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 April 29, 2023
OR
| 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
_________________________________
(Exact name of registrant as specified in its charter)
_______________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
| (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 | ||||||
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.
| ☒ | 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 May 26, 2023, the number of outstanding shares of the Registrant’s common stock was 77,149,277 shares.
VICTORIA'S SECRET & CO.
TABLE OF CONTENTS
| Page No. | |||||
Item 1. Financial Statements * | |||||
Item 4. Controls and Procedures | |||||
Item 1. Legal Proceedings | |||||
Item 1A. Risk Factors | |||||
Item 3. Defaults Upon Senior Securities | |||||
Item 4. Mine Safety Disclosures | |||||
Item 5. Other Information | |||||
Item 6. Exhibits | |||||
| * | Victoria's Secret & Co.'s fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2023” and “first quarter of 2022” refer to the thirteen-week periods ended April 29, 2023 and April 30, 2022, respectively, and “fiscal year 2023” and “fiscal year 2022” refer to the 53-week period ending February 3, 2024 and the 52-week period ended January 28, 2023, respectively. | ||||
2
PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF INCOME
(in millions except per share amounts)
(Unaudited)
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| Net Sales | $ | $ | |||||||||
| Costs of Goods Sold, Buying and Occupancy | ( | ( | |||||||||
| Gross Profit | |||||||||||
| General, Administrative and Store Operating Expenses | ( | ( | |||||||||
| Operating Income | |||||||||||
| Interest Expense | ( | ( | |||||||||
| Other Loss | ( | ||||||||||
| Income Before Income Taxes | |||||||||||
| Provision for Income Taxes | |||||||||||
| Net Income | |||||||||||
| Less: Net Income (Loss) Attributable to Noncontrolling Interest | ( | ||||||||||
| Net Income Attributable to Victoria's Secret & Co. | $ | $ | |||||||||
| Net Income Per Basic Share Attributable to Victoria's Secret & Co. | $ | $ | |||||||||
| Net Income Per Diluted Share Attributable to Victoria's Secret & Co. | $ | $ | |||||||||
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| Net Income | $ | $ | |||||||||
| Other Comprehensive Income (Loss), Net of Tax: | |||||||||||
| Foreign Currency Translation | ( | ||||||||||
| Amounts Reclassified from Accumulated Other Comprehensive Income to Paid-in Capital | |||||||||||
| Total Other Comprehensive Income (Loss), Net of Tax | ( | ||||||||||
| Total Comprehensive Income | |||||||||||
| Less: Net Income (Loss) Attributable to Noncontrolling Interest | ( | ||||||||||
| Less: Foreign Currency Translation Attributable to Noncontrolling Interest | |||||||||||
| Comprehensive Income (Loss) Attributable to Victoria's Secret & Co. | $ | ( | $ | ||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
VICTORIA'S SECRET & CO.
CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||||||
| ASSETS | |||||||||||||||||
| Current Assets: | |||||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | ||||||||||||||
| Accounts Receivable, Net | |||||||||||||||||
| Inventories | |||||||||||||||||
| Other | |||||||||||||||||
| Total Current Assets | |||||||||||||||||
| Property and Equipment, Net | |||||||||||||||||
| Operating Lease Assets | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Trade Names | |||||||||||||||||
| Other Intangible Assets, Net | |||||||||||||||||
| Deferred Income Taxes | |||||||||||||||||
| Other Assets | |||||||||||||||||
| Total Assets | $ | $ | $ | ||||||||||||||
| LIABILITIES AND EQUITY | |||||||||||||||||
| Current Liabilities: | |||||||||||||||||
| Accounts Payable | $ | $ | $ | ||||||||||||||
| Accrued Expenses and Other | |||||||||||||||||
| Current Debt | |||||||||||||||||
| Current Operating Lease Liabilities | |||||||||||||||||
| Income Taxes | |||||||||||||||||
| Total Current Liabilities | |||||||||||||||||
| Deferred Income Taxes | |||||||||||||||||
| Long-term Debt | |||||||||||||||||
| Long-term Operating Lease Liabilities | |||||||||||||||||
| Other Long-term Liabilities | |||||||||||||||||
| Total Liabilities | |||||||||||||||||
| Shareholders' Equity: | |||||||||||||||||
Preferred Stock — $ | |||||||||||||||||
Common Stock — $ | |||||||||||||||||
| Paid-in Capital | |||||||||||||||||
| Accumulated Other Comprehensive Income (Loss) | ( | ||||||||||||||||
| Retained Earnings | |||||||||||||||||
| Total Victoria's Secret & Co. Shareholders' Equity | |||||||||||||||||
| Noncontrolling Interest | |||||||||||||||||
| Total Equity | |||||||||||||||||
| Total Liabilities and Equity | $ | $ | $ | ||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
(Unaudited)
First Quarter 2023
| Common Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Victoria's Secret & Co. Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Par Value | Paid-in Capital | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 28, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total Comprehensive Income (Loss) | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of Common Stock | ( | — | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Treasury Share Retirements | — | — | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Compensation Expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax Payments related to Share-based Awards | ( | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 29, 2023 | $ | $ | $ | ( | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
First Quarter 2022
| Common Stock | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total Victoria's Secret & Co. Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares Outstanding | Par Value | Paid-in Capital | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 29, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total Comprehensive Income (Loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Noncontrolling Interest | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of Common Stock | ( | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Treasury Share Retirements | — | — | ( | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based Compensation Expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Tax Payments related to Share-based Awards | ( | — | ( | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 30, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
VICTORIA'S SECRET & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities: | |||||||||||
| Net Income | $ | $ | |||||||||
| Adjustments to Reconcile Net Income to Net Cash Used for Operating Activities: | |||||||||||
| Depreciation and Amortization of Long-lived Assets | |||||||||||
| Share-based Compensation Expense | |||||||||||
| Deferred Income Taxes | |||||||||||
| Amortization of Fair Value Adjustment to Acquired Inventories | |||||||||||
| Changes in Assets and Liabilities: | |||||||||||
| Accounts Receivable | |||||||||||
| Inventories | ( | ||||||||||
| Accounts Payable, Accrued Expenses and Other | ( | ( | |||||||||
| Income Taxes | ( | ( | |||||||||
| Other Assets and Liabilities | ( | ( | |||||||||
| Net Cash Used for Operating Activities | ( | ( | |||||||||
| Investing Activities: | |||||||||||
| Capital Expenditures | ( | ( | |||||||||
| Investment in Frankies Bikinis, LLC | ( | ||||||||||
| Other Investing Activities | ( | ||||||||||
| Net Cash Used for Investing Activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Repurchases of Common Stock | ( | ( | |||||||||
| Borrowings from Asset-based Revolving Credit Facility | |||||||||||
| Repayments of Borrowings from Asset-based Revolving Credit Facility | ( | ||||||||||
| Tax Payments related to Share-based Awards | ( | ( | |||||||||
| Proceeds from Stock Option Exercises | |||||||||||
| Payments of Long-term Debt | ( | ( | |||||||||
| Cash Received from Noncontrolling Interest Partner | |||||||||||
| Other Financing Activities | ( | ||||||||||
| Net Cash Used for Financing Activities | ( | ( | |||||||||
| Effects of Exchange Rate Changes on Cash and Cash Equivalents | ( | ||||||||||
| Net Decrease in Cash and Cash Equivalents | ( | ( | |||||||||
| Cash and Cash Equivalents, Beginning of Period | |||||||||||
| Cash and Cash Equivalents, End of Period | $ | $ | |||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
6
VICTORIA'S SECRET & CO.
NOTES TO CONSOLIDATED 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, PINK and Adore Me brand names. The Company has more than 900 stores in the U.S., Canada and China as well as its own websites, www.VictoriasSecret.com, www.PINK.com and www.AdoreMe.com and other online channels worldwide. Additionally, the Company has approximately 440 stores in approximately 70 countries operating under franchise, license and wholesale arrangements. The Company also includes the 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.
On December 30, 2022, the Company completed its acquisition of 100 % of AdoreMe, Inc. (“Adore Me”), a digitally-native intimates brand. For additional information, see Note 2, “Acquisition.”
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2023” and “first quarter of 2022” refer to the thirteen-week periods ended April 29, 2023 and April 30, 2022, respectively, and “fiscal year 2023” and “fiscal year 2022” refer to the 53-week period ending February 3, 2024 and the 52-week period ended January 28, 2023, respectively.
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended April 29, 2023 and April 30, 2022 are unaudited. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 17, 2023.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the interim periods.
Seasonality of Business
Due to the seasonal variations in the retail industry, the results of operations for the thirteen-week period ended April 29, 2023 are not necessarily indicative of the results expected for any other interim period or the full fiscal year ending February 3, 2024.
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.
7
The carrying values of equity method investments were $58 million as of April 29, 2023, $56 million as of January 28, 2023 and $54 million as of April 30, 2022. These investments are recorded in Other Assets on the Consolidated Balance Sheets.
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 April 29, 2023, the Company's investment portfolio is primarily comprised of bank deposits.
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 first quarter of 2023 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. Acquisition
On December 30, 2022, the Company completed the acquisition of 100 % of Adore Me. Adore Me is a direct-to-consumer lingerie and apparel brand with technology driven commerce service and a series of innovation-driven products. The acquisition creates the opportunity for the Company to leverage Adore Me's expertise and technology to continue to improve the Victoria's Secret and PINK customer shopping experience and accelerate the modernization of the Company's digital platform.
Under the terms of the definitive agreement setting forth the terms and conditions of the acquisition (the “Merger Agreement”), the Company made an upfront cash payment of $391 million at closing and will pay further cash consideration in an aggregate amount of at least $80 million, consisting of a fixed payment to be made on or prior to January 15, 2025, and up to $300 million based on the performance of Adore Me and achievement of specified strategic objectives and certain EBITDA and net revenue goals within the two-year period following closing of the transaction. Under the terms of the Merger Agreement, up to $60 million of the further cash consideration is subject to the continued employment of a certain Adore Me employee (“Contingent Compensation Payments”). These Contingent Compensation Payments are not included as consideration when applying the acquisition method of accounting and are recognized as compensation expense within General, Administrative and Store Operating Expenses in the Consolidated Statements of Income if and when earned in future periods.
8
The total consideration when applying the acquisition method of accounting was $537 million, net of $22 million of cash acquired. The gross consideration as of the acquisition date of $559 million consists of $391 million in cash paid at closing, $98 million which represents the fair value of the contingent cash consideration and $70 million which represents the fair value of the future fixed payment.
The Company accounted for the acquisition of Adore Me using the acquisition method of accounting. Assets acquired and liabilities assumed have been recorded based on their preliminary fair values, and as a result, the estimates and assumptions are subject to change. The Company is still in the process of finalizing the valuation estimates and final purchase price allocation which includes potential adjustments related to the final working capital settlement and amounts allocated to intangible assets. The Company expects to complete this process no later than twelve months after the closing of the acquisition. In the first quarter of 2023, the Company recorded certain measurement period adjustments based on additional information, primarily related to assumed deferred income tax liabilities and acquired accounts receivable, resulting in a $3 million increase to Goodwill, a $1 million increase to Deferred Income Tax Liabilities, a $1 million increase to Accrued Expenses and Other and a $1 million decrease to Accounts Receivable.
The following is a preliminary purchase price allocation of assets acquired and liabilities assumed as of December 30, 2022 related to the Adore Me acquisition:
| Initial Allocation | Measurement Period Adjustments | Adjusted Allocation | |||||||||||||||
| (in millions) | |||||||||||||||||
Accounts Receivable | $ | $ | ( | $ | |||||||||||||
| Inventories | — | ||||||||||||||||
| Other Current Assets | — | ||||||||||||||||
| Property and Equipment, Net | — | ||||||||||||||||
| Operating Lease Assets | — | ||||||||||||||||
| Goodwill | |||||||||||||||||
| Trade Name | — | ||||||||||||||||
| Other Intangible Assets | — | ||||||||||||||||
| Other Assets | — | ||||||||||||||||
| Accounts Payable | — | ||||||||||||||||
| Accrued Expenses and Other | |||||||||||||||||
| Current Operating Lease Liabilities | — | ||||||||||||||||
| Deferred Income Tax Liabilities | |||||||||||||||||
| Long-term Operating Lease Liabilities | — | ||||||||||||||||
| Other Long-term Liabilities | — | ||||||||||||||||
| Net Assets Acquired and Liabilities Assumed | $ | $ | — | $ | |||||||||||||
The following table represents the definite-lived intangible assets acquired, the preliminary fair values and respective useful lives:
| Useful Life | Preliminary Fair Value | ||||||||||
| (in millions) | |||||||||||
Customer Relationships | $ | ||||||||||
Developed Technology | |||||||||||
| Trade Name | |||||||||||
| Total Definite-Lived Intangible Assets | $ | ||||||||||
The Company used the multi-period excess earnings method to value the customer relationships intangible assets and the relief from royalty method to value the developed technology and trade name intangible assets. The significant assumptions used to estimate the fair value of customer relationships included forecasted revenues, customer attrition rates and a discount rate. The significant assumptions used to estimate the fair value of developed technology and the trade name included forecasted revenues, royalty rates and a discount rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The estimated weighted-average useful life was 7.4 years for definite-lived intangible assets.
