Proceedings			37

Item 1A. Risk Factors			37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37

Item 3. Defaults Upon Senior Securities			37

Item 4. Mine Safety Disclosures			38

Item 5. Other Information			38

Item 6. Exhibits			38

Signature			39


*			Victoria's Secret & Co.'s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2022” and “second quarter of 2021” refer to the thirteen-week periods ended July 30, 2022 and July 31, 2021, respectively. “Year-to-date 2022” and “year-to-date 2021” refer to the twenty-six-week periods ended July 30, 2022 and July 31, 2021, respectively.

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PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

VICTORIA'S SECRET & CO.

CONSOLIDATED AND COMBINED STATEMENTS OF INCOME

(in millions except per share amounts)

(Unaudited)


	Second Quarter				Year-to-Date
	2022		2021		2022		2021
Net Sales	$	1,521	$	1,614	$	3,005	$	3,168
Costs of Goods Sold, Buying and Occupancy	(986)		(944)		(1,948)		(1,826)
Gross Profit	535		670		1,057		1,342
General, Administrative and Store Operating Expenses	(437)		(467)		(865)		(914)
Operating Income	98		203		192		428
Interest Expense	(13)		(3)		(25)		(4)
Other Loss	(2)		(1)		(6)		—
Income Before Income Taxes	83		199		161		424
Provision for Income Taxes	16		48		18		99
Net Income	67		151		143		325
Less: Net Loss Attributable to Noncontrolling Interest	(3)		—		(8)		—
Net Income Attributable to Victoria's Secret & Co.	$	70	$	151	$	151	$	325
Net Income Per Basic Share Attributable to Victoria's Secret & Co.	$	0.84	$	1.71	$	1.81	$	3.68
Net Income Per Diluted Share Attributable to Victoria's Secret & Co.	$	0.83	$	1.71	$	1.76	$	3.68

VICTORIA'S SECRET & CO.

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)


	Second Quarter				Year-to-Date
	2022		2021		2022		2021
Net Income	$	67	$	151	$	143	$	325
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	(1)		—		—		4
Unrealized Gain on Cash Flow Hedges	—		1		—		—
Amounts Reclassified from Accumulated Other Comprehensive Income to Paid-in Capital	—		—		3		—
Total Other Comprehensive Income (Loss), Net of Tax	(1)		1		3		4
Total Comprehensive Income	66		152		146		329
Less: Net Loss Attributable to Noncontrolling Interest	(3)		—		(8)		—
Less: Foreign Currency Translation Attributable to Noncontrolling Interest	1		—		2		—
Comprehensive Income Attributable to Victoria's Secret & Co.	$	68	$	152	$	152	$	329

The accompanying Notes are an integral part of these Consolidated and Combined Financial Statements.

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VICTORIA'S SECRET & CO.

CONSOLIDATED AND COMBINED BALANCE SHEETS

(in millions except par value amounts)


	July 30, 2022		January 29, 2022		July 31, 2021
	(Unaudited)				(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	201	$	490	$	293
Cash in Escrow related to the Spin-Off	—		—		600
Accounts Receivable, Net	149		162		99
Inventories	1,086		949		745

Other	116		90		90
Total Current Assets	1,552		1,691		1,827
Property and Equipment, Net	864		957		999
Operating Lease Assets	1,298		1,369		1,513

Trade Name	246		246		246
Deferred Income Taxes	21		17		12
Other Assets	91		64		61
Total Assets	$	4,072	$	4,344	$	4,658
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable	$	490	$	538	$	371
Accrued Expenses and Other	623		714		704
Current Debt	4		4		—
Current Operating Lease Liabilities	322		340		332
Income Taxes	6		102		28
Total Current Liabilities	1,445		1,698		1,435
Deferred Income Taxes	60		58		70
Long-term Debt	977		978		592
Long-term Debt due to Former Parent	—		—		97
Long-term Operating Lease Liabilities	1,269		1,314		1,457
Other Long-term Liabilities	52		39		123
Total Liabilities	3,803		4,087		3,774
Shareholders' Equity:
Preferred Stock — $0.01 par value; 10 shares authorized; 0 issued and outstanding	—		—		—
Common Stock — $0.01 par value; 1,000 shares authorized; 82, 85, and 0 shares issued and outstanding, respectively	1		1		—
Paid-in Capital	177		125		—
Accumulated Other Comprehensive Income	6		5		8
Retained Earnings	65		126		—
Net Investment by Former Parent	—		—		876
Less: Treasury Stock, at Average Cost; 0, 0, and 0 shares, respectively	(2)		—		—
Total Victoria's Secret & Co. Shareholders' Equity	247		257		884
Noncontrolling Interest	22		—		—
Total Equity	269		257		884
Total Liabilities and Equity	$	4,072	$	4,344	$	4,658

The accompanying Notes are an integral part of these Consolidated and Combined Financial Statements.

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VICTORIA'S SECRET & CO.

