Victoria's Secret & Co
NYSE:VSCO
Earnings Call Analysis
Q4-2024 Analysis
Victoria's Secret & Co
Victoria's Secret & Company announced a strong end to their fiscal year on February 3, 2024, with the fourth quarter showcasing pivotal results. The executive team highlighted that the quarter’s adjusted operating income and earnings per share (EPS) were at the upper echelons of their earlier forecasts. Significantly, sales elevated by 3% from the previous year, meeting their expectations with contributions from disciplined inventory management and cost-saving initiatives from their Transform the Foundation strategy, which aims to modernize the supply chain. A notable uptick in traffic and average unit retail, both in-store and digitally, fueled the promising sales trend in North America, despite the intimate apparel market's overall dip. The international business especially shone, marking a 20% increase in system-wide retail sales, majorly buoyed by marked expansion in China and through franchise and travel retail partnerships.
Despite the market's mid-single-digit decline, Victoria's Secret's approach has been decidedly strategic. They've continued to evolve through calculated promotions during peak holiday periods, strong product performance across various categories, and novelty through relaunches, such as the 'Body by Victoria' bra collection. In addition, notable growth has been achieved through their loyalty program, comprising over 26 million members, contributing to a robust customer understanding for crafting superior experiences. The partnership with Google Cloud heralds a step into AI-focused customer experience enhancement, alongside operational improvements. Financially, the balance sheet remains robust with improved liquidity through significant cash flow in Q4 and debt reduction, also allowing for a generous $250 million share repurchase program authorization.
Looking into fiscal 2024, the company's guidance suggests a cautios approach due to a challenging macroeconomic landscape, forecasting sales around $6 billion, which indicates a slight drop from the previous year. They anticipate the intimates market to stay under strain in North America, with hopes pinned on improvements later in the year to fortify the annual trajectory. Operational income is projected at $250 million to $275 million for the year. The first quarter is expected to witness a mid-single-digit sales decrease, with a conservative outlook on operating income ranging from $10 million to $35 million. Inventory discipline remains rigid, in line with anticipated mid-single-digit reductions in core business stock levels. Operational efficiencies are expected to continue, with a strong commitment to a $250 million savings goal over three years, following the previously realized $90 million in 2023 and forecasting $120 million more in 2024, predominantly affecting gross margin.
The executive team remains steadfast in their strategic focus aimed at sustaining and nurturing the long-term welfare of the company. Their strategies are designed to harness the company's market leadership and significant cultural influence to drive enduring financial growth. Overall, the company presented a narrative of resilience and prudence. While it's navigating through a challenging and declining intimates market, Victoria's Secret & Company remains resolute in its pursuit of growth, innovation, and enhanced customer experiences.
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Good morning. My name is Fran and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria's Secret & Company's Fourth Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to turn the call over to Mr. Kevin Wynk, Vice President of External Financial Reporting and Investor Relations at Victoria's Secret & Company. Kevin, you may begin.
Thanks, Fran. Good morning, and welcome to Victoria's Secret & Company's Fourth Quarter Earnings Conference Call for the period ending February 3, 2024.
As a matter of formality, I would like to remind you that any forward-looking statements we may make today are subject to our safe harbor statements found in our SEC filings and in our press releases.
Joining me on the call today is CEO, Martin Waters; and CFO, Tim Johnson. We are available today for up to 45 minutes to answer any questions.
Certain results we discuss on the call today are adjusted results, and exclude the impact of certain items described in our press release and our SEC filings. Reconciliations of these and other non-GAAP measures to the most comparable GAAP measures are included in our press release, our SEC filings and the investor presentation posted on the Investors section of our website. Thanks.
And now I'll turn the call over to Martin.
Thanks, Kevin, and good morning, everyone. I want to first share my appreciation and gratitude for the hard work and dedication of our associates and partners around the world who executed our strategies, delighted our customers and delivered solid financial results in the all-important holiday quarter.