9
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of net assets recognized for Adore Me, and represents the future economic benefits, including synergies, and assembled workforce, that are expected to be achieved as a result of the consummation of the acquisition of Adore Me. The goodwill arising from the acquisition is not expected to be deductible for tax purposes.
The Company consolidates Adore Me's financial information on an approximate one-month reporting lag. Accordingly, given the acquisition closing date of December 30, 2022, the operating results of Adore Me for the three-month period subsequent to the acquisition date are recorded in the Company's consolidated financial statements in the first quarter of 2023.
In the first quarter of 2023, the Company recognized the financial impact of purchase accounting items and additional acquisition-related costs, including recognition in gross profit of the fair value adjustment to acquired inventories as it is sold, income related to changes in the estimated fair value of contingent consideration and Contingent Compensation Payments, as well as amortization of acquired intangible assets. During the first quarter of 2023, the Company recognized total related costs of $17 million, including $9 million in Costs of Goods Sold, Buying and Occupancy, $7 million in General, Administrative and Store Operating Expenses and $1 million in Interest Expense. See Note 12, “Fair Value of Financial Instruments” for further information on the contingent consideration. The deferred consideration liability for the future fixed payment is included within Other Long-term Liabilities in the Consolidated Balance Sheets and was $72 million as of April 29, 2023 and $71 million as of January 28, 2023.
3. Revenue Recognition
Accounts receivable, net from revenue-generating activities were $99 million as of April 29, 2023, $101 million as of January 28, 2023 and $100 million as of April 30, 2022. 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 $284 million as of April 29, 2023, $309 million as of January 28, 2023 and $238 million as of April 30, 2022. The Company recognized $60 million as revenue in the first quarter of 2023 from amounts recorded as deferred revenue at the beginning of the year. As of April 29, 2023, the Company recorded deferred revenue of $266 million within Accrued Expenses and Other, and $18 million within Other Long-term Liabilities on the Consolidated Balance Sheet.
The following table provides a disaggregation of Net Sales for the first quarter of 2023 and 2022:
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
Stores – North America (a) | $ | $ | |||||||||
| Direct (a) | |||||||||||
| International (b) | |||||||||||
| Total Net Sales | $ | $ | |||||||||
_______________
(a)Results for the first quarter of 2023 include Adore Me sales.
In April 2022, the Company launched a new Victoria's Secret and PINK co-branded credit card through which customers can earn points on purchases of Victoria's Secret and PINK product as well as on purchases outside of the Company. The co-branded credit card is in addition to Victoria's Secret's existing U.S. private label credit card. A third-party financing company is the sole owner of the accounts and underwrites the credit issued under the credit card programs. Revenue earned in connection with the Company's credit card arrangements with the third-party is primarily recognized based on credit card sales and usage.
The Company recognized Net Sales of $23 million and $26 million for the first quarter of 2023 and 2022, 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 $200 million and $184 million for the first quarter of 2023 and 2022, respectively.
10
4. Restructuring Activities
Organizational Restructuring
In the first quarter of 2023, the Company implemented additional restructuring actions to continue to reorganize and improve its organizational structure. As a result, pre-tax severance and related costs of $11 million, of which $8 million are included in General, Administrative and Store Operating Expenses and $3 million are included in Costs of Goods Sold, Buying and Occupancy, are included in the 2023 Consolidated Statement of Income.
During the second quarter and fourth quarter of 2022, the Company implemented restructuring actions to reorganize and improve its organizational structure. As a result, during 2022, the Company incurred pre-tax severance and related costs of $35 million, of which $21 million are included in General, Administrative and Store Operating Expenses and $14 million are included in Costs of Goods Sold, Buying and Occupancy.
During the first quarter of 2023, the Company made payments of $5 million related to severance and related costs associated with these reductions. As of April 29, 2023, liabilities related to these restructuring activities of $22 million are included in the April 29, 2023 Consolidated Balance Sheet.
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
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 Sheets and in Net Income (Loss) Attributable to Noncontrolling Interest in the Consolidated Statements of Income.
5. Earnings Per Share and Shareholders' Equity
The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings per share for the first quarter of 2023 and 2022:
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Common Shares | |||||||||||
| Treasury Shares | |||||||||||
| Basic Shares | |||||||||||
| Effect of Dilutive Awards (a) | |||||||||||
| Diluted Shares | |||||||||||
| Anti-dilutive Awards (a) | |||||||||||
11
Shareholders' Equity
Common Stock Share Repurchases & Treasury Stock Retirements
January 2023 Share Repurchase Program
In January 2023, the Company's Board of Directors approved a share repurchase program (“January 2023 Share Repurchase Program”), authorizing 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 or as otherwise authorized by the Board of Directors, subject to market conditions and other factors. Shares acquired through the January 2023 Share Repurchase Program will be available to meet obligations under the Company's equity compensation plans and for general corporate purposes. The January 2023 Share Repurchase Program began upon completion of the March 2022 Share Repurchase Program and will continue until exhausted, but no later than the end of fiscal year 2023. The Company did not repurchase any shares of its common stock under the January 2023 Share Repurchase Program during fiscal year 2022.
In February 2023, as part of the January 2023 Share Repurchase Program, the Company entered into an accelerated share repurchase agreement (“ASR Agreement”) with Goldman Sachs & Co. LLC (“Goldman Sachs”) to repurchase $125 million of the Company's common stock. In February 2023, the Company made an initial payment of $125 million to Goldman Sachs and received an initial delivery of 2.4 million shares of the Company's common stock. The final number of shares repurchased was based on the volume-weighted average price of the Company’s common stock during the term of the ASR Agreement, less a discount and subject to adjustments pursuant to the terms of the ASR Agreement. The final settlement of the ASR Agreement occurred in May 2023 subsequent to the end of the first quarter of 2023. At final settlement, the Company received an additional 1.3 million shares of the Company's common stock from Goldman Sachs.
As of April 29, 2023, the $125 million payment to Goldman Sachs is recognized as a reduction to shareholders’ equity, consisting of a $100 million increase in Treasury Stock, which reflects the value of the initial 2.4 million shares received upon initial settlement, and a $25 million decrease in Paid-in Capital, which reflects the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement. The $25 million recorded in Paid-in Capital as of April 29, 2023 will be reclassified to Treasury Stock in the second quarter of 2023 in connection with the final settlement of the ASR Agreement. As a result of the initial share delivery, there was an additional $1 million increase in Treasury Stock, which reflects the excise tax liability recorded related to the share repurchase in accordance with the Inflation Reduction Act of 2022. In accordance with the Board of Directors' resolution, upon delivery the Company immediately retired the 2.4 million shares repurchased under the ASR Agreement in the first quarter of 2023. The retirement resulted in a reduction of $101 million in Treasury Stock, less than $1 million in the par value of Common Stock, $6 million in Paid-in Capital and $95 million in Retained Earnings in the first quarter of 2023.
As of April 29, 2023, the Company was authorized to repurchase up to $150 million of the Company's common stock under the January 2023 Share Repurchase Program. Of the remaining authorization as of April 29, 2023, $25 million represents the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement.
March 2022 Share Repurchase Program
In March 2022, the Company's Board of Directors approved a 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 was utilized in fiscal year 2022 to repurchase shares in the open market, subject to market conditions and other factors.
The Company repurchased the following shares of its common stock under the March 2022 Share Repurchase Program during the first quarter of 2022:
| Amount Authorized | Shares Repurchased | Amount Repurchased | Average Stock Price | ||||||||||||||||||||
| (in millions) | (in thousands) | (in millions) | |||||||||||||||||||||
| 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 were retired upon repurchase and are available to meet obligations under equity compensation plans and for general corporate purposes. As a result, during the first quarter of 2022 the Company retired 2.2 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, $4 million in Paid-in Capital and $105 million in Retained Earnings.
12
December 2021 Accelerated Share Repurchase Agreement
In February 2022, upon final settlement of the Company's December 2021 accelerated share repurchase agreement (“December 2021 ASR Agreement”) with 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 December 2021 ASR Agreement, $50 million previously recorded in Paid-in Capital as of January 29, 2022, was reclassified to Treasury Stock in the first quarter of 2022. In February 2022, the Company immediately retired the additional 0.3 million shares repurchased in connection with the settlement of the December 2021 ASR Agreement. The retirement resulted in a reduction of $50 million in Treasury Stock, less than $1 million in the par value of Common Stock, less than $1 million in Paid-in Capital and nearly $50 million in Retained Earnings.
6. Inventories
The following table provides details of Inventories as of April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Finished Goods Merchandise | $ | $ | $ | ||||||||||||||
| Raw Materials and Merchandise Components | |||||||||||||||||
| Total Inventories | $ | $ | $ | ||||||||||||||
7. Long-Lived Assets
The following table provides details of Property and Equipment, Net as of April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Property and Equipment, at Cost | $ | $ | $ | ||||||||||||||
| Accumulated Depreciation and Amortization | ( | ( | ( | ||||||||||||||
| Property and Equipment, Net | $ | $ | $ | ||||||||||||||
Depreciation expense was $67 million and $70 million for the first quarter of 2023 and 2022, respectively.
8. Intangible Assets
Goodwill
The Company's goodwill was established as a result of the acquisition of Adore Me on December 30, 2022. For additional information, see Note 2, “Acquisition.” Prior to the acquisition of Adore Me, the Company did not have any goodwill.
The following table shows the change in the carrying value of goodwill:
| (in millions) | |||||
| Balance, January 28, 2023 | $ | ||||
| Adjustments (a) | |||||
| Balance, April 29, 2023 | $ | ||||
_______________
(a)Includes measurement period adjustments related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition.”
Trade Name - Indefinite-Lived
The Victoria's Secret trade name, an indefinite-lived intangible asset, was $246
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Definite-Lived Intangible Assets
The Company's definite-lived intangible assets were established as a result of the acquisition of Adore Me. Prior to the acquisition of Adore Me, the Company did not have any definite-lived intangible assets.
The following table provides details of the gross carrying amount and accumulated amortization of the Company's definite-lived intangible assets as of April 29, 2023 and January 28, 2023:
| April 29, 2023 | January 28, 2023 | ||||||||||
| (in millions) | |||||||||||
| Gross Definite-Lived Intangible Assets | |||||||||||
Customer Relationships | $ | $ | |||||||||
Developed Technology | |||||||||||
| Adore Me Trade Name | |||||||||||
| Total Gross Definite-Lived Intangible Assets | $ | $ | |||||||||
| Accumulated Amortization | |||||||||||
Customer Relationships | $ | ( | $ | ||||||||
Developed Technology | ( | ||||||||||
| Adore Me Trade Name | ( | ||||||||||
| Total Accumulated Amortization | ( | ||||||||||
| Total Definite-Lived Intangible Assets, Net | $ | $ | |||||||||
Amortization expense for intangible assets was $6 million for the first quarter of 2023. There was no amortization expense recorded related to these definite-lived intangible assets in fiscal year 2022.
9. Accrued Expenses and Other
The following table provides additional information about the composition of Accrued Expenses and Other as of April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Deferred Revenue on Gift Cards | $ | $ | $ | ||||||||||||||
| Compensation, Payroll Taxes and Benefits | |||||||||||||||||
| Accrued Marketing | |||||||||||||||||
| Taxes, Other than Income | |||||||||||||||||
| Deferred Revenue on Loyalty and Credit Card Programs | |||||||||||||||||
| Contingent Consideration Related to Adore Me Acquisition | |||||||||||||||||
| Returns Reserve | |||||||||||||||||
| Accrued Freight and Other Logistics | |||||||||||||||||
| Accrued Interest | |||||||||||||||||
| Rent | |||||||||||||||||
| Deferred Revenue on Direct Shipments not yet Delivered | |||||||||||||||||
| Accrued Claims on Self-insured Activities | |||||||||||||||||
| Other | |||||||||||||||||
| Total Accrued Expenses and Other | $ | $ | $ | ||||||||||||||
10. Income Taxes
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For the first quarter of 2023, the Company’s effective tax rate was 34.0 % compared to 2.4 % in the first quarter of 2022. The first quarter of 2023 rate differed from the Company's combined estimated federal and state statutory rate primarily due to non-deductible further cash consideration liability under the terms of the Merger Agreement. The first quarter of 2022 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits related to share-based compensation awards that vested in the first quarter of 2022.
The Company paid income taxes in the amount of $16 million and $10 million for the first quarter of 2023 and 2022, respectively.