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(in millions)

(Unaudited)

Second Quarter 2022


	Common Stock					Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock, at Average Cost		Total Victoria's Secret & Co. Equity
	Shares Outstanding	Par Value		Paid-in Capital										Noncontrolling Interest		Total Equity
Balance, April 30, 2022	83	$	1	$	166	$	8	$	52	$	—	$	227	$	24	$	251
Net Income (Loss)	—	—		—		—		70		—		70		(3)		67
Other Comprehensive Income (Loss)	—	—		—		(2)		—		—		(2)		1		(1)
Total Comprehensive Income (Loss)	—	—		—		(2)		70		—		68		(2)		66


Repurchases of Common Stock	(1)	—		—		—		—		(62)		(62)		—		(62)
Treasury Share Retirements	—	—		(3)		—		(57)		60		—		—		—
Share-based Compensation Expense	—	—		14		—		—		—		14		—		14
Tax Payments related to Share-based Awards	—	—		(1)		—		—		—		(1)		—		(1)
Other	—	—		1		—		—		—		1		—		1
Balance, July 30, 2022	82	$	1	$	177	$	6	$	65	$	(2)	$	247	$	22	$	269

Second Quarter 2021


	Common Stock					Net Investment by Former Parent		Accumulated Other Comprehensive Income		Retained Earnings		Total Victoria's Secret & Co. Equity
	Shares Outstanding	Par Value		Paid-in Capital										Noncontrolling Interest		Total Equity
Balance, May 1, 2021	—	$	—	$	—	$	1,000	$	7	$	—	$	1,007	$	—	$	1,007
Net Income	—	—		—		151		—		—		151		—		151
Other Comprehensive Income	—	—		—		—		1		—		1		—		1
Total Comprehensive Income	—	—		—		151		1		—		152		—		152
Net Transfers to Former Parent	—	—		—		(275)		—		—		(275)		—		(275)
Balance, July 31, 2021	—	$	—	$	—	$	876	$	8	$	—	$	884	$	—	$	884

The accompanying Notes are an integral part of these Consolidated and Combined Financial Statements.

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VICTORIA'S SECRET & CO.

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY

(in millions)

(Unaudited)

Year-to-Date 2022


	Common Stock					Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock, at Average Cost		Total Victoria's Secret & Co. Equity
	Shares Outstanding	Par Value		Paid-in Capital										Noncontrolling Interest		Total Equity
Balance, January 29, 2022	85	$	1	$	125	$	5	$	126	$	—	$	257	$	—	$	257
Net Income (Loss)	—	—		—		—		151		—		151		(8)		143
Other Comprehensive Income	—	—		—		1		—		—		1		2		3
Total Comprehensive Income (Loss)	—	—		—		1		151		—		152		(6)		146
Sale of Noncontrolling Interest	—	—		17		—		—		—		17		28		45
Repurchases of Common Stock	(4)	—		50		—		—		(221)		(171)		—		(171)
Treasury Share Retirements	—	—		(7)		—		(212)		219		—		—		—

Share-based Compensation Expense	—	—		26		—		—		—		26		—		26
Tax Payments related to Share-based Awards	(1)	—		(39)		—		—		—		(39)		—		(39)
Other	2	—		5		—		—		—		5		—		5
Balance, July 30, 2022	82	$	1	$	177	$	6	$	65	$	(2)	$	247	$	22	$	269

Year-to-Date 2021


	Common Stock					Net Investment by Former Parent		Accumulated Other Comprehensive Income		Retained Earnings		Total Victoria's Secret & Co. Equity
	Shares Outstanding	Par Value		Paid-in Capital										Noncontrolling Interest		Total Equity
Balance, January 30, 2021	—	$	—	$	—	$	887	$	4	$	—	$	891	$	—	$	891
Net Income	—	—		—		325		—		—		325		—		325
Other Comprehensive Income	—	—		—		—		4		—		4		—		4
Total Comprehensive Income	—	—		—		325		4		—		329		—		329
Net Transfers to Former Parent	—	—		—		(336)		—		—		(336)		—		(336)
Balance, July 31, 2021	—	$	—	$	—	$	876	$	8	$	—	$	884	$	—	$	884

The accompanying Notes are an integral part of these Consolidated and Combined Financial Statements.

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VICTORIA'S SECRET & CO.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


	Year-to-Date
	2022		2021
Operating Activities:
Net Income	$	143	$	325
Adjustments to Reconcile Net Income to Net Cash Provided by (Used for) Operating Activities:
Depreciation of Long-lived Assets	140		158


Share-based Compensation Expense	26		15
Deferred Income Taxes	(2)		59
Changes in Assets and Liabilities:
Accounts Receivable	12		22
Inventories	(138)		(44)
Accounts Payable, Accrued Expenses and Other	(137)		(86)
Income Taxes	(120)		12
Other Assets and Liabilities	25		(72)
Net Cash Provided by (Used for) Operating Activities	(51)		389
Investing Activities:
Capital Expenditures	(58)		(66)
Investment in Frankies Bikinis, LLC	(18)		—