I'm pleased to report that fourth quarter adjusted operating income and EPS came in at the high end of our guidance. Sales in the quarter were up 3% compared to last year and were at the midpoint of our guidance. Our fourth quarter gross margin rate increased significantly compared to last year, exceeding our expectations, driven by disciplined inventory management and cost reductions related to our Transform the Foundation initiative to modernize our supply chain.
Sales trends during the quarter were volatile by week, but we were encouraged by the improving quarterly sales trend in North America, driven by a sequential improvement in traffic and average unit retail in both our stores and digital channels, with traffic in our stores increasing in the fourth quarter as compared to last year.
We were particularly pleased with our early holiday sales in November and during the peak days and weekends leading up to Christmas, both in stores and through our digital channels, led by strong response to our giftable merchandise assortment, improving customer experiences and marketing messages.
The team strategically managed promotional activities to amplify key moments through the days and weeks leading up to Christmas, and we entered the semiannual sale period with lower inventory levels than last year, which allowed us to maximize margins during the sale period and into the spring season with healthy inventories.
Our International business continued its strong performance, with system-wide retail sales up more than 20% in the fourth quarter compared to last year, driven by significant growth in China and globally with our franchise and travel retail partners.
We continue to experience profitable growth across stores and digital, and we're excited about our aggressive growth plans to expand our footprint in both stores and digital around the world.
From a market perspective, sales for the intimate market in North America as a whole decreased mid-single digits in the quarter compared to last year, which was the fourth consecutive quarterly year-over-year decline. We remain the leader in market share for the intimates category, including both bras and panties. Our share in the intimates category remains at about 20%, with our digital share up slightly and our store share down slightly. We were encouraged by our market share gain in digital increase in both bras and panties.
From a merchandise category perspective, starting with Victoria's Secret, our beauty business continued to be our best performing category, with year-over-year growth for the second consecutive quarter and was followed by performance in casual sleepwear panties and bras.
Within PINK, sleepwear outperformed intimates and apparel. We continue to roll out our reimagined PINK apparel merchandising assortment in the fourth quarter. The sales trend improved, and while still down compared to last year, we continue to buy the category cautiously. The impact of the PINK apparel challenges in the fourth quarter was approximately 1 to 2 points compared to last year.
Over the last 90 days, we've executed several key actions in support of our strategy and brand positioning for the long term. For example, we continue to further develop our understanding of our Victoria's Secret and PINK customer through our multi-tender loyalty program, which now has more than 26 million members, who drive more than 75% of our sales on a weekly basis. Through insights and data, we're focused on turning our understanding of her into world-class customer experiences.
In February, we relaunched our #1 bra collection, Body by Victoria, with all new styles and our latest innovation. The popularity for online bras continues to increase, and our newest invisible lift technology offers lightweight design that smooths, shapes and supports without an ounce of padding.
In February, we also released our PINK apparel spring campaign going places, featuring Natalia Bryant with the new PINK styles and comfy fits.
As part of our commitment to expand our categories, we debut swim products under our new swim collaboration label, PINK by Frankies Bikini, which celebrates the iconic PINK brand reimagined through the lens of Founder and Creative Director of Frankies Bikinis, Francesca Aiello.
From a technology perspective, we entered a multiyear partnership with Google Cloud to embark on VS&Co's AI journey to focus on improving customer experience online and on our mobile apps, improving the associate experience and improving operational efficiency across the enterprise. As we expanded our Store of the Future fleet to 83 stores or approximately 10% of the fleet in North America and continue to expand our footprint internationally.
From a liquidity and capital allocation perspective, we ended the year with a strong balance sheet and ample liquidity to execute our strategic plans. We generated significant cash flow in the fourth quarter and ended the year with a cash balance of $270 million and debt down over $150 million year-over-year. Additionally, our Board has approved a new share repurchase program, authorizing the repurchase of up to $250 million of the company's common stock.
As we look into the new year, we recognize the broader intimates market in North America has been down for 4 consecutive quarters, and the macro environment remains challenging, putting pressure on the consumer. As such, we are planning the business conservatively in the near term and maintaining open to buy to capitalize on any changes in trend. At the same time, we remain focused on delivering on multiple initiatives to drive growth in our business over the longer term.