11. 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 April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Senior Secured Debt with Subsidiary Guarantee | |||||||||||||||||
$ | $ | $ | $ | ||||||||||||||
Asset-based Revolving Credit Facility due August 2026 (“ABL Facility”) | |||||||||||||||||
| Total Senior Secured Debt with Subsidiary Guarantee | |||||||||||||||||
| Senior Debt with Subsidiary Guarantee | |||||||||||||||||
$ | |||||||||||||||||
| Total Senior Debt with Subsidiary Guarantee | |||||||||||||||||
| Total | |||||||||||||||||
| Current Debt | ( | ( | ( | ||||||||||||||
| Total Long-term Debt, Net of Current Portion | $ | $ | $ | ||||||||||||||
Cash paid for interest was $13 million and $4 million for the first quarter of 2023 and first quarter of 2022, respectively.
Credit Facilities
On August 2, 2021, the Company 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, the Company is 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. The Company made principal payments of $1
Interest under the Term Loan Facility is calculated by reference to the London Interbank Offered Rate (“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 is subject to a floor of 0.50 %. 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 the Company's wholly-owned domestic subsidiaries. The loans under the Term Loan Facility are secured on a first-priority lien basis by certain assets of the Company 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 April 29, 2023, the interest rate on the loans under the Term Loan Facility was 8.24 %.
On May 8, 2023, subsequent to the end of the first quarter of 2023, the Company amended its Term Loan Facility to allow for an early transition to using the Secured Overnight Financing Rate (“SOFR”) instead of LIBOR. In accordance with the amendment, interest on SOFR loans under the Term Loan Facility will be calculated by reference to SOFR, plus an interest rate margin ranging from 3.36 % to 3.68 %.
15
On August 2, 2021, the Company 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 the Company's eligible U.S. and Canadian credit card receivables, eligible accounts receivable, eligible inventory and eligible real property, and (ii) the aggregate commitment. Interest on the loans under the ABL Facility is calculated by reference to (i) LIBOR or an alternative base rate and (ii) in the case of loans denominated in Canadian dollars, Canadian Dollar Offered Rate (“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 %. 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 the Company's wholly-owned domestic and Canadian subsidiaries. The loans under the ABL Facility are secured on a first-priority lien basis by the Company's 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 the Company, subject to customary exceptions.
During the first quarter of 2023, the Company borrowed $15 million and made payments of $15 million under the ABL Facility. As of April 29, 2023, there were borrowings of $295 million outstanding under the ABL Facility and the interest rate on the borrowings was 6.71 %. The Company had $30 million of outstanding letters of credit as of April 29, 2023 that further reduced its availability under the ABL Facility. As of April 29, 2023, the Company's remaining availability under the ABL Facility was $308 million.
On May 8, 2023, subsequent to the end of the first quarter of 2023, the Company amended its ABL Facility to allow for an early transition to using SOFR instead of LIBOR. In accordance with the amendment, interest on SOFR loans under the ABL Facility will be calculated by reference to SOFR, plus an interest rate margin based on average daily excess availability ranging from 1.60 % to 2.10 %.
The Company's 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 earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) ratio. The financial covenants could, within specific predefined circumstances, limit the Company's ability to incur additional indebtedness, make certain investments, pay dividends or repurchase shares. As of April 29, 2023, the Company was in compliance with all covenants under its long-term debt and borrowing facilities.
12. Fair Value of Financial Instruments
The following table provides a summary of the principal value and estimated fair value of the Company's outstanding debt as of April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Principal Value | $ | $ | $ | ||||||||||||||
| Fair Value, Estimated (a) | |||||||||||||||||
(a)The estimated fair value of the Company’s 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 the Company could realize in a current market exchange.
Management believes that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity. Management further believes the principal value of the outstanding debt under the ABL Facility approximates its fair value as of April 29, 2023 based on the terms of the borrowings from the ABL Facility.
16
Recurring Fair Value Measurements
The following tables provide a summary of the Company's contingent consideration recognized at fair value related to the Adore Me acquisition as of April 29, 2023 and January 28, 2023 (in millions):
| Balance Sheet Location | April 29, 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Accrued Expenses and Other | $ | $ | $ | $ | ||||||||||||||||||||||
| Other Long-term Liabilities | ||||||||||||||||||||||||||
| Balance Sheet Location | January 28, 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Accrued Expenses and Other | $ | $ | $ | $ | ||||||||||||||||||||||
| Other Long-term Liabilities | ||||||||||||||||||||||||||
The estimated fair value of the contingent consideration is valued using a Scenario-Based method and a Monte Carlo simulation which utilize inputs including discount rates, estimated probability of achievement of certain milestones, forecasted revenues, forecasted EBITDA and volatility rates. These are considered Level 3 inputs in accordance with ASC 820, Fair Value Measurement. Changes in the fair value of the contingent consideration are recorded within General, Administrative and Store Operating Expenses on the Consolidated Statements of Income. For additional information regarding the contingent consideration, see Note 2, “Acquisition.”
13. Comprehensive Income (Loss)
The following table provides the rollforward of accumulated other comprehensive income (loss) attributable to Victoria's Secret & Co. for the first quarter of 2023:
| Foreign Currency Translation | Accumulated Other Comprehensive Income (Loss) | ||||||||||
| (in millions) | |||||||||||
| Balance as of January 28, 2023 | $ | $ | |||||||||
| Other Comprehensive Loss Before Reclassifications | ( | ( | |||||||||
Tax Effect | |||||||||||
| Current-period Other Comprehensive Loss | ( | ( | |||||||||
| Balance as of April 29, 2023 | $ | ( | $ | ( | |||||||
The following table provides the rollforward of accumulated other comprehensive income attributable to Victoria's Secret & Co. for the first quarter of 2022:
| Foreign Currency Translation | Accumulated Other Comprehensive Income | ||||||||||
| (in millions) | |||||||||||
| Balance as of January 29, 2022 | $ | $ | |||||||||
| Other Comprehensive Income Before Reclassifications | |||||||||||
| Amounts Reclassified from Accumulated Other Comprehensive Income to Paid-in Capital | |||||||||||
Tax Effect | |||||||||||
| Current-period Other Comprehensive Income | |||||||||||
| Balance as of April 30, 2022 | $ | $ | |||||||||
17
14. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Settlement of Former Parent Derivative Lawsuits
In May 2022, the U.S. District Court of the Southern District of Ohio approved a global settlement regarding certain shareholder actions against L Brands, Inc. (the “Former Parent”) that were filed in 2020 and 2021. See Note 14, “Commitments and Contingencies” in the Company's Quarterly Report on Form 10-Q for the quarter ended July 30, 2022 for additional information. The settlement terms apply to both the Former Parent and the Company. Pursuant to the settlement terms, the Company committed to, among other things, invest $45 five years
Occupancy-related Legal Matter
18
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We caution that any forward-looking statements (as such term is defined in the U.S. Private Securities Litigation Reform Act of 1995) contained in this report or made by us, our management, or our spokespeople involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Forward-looking statements include, without limitation, statements regarding our future operating results, the implementation and impact of our strategic plans, and our ability to meet environmental, social, and governance goals. Words such as “estimate,” “commit,” “target,” “goal,” “project,” “plan,” “believe,” “seek,” “strive,” “expect,” “anticipate,” “intend,” “potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, could affect our financial performance and cause actual results to differ materially from those expressed or implied in any forward-looking statements:
• the spin-off from our Former Parent may not be tax-free for U.S. federal income tax purposes;
•we may not realize all of the expected benefits of the spin-off;
• general economic conditions, inflation, consumer confidence, consumer spending patterns and market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
• the novel coronavirus (COVID-19) global pandemic has had and may continue to have an adverse effect on our business and results of operations;
• difficulties arising from turnover in company leadership or other key positions;
• our ability to attract, develop and retain qualified associates and manage labor-related costs;
• our dependence on mall traffic and the availability of suitable store locations on appropriate terms;
• our ability to successfully operate and expand internationally and related risks;
• our independent franchise, license, wholesale, and joint venture partners;
• our direct channel business;
• our ability to protect our reputation and the image of our brands;
• our ability to attract customers with marketing, advertising and promotional programs;
• the highly competitive nature of the retail industry and the segments in which we operate;
• consumer acceptance of our products and our ability to manage the life cycle of our brands, keep up with fashion trends, develop new merchandise and launch new product lines successfully;
• our ability to realize the potential benefits and synergies sought with the acquisition of Adore Me;
• our ability to source, distribute and sell goods and materials on a global basis, including risks related to:
• political instability, environmental hazards or natural disasters;
• significant health hazards or pandemics;
• legal and regulatory matters;
• delays or disruptions in shipping and transportation and related pricing impacts; and
• disruption due to labor disputes;
• our geographic concentration of vendor and distribution facilities in central Ohio and Southeast Asia;
• the ability of our vendors to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
• fluctuations in freight, product input and energy costs, including those caused by inflation;
• our and our third-party service providers’ ability to implement and maintain information technology systems and to protect associated data and system availability;
• our ability to maintain the security of customer, associate, third-party and company information;
• stock price volatility;
• shareholder activism matters;
• our ability to maintain our credit rating;
• our ability to comply with regulatory requirements; and
• legal, tax, trade and other regulatory matters.
19
Except as may be required by law, we assume no obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in “Item 1A. Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 17, 2023.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.
Executive Overview
Victoria’s Secret is an iconic global brand of women’s intimate and other apparel, personal care and beauty products. We sell our products through three brands, Victoria’s Secret, PINK and Adore Me. Victoria’s Secret is a category-defining global lingerie brand with a leading market position and a rich, over 45-year history of serving women across the globe. PINK is a lifestyle brand for the college-oriented customer, built around a strong intimates core. We also sell beauty products under both the Victoria’s Secret and PINK brands. Adore Me is a technology-led, digital first innovative intimates brand serving women of all sizes and budgets at all phases of life. Together, Victoria’s Secret, PINK, Victoria’s Secret Beauty and Adore Me support, inspire and celebrate women through every phase of their life.
Victoria’s Secret, PINK and Adore Me merchandise is sold online through e-commerce platforms, through retail stores located in the U.S., Canada and China, and through international stores and websites operated by partners under franchise, license, wholesale and joint venture arrangements. We have a presence in approximately 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 first quarter of 2023, our operating income was $28 million compared to $94 million in the first quarter of 2022, and our operating income rate (expressed as a percentage of net sales) was 2.0% compared to 6.3% last year. The operating income decrease in the first quarter of 2023 compared to the first quarter of 2022 was primarily driven by a decrease in net sales and gross profit and an increase in general, administrative and store operating expense. Net sales decreased $77 million, or 5%, to $1.407 billion compared to $1.484 billion in the first quarter of 2022 and comparable sales decreased 11% in the first quarter of 2023. Our North American store sales decreased $145 million, to $786 million compared to $931 million in the first quarter of 2022 driven by a decrease in traffic results which were down compared to the first quarter of 2022. Our North American store sales were also impacted 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) in the quarter compared to the first quarter of 2022. Our direct channel sales increased by 10%, or $43 million, to $464 million compared to $421 million in the first quarter of 2022, as Adore Me sales were reported in our results in 2023 for the first time. On a comparative basis, an increase in units per transaction was more than offset by a decrease in average unit retail and conversion.
Despite a macro environment that remained challenging on the customer, we continue to focus on our strategic growth plans and the three pillars of our strategy: strengthening our core, igniting growth and transforming the foundation. We are committed to optimizing our performance in the current challenging environment by focusing on what is within our control, and we are confident in our strategic growth plan and remain committed to delivering long-term sustainable value for our shareholders.
For additional information related to our first quarter of 2023 financial performance, see “Results of Operations.”
Financial Impacts of the Adore Me Acquisition
We consolidate Adore Me's financial information on an approximate one-month reporting lag. Accordingly, given the acquisition closing date of December 30, 2022, the operating results of Adore Me for the three-month period subsequent to the acquisition date are recorded in our results in the first quarter of 2023.
In the first quarter of 2023, we recognized the financial impact of purchase accounting items and additional acquisition-related costs, including recognition in gross profit of the fair value adjustment to acquired inventories as it is sold, income related to changes in the estimated fair value of contingent consideration and Contingent Compensation Payments, as well as amortization of acquired intangible assets. For additional information, see Note 2, “Acquisition.”