Other Investing Activities	(7)		—
Net Cash Used for Investing Activities	(83)		(66)
Financing Activities:


Repurchases of Common Stock	(169)		—

Cash Received from Noncontrolling Interest Partner	55		—
Tax Payments related to Share-based Awards	(39)		—
Proceeds from Stock Option Exercises	4		—
Payments of Long-term Debt	(2)		—
Proceeds from Issuance of Long-term Debt	—		600
Net Transfers to Former Parent	—		(367)
Other Financing Activities	(2)		—
Net Cash Provided by (Used for) Financing Activities	(153)		233
Effects of Exchange Rate Changes on Cash and Cash Equivalents and Restricted Cash	(2)		2
Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash	(289)		558
Cash and Cash Equivalents and Restricted Cash, Beginning of Period	490		335
Cash and Cash Equivalents and Restricted Cash, End of Period	$	201	$	893

The accompanying Notes are an integral part of these Consolidated and Combined Financial Statements.

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VICTORIA'S SECRET & CO.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Victoria’s Secret & Co. (together with its subsidiaries unless the context otherwise requires, the “Company”) is a specialty retailer of women's intimate and other apparel and beauty products marketed under the Victoria’s Secret and PINK brand names. The Company has more than 890 Victoria’s Secret and PINK stores in the U.S., Canada and China as well as online at www.VictoriasSecret.com and www.PINK.com and other online channels worldwide. Additionally, Victoria’s Secret and PINK have more than 440 stores in 70 countries operating under franchise, license and wholesale arrangements. The Company also includes the Victoria’s Secret and PINK merchandise sourcing and production function serving the Company and its international partners. The Company operates as a single segment designed to serve customers worldwide seamlessly through stores and online channels.

In July 2022, the Company announced a new, simplified corporate leadership structure designed to unite the Company's brands, better align its teams with a shifting consumer landscape and enable better execution of its strategy. The restructuring eliminated approximately 160 management roles, or approximately 5% of the Company's home office headcount. For additional information, see Note 4, “Restructuring Activities.”

Victoria's Secret & Co. Spin-Off

On July 9, 2021, L Brands, Inc. (“L Brands” or the “Former Parent”) announced that its Board of Directors approved the previously announced separation of the Victoria’s Secret business, including PINK, into an independent, publicly traded company (the “Separation”). Prior to the Separation, L Brands operated the Bath & Body Works, Victoria’s Secret and PINK retail brands.

On August 2, 2021 (the “Distribution Date”), after the New York Stock Exchange (“NYSE”) market closing, the Separation of the Victoria’s Secret business was completed. On August 3, 2021, Victoria’s Secret & Co. became an independent, publicly traded company trading on the NYSE under the stock symbol “VSCO.”

The Separation was achieved through the Former Parent’s distribution of 100% of the shares of the Company’s common stock to holders of the Former Parent’s common stock as of the close of business on the record date of July 22, 2021. The Former Parent’s stockholders of record received one share of the Company’s common stock for every three shares of the Former Parent’s common stock. In connection with the Separation, the Company made a cash payment of approximately $976 million to the Former Parent on August 2, 2021 using cash proceeds from the issuances of certain debt (discussed in Note 10, “Long-term Debt and Borrowing Facilities”). The Former Parent retained no ownership interest in the Company following the Separation.

The Company entered into several agreements with the Former Parent that, among other things, effect the Separation and govern the relationship of the parties following the Separation, including a Separation and Distribution Agreement, a Tax Matters Agreement, an L Brands to VS Transition Services Agreement, a VS to L Brands Transition Services Agreement, an Employee Matters Agreement and a Domestic Transportation Services Agreement. For additional information, see Note 2, “Transactions with Former Parent.”

Fiscal Year

The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2022” and “second quarter of 2021” refer to the thirteen-week periods ended July 30, 2022 and July 31, 2021, respectively. “Year-to-date 2022” and “year-to-date 2021” refer to the twenty-six-week periods ended July 30, 2022 and July 31, 2021, respectively.

Basis of Presentation - Unaudited Consolidated and Combined Financial Statements

The Company’s financial statements for periods through the Separation date of August 2, 2021 are combined financial statements prepared on a carve-out basis as discussed below. The Company’s financial statements for the period from August 3, 2021 through July 30, 2022 are consolidated financial statements based on the reported results of Victoria's Secret & Co. as a standalone company.

The Consolidated and Combined Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The Consolidated and Combined Financial Statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during all of the periods presented.

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Basis of Presentation - Prior to Separation

Through the Separation date, the Company's combined financial statements are prepared on a “carve-out” basis. The Combined Financial Statements have been derived from the consolidated financial statements and accounting records of the Former Parent in conformity with GAAP.