For fiscal 2024, our forecast assumes the broader intimates market in North America will remain pressured throughout the first and second quarters, with sales trends improving through the back half of 2024 as we continue to roll out growth strategies and new customer experiences.
For the 52-week fiscal year 2024, we're forecasting sales to be about $6 billion or down low single digits to a comparative 52 weeks from fiscal 2023. At this level of sales, we expect adjusted operating income for the year to be about $250 million to $275 million.
For the first quarter of 2024, we're forecasting sales to decrease in the mid-single-digit range compared to sales of $1.407 billion in the first quarter of 2023. This forecast reflects our expectation that the domestic intimates market will remain challenged and that our core customer will be cautious in this environment. These challenges will be partially offset by the continued strength in our international business. At this level of sales, we're forecasting first quarter adjusted operating income to be in the range of $10 million to $35 million.
The team continues to manage inventories with discipline, and we expect to end the first quarter with inventory levels in our core Victoria's Secret and PINK businesses down mid-single digits compared to last year.
At our Investor Day in October '23, we discussed the opportunity to drive operating margin expansion through our initiatives to transform the foundation of the company by modernizing the operating model. We remain on track and committed to a total of $250 million 3-year goal that we established at our Investor Day in October 2022. We realized about $90 million of savings in 2023 and expect to realize approximately $120 million of savings in 2024, primarily in gross margin.
Lastly, as we have shared consistently inside and outside the business, with the long-term health of the business in mind, we remain committed to our strategic priorities: firstly, to accelerate core; second, to ignite growth; and thirdly, to transform the foundation. As we look into the new year, we are committed to our initiatives designed to leverage our market leadership position and unlock the opportunity to convert our significant cultural influence into long-term financial growth.
We believe our evolving strategies will position our business to deliver the potential of our category-defining brand, and we remain confident and are committed to delivering long-term financial targets and returning value to shareholders. Thank you.
That concludes our prepared remarks. And at this time, we'd be more than happy to take whatever questions you might have.
We will now begin the question-and-answer session. [Operator Instructions] Our first question now is from Alex Straton with Morgan Stanley.
Great. Just on the full year revenue guidance, it looks like there's an acceleration embedded after the first quarter despite compares getting harder. So can you just talk about what enables that acceleration? It sounds like it's particularly back half weighted? And then I just have one quick follow-up.
Yes. Thanks for the question, Alex. So when we thought about the full year in relationship to the first quarter and the trends that we've been seeing in the business, we made some assumptions around kind of where the domestic market share might go or the intimates market domestically might go.
So as Martin mentioned in his prepared comments, the market for intimates has been down 4 quarters in a row now. As we look at the beginning parts of Q1 and 2024, it appears to us it's going to continue to be a challenge.
We've assumed in our guidance that the domestic market for intimates will continue to be down through this spring season and will start to stabilize, not grow, but stabilize as we move into the back half of the year. So we've tried to align our forecast with that. We've tried to align our inventory and cost structure with that in mind.
Additionally, as we move through the year, we recognize that many of the merchandising strategies that were articulated at the Investor Day in October will be in full flight as we move into the fall season. So things like category adjacencies that Greg spoke to, the relaunch of Sport, which Greg spoke to at the Investor Day. So those high-level merchandising initiatives that will put out different products and present differently in the store really are in full flight in the back half of the year.
So the combination of an assumption around the stabilizing intimates market and newness in category and presentation and expansion of category, particularly as it relates to intimates and bras and Sport are part of our assumptions for an improving trend, ever so slightly quarter-to-quarter as we move throughout the year. So down mid-singles, down low singles for the year, you kind of get to flat to down low singles, the balance of the year.
Great. That's super helpful. And maybe just one quick follow-up, just with the headlines recently on the credit card late fee proposal or ruling going through. Have you contemplated that in the guidance? Or how should we think about what that means for Victoria's?