20
Non-GAAP Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided below are non-GAAP financial measures that present operating income, net income attributable to Victoria's Secret & Co. and net income per diluted share attributable to Victoria's Secret & Co. on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. The intangible asset amortization excluded from these non-GAAP financial measures is excluded because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures.
| First Quarter | |||||||||||
| (in millions, except per share amounts) | 2023 | 2022 | |||||||||
| Reconciliation of Reported to Adjusted Operating Income | |||||||||||
| Reported Operating Income - GAAP | $ | 28 | $ | 94 | |||||||
| Restructuring Charge (a) | 11 | — | |||||||||
| Adore Me Acquisition-related Items (b) | 10 | — | |||||||||
| Amortization of Intangible Assets (c) | 6 | — | |||||||||
| Occupancy-related Legal Matter (d) | — | 22 | |||||||||
| Adjusted Operating Income | $ | 55 | $ | 116 | |||||||
| Reconciliation of Reported to Adjusted Net Income Attributable to Victoria's Secret & Co. | |||||||||||
| Reported Net Income Attributable to Victoria's Secret & Co. - GAAP | $ | 1 | $ | 81 | |||||||
| Restructuring Charge (a) | 11 | — | |||||||||
| Adore Me Acquisition-related Items (b) | 11 | — | |||||||||
| Amortization of Intangible Assets (c) | 6 | — | |||||||||
| Occupancy-related Legal Matter (d) | — | 22 | |||||||||
| Tax Effect of Adjusted Items | (7) | (6) | |||||||||
| Adjusted Net Income Attributable to Victoria's Secret & Co. | $ | 22 | $ | 97 | |||||||
| Reconciliation of Reported to Adjusted Net Income Per Diluted Share Attributable to Victoria's Secret & Co. | |||||||||||
| Reported Net Income Per Diluted Share Attributable to Victoria's Secret & Co. - GAAP | $ | 0.01 | $ | 0.93 | |||||||
| Restructuring Charge (a) | 0.10 | — | |||||||||
| Adore Me Acquisition-related Items (b) | 0.10 | — | |||||||||
| Amortization of Intangible Assets (c) | 0.06 | — | |||||||||
| Occupancy-related Legal Matter (d) | — | 0.19 | |||||||||
| Adjusted Net Income Per Diluted Share Attributable to Victoria's Secret & Co. | $ | 0.28 | $ | 1.11 | |||||||
________________
(a)In the first quarter of 2023, we recognized a pre-tax charge of $11 million ($8 million after-tax), $8 million included in general, administrative and store operating expense and $3 million included in buying and occupancy expense, related to restructuring activities to continue to reorganize and improve our organizational structure. For additional information, see Note 4, “Restructuring Activities” included in Item 1. Financial Statements.
(b)In the first quarter of 2023, we recognized a pre-tax charge of $11 million ($8 million after-tax) within net income, $9 million included in costs of goods sold, buying and occupancy expense, $1 million included in interest expense and $1 million included in general, administrative and store operating expense, related to the financial impact of purchase accounting items and professional service costs related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” included in Item 1. Financial Statements.
(c)In the first quarter of 2023, we recognized $6 million of amortization expense ($5 million after-tax) included in general, administrative and store operating expense related to the acquisition of Adore Me. For additional information, see Note 2, “Acquisition” and Note 8, “Intangible Assets” included in Item 1. Financial Statements.
21
(d)In the first quarter of 2022, we recognized a pre-tax charge of $22 million ($16 million after-tax), included in buying and occupancy expense, related to a legal matter with a landlord regarding a high-profile store that we surrendered to the landlord prior to our separation from the Former Parent. For additional information, see Note 14, “Commitments and Contingencies” included in Item 1. Financial Statements.
Store Data
The following table compares the first quarter of 2023 U.S. company-operated store data to the first quarter of 2022:
| First Quarter | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| Sales per Average Selling Square Foot (a) | $ | 133 | $ | 158 | (16 | %) | |||||||||||
| Sales per Average Store (in thousands) (a) | $ | 915 | $ | 1,096 | (17 | %) | |||||||||||
| Average Store Size (selling square feet) | 6,891 | 6,943 | (1 | %) | |||||||||||||
| Total Selling Square Feet (in thousands) | 5,600 | 5,589 | — | % | |||||||||||||
________________
(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 the first quarter of 2023:
| Stores at | Stores at | ||||||||||||||||||||||
| January 28, 2023 | Opened | Closed | April 29, 2023 | ||||||||||||||||||||
| Company-Operated: | |||||||||||||||||||||||
| U.S. | 812 | 1 | (6) | 807 | |||||||||||||||||||
| Canada | 25 | — | (1) | 24 | |||||||||||||||||||
| Subtotal Company-Operated | 837 | 1 | (7) | 831 | |||||||||||||||||||
| China Joint Venture: | |||||||||||||||||||||||
| Beauty & Accessories (a) | 39 | 1 | (2) | 38 | |||||||||||||||||||
| Full Assortment | 33 | 1 | — | 34 | |||||||||||||||||||
| Subtotal China Joint Venture | 72 | 2 | (2) | 72 | |||||||||||||||||||
| Partner-Operated: | |||||||||||||||||||||||
| Beauty & Accessories | 308 | 2 | (5) | 305 | |||||||||||||||||||
| Full Assortment | 135 | 4 | (6) | 133 | |||||||||||||||||||
| Subtotal Partner-Operated | 443 | 6 | (11) | 438 | |||||||||||||||||||
| Adore Me | 6 | — | — | 6 | |||||||||||||||||||
| Total | 1,358 | 9 | (20) | 1,347 | |||||||||||||||||||
________________
(a)Includes fourteen partner-operated stores as of April 29, 2023.
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The following table represents store data for the first quarter of 2022:
| Stores at | Reclassed to | Stores at | |||||||||||||||||||||||||||
| January 29, 2022 | Opened | Closed | Joint Venture | April 30, 2022 | |||||||||||||||||||||||||
| Company-Operated: | |||||||||||||||||||||||||||||
| U.S. | 808 | — | (3) | — | 805 | ||||||||||||||||||||||||
| Canada | 26 | — | — | — | 26 | ||||||||||||||||||||||||
| Subtotal Company-Operated | 834 | — | (3) | — | 831 | ||||||||||||||||||||||||
| China Joint Venture: | |||||||||||||||||||||||||||||
| Beauty & Accessories (a) | 35 | — | (2) | 8 | 41 | ||||||||||||||||||||||||
| Full Assortment | 30 | — | — | — | 30 | ||||||||||||||||||||||||
| Subtotal China Joint Venture | 65 | — | (2) | 8 | 71 | ||||||||||||||||||||||||
| Partner-Operated: | |||||||||||||||||||||||||||||
| Beauty & Accessories | 335 | 1 | (4) | (8) | 324 | ||||||||||||||||||||||||
| Full Assortment | 128 | 3 | — | — | 131 | ||||||||||||||||||||||||
| Subtotal Partner-Operated | 463 | 4 | (4) | (8) | 455 | ||||||||||||||||||||||||
| Total | 1,362 | 4 | (9) | — | 1,357 | ||||||||||||||||||||||||
________________
(a)Includes eight partner-operated stores as of April 30, 2022.
Results of Operations
First Quarter of 2023 Compared to First Quarter of 2022
Operating Income
For the first quarter of 2023, operating income decreased $66 million, to $28 million, compared to operating income of $94 million in the first quarter of 2022, and the operating income rate (expressed as a percentage of net sales) decreased to 2.0% from 6.3%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the first quarter of 2023 in comparison to the first quarter of 2022:
| 2023 | 2022 | % Change | |||||||||||||||
| First Quarter | (in millions) | ||||||||||||||||
Stores – North America (a) | $ | 786 | $ | 931 | (16 | %) | |||||||||||
| Direct (a) | 464 | 421 | 10 | % | |||||||||||||
| International (b) | 157 | 132 | 19 | % | |||||||||||||
| Total Net Sales | $ | 1,407 | $ | 1,484 | (5 | %) | |||||||||||
_______________
(a)Results for the first quarter of 2023 include Adore Me sales.
(b)Results include consolidated joint venture sales in China, royalties associated with franchised stores and wholesale sales.
23
The following table provides a reconciliation of net sales from the first quarter of 2022 to the first quarter of 2023:
| (in millions) | |||||
| 2022 Net Sales | $ | 1,484 | |||
| Comparable Store Sales | (124) | ||||
| Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net (a) | (10) | ||||
| Direct Channels (a) | 60 | ||||
| Credit Card Programs | (4) | ||||
International Wholesale, Royalty and Other | 6 | ||||
| Foreign Currency Translation | (5) | ||||
| 2023 Net Sales | $ | 1,407 | |||
_______________
(a)Results for the first quarter of 2023 include Adore Me sales.
The following table compares the first quarter of 2023 comparable sales to the first quarter of 2022:
| 2023 | 2022 | ||||||||||
| Comparable Sales (Stores and Direct) (a) | (11 | %) | (8 | %) | |||||||
| Comparable Store Sales (a) | (14 | %) | (3 | %) | |||||||
_______________
(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 first quarter of 2023 decreased $77 million, or 5%, to $1.407 billion compared to $1.484 billion in the first quarter of 2022.
In the stores channel, our North America net sales decreased $145 million, or 16%, to $786 million compared to the first quarter of 2022 driven by a decrease in traffic which was down compared to the first quarter last year and sequentially got worse compared to the fourth quarter of 2022. Our North American store sales were also impacted by decreases in conversion and average unit retail in the quarter compared to the first quarter of 2022.
In the direct channel, net sales increased $43 million, or 10%, to $464 million, as Adore Me sales were reported in our results in 2023 for the first time. On a comparable basis, an increase in units per transaction was more than offset by a decrease in average unit retail and conversion.
In the international channel, net sales increased $25 million, or 19%, to $157 million compared to the first quarter of 2022, as stores and online sales increased due to increased traffic in most countries outside of North America and positive customer acceptance of our product assortment.
Gross Profit
For the first quarter of 2023, our gross profit decreased $20 million compared to the first quarter of 2022 to $502 million, and our gross profit rate (expressed as a percentage of net sales) increased to 35.7% from 35.1%.
The decrease in gross profit dollars was due to the decrease in merchandise margin dollars driven by the decrease in net sales and the increase in promotional activity, partially offset by a decrease in supply chain costs compared to the first quarter of 2022. Buying and occupancy expenses were down compared to the first quarter of 2022, primarily driven by a legal reserve of $22 million related to a landlord matter in the first quarter last year, partially offset by the inclusion of Adore Me buying and occupancy expenses in the current year. Additionally, the decrease in gross profit dollars was driven by the partial recognition in gross profit of the inventory fair value step-up adjustment related to acquired inventory from Adore Me.
The gross profit rate increase was driven by a decrease in supply chain costs compared to the first quarter of 2022, partially offset by increased promotional activity and deleverage in buying and occupancy expenses in the quarter as a result of the decrease in sales compared to the first quarter of 2022.
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General, Administrative and Store Operating Expenses
For the first quarter of 2023, our general, administrative and store operating expenses increased $46 million, or 11%, compared to the first quarter of 2022 to $474 million. The increase in general, administrative and store operating expenses compared to the first quarter of 2022 was primarily due to the inclusion of Adore Me general, administrative and store operating expenses for the first time during the first quarter of 2023. The increase in general, administrative and store operating expenses was also driven by restructuring charges of $8 million and amortization of intangible assets acquired from Adore Me of $6 million in the first quarter of 2023.
The general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 33.7% from 28.8% primarily due to the inclusion of Adore Me general, administrative and store operating expenses for the first time in the first quarter of 2023.
Interest Expense
For the first quarter of 2023, our interest expense increased $10 million to $22 million compared to the first quarter of 2022, primarily driven by a higher average borrowing rate for our Term Loan Facility and the increase in our outstanding debt due to the borrowings from the ABL Facility during the third and fourth quarters of 2022.
Provision for Income Taxes
For the first quarter of 2023, the Company's effective tax rate was 34.0% compared to 2.4% in the first quarter of 2022. The first quarter of 2023 rate differed from the Company's combined estimated federal and state statutory rate primarily due to non-deductible further cash consideration liability under the terms of the Merger Agreement. The first quarter of 2022 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the recognition of excess tax related to share-based compensation awards that vested in the first quarter of 2022.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided by (used for) operations is impacted by our net income and working capital changes. Our net income 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 may require us to seek additional debt or equity financing, and there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms, if at all, in the future.
We expect to utilize our cash flows to continue to invest in our brands, talent and capabilities, and growth strategies as well as to repay our indebtedness over time. We believe that our available short-term and long-term capital resources are sufficient to fund requirements over the next 12 months.
Working Capital and Capitalization
Based upon our cash balances and funds provided by operating activities, along with the borrowing capacity under our ABL Facility, we believe we will be able to continue to meet our working capital needs.
25
The following table provides a summary of our working capital position and capitalization as of April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Net Cash Provided by (Used for) Operating Activities (a) | $ | (108) | $ | 437 | $ | (146) | |||||||||||
| Capital Expenditures (a) | 55 | 164 | 21 | ||||||||||||||
| Working Capital | 66 | 158 | 63 | ||||||||||||||
| Capitalization: | |||||||||||||||||
| Long-term Debt | 1,271 | 1,271 | 977 | ||||||||||||||
| Victoria's Secret & Co. Shareholders' Equity | 265 | 383 | 227 | ||||||||||||||
| Total Capitalization | $ | 1,536 | $ | 1,654 | $ | 1,204 | |||||||||||
| Amounts Available Under the ABL Facility (b) | $ | 308 | $ | 259 | $ | 611 | |||||||||||
(a)The April 29, 2023 and April 30, 2022 amounts represent thirteen-week periods and the January 28, 2023 amounts represent a fifty-two-week period.