Intracompany transactions have been eliminated. Transactions between the Company and the Former Parent have been included in these financial statements. For those transactions between the Company and the Former Parent that were historically settled in cash, the Company reflected such balances in the Consolidated and Combined Balance Sheets in Other Current Assets for balances due from the Former Parent and in Accrued Expenses and Other for balances due to the Former Parent. The aggregate net effect of transactions between the Company and the Former Parent that were historically settled other than in cash are reflected in the Consolidated and Combined Balance Sheets as Net Investment by Former Parent and in the Consolidated and Combined Statements of Cash Flows as Net Transfers to Former Parent. For additional information, see Note 2, “Transactions with Former Parent.”

The Consolidated and Combined Balance Sheets include certain of the Former Parent's assets and liabilities that were specifically identifiable or otherwise attributable to the Company. The Former Parent's third-party long-term notes payable and the related interest expense have not been allocated to the Company for any of the periods presented as the Company was not the legal obligor of such debt. Except for Long-term Debt due to Former Parent, the debt reflected in the Consolidated and Combined Balance Sheets relate to third-party borrowings specifically attributable to, and legal obligations of, the Company.

The Former Parent utilized a centralized approach to cash management and financing its operations. The Cash and Cash Equivalents held by the Former Parent at the corporate level were not specifically identifiable to the Company and, therefore, were not reflected in the Company’s Consolidated and Combined Balance Sheets. Cash transfers between the Former Parent and the Company were accounted for through Net Investment by Former Parent. Cash and Cash Equivalents in the Consolidated and Combined Balance Sheets represent cash and cash equivalents held by the Company at period-end prior to any potential transfer to the centralized cash management pool of the Former Parent.

The Consolidated and Combined Statements of Income include costs for certain functions, including information technology, human resources and store design and construction, that historically were provided and administered on a centralized basis by the Former Parent. Starting in the third quarter of 2020, as part of the steps to prepare the Company to operate as a separate, standalone company, these functions were transitioned to the business and began to be operated and administered as part of Victoria’s Secret & Co. Costs applicable to the Company related to these functions are included in the Consolidated and Combined Statements of Income for all periods presented. Prior to the transition of these functions, these costs were directly charged to the Company by the Former Parent.

In addition, for purposes of preparing the combined financial statements on a “carve-out” basis prior to the Separation, a portion of the Former Parent's corporate expenses were allocated to the Company. These expense allocations include the cost of corporate functions and resources provided by, or administered by, the Former Parent including, but not limited to, executive management and other corporate and governance functions, such as corporate finance, internal audit, tax and treasury. The related employee payroll and benefit costs associated with such functions, such as share-based compensation, were included in the expense allocations. Corporate expenses of $30 million and $49 million in the second quarter of 2021 and year-to-date 2021, respectively, were allocated and included within General, Administrative and Store Operating Expenses in the Consolidated and Combined Statements of Income.

Costs were allocated to the Company based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net sales. Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, the Company during the periods presented. However, the allocations may not reflect the expenses the Company would have incurred if the Company had been a standalone company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic or capital decisions. Going forward, the Company may perform these functions using its own resources or outsourced services. For a period following the Separation, however, some of these functions will continue to be provided by the Former Parent under a transition services agreement, and the Company will provide some services to the Former Parent under a transition services agreement. The Company has also entered into certain commercial arrangements with the Former Parent in connection with the Separation. For more information, see Note 2, “Transactions with Former Parent.”

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During the periods prior to the Separation that are presented in these Consolidated and Combined Financial Statements, the Company's income tax expense (benefit) and deferred tax balances were included in the Former Parent's income tax returns. Income tax expense (benefit) and deferred tax balances contained in these Consolidated and Combined Financial Statements for periods prior to the Separation are presented on a separate return basis, as if the Company had filed its own income tax returns. As a result, actual tax transactions included in the consolidated financial statements of the Former Parent may or may not be included in the Consolidated and Combined Financial Statements of the Company. Similarly, the tax treatment of certain items reflected in the Consolidated and Combined Financial Statements of the Company may or may not be reflected in the consolidated financial statements and income tax returns of the Former Parent. The taxes recorded in the Consolidated and Combined Statement of Income for periods prior to the Separation are not necessarily representative of the taxes that may arise in the future when the Company files its income tax returns independent from the Former Parent's returns.

Interim Financial Statements

The Consolidated and Combined Financial Statements as of and for the periods ended July 30, 2022 and July 31, 2021 are unaudited. These Consolidated and Combined Financial Statements should be read in conjunction with the audited Consolidated and Combined Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 18, 2022.

In the opinion of management, the accompanying Consolidated and Combined Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods.

Ongoing Impacts of COVID-19

Even as the coronavirus pandemic (“COVID-19”) subsides, macroeconomic impacts related to the pandemic, including inflation, supply chain disruptions and labor shortages, are expected to continue. The Company remains focused on the safe operation of its business, including its stores, distribution, fulfillment and call centers. There remains the potential for COVID-19-related risks of closure or operating restrictions, as well as risks related to delays or disruptions in our supply chain and related pricing impacts, which could materially impact the Company's operations and financial performance in future periods.

Seasonality of Business

Due to the seasonal variations in the retail industry, the results of operations for the thirteen-week and twenty-six-week periods ended July 30, 2022 are not necessarily indicative of the results expected for any other interim period or the full fiscal year ending January 28, 2023.