Yes. Good question. Obviously, that's very topical at the moment, but it's not a new topic. It's been out there for several months and several quarters, but does seem to be picking up a little bit of momentum lately. First, I think it's important to understand that we do not necessarily recognize any revenue on some of the fees that are being discussed or debated, but certainly, our provider does, and that impacts their model. So we've got a long-standing relationship with our partner, and we'll continue to try to work with them. But I think it's important to understand that some of the fees that are being discussed do not directly go into our P&L. It's certainly something that our partner relationship will need to work on now.
I think additionally, Alex, you might recall or others might recall to the launch of the non-tender or multi-tender loyalty program in the middle part of last year, obviously, it was a big, big move for the company and a big opportunity to communicate and understand customers differently than maybe in the past. So we do have a couple of different ways to be working with our customers to internet traffic and encourage them to continue to shop in our stores, not just one dimension like in years gone by.
Our next question now is from Ike Boruchow with Wells Fargo.
Two questions from me, maybe both for T.J. Just on the guidance, can you talk to us about the flow-through on the lower sales outlook? I think when we look at the guidance, it's about low single digits, 3% below Street for revenue for next fiscal year, but it's 20%, 25% below EBIT. How should we think about that? Are there things you can look at in the cost structure? It just seems like a lot of lost EBIT on not as not that much lost revenue, honestly.
And then the second follow-up is just on the share buyback. How opportunistic do you plan to be with that as you kind of look out for the rest of the year?
Yes. Thanks for the question, Ike. In terms of the full year guide, it's difficult for me to speak to what others might have in the model. So I'll speak to how we're thinking about it and how it compares back to the Investor Day in October. So back in October, we talked to you about a number of things that needed to happen in our business in order for the operating margin to expand and the flow-through to be significant to operating income. We talked about North America sales needed to improve and needed to move into the low single-digit range. That has not happened yet. We're not forecasting that to happen in the current year. So that's a bit of a headwind.
We talked about the international business needed to continue to grow and it will become a larger part of our business growth in the mid-teens or higher. Clearly, we just came across the fourth quarter of 2023, where that was the case. So I'll put a check mark next to that for a job well done by the team.
We said that Adore Me needed to continue to grow both in sales and profitability. They were relatively close to their targets for 2023, and we have plans for growth in 2024. So we feel good about that element of the model.
We said the gross margin rate would go up, would increase, both based on sales, but also based on some of the cost work that we're doing around cost of goods sold, you started to see that come through in the fourth quarter and that's embedded in our first quarter guide. So that is working as intended.
The expense rate, we said you need about a 1% to 2% increase in sales to leverage on expenses, that's not our current forecast for the year. However, our internal plans that we review on a regular basis with the Board, we're comfortable that our expenses are in line and would be leveraging as sales were up 1% to 2%.
We also said that our debt to EBITDA or our leverage ratio should be 2x or less, and we just came across the year where that is true as well.
So the single biggest challenge in the model right now is the North America sales trend, and that's what would be driving the majority of the flow-through that you're challenging. So I'm confident that the gross margin, when I look at estimates, actually, our gross margin rate was likely above the Street for the year, even on the lower sales.
When we look at expense rate and leverage opportunities in any given quarter, Ike, we're talking about expense dollars that are up minimally year-over-year, it really comes back to the North American sales element.
Even in the first quarter that we just guided to when you start to work through the model, I think you're going to find that we're talking about expense dollars maybe being up $10 million to $15 million year-over-year. And as a business that continues to invest in technology and continues to want to provide for a good a good wage and merit, et cetera, I think those numbers are probably pretty minimal relative to what you might see elsewhere. So I feel good that expenses are well under control. It really comes back to the top line movement that we need to see in North America.
The second part of your question around share repurchase, I think we mentioned in our prepared comments that there is no assumption for share repurchase activity in our guidance for 2024. So we worked with our Board of Directors, and we aligned on a share repurchase authorization.
Candidly, based on feedback from shareholders that they wanted to know and feel confident that we could be in the market at any given time. But at this time, we're not providing a forecast on how we might go into the market or when.