(b)For the reporting period ended April 29, 2023, the availability under the ABL Facility was limited by our borrowing base of $633 million, less outstanding borrowings of $295 million and letters of credit of $30 million. For the reporting period ended January 28, 2023, the availability was limited by our borrowing base of $596 million, less outstanding borrowings of $295 million and letters of credit of $42 million. For the reporting period ended April 30, 2022, the availability was limited by our borrowing base of $651 million, less letters of credit of $40 million. There were no outstanding borrowings under the ABL Facility as of April 30, 2022.
Cash Flow
The following table provides a summary of our cash flow activity for the first quarter of 2023 and 2022:
| First Quarter | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Cash and Cash Equivalents, Beginning of Period | $ | 427 | $ | 490 | |||||||
| Net Cash Flows Used for Operating Activities | (108) | (146) | |||||||||
| Net Cash Flows Used for Investing Activities | (55) | (48) | |||||||||
| Net Cash Flows Used for Financing Activities | (132) | (91) | |||||||||
| Effects of Exchange Rate Changes on Cash and Cash Equivalents | — | (1) | |||||||||
| Net Decrease in Cash and Cash Equivalents | (295) | (286) | |||||||||
| Cash and Cash Equivalents, End of Period | $ | 132 | $ | 204 | |||||||
Operating Activities
Net cash used for operating activities reflects net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense and deferred tax expense, as well as changes in working capital. Net cash used for operating activities in the first quarter of 2023 was $108 million, an increase in net cash flows from operating activities of $38 million compared to the first quarter of 2022. The increase in net cash from operating activities in the first quarter of 2023 was primarily driven by lower cash outflows associated with working capital changes, partially offset by lower net income. The most significant working capital driver resulting in the increase in operating cash flows this year compared to last year is driven by the timing of payments related to the increased inventory levels last year, which were primarily driven by modal mix changes and longer in-transit shipment times.
Investing Activities
Net cash used for investing activities in the first quarter of 2023 was $55 million, consisting solely of capital expenditures. The capital expenditures were primarily related to our store capital program, along with investments in technology, distribution and logistics to support our retail capabilities.
26
Net cash used for investing activities in the first quarter of 2022 was $48 million, consisting primarily of capital expenditures of $21 million and our $18 million investment in Frankies Bikinis. The capital expenditures were primarily related to our store refresh program and technology to support our retail capabilities and general infrastructure needs as we separate into a standalone company.
We are estimating capital expenditures to be approximately $275 million for fiscal year 2023. Capital investments during 2023 will be primarily focused on our store capital program along with investments in technology related to our strategic initiatives to drive growth and technology investments relating to separation activities from our Former Parent.
Financing Activities
Net cash used for financing activities in the first quarter of 2023 was $132 million, consisting primarily of $125 million of share repurchases and $9 million of payments for taxes on share-based compensation awards issued, partially offset by $3 million of proceeds from stock option exercises.
Net cash used for financing activities in the first quarter of 2022 was $91 million, consisting primarily of $109 million of share repurchases and $38 million of payments for taxes on share-based compensation awards issued, partially offset by $55 million of cash received from Regina Miracle in connection with the joint venture agreement completed in April 2022.
Common Stock Share Repurchases & Treasury Stock Retirements
Our Board of Directors determines share repurchase authorizations, giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements and the Tax Matters Agreement with the Former Parent, as well as financial and other conditions existing at the time. We use cash flow generated from operating activities to fund our share repurchase programs. The timing and amount of any repurchases will be made at our discretion, taking into account a number of factors, including market conditions.
January 2023 Share Repurchase Program
In January 2023, our Board of Directors approved the January 2023 Share Repurchase Program, authorizing the repurchase of up to $250 million of our common stock. The $250 million authorization is expected to be utilized to repurchase shares in the open market or as otherwise authorized by the Board of Directors, subject to market conditions and other factors. Shares acquired through the January 2023 Share Repurchase Program will be available to meet obligations under our equity compensation plans and for general corporate purposes. The January 2023 Share Repurchase Program began upon completion of the March 2022 Share Repurchase Program and will continue until exhausted, but no later than the end of fiscal year 2023. We did not repurchase any shares of our common stock under the January 2023 Share Repurchase Program during fiscal year 2022.
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. The final number of shares repurchased 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. The final settlement of the ASR Agreement occurred in May 2023 subsequent to the end of the first quarter of 2023. At final settlement, we received an additional 1.3 million shares of our common stock from Goldman Sachs.
As of April 29, 2023, the $125 million payment to Goldman Sachs is recognized as a reduction to shareholders’ equity, consisting of a $100 million increase in Treasury Stock, which reflects the value of the initial 2.4 million shares received upon initial settlement, and a $25 million decrease in Paid-in Capital, which reflects the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement. The $25 million recorded in Paid-in Capital as of April 29, 2023 will be reclassified to Treasury Stock in the second quarter of 2023 in connection with the final settlement of the ASR Agreement. As a result of the initial share delivery, there was an additional $1 million increase in Treasury Stock, which reflects the excise tax liability recorded related to the share repurchase in accordance with the Inflation Reduction Act of 2022. In accordance with the Board of Directors' resolution, upon delivery we immediately retired the 2.4 million shares repurchased under the ASR Agreement in the first quarter of 2023. The retirement resulted in a reduction of $101 million in Treasury Stock, less than $1 million in the par value of Common Stock, $6 million in Paid-in Capital and $95 million in Retained Earnings in the first quarter of 2023.
As of April 29, 2023, we were authorized to repurchase up to $150 million of our common stock under the January 2023 Share Repurchase Program. Of the remaining authorization as of April 29, 2023, $25 million represents the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement.
27
March 2022 Share Repurchase Program
In March 2022, our Board of Directors approved the March 2022 Share Repurchase Program, providing for the repurchase of up to $250 million of our common stock. The $250 million authorization was utilized in fiscal year 2022 to repurchase shares in the open market, subject to market conditions and other factors.
We repurchased the following shares of its common stock under the March 2022 Share Repurchase Program during the first quarter of 2022:
| Amount Authorized | Shares Repurchased | Amount Repurchased | Average Stock Price | ||||||||||||||||||||
| (in millions) | (in thousands) | (in millions) | |||||||||||||||||||||
| March 2022 Share Repurchase Program | $ | 250 | 2,162 | $ | 109 | $ | 50.43 | ||||||||||||||||
In accordance with the Board of Directors' resolution, shares of our common stock repurchased under the March 2022 Share Repurchase Program were retired upon repurchase and are available to meet obligations under equity compensation plans and for general corporate purposes. As a result, during the first quarter of 2022 we retired 2.2 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, $4 million in Paid-in Capital and $105 million in Retained Earnings.
December 2021 ASR Agreement
In February 2022, upon final settlement of our December 2021 ASR Agreement with Goldman Sachs, we received an additional 0.3 million shares of our common stock from Goldman Sachs. The delivery of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share. In connection with the settlement of the December 2021 ASR Agreement, $50 million previously recorded in Paid-in Capital as of January 29, 2022, was reclassified to Treasury Stock in the first quarter of 2022. In February 2022, we immediately retired the additional 0.3 million shares repurchased in connection with the settlement of the December 2021 ASR Agreement. The retirement resulted in a reduction of $50 million in Treasury Stock, less than $1 million in the par value of Common Stock, less than $1 million in Paid-in Capital and nearly $50 million in Retained Earnings.
Dividend Policy and Procedures
We have not paid any cash dividends since becoming an independent, publicly traded company. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends. The declaration and amount of any dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, cash flows, capital requirements of our business, covenants associated with our debt obligations, legal requirements, regulatory constraints, industry practice and any other factors the Board of Directors deems relevant. We would use cash flow generated from operating and financing activities to fund our dividends.
Long-term Debt and Borrowing Facilities
The following table provides our outstanding debt balance, net of unamortized debt issuance costs and discounts, as of April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Senior Secured Debt with Subsidiary Guarantee | |||||||||||||||||
$394 million Term Loan due August 2028 (“Term Loan Facility”) | $ | 387 | $ | 387 | $ | 389 | |||||||||||
Asset-based Revolving Credit Facility due August 2026 (“ABL Facility”) | 295 | 295 | — | ||||||||||||||
| Total Senior Secured Debt with Subsidiary Guarantee | 682 | 682 | 389 | ||||||||||||||
| Senior Debt with Subsidiary Guarantee | |||||||||||||||||
$600 million, 4.625% Fixed Interest Rate Notes due July 2029 (“2029 Notes”) | 593 | 593 | 592 | ||||||||||||||
| Total Senior Debt with Subsidiary Guarantee | 593 | 593 | 592 | ||||||||||||||
| Total | 1,275 | 1,275 | 981 | ||||||||||||||
| Current Debt | (4) | (4) | (4) | ||||||||||||||
| Total Long-term Debt, Net of Current Portion | $ | 1,271 | $ | 1,271 | $ | 977 | |||||||||||
Cash paid for interest was $13 million and $4 million for the first quarter of 2023 and first quarter of 2022, respectively.
28
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 of $1 million for the Term Loan Facility during both the first quarter of 2023 and the first quarter of 2022.
Interest under the Term Loan Facility is calculated by reference to the LIBOR or an alternative base rate, plus an interest rate margin equal to (i) in the case of LIBOR loans, 3.25% and (ii) in the case of alternate base rate loans, 2.25%. The LIBOR rate applicable to the Term Loan Facility is subject to a floor of 0.50%. 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 April 29, 2023, the interest rate on the loans under the Term Loan Facility was 8.24%.
On May 8, 2023, subsequent to the end of the first quarter of 2023, we amended our Term Loan Facility to allow for an early transition to using SOFR instead of LIBOR. In accordance with the amendment, interest on SOFR loans under the Term Loan Facility will be calculated by reference to SOFR, plus an interest rate margin ranging from 3.36% to 3.68%.
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. Interest on the loans under the ABL Facility is 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%. 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.
During the first quarter of 2023, we borrowed $15 million and made payments of $15 million under the ABL Facility. As of April 29, 2023, there were borrowings of $295 million outstanding under the ABL Facility and the interest rate on the borrowings was 6.71%. We had $30 million of outstanding letters of credit as of April 29, 2023 that further reduced our availability under the ABL Facility. As of April 29, 2023, our remaining availability under the ABL Facility was $308 million.
On May 8, 2023, subsequent to the end of the first quarter of 2023, we amended our ABL Facility to allow for an early transition to using SOFR instead of LIBOR. In accordance with the amendment, interest on SOFR loans under the ABL Facility will be calculated by reference to SOFR, plus an interest rate margin based on average daily excess availability ranging from 1.60% to 2.10%.
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 April 29, 2023, 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 April 29, 2023:
| Moody’s | S&P | ||||||||||
| Corporate | Ba3 | BB- | |||||||||
| Senior Secured Debt with Subsidiary Guarantee | Ba2 | BB+ | |||||||||
| Senior Unsecured Debt with Subsidiary Guarantee | B1 | BB- | |||||||||
| Outlook | Stable | Stable | |||||||||
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Contingent Liabilities and Contractual Obligations
Contractual Obligations
Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since January 28, 2023, as discussed in “Contingent Liabilities and Contractual Obligations” in our Annual Report on Form 10-K filed with the SEC on March 17, 2023. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of our operations).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
We did not adopt any new accounting standards during the first quarter of 2023 that had a material impact on our results of operations, financial position or cash flows. In addition, there are no new accounting standards not yet adopted that are expected to have a material impact on our results of operations, financial position or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K filed with the SEC on March 17, 2023.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We may use derivative financial instruments like foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rate Risk
We have operations and investments in unconsolidated entities in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations. Our Canadian dollar and Chinese Yuan denominated earnings are subject to exchange rate risk as substantially all our merchandise sold in Canada and China is sourced through U.S. dollar transactions. From time to time we may adjust our exposure to foreign exchange rate risk by entering into foreign currency forward contracts, however, these measures may not succeed in offsetting all the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.
Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange rate fluctuations.
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities is the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. As of April 29, 2023, our investment portfolio is primarily comprised of bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.