Restricted Cash

In July 2021, the Company issued $600 million of 4.625% notes due in July 2029 (the “2029 Notes”) in a transaction exempt from registration under the Securities Act of 1933, as amended. As of July 31, 2021, the proceeds were held in escrow for release to the Company upon satisfaction of certain conditions, including completion of the Separation. The $600 million initial gross proceeds were included in Cash in Escrow related to the Spin-Off on the July 31, 2021 combined balance sheet. For additional information, see Note 10, “Long-term Debt and Borrowing Facilities.”

As of July 31, 2021, the Company's Cash and Cash Equivalents and restricted cash totaled $893 million.

Equity Method Investments

The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy in the Consolidated and Combined Statements of Income, and the Company's share of net income or loss from all other unconsolidated entities is included in General, Administrative and Store Operating Expenses in the Consolidated and Combined Statements of Income. The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.

In March 2022, the Company acquired a minority interest in swimwear brand Frankies Bikinis, LLC (“Frankies Bikinis”) in exchange for $18 million. The investment in Frankies Bikinis is accounted for using the equity method of accounting.

The carrying values of equity method investments were $57 million as of July 30, 2022, $35 million as of January 29, 2022 and $32 million as of July 31, 2021. These investments are recorded in Other Assets on the Consolidated and Combined Balance Sheets.

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Noncontrolling Interest

The Company accounts for investments in entities where it has control over the entity by consolidating the entities' assets, liabilities and results of operations and including them in the Company's Consolidated and Combined Financial Statements. The share of the investment not owned by the Company is reflected in Noncontrolling Interest in the Consolidated and Combined Balance Sheets. The Company recognizes the share of net income or loss not attributable to the Company in Net Loss Attributable to Noncontrolling Interest in the Consolidated and Combined Statements of Income. Noncontrolling interest represents the portion of equity interests in a joint venture in China that is not owned by the Company. For additional information, see Note 4, “Restructuring Activities.”

Net Investment by Former Parent

Net Investment by Former Parent in the Consolidated and Combined Balance Sheets represents the Former Parent's historical investment in the Company, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from the Former Parent. All transactions reflected in Net Investment by Former Parent in the accompanying Consolidated and Combined Balance Sheets have been considered as financing activities for purposes of the Consolidated and Combined Statements of Cash Flows.

For additional information, see Basis of Presentation above and Note 2, “Transactions with Former Parent.”

Derivative Financial Instruments

The Company from time to time uses derivative financial instruments to manage exposure to foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated and Combined Balance Sheets at fair value.

The earnings of the Company’s foreign operations are subject to exchange rate risk as substantially all the merchandise is sourced through U.S. dollar transactions. The Company from time to time utilizes foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure. Amounts for these designated cash flow hedges are reclassified from Accumulated Other Comprehensive Income (Loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated and Combined Statements of Income. During the second quarter of 2021, the Company terminated its foreign currency forward contracts designated as cash flow hedges that were used to mitigate foreign currency exposure for its Canadian operations. The fair value of designated cash flow hedges is not significant for any period presented.

Concentration of Credit Risk

The Company maintains cash and cash equivalents with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts with and limits the amount of credit exposure with any one entity. As of July 30, 2022, the Company's investment portfolio is primarily comprised of bank deposits. Prior to the Separation, cash generated by the Company was invested by the Former Parent in U.S. government obligations and U.S. Treasury and AAA-rated money market funds.

The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company determines the required allowance for expected credit losses using information such as customer credit history and financial condition. Amounts are recorded to the allowance when it is determined that expected credit losses may occur.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make 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. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.

Recently Issued Accounting Pronouncements

The Company did not adopt any new accounting standards during the second quarter of 2022 that had a material impact on the Company's 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 the Company's results of operations, financial position or cash flows.

2. Transactions with Former Parent

Prior to the Separation, the Company's financial statements were prepared on a “carve-out” basis and were derived from the consolidated financial statements and accounting records of the Former Parent. The following discussion summarizes activity between the Company and the Former Parent.

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Allocation of General Corporate Expenses

Prior to the Separation, for purposes of preparing the financial statements on a “carve-out” basis, the Company was allocated a portion of the Former Parent's total corporate expenses. See Note 1 for a discussion of the methodology used to allocate corporate-related costs for purposes of preparing the financial statements on a “carve-out” basis.

Balances Between the Company and the Former Parent Prior to the Separation

Balances between the Company and the Former Parent or its affiliates prior to the Separation, that are derived from transactions that historically were cash settled, are reflected in the Consolidated and Combined Balance Sheets in Other Current Assets for balances due from the Former Parent and in Accrued Expenses and Other for balances due to the Former Parent for periods prior to the Separation.

Balances between the Company and the Former Parent or its affiliates prior to the Separation, that are derived from transactions that were historically settled other than in cash, are included in Net Investment by Former Parent within Shareholders' Equity on the Consolidated and Combined Balance Sheets for periods prior to the Separation.