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Our long-term debt as of April 29, 2023 consists of the 2029 Notes, which have a fixed interest rate, the $394 million in outstanding borrowing under the Term Loan Facility, which has a variable interest rate based on LIBOR, and the $295 million in outstanding borrowing under the ABL Facility, which has a variable interest rate based on LIBOR. Subsequent to the end of the first quarter of 2023, we amended our Term Loan Facility and ABL Facility to allow for an early transition to using SOFR instead of LIBOR. Our exposure to interest rate changes is limited to the fair value of the debt issued 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 April 29, 2023, January 28, 2023 and April 30, 2022:
| April 29, 2023 | January 28, 2023 | April 30, 2022 | |||||||||||||||
| (in millions) | |||||||||||||||||
| Principal Value | $ | 994 | $ | 995 | $ | 998 | |||||||||||
| Fair Value, Estimated (a) | 873 | 894 | 881 | ||||||||||||||
(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 April 29, 2023, we believe that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity. We further believe the principal value of the outstanding debt under the ABL Facility approximates its fair value as of April 29, 2023 based on the terms of the borrowings from the ABL Facility.
Concentration of Credit Risk
We maintain cash and cash equivalents with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. As of April 29, 2023, our investment portfolio is primarily comprised of bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. We are integrating Adore Me into our internal controls over financial reporting beginning in fiscal year 2023. Other than the changes with regard to Adore Me, there were no changes in our internal control over financial reporting that occurred during the first quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against us from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.
Item 1A. RISK FACTORS
The risk factors that affect our business and financial results are set forth under “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K filed with the SEC on March 17, 2023. There have been no material changes to the risk factors from those described in the 2022 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A. Risk Factors” in our 2022 Annual Report on Form 10-K and those described in this report or other SEC filings could cause actual results to differ materially from those stated in any forward-looking statements.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides our repurchases of our common stock during the first quarter of 2023:
| Period | Total Number of Shares Purchased (a) | Average Price Paid per Share (b) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Plans or Programs (c) | |||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||
January 29, 2023 - February 25, 2023 (“February 2023”) | 2,380 | (b) | 2,372 | $ | 150,000 | ||||||||||||||||||
February 26, 2023 - April 1, 2023 (“March 2023”) | 255 | $ | 31.01 | — | 150,000 | ||||||||||||||||||
April 2, 2023 - April 29, 2023 (“April 2023”) | 16 | $ | 31.60 | — | 150,000 | ||||||||||||||||||
| Total | 2,651 | 2,372 | |||||||||||||||||||||
(a)The total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options.
(b)The amount purchased in February 2023 includes the initial delivery of 2.372 million shares pursuant to the ASR Agreement discussed in Note 5, “Earnings Per Share and Shareholders' Equity” included in Item 1. Financial Statements. The average price paid per share, including any broker commissions, in February 2023 for shares not purchased pursuant to the ASR Agreement was $44.24. The final settlement of the ASR Agreement occurred in May 2023, subsequent to the end of the first quarter of 2023. The average price paid per share pursuant to the ASR Agreement was $34.22 which 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.
(c)The January 2023 Share Repurchase Program authorizes the purchase of up to $250 million of our common stock, subject to market conditions and other factors. The January 2023 Share Repurchase Program will continue until exhausted, but no later than the end of fiscal year 2023. Of the remaining authorization as of April 29, 2023, $25 million represents the value of the stock then held by Goldman Sachs pending final settlement of the ASR Agreement.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
| Exhibits | ||||||||
| Amended and Restated Certificate of Incorporation of Victoria’s Secret & Co. (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on August 3, 2021). | ||||||||
| Second Amended and Restated Bylaws of Victoria’s Secret & Co. (incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K filed on March 17, 2023). | ||||||||
| Executive Severance Agreement by and between VS Service Company, LLC and Christine Rupp, dated as of June 20, 2022. | ||||||||
| Section 302 Certification of CEO. | ||||||||
| Section 302 Certification of CFO. | ||||||||
| Section 906 Certification (by CEO and CFO). | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
________________________
* Previously filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VICTORIA'S SECRET & CO. | ||||||||
| (Registrant) | ||||||||
| By: | /s/ Timothy Johnson | |||||||
| Timothy Johnson Chief Financial and Administrative Officer * | ||||||||
Date: June 2, 2023
* Mr. Johnson is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.
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Exhibit 10.1
EXECUTIVE SEVERANCE AGREEMENT
THIS EXECUTIVE SEVERANCE AGREEMENT (this “Agreement”) is made and entered into as of 6/20/2022 (the “Effective Date”), by and between the Company and CHRIS RUPP (the “Executive”) (hereinafter collectively referred to as the “Parties”).
WHEREAS, the Executive currently serves as a key employee of the Company and the Executive’s services and knowledge are valuable to the Company; and
WHEREAS, in consideration of the Executive’s continued employment, the Company has determined that it is in its best interests to provide the Executive with the severance protections in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the foregoing, and in view of the promises and other good and valuable consideration described in this Agreement (the sufficiency and receipt of which are hereby acknowledged) the Parties agree as follows:
1.Effective Date and Term of this Agreement. This Agreement shall be effective on the Effective Date and will remain in effect unless and until (i) the Executive’s employment with the Company is terminated by either Party in accordance with Section 2, and (ii) all payments and/or benefits to which the Executive is entitled under this Agreement, if any, have been made or provided to the Executive in accordance with the terms of this Agreement.
2.Termination of Employment. The Executive’s employment with the Company shall terminate upon the earlier of: (i) automatically thirty (30) days after the Executive provides a written Notice of Termination of his or her resignation for any reason other than for Good Reason; (ii) thirty (30) days following the Executive providing a Notice of Termination indicating the existence of a condition(s) constituting Good Reason other than to the extent that such condition is cured; (iii) immediately upon the Executive’s Disability or death; (iv) automatically thirty (30) days after the Executive receives written Notice of Termination from the Company of his or her Termination without Cause; or (v) the date set forth in the Notice of Termination from the Company of the Executive’s termination of employment with the Company for Cause (collectively, the earlier of being the “Termination Date”). The Company may elect to pay the Executive in lieu of the thirty (30) days’ written notice, but will still deliver a Notice of Termination.
3.Non-Qualifying Termination.
(a)Notwithstanding anything herein or in any other agreement to the contrary, if the Executive’s employment is terminated by the Company for Cause, the Company’s sole obligation shall be to pay the Executive the Accrued Amounts and the Executive shall not be entitled to severance benefits under this Agreement or any other agreement or severance plan, policy or program of the Company (or any of its affiliates).
(b)Notwithstanding anything herein or in any other agreement to the contrary, to the extent that the Executive experiences a Termination for any reason while a Company-led internal investigation into facts that could reasonably give rise to the Executive’s Termination for Cause is pending: (i) the Executive shall not be entitled to receive any severance benefits under this Agreement (other than the Accrued Amounts) or any other agreement or severance plan, policy or program of the Company (or any of its affiliates); and (ii) the Executive shall not be entitled to vest in or receive any Variable Compensation, in either case, unless and until the Company concludes its investigation with a finding that grounds for a Termination for Cause did not in fact exist, and only to the extent provided for under the terms of the applicable agreement, plan, policy or program.
(c)If the Executive experiences a Termination by reason of the Executive’s death or if the Executive gives the Company a written Notice of Termination other than for Good Reason, the Company’s sole obligation shall be to pay the Executive the Accrued Amounts.
(d)If the Executive’s experiences a Termination by reason of the Executive’s Disability, the Company’s sole obligation shall be to pay the Executive the Accrued Amounts and the Executive shall be entitled to receive disability benefits available under the Company’s (or any affiliate’s) long-term disability plan, to the extent applicable.
4.Severance Upon a Qualifying Termination Not Within the Protection Period. If the Executive experiences a Qualifying Termination not within the Protection Period, then, subject to Section 6, the Company will provide the Executive with the following (collectively, the “Severance Benefits”):
(a)Accrued Amounts;
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(b)The Company shall continue to pay the Executive’s Base Salary for a period of two (2) years following the Qualifying Termination, less applicable withholding, payable as follows: (i) on the Company’s first regularly scheduled pay date falling on or after sixty (60) days from the Executive’s Termination Date (the “First Payment Date”), the Company will pay the Executive, without interest, the number of missed payroll installments that would have been paid during the period beginning on the Termination Date and ending on the First Payment Date had the installments been paid on the Company’s regularly scheduled payroll dates, and (ii) each of the remaining installments shall be paid on the Company’s regularly scheduled pay dates during the remainder of such two (2)-year period;
(c)For up to two (2) years following the Termination Date, and provided that the Executive pays the applicable contribution amount required to be paid by similarly-situated active employees for such coverage, the Company shall provide to the Executive and the Executive’s covered dependents, medical and dental benefits substantially similar in the aggregate to the those provided to similarly-situated active employees, provided that the Company’s contribution toward the cost of such coverage shall be treated as taxable income to the Executive and the Executive must continue to pay his or her portion of the cost of this coverage with after-tax dollars (the “Benefit Continuation”). The Company’s obligation to provide the Benefit Continuation shall cease upon the Executive becoming eligible for similar benefits as the result of employment with another employer. Notwithstanding the foregoing, if the Executive is not eligible to continue to participate in the relevant plan(s) providing the Benefit Continuation or if providing the Benefit Continuation would violate the nondiscrimination rules under Section 105(h) of the Code, or the rules applicable to non-grandfathered health plans under the Patient Protection and Affordable Care Act of 2010 (“PPACA”), or result in the imposition of penalties under the Code and/or PPACA and the related regulations and guidance promulgated thereunder, the Parties agree to reform this section in a manner as necessary to comply with applicable law, while, to the extent permitted by applicable law, preserve its intended economic benefit;
(d)The Company shall pay the Executive any incentive compensation under the IC Plan that the Executive would have received if the Executive had remained employed with the Company for a period of one (1) year after the Termination Date based on actual performance, less applicable withholding, subject to the terms of the IC Plan. The foregoing payments shall be paid at the same time as payments under the IC Plan are typically paid, but in no event earlier than three (3) months following the Executive’s Qualifying Termination and in no event later than March 15th of the year following the year in which the applicable season is completed. For the purposes of clarity, under this subsection, the Executive shall not be entitled to payments under the IC Plan pursuant to this provision for partial performance periods that are not then-completed on the first anniversary of the Termination Date; and
(e)The treatment of any outstanding equity awards will be determined as follows:
(i)A pro-rata portion of the outstanding unvested equity awards that are held by the Executive as of the Termination Date and vest only based on the passage of time shall vest and be settled on the First Payment Date, which pro-rata vesting shall be determined by (A) multiplying (x) the number of shares subject to the award by (y) a fraction, the numerator of which is the number of complete months between the first day of the applicable time-based vesting period and the Termination Date, and the denominator of which is the aggregate number of months in the time-based vesting period, less (B) the number of shares subject to the award that had already vested pursuant to the award’s terms prior to the Termination Date, if any;
(ii)A pro-rata portion of the outstanding unvested equity awards that are held by the Executive as of the Termination Date and vest based, at least in part, on the satisfaction of performance goals shall vest and be settled by the later of the First Payment Date and sixty (60) days following the end of the applicable performance period, which pro-rata vesting shall be determined by (A) multiplying the number of shares that the Executive would have earned for the entire performance period based on the level of performance determined in accordance with the applicable plan and award agreements by (B) a fraction, the numerator of which is the number of complete months between the first day of the applicable performance period and the Termination Date, and the denominator of which is the aggregate number of months in the performance period;
(iii)To the extent that any outstanding unvested equity award that is held by the Executive as of the Termination Date would vest at a greater percentage under the terms of the applicable plan and award agreement than as provided for under Sections 4(e)(i)-(ii), the terms of such award agreement shall instead to determine the number of shares covered by such equity award that will vest under this Section 4(e), subject to Sections 4(e)(iv)-(v);
(iv)Notwithstanding the foregoing, no equity awards that are outstanding as of the Termination Date will be forfeited during the three (3)-month period commencing upon the Termination Date, provided, that, (x) to the extent a VS Change in Control occurs during such three (3)-month period, any such equity awards that are outstanding and unvested as of the VS Change in Control will instead be treated in accordance with Section 5; and (y) to the extent a VS Change in Control does not occur during such three (3)-month period, any portion of the equity awards outstanding as of Termination Date that do not vest pursuant to Sections 4(e)(i)-(iii) shall be forfeited; and
(v)To the extent that the payment or settlement of any equity awards in accordance with the foregoing would constitute an impermissible change in the time or form of payment under Section 409A of the Code, then such portion shall be payable at a time that would be permitted under Section 409A of the Code and that is as near as possible to the payment timing contemplated by the foregoing.