Long-term Debt due to Former Parent

Prior to the Separation, during 2020, the Company borrowed $97 million from the Former Parent to pay down outstanding debt with external parties. This borrowing was due in September 2025 and had a variable interest rate based on the China Loan Prime Rate. As a result of the Separation, the Company no longer has this Long-term Debt due to Former Parent. Prior to the Separation, the Company recognized $2 million of interest expense year-to-date 2021 related to this borrowing.

Net Transfers from (to) Former Parent

The following table presents the components of Net Transfers from (to) Former Parent prior to the Separation in the second quarter and year-to-date 2021 Consolidated and Combined Statements of Equity:


	Second Quarter		Year-to-Date
	2021		2021

Cash Pooling and General Financing Activities, Net	$	(322)	$	(431)
Long-lived Assets (a)	(4)		16
Corporate Expense Allocations	30		49
Share-based Compensation Expense	8		15
Assumed Income Tax Payments	13		15

Total Net Transfers to Former Parent	$	(275)	$	(336)

_______________

(a)Represents long-lived assets transferred between the Company and the Former Parent as a result of asset allocation decisions made during the period.

Agreements with Former Parent

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Under the terms of the transition services agreements, as amended, the Company provides its Former Parent, on a transitional basis, certain services or functions, including information technology, certain logistics functions, customer marketing and customer call center services. Additionally, the Former Parent provides to the Company various services or functions, many of which currently use a shared technology platform, including human resources, payroll and certain logistics functions. Generally, these services will be provided for a period of up to two years following the Separation, except for information technology services, which will be provided for a period of up to three years following the Separation and may be extended for a maximum of two additional one-year periods subject to increased administrative charges. Consideration and costs for the transition services will be determined using several billing methodologies as described in the agreements, including customary billing, pass-through billing, percent of sales billing or fixed fee billing. Costs for transition services provided by the Former Parent are recorded within the Consolidated and Combined Statements of Income based on the nature of the services. Consideration for transition services provided to the Former Parent are recorded within the Consolidated and Combined Statements of Income based on the nature of the services and as an offset to expenses incurred to provide the services. The Company recognized consideration of $20 million and $40 million for services provided to the Former Parent and recognized costs of $19 million and $38 million for services provided by the Former Parent in the second quarter of 2022 and year-to-date 2022, respectively, pursuant to the transition services agreements.

Under the terms of the Domestic Transportation Services Agreement, the Former Parent will continue to provide transportation services to the Company for certain beauty and apparel merchandise in the United States and Canada for an initial term of three years following the Separation, which term will thereafter continuously renew unless and until either party elects to terminate the arrangement upon written prior notice. Costs for the transportation services will be determined using customary billing and fixed billing methodologies, which are described in the agreement, and are subject to an administrative charge. Costs for transition services are recorded within Costs of Goods Sold, Buying and Occupancy in the Consolidated and Combined Statements of Income. The Company recognized costs of $21 million and $39 million pursuant to the Domestic Transportation Services Agreement during the second quarter of 2022 and year-to-date 2022, respectively.

Prior to the Separation, certain Company employees participated in the stock option and performance incentive plan of the Former Parent. Under the terms of the Employee Matters Agreement, in connection with the Separation, restricted stock and stock option equity awards held by Company employees were converted to awards representing approximately 6.0 million shares of the Company's common stock under the Company's 2021 Stock Option and Performance Incentive Plan.

3. Revenue Recognition

Accounts receivable, net from revenue-generating activities were $101 million as of July 30, 2022, $101 million as of January 29, 2022 and $73 million as of July 31, 2021. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days.

The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue was $238 million as of July 30, 2022, $258 million as of January 29, 2022 and $219 million as of July 31, 2021. The Company recognized $105 million as revenue year-to-date 2022 from amounts recorded as deferred revenue at the beginning of the year. As of July 30, 2022, the Company recorded deferred revenue of $218 million within Accrued Expenses and Other, and $20 million within Other Long-term Liabilities on the Consolidated and Combined Balance Sheet.

The following table provides a disaggregation of Net Sales for the second quarter and year-to-date 2022 and 2021:


	Second Quarter				Year-to-Date
	2022		2021		2022		2021
	(in millions)
Stores – North America	$	968	$	1,037	$	1,900	$	1,970
Direct	414		469		834		990
International (a)	139		108		271		208
Total Net Sales	$	1,521	$	1,614	$	3,005	$	3,168

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

In April 2022, the Company launched a new co-branded credit card through which customers can earn points on purchases of Company product as well as on purchases outside of the Company. The co-branded credit card is in addition to the Company's existing U.S. private label credit card.

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The Company recognized Net Sales of $30 million and $31 million for the second quarter of 2022 and 2021, respectively, related to revenue earned in connection with its credit card arrangements. The Company recognized Net Sales of $57 million and $59 million year-to-date 2022 and 2021, respectively, related to revenue earned in connection with its credit card arrangements.

The Company’s international net sales include sales from Company-operated stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s net sales outside of the U.S. totaled $199 million and $167 million for the second quarter of 2022 and 2021, respectively. The Company’s net sales outside of the U.S. totaled $383 million and $330 million year-to-date 2022 and 2021, respectively.

4. Restructuring Activities

Victoria's Secret China

In April 2022, the Company announced the completion of the joint venture agreement with Regina Miracle International (Holdings) Limited (“Regina Miracle”), a company listed on the Hong Kong Stock Exchange, related to its existing Company-owned business in China. The Company and Regina Miracle formed a joint venture to operate Victoria's Secret stores and the related online business in China. Under the terms of the agreement, the Company owns 51% of the joint venture and Regina Miracle owns the remaining 49%. The Company received $45 million in cash from Regina Miracle during the first quarter of 2022 as consideration for its investment in the joint venture. In connection with the execution of the agreement, the Company and Regina Miracle each contributed $10 million in cash to the joint venture. The cash received from Regina Miracle is reflected within Cash Received from Noncontrolling Interest Partner in the 2022 Consolidated and Combined Statement of Cash Flows.

Since the Company has retained control over the joint venture, the joint venture's assets, liabilities and results of operations will continue to be consolidated in the Company's consolidated financial statements. Regina Miracle's interest in the joint venture is now reflected in Noncontrolling Interest in the consolidated balance sheet and in Net Loss Attributable to Noncontrolling Interest in the consolidated statements of income.

Corporate Leadership Restructuring

In July 2022, the Company announced a new, simplified corporate leadership structure designed to unite the Company's brands, better align its teams with a shifting consumer landscape and enable better execution of its strategy. As a result of the restructuring, pre-tax severance and related costs of $29 million, of which $16 million are included in General, Administrative and Store Operating Expenses and $13 million are included in Costs of Goods Sold, Buying and Occupancy, are included in the 2022 consolidated statements of income.

During the second quarter of 2022, the Company made payments of $2 million related to severance and related costs associated with these reductions. As of July 30, 2022, liabilities related to the restructuring of $27 million are included in the consolidated balance sheet.

5. Earnings Per Share and Shareholders' Equity

Earnings Per Share

Earnings per basic share is computed based on the weighted-average number of common shares outstanding. Earnings per diluted share include the weighted-average effect of dilutive restricted stock and options on the weighted-average shares outstanding.

On August 2, 2021, the Separation was achieved through the Former Parent's distribution of 100% of the shares of the Company's common stock to holders of the Former Parent's common stock as of the close of business on the record date of July 22, 2021. The Former Parent's stockholders of record received one share of the Company's common stock for every three shares of the Former Parent's common stock. As a result, on August 3, 2021, the Company had 88 million shares of common stock outstanding. This share amount is being utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation. After the Separation, actual outstanding shares are used to calculate both basic and diluted weighted-average number of common shares outstanding.

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The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings per share for the second quarter and year-to-date 2022 and 2021:


	Second Quarter		Year-to-Date
	2022	2021	2022	2021
	(in millions)
Common Shares	83	88	83	88
Treasury Shares	—	—	—	—
Basic Shares	83	88	83	88
Effect of Dilutive Options and Restricted Stock Awards	1	—	3	—
Diluted Shares	84	88	86	88
Anti-dilutive Options and Restricted Stock Awards (a)	2	—	1	—

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(a)These options and restricted stock awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Shareholders' Equity

Common Stock Share Repurchases & Treasury Stock Retirements

In February 2022, upon final settlement of the Company's December 2021 accelerated share repurchase agreement (“ASR Agreement”) with Goldman Sachs & Co. LLC (“Goldman Sachs”), the Company received an additional 0.3 million shares of the Company's 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 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, the Company immediately retired the additional 0.3 million shares repurchased in connection with the settlement of the 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.

In March 2022, the Company's Board of Directors approved a new share repurchase program (“March 2022 Share Repurchase Program”), providing for the repurchase of up to $250 million of the Company's common stock. The $250 million authorization is expected to be utilized to repurchase shares in the open market, subject to market conditions and other factors. Shares acquired through the March 2022 Share Repurchase Program will be available to meet obligations under equity compensation plans and for general corporate purposes. The March 2022 Share Repurchase Program will continue until exhausted, but no later than January 28, 2023.

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


	Amount Authorized		Shares Repurchased	Amount Repurchased		Average Stock Price
	(in millions)		(in thousands)	(in millions)
March 2022 Share Repurchase Program	$	250	3,879	$	171	$	44.06

The March 2022 Share Repurchase Program has $79 million remaining as of July 30, 2022. There were $2 million of share repurchases reflected in Accounts Payable on the July 30, 2022 consolidated balance sheet.

Subsequent to July 30, 2022, the Company repurchased an additional 0.7 million shares for $27 million through September 7, 2022 under the March 2022 Share Repurchase Program.