2
5.Severance Upon a Qualifying Termination Within the Protection Period. If the Executive has a Qualifying Termination within the Protection Period, then, subject to Section 6, the Company will provide the Executive with the following (collectively, the “Change in Control Severance Benefits”):
(a)The payments and benefits described in Sections 4(a), (b), and (c);
(b)A payment equal to the sum of the incentive compensation payouts that the Executive actually received under the IC Plan for the four (4) completed seasons immediately preceding the Termination Date (the “Bonus Amount”). The Bonus Amount shall be paid, less applicable withholding, in a lump sum cash payment on the First Payment Date;
(c)A payment equal to the product of (i) the IC Plan payment that the Executive would have earned for the season during which the Executive’s Qualifying Termination occurs, based on actual performance, multiplied by (ii) a fraction, the numerator of which is the number of days in the season (within the meaning of the IC Plan) in which the Termination Date occurs that elapsed through the Termination Date and the denominator of which is the total number of days in such season. The foregoing payment, less applicable withholding, shall be paid at the same time as payments under the IC Plan are typically paid, but in no event earlier than the First Payment Date and in no event later than March 15th of the year following the year in which the applicable season is completed; and
(d)All of the outstanding and unvested equity awards held by the Executive immediately before such Qualifying Termination will immediately become fully vested and payable on the First Payment Date, provided that, to the extent that paying any portion of such amount in accordance with the foregoing would constitute an impermissible change in the time or form of payment under Section 409A of the Code, then such portion shall be payable at a time that would be permitted under Section 409A of the Code and that is as near as possible to the payment timing contemplated by the foregoing. To the extent that an equity award vests based on the achievement of performance goals, performance goals will be deemed to be achieved at target levels if less than one-third of the applicable performance period has elapsed as of the date of the Change in Control, otherwise performance goals will be deemed achieved at maximum levels.
In the event that the Termination Date occurs during the portion of the Protection Period that precedes a VS Change in Control and the Executive has already commenced receiving payments and/or benefits under Section 4 prior to the VS Change in Control, then (i) the Executive will be entitled to the payments and benefits under this Section 5 in lieu of any additional payments or benefits under Section 4, but only to the extent an equivalent payment and/or benefit has not already been paid or provided pursuant to Section 4; and (ii) any payments that the Executive would have otherwise been entitled to under this Section 5 that have not otherwise been paid to the Executive as of the VS Change in Control will be paid to the Executive in a single lump sum payment as soon as administratively practicable, but no later than sixty (60) calendar days following the occurrence of the VS Change in Control.
6.Release Requirement. Notwithstanding any other provisions of this Agreement to the contrary, the Company shall not make or provide the Severance Benefits or the Change in Control Severance Benefits (in each case, other than the Accrued Amounts), unless the Executive timely executes and delivers to the Company a release of claims in favor of the Company, its affiliates and their respective officers and directors in a form provided by the Company (the “Release”) and such Release becomes effective and irrevocable within sixty (60) days following the Executive’s Termination Date. If the foregoing requirements are not satisfied by the Executive, then no Severance Benefits nor Change in Control Severance Benefits (in each case, other than the Accrued Amounts) shall be due to the Executive pursuant to this Agreement.
7.Effect on Other Plans, Agreements and Benefits.
(a)Any severance benefits payable to the Executive under this Agreement will be in lieu of and not in addition to: (i) any severance benefits to which the Executive would otherwise be entitled under any general severance policy or severance plan maintained by the Company (or any of its affiliates) or any agreement between the Executive and the Company (or any of its affiliates) that provides for severance benefits; (ii) unused PTO remaining upon the Termination Date; and (iii) salary continuation provided for under the Confidentiality, Noncompetition and Intellectual Property Agreement.
(b)Any severance benefits payable to the Executive under this Agreement will not be counted as compensation for purposes of determining benefits under any other benefit policies or plans of the Company (or any of its affiliates), except to the extent expressly provided therein.
(c)The Executive’s entitlement to any other benefits not expressly referenced herein shall be determined in accordance with the applicable employee benefit plans then in effect.
(d)The Executive expressly agrees that any amounts the Executive may owe to the Company as of the Termination Date may be deducted from the amounts that the Company would otherwise owe to the Executive under this Agreement.
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(e)Notwithstanding anything herein or in any other agreement to the contrary, if the Executive incurs a Termination for Cause, then all Variable Compensation shall be immediately canceled for no consideration. If the Executive incurs a Termination for Cause, or the Company becomes aware (after the Executive’s Termination) of conduct on the part of the Executive that would have been grounds for a Termination for Cause, then, the Executive will be required to deliver to the Company, immediately upon request, the Variable Compensation (in shares and/or cash), granted on or after the Effective Date and paid or delivered to the Executive within the three (3) years prior to the Termination Date, including the profit the Executive realized upon the exercise of stock options.
8.Section 280G of the Code.
(a)Notwithstanding anything in this Agreement to the contrary, if the Executive is a “disqualified individual” (as defined in Section 280G(c) of the Code), and the payments and benefits provided for in this Agreement, together with any other payments and benefits which the Executive has the right to receive from the Company or any other person, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code), then the payments and benefits provided for in this Agreement will be either (a) reduced (but not below zero) so that the present value of such total amounts and benefits received by the Executive from the Company and/or such person(s) will be $1.00 less than three (3) times the Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code) and so that no portion of such amounts and benefits received by the Executive will be subject to the excise tax imposed by Section 4999 of the Code or (b) paid in full, whichever produces the better “net after-tax position” to the Executive (taking into account any applicable excise tax under Section 4999 of the Code and any other applicable taxes).
(b)The reduction of payments and benefits hereunder, if applicable, will be made by reducing, first, payments or benefits to be paid in cash hereunder in the order in which such payment or benefit would be paid or provided (beginning with such payment or benefit that would be made last in time and continuing, to the extent necessary, through to such payment or benefit that would be made first in time) and, then, reducing any benefit to be provided in-kind hereunder in a similar order.
(c)The determination as to whether any such reduction in the amount of the payments and benefits provided hereunder is necessary will be made applying principles, assumptions and procedures consistent with Section 280G of the Code by an accounting firm or law firm of national reputation that is selected for this purpose by the Company (the “280G Firm”). In order to assess whether payments under this Agreement or otherwise qualify as reasonable compensation that is exempt from being a parachute payment under Section 280G of the Code, the 280G Firm or the Company may retain the services of an independent valuation expert.
(d)If a reduced payment or benefit is made or provided and through error or otherwise that payment or benefit, when aggregated with other payments and benefits from the Company (or its affiliates) used in determining if a “parachute payment” exists, exceeds $1.00 less than three (3) times the Executive’s base amount, then the Executive must immediately repay such excess to the Company upon notification that an overpayment has been made. Nothing in this Section 8 will require the Company to be responsible for, or have any liability or obligation with respect to, the Executive’s excise tax liabilities under Section 4999 of the Code.
9.Arbitration and Class and Representative Action Waiver.
(a)The Parties agree that, subject to Section 9(b), any controversy or claim between the Company and the Executive arising out of or relating to this Agreement or its termination shall be settled and determined by a single arbitrator whose award shall be accepted as final and binding upon the parties. If Executive initiates arbitration, Executive will be responsible for paying a filing fee of $300 or the filing fee in federal court in Columbus, Ohio, whichever is lower. Each Party will be responsible for its/her own attorney’s fees. The Parties shall jointly select an arbitrator from JAMS, Inc. (“JAMS”) or the American Arbitration Association (“AAA”) with at least ten (10) years of experience in employment disputes. The arbitration shall be conducted on a confidential basis by the AAA or JAMS and administered under their Employment Arbitration Rules, which are currently available at http://www.adr.org and http://www.jamsadr.com, respectively. The arbitrator shall have the authority to allow for appropriate discovery and exchange of information before a hearing, including, but not limited to, production of documents, information requests, depositions and subpoenas. Unless the arbitrator determines additional discovery is necessary to adequately arbitrate Executive’s claims, discovery shall be conducted in accordance with the then-current version of the Federal Rules of Civil Procedure. Those rules can be found at https://www.law.cornell.edu/rules/frcp. The arbitration shall take place in Columbus, Ohio. Notwithstanding the AAA or JAMS rules, all parties to the arbitration shall have the right to file a dispositive motion and shall not be required to seek permission from the arbitrator to do so. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses, and reasonable attorneys’ fees. Judgment on the award may be entered in any court having jurisdiction.
(b)This Arbitration provision does not include:
(i)Any claim arising under or related to the Confidentiality, Noncompetition and Intellectual Property Agreement;
(ii)A claim for workers’ compensation benefits;
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(iii)A claim for unemployment compensation benefits;
(iv)A claim based upon the Company’s current (successor or future) employee benefits and/or welfare plans that contain an appeal procedure or other procedure for the resolution of disputes under this Agreement; and
(v)A claim of sexual harassment, including hostile work environment, “sexual assault” (defined as actual or threatened unwelcomed touching of a sexual nature), gender discrimination, and retaliation related to same.
(c)This Agreement also does not prevent Executive from filing a claim or charge with a federal, state or local administrative agency, such as the Equal Employment Opportunity Commission, the National Labor Relations Board, or similar state or local agencies.
(d)This Agreement does not prohibit those limited circumstances under which either Party finds it necessary to seek emergency or temporary injunctive relief, such as a preliminary injunction or a temporary restraining order, from a court that may be necessary to protect any rights or property of either Party pending the establishment of the arbitral tribunal or its determination of the merits of the dispute.
(e)CLASS ACTION WAIVER. To the extent permissible by law, there shall be no right or authority for any dispute to be arbitrated as a class action or collective action (“Class Action Waiver”). THIS MEANS THAT, EXCEPT AS EXPLICITLY PROVIDED HEREIN, ALL DISPUTES BETWEEN THE PARTIES THAT ARISE, OR HAVE ARISEN, OUT OF EXECUTIVE’S EMPLOYMENT OR THE TERMINATION OF EXECUTIVE’S EMPLOYMENT SHALL PROCEED IN ARBITRATION SOLELY ON AN INDIVIDUAL BASIS, AND THAT THE ARBITRATOR’S AUTHORITY TO RESOLVE ANY DISPUTE AND TO MAKE WRITTEN AWARDS WILL BE LIMITED TO EXECUTIVE’S INDIVIDUAL CLAIMS.
(f)REPRESENTATIVE ACTION WAIVER. To the extent permissible by law, there shall be no right or authority for any dispute to be arbitrated as a representative action or as a private attorney general action, including but not limited to claims brought pursuant to the Private Attorney General Act of 2004, Cal. Lab. Code § 2698, et seq. (“Representative Action Waiver”). THIS MEANS THAT, TO THE EXTENT CONSISTENT WITH APPLICABLE LAW, EXECUTIVE MAY NOT SEEK RELIEF ON BEHALF OF OTHERS IN ARBITRATION, INCLUDING BUT NOT LIMITED TO SIMILARLY AGGRIEVED EMPLOYEES. THE ARBITRATOR’S AUTHORITY TO RESOLVE ANY DISPUTE AND TO MAKE WRITTEN AWARDS WILL BE LIMITED TO EXECUTIVE’S INDIVIDUAL CLAIMS.
(g)The Parties agree that only a court of competent jurisdiction may interpret this Section 9 and resolve challenges to its validity and enforceability, including but not limited to the validity, enforceability and interpretation of the Class Action Waiver and Representative Action Waiver. The arbitrator shall have no jurisdiction or power to make such determinations. The Federal Arbitration Act, 9 U.S.C. §§ 1-16, shall govern the interpretation and enforcement of the duty to arbitrate found in this Section 9 and all arbitration proceedings under this Agreement.
(h)Any conflict between the rules and procedures set forth in either the JAMS or AAA rules and those set forth in this Agreement shall be resolved in favor of those in this Agreement.
(i)The burden of proof at an arbitration shall at all times be on the Party seeking relief.
(j)In reaching a decision, the arbitrator shall apply the governing substantive law applicable to the claims, causes of action and defenses asserted by the Parties, as applicable in Ohio. The arbitrator shall have the power to award all remedies that could be awarded by a court or administrative agency in accordance with the governing and applicable substantive law, including, without limitation, Title VII, the Age Discrimination in Employment Act, the Family and Medical Leave Act.
(k)The aggrieved Party must give written notice of any claim to the other Party as soon as possible after the aggrieved Party first knew or should have known of the facts giving rise to the claim. The written notice shall describe the nature of all claims asserted, the facts upon which those claims are based, and shall set forth the aggrieved Party’s intention to pursue arbitration. The notice shall be mailed to the other Party by certified or registered mail, return receipt requested. A copy of the notice may be sent by electronic mail.
10.Amendment. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive and the Company.
11.At-Will Employment. This Agreement does not alter the status of each Executive as an at-will employee of the Company. Nothing contained herein shall be deemed to give the Executive the right to remain employed by the Company or to interfere with the rights of the Company to terminate the employment of the Executive at any time, with or without Cause.
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12.Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid, void or unenforceable, such provision shall be deemed modified, amended and narrowed to the extent necessary to render such provision legal, valid and enforceable, and the other remaining provisions of this Agreement shall not be affected but shall remain in full force and effect. If a court of competent jurisdiction finds the Class Action Waiver and/or Representative Action Waiver in Section 9 is unenforceable for any reason, then the unenforceable waiver provision shall be severable from this Agreement, and any claims covered by any deemed unenforceable waiver provision may only be litigated in a court of competent jurisdiction, but the remainder of the Agreement shall be binding and enforceable.
13.Headings and Subheadings. Headings and subheadings contained in this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the heading or subheading of any section or paragraph.
14.Unfunded Obligations. The amounts to be paid to the Executive under this Agreement are unfunded obligations of the Company. The Company is not required to segregate any monies or other assets from its general funds with respect to these obligations. The Executive shall not have any preference or security interest in any assets of the Company other than as a general unsecured creditor.
15.Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement (including the Notice of Termination and a notice of a claim for which a Party seeks arbitration) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by registered or certified mail, return receipt requested, postage prepaid, or upon receipt if overnight delivery service or facsimile is used, addressed as follows:
To the Executive:
Christine A. Rupp
[REDACTED]
[REDACTED]
To the Company:
VS Service Company, LLC
Four Limited Parkway,
Reynoldsburg, Ohio 43068
Attn: Chief Legal Officer
16.Successors and Assigns. The Company may assign its rights and obligations under this Agreement without the Executive’s consent: to (i) an affiliate of the Company, or (ii) in the event that the Company shall hereafter effect a reorganization, consolidate with, or merge into, any other entity or person, or transfer all or substantially all of its properties, stock, or assets to any other entity or person, to the acquirer or resulting entity in such transaction. This Agreement will be binding upon any successor of the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise), in the same manner and to the same extent that the Company would be obligated under this Agreement if no succession had taken place. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, the Executive’s beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal personal representative.
17.Waiver. Any Party’s failure to enforce any provision or provisions of this Agreement will not in any way be construed as a waiver of any such provision or provisions, nor prevent any Party from thereafter enforcing each and every other provision of this Agreement.
18.Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed to constitute one and the same original.
19.Governing Law. Unless otherwise noted in this Agreement, this Agreement shall be construed in accordance with and governed by the laws of Ohio without regard to conflicts of law principles.
20.Withholding. The Company shall have the right to withhold from any amount payable hereunder any Federal, state and local taxes in order for the Company to satisfy any withholding tax obligation it may have under any applicable law or regulation.
21.Section 409A of the Code. This Agreement is intended to either avoid the application of, or comply with, Section 409A of the Code. To that end, this Agreement shall at all times be interpreted in a manner that is consistent with Section 409A of the Code. Notwithstanding any other provision in this Agreement to the contrary, the Company shall have the right, in its sole discretion, to adopt such amendments to this Agreement or take such other actions (including amendments and actions with retroactive effect) as it determines is necessary or appropriate for this Agreement to comply with Section 409A of the Code. Further:
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(a)Any reimbursement of any costs and expenses by the Company to the Executive under this Agreement shall be made by the Company in no event later than the close of the Executive’s taxable year following the taxable year in which the cost or expense is incurred by the Executive. The expenses incurred by the Executive in any calendar year that are eligible for reimbursement under this Agreement shall not affect the expenses incurred by the Executive in any other calendar year that are eligible for reimbursement hereunder and the Executive’s right to receive any reimbursement hereunder shall not be subject to liquidation or exchange for any other benefit.
(b)Any payment following a separation from service that would be subject to Section 409A(a)(2)(A)(i) of the Code as a distribution following a separation from service of a “specified employee” (as defined under Section 409A(a)(2)(B)(i) of the Code) shall be made on the first to occur of (i) ten (10) days after the expiration of the six (6)-month period following such separation from service, (ii) death, or (iii) such earlier date that complies with Section 409A of the Code.
(c)Each payment that the Executive may receive under this Agreement shall be treated as a “separate payment” for purposes of Section 409A of the Code.
(d)Payments under this Agreement are intended to be exempt from the requirements of Section 409A of the Code to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the involuntary separation pay plan exception described in Treasury Regulation Section 1.409A-1(b)(9)(iii), or otherwise. Any payments and benefits provided under this Agreement may be accelerated in time or schedule by the Company, in its sole discretion, to the extent permitted by Section 409A of the Code.
22.Definitions. Capitalized terms used but not otherwise defined herein have the meanings set forth in this Section 22.
(a)“2020 Stock Plan” means the L Brands, Inc. 2020 Stock Option and Performance Incentive Plan, as amended from time to time.
(b)“Accrued Amounts” means: (i) unpaid Base Salary through the Termination Date; and (ii) unreimbursed business expenses incurred by the Executive on behalf of the Company during the term of his or her employment in accordance with the Company’s standard policies (including expense verification policies) regarding the reimbursement of business expenses, as the same may be modified from time to time.
(c)“Base Salary” means the Executive’s annual base salary in effect as of the Termination Date (without giving effect to any reduction resulting in a Qualifying Termination for Good Reason).
(d)“Cause” means, as determined by the Company in its sole discretion, that the Executive (i) was grossly negligent in the performance of the Executive’s duties with the Company (other than a failure resulting from the Executive’s incapacity due to physical or mental illness); (ii) has pled “guilty” or “no contest” to, or has been convicted of, an act which is defined as a felony under federal or state law; (iii) engaged in misconduct in bad faith that could reasonably be expected to materially harm the Company’s business or its reputation; or (iv) violated a material provision of the Code of Conduct, including, but not limited to, committing Subject Conduct or other violations of the Company’s Discrimination, Anti-Harassment, and Non-Retaliation policies. No event of condition described in subsections (i), (iii) or (iv) of the immediately preceding sentence shall constitute Cause unless (x) the Company provides the Executive a Notice of Termination stating the grounds for such termination; (y) such grounds for termination (if susceptible to correction) are not corrected by the Executive within thirty (30) days of the Executive’s receipt of the Notice of Termination; and (z) the Company terminates the Executive’s employment with the Company (any its affiliates) immediately following expiration of such thirty-day (30) period. Notwithstanding anything in this Agreement to the contrary, if the Executive’s experiences a Termination other than by the Company for Cause, the Company shall have the sole discretion to later use after-acquired evidence to retroactively re-characterize the prior Termination as a Termination for Cause if such after-acquired evidences supports such an action.
(e)“Change in Control” means a VS Change in Control and/or an LB Change in Control.
(f)“Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.
(g)“Company” means VS Service Company, LLC, a Delaware limited liability company or its successors and permitted assigns.
(h)“Disability” means a physical or mental infirmity that impairs the Executive’s ability to substantially perform the Executive’s duties for the Company for a period of at least six (6) months in any twelve (12)-month calendar period as determined in accordance with the Company’s (or any affiliate’s) long-term disability plan, to the extent applicable.
(i)“IC Plan” means the incentive compensation plan of the Company (or any of its affiliates) in which the Executive participates as of the Termination Date.
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(j)“Good Reason” means (i) a material reduction in the Executive’s positions, duties, authority, responsibilities or reporting requirements; (ii) the failure of the Company to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Company within fifteen (15) days after a merger, consolidation, sale, or similar transaction; (iii) a material reduction in the Executive’s Base Salary or annual bonus opportunity under the IC Plan other than pursuant to an across-the-board reduction applicable to all similarly-situated employees; or (iv) the relocation of the Executive’s principal place of employment from the Columbus, Ohio area. “Good Reason” shall not include acts taken by the Company by reason of the Executive’s physical or mental infirmity which impairs the Executive’s ability to substantially perform his or her duties. Notwithstanding the foregoing provisions of this definition, any assertion by the Executive of a termination for Good Reason shall not be effective unless all of the following conditions are satisfied: (x) the Executive has provided a Notice of Termination to the Company indicating the existence of the condition(s) providing grounds for termination for Good Reason within sixty (60) days of the initial existence of such condition becoming known (or should have become known) to him or her; (y) the condition(s) specified in such notice must remain uncorrected by the Company for thirty (30) days following the Company’s receipt of such written notice; and (x) the Executive terminates employment immediately following the expiration of such thirty-day (30) period.
(k)“LB Change in Control” means a “Change in Control” under the 2020 Stock Plan.
(l)“Notice of Termination” means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, if applicable, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Executive’s Termination under the provision so indicated, and (iii) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date.
(m)“Protection Period” means, (i) the period beginning three (3) months prior to a VS Change in Control and ending twenty-four (24) months following a VS Change in Control, and (ii) only to the extent that an LB Change in Control occurs prior to a VS Change in Control, the period beginning on the date of an LB Change in Control and ending twenty-four (24) months thereafter.
(n)“Qualifying Termination” means the Executive’s Termination either: (i) by the Company without Cause; or (ii) by the Executive for Good Reason.
(o)“Subject Conduct” means sexual harassment (including creation of a hostile work environment), gender discrimination and retaliation related to the foregoing or a violation of any policy of the Company (or any of its affiliates) relating to sexual harassment (including creation of a hostile work environment), gender discrimination and retaliation related to the foregoing.
(p)“Termination” means the Executive’s termination of employment with the Company, for any reason, whether voluntary or involuntary, provided that such termination constitutes a “separation from service” as defined and applied under Section 409A of the Code.
(q)“Variable Compensation” means any cash-based performance or incentive award paid by or any equity compensation awarded by the Company (or any of its affiliates), including, but not limited to, under the 2020 Stock Plan (and any successor thereto) and the IC Plan.
(r)“VS Change in Control” means, (i) the consummation of any transaction (including, without limitation, any sale of stock, merger, consolidation or spin-off), the result of which is that L Brands no longer owns, directly or indirectly, at least fifty percent (50%) of the voting securities of VS&Co. then outstanding; (ii) any Person (other than an Excluded Person) becomes, together with all “affiliates” and “associates” (each as defined under Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Act”)) the “beneficial owner” (as defined under Rule 13d-3 of the Act) of securities representing fifty percent (50%) or more of the combined voting power of the Voting Stock of VS&Co. then outstanding, unless such Person becomes the “beneficial owner” of fifty percent (50%) or more of the combined voting power of such Voting Stock then outstanding solely as a result of an acquisition of such Voting Stock by VS&Co. which, by reducing the Voting Stock of VS&Co. outstanding, increases the proportionate Voting Stock beneficially owned by such Person (together with all “affiliates” and “associates” of such Person) to fifty percent (50%) or more of the combined voting power of the Voting Stock of VS&Co. then outstanding; provided that if a Person shall become the “beneficial owner” of fifty percent (50%) or more of the combined voting power of the Voting Stock of VS&Co. then outstanding by reason of such Voting Stock acquisition by VS&Co. and shall thereafter become the “beneficial owner” of any additional Voting Stock of VS&Co. which causes the proportionate voting power of Voting Stock beneficially owned by such Person to increase to fifty percent (50%) or more of the combined voting power of the Voting Stock of VS&Co. then outstanding, such Person shall, upon becoming the “beneficial owner” of such additional Voting Stock of VS&Co., be deemed to have become the “beneficial owner” of fifty percent (50%) or more of the combined voting power of the Voting Stock then outstanding other than solely as a result of such Voting Stock acquisition by VS&Co.; (iii) the sale or other disposition of all or substantially all of the assets of VS&Co.; or (iv) the consummation of a complete liquidation or dissolution of VS&Co. For the purposes of the foregoing definition, “Person,” “Excluded Person,” and “Voting Stock” shall have their respective meanings set forth in the 2020 Stock Plan as of the Effective Date, provided that any reference therein to the Company shall be deemed a reference to VS&Co.
(s)VS&Co. means Victoria’s Secret & Company.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written.
| CHRIS RUPP | DATE | ||||||||||
| /s/ Chris Rupp | 6/20/2022 | ||||||||||
| VS SERVICE COMPANY, LLC | DATE | ||||||||||
| By: /s/ Martin Waters | 6/22/2022 | ||||||||||
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Exhibit 31.1
Section 302 Certification
I, Martin Waters, certify that:
1.I have reviewed this report on Form 10-Q of Victoria’s Secret & Co.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Martin Waters | |||||
Martin Waters | |||||
Chief Executive Officer | |||||
Date: June 2, 2023
Exhibit 31.2
Section 302 Certification
I, Timothy Johnson, certify that:
1.I have reviewed this report on Form 10-Q of Victoria’s Secret & Co.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Timothy Johnson | |||||
Timothy Johnson | |||||
Chief Financial and Administrative Officer | |||||
Date: June 2, 2023
Exhibit 32
Section 906 Certification
Martin Waters, the Chief Executive Officer, and Timothy Johnson, the Chief Financial and Administrative Officer, of Victoria’s Secret & Co. (the “Company”), each certifies that, to the best of his knowledge:
(i)the Quarterly Report of the Company on Form 10-Q dated June 2, 2023 for the period ending April 29, 2023 (the “Form 10-Q”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii)the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Martin Waters | |||||
Martin Waters | |||||
Chief Executive Officer | |||||
| /s/ Timothy Johnson | |||||
Timothy Johnson | |||||
Chief Financial and Administrative Officer | |||||
Date: June 2, 2023