In accordance with the Board of Directors' resolution, shares of the Company's common stock repurchased under the March 2022 Share Repurchase Program will be retired and cancelled upon repurchase. As a result, year-to-date 2022 the Company retired 3.8 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, $7 million in Paid-in Capital and $162 million in Retained Earnings.

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6. Inventories

The following table provides details of Inventories as of July 30, 2022, January 29, 2022 and July 31, 2021:


	July 30, 2022		January 29, 2022		July 31, 2021
	(in millions)
Finished Goods Merchandise	$	1,020	$	898	$	694
Raw Materials and Merchandise Components	66		51		51
Total Inventories	$	1,086	$	949	$	745

Inventories are principally valued at the lower of cost or net realizable value, on an average cost basis. The above amounts are net of valuation adjustments for inventory where the cost exceeds the amount the Company expects to realize from the ultimate sale or disposal of the inventory and net of loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory.

7. Long-Lived Assets

The following table provides details of Property and Equipment, Net as of July 30, 2022, January 29, 2022 and July 31, 2021:


	July 30, 2022		January 29, 2022		July 31, 2021
	(in millions)
Property and Equipment, at Cost	$	3,667	$	3,795	$	3,755
Accumulated Depreciation and Amortization	(2,803)		(2,838)		(2,756)
Property and Equipment, Net	$	864	$	957	$	999

Depreciation expense was $70 million and $78 million for the second quarter of 2022 and 2021, respectively. Depreciation expense was $140 million and $158 million for year-to-date 2022 and 2021, respectively.

8. Accrued Expenses and Other

The following table provides additional information about the composition of Accrued Expenses and Other as of July 30, 2022, January 29, 2022 and July 31, 2021:


	July 30, 2022		January 29, 2022		July 31, 2021
	(in millions)
Deferred Revenue on Gift Cards	$	170	$	198	$	158
Compensation, Payroll Taxes and Benefits	87		152		145
Rent	63		45		80
Accrued Freight and Other Logistics	41		62		19
Accrued Marketing	37		36		39
Deferred Revenue on Loyalty and Credit Card Programs	28		36		37
Taxes, Other than Income	22		24		37
Deferred Revenue on Direct Shipments not yet Delivered	20		16		15
Returns Reserve	17		23		20
Accrued Interest	6		5		1
Accrued Claims on Self-insured Activities	6		4		15
Other	126		113		138
Total Accrued Expenses and Other	$	623	$	714	$	704

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9. Income Taxes

Prior to the Separation, the Company's U.S. operations and certain of its non-U.S. operations were historically included in the income tax returns of the Former Parent or its subsidiaries that may not be part of the Company. For the periods prior to the Separation, the income tax expense (benefit) and all tax liabilities that are presented in these financial statements were calculated on a “carve-out” basis, which applied the accounting guidance as if we filed income tax returns for the Company on a standalone, separate return basis. The Company believes the assumptions supporting its allocation and presentation of income taxes on a separate return basis are reasonable. However, the Company's tax results, as presented in these financial statements for periods prior to the Separation, may not be reflective of the results that the Company expects to generate in the future.

Post-Separation, the Company is filing a consolidated U.S. federal income tax return as well as separate and combined income tax returns in numerous state, local and international jurisdictions. Income tax expense (benefit) for the period prior to the Separation is based on the combined financial statements prepared on a “carve-out” basis. Income tax expense (benefit) for the period after the Separation is based on the consolidated results of the Company on a standalone basis.

The provision for income taxes is based on the current estimate of the annual effective tax rate and adjusted as necessary for quarterly events.

For the second quarter of 2022, the Company’s effective tax rate was 19.2% compared to 24.1% in the second quarter of 2021. The second quarter of 2022 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined statutory rate. The second quarter of 2021 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 quarter.

For year-to-date 2022, the Company’s effective tax rate was 11.1% compared to 23.2% for year-to-date 2021. Both rates were 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.

The Company paid income taxes in the amount of $130 million and $13 million for the second quarter of 2022 and 2021, respectively. Year-to-date income taxes paid were $140 million and $15 million for 2022 and 2021, respectively.

On August 2, 2021, in connection with the Separation, the Company and the Former Parent entered into a Tax Matters Agreement. Under the agreement, the Former Parent will generally be responsible for all U.S. federal, state, local and non-U.S. income taxes of the Company for any taxable period, or portion of such period, ending on or before the Distribution Date. As such, the net liabilities associated with uncertain tax positions that were presented in the financial statements in prior periods on a carve-out basis were not transferred to the Company as part of the Separation.

10. Long-term Debt and Borrowing Facilities

The following table provides the Company's outstanding debt balance, net of unamortized debt issuance costs and discounts, as of July 30, 2022, January 29, 2022 and July 31, 2021:


	July 30, 2022		January 29, 2022		July 31, 2021
	(in millions)
Senior Secured Debt with Subsidiary Guarantee
$397 million Term Loan due August 2028 (“Term Loan Facility”)	$	388	$	390	$	—
Total Senior Secured Debt with Subsidiary Guarantee	388