We're very focused on making sure that we're trying to increment the trend of the business, stabilize and improve the profitability in a down intimates market. We're very focused on making sure that we've got sufficient liquidity to execute our strategies and we know that we do based on our forecast. So future decisions on capital allocation and share repurchase will be made in concert with the Board on a quarterly basis. Hope that helps.
Our next question now is from Simeon Siegel with BMO Capital Markets.
Martin, how are you thinking about marketing this year? Just -- I guess, last year, you had a tour in Mariah, I assume some big investments that we're going to be lapping. So any learnings on those spends? How you're planning marketing this year?
And then just maybe a little higher level, just recognizing the industry's top line pressures are what they are. And then, T.J., the point you just made about despite operating profit guide down, the gross margin is showing improvement. Any changes in how you're thinking about the value of promotions and maybe balancing a focus on revenue versus profits?
Yes. Thank you, Simeon. Good questions. I'll start with the marketing. We plan to invest marketing dollars at about the same percentage of sales that we did in 2023, so continue to invest in the brand.
Essentially, that's across the 5 areas that we talked about at our Investor Day.
So firstly, in terms of customer really deeply understanding the customer, segmenting the customer file, building data and personalizing. So more and more of our spend is going through personalized marketing, particularly through social media, but also through curated online experiences through the app and on site, continued investment in our brand focusing on relevance and brand heat, positioning around powerful, confident, sexy on her terms and then supporting product launches. Our broader category appeal beyond intimates getting back into sport. All of those initiatives will be supported with marketing dollars.
And trying to find ways to go to market that are at the intersection of brand and product and entertainment. And to some extent, the world tour was a sort of a tip toe back into that last year. As we hindsight, I would say, we got enormous media coverage, like 17 billion media impressions that were in excess of 80% positive. So that was good. We were part of the narrative about popular culture, and that was certainly our intent. And it gave us some good assets that we could use in the fourth quarter marketing.
To a large extent, it met our objectives. However, I think about the way that we went to market during the fourth quarter is more of a sequence. World Tour was the start of it. We then had the My Wings, My Way campaign, which was extremely successful and very popular. And then that led into Mariah Carey, which was our best received of all of the work that we did last year.
So as I think forward to what will be the next iteration of our flagship marketing events, I think it will be less fashion and more commercial. It will be less ethereal and more fun. It will be more of our own product and less of other people's products. And it will be more focused on holiday commercial and building commercial sales into the all-important time of year.
So I always try to look forward, Simeon, rather than to look backwards. We're excited about what we've got coming forward. The world tour was a bold and progressive expression of our brand and gives us a basis from which to build and continue to move forward.
As it relates to your second question on promotions, our level of promotionality in the fourth quarter was slightly up relative to prior year. We still, as TJ talked about, we're able to maintain healthy gross margins, but we did feel the need in a down market, in a very competitive environment to lean into promotionality.
The first quarter of this year looks about the same with promotions up slightly. We, on a day-to-day basis, are balancing the art of offering newness at full price, with being aggressive in our core categories. And I will tell you that it's very much the balance of art and science, and it's different by category.
In some areas where it's more difficult for us to defend share, like panties, which is a less differentiated merchandise category, we will need to be aggressive and you will see us leaning into promotions as aggressively as we ever have. In other areas where we've got true differentiation and added value, it's less of a requirement.
So that's the scale of what we do, Simeon, and we manage it very carefully on a day-to-day basis, and I'm very proud of the team that are doing that work. Thank you for your question. Next question, Fran.
Jonna Kim with TD Cowen.
Just curious, what you've seen in terms of consumer behavior, quarterly data in terms of traffic and conversion? And then also if you can talk about key drivers behind international strength and what gives you confidence that momentum will continue throughout the year.
Yes. On consumer behavior, I would say nothing particularly meaningfully different year-over-year. We did see spikes in traffic. So traffic to stores came back at certain peak weeks, and that put pressure on our selling organization to be ready. We did see an increase in browsing traffic. So conversion was down in stores and some peak times. We saw that our digital business performed slightly better in the quarter than our stores business. We actually picked up some share in digital. That's partly due to us being more efficient with our marketing dollars, partly due to the enhanced digital experiences that we're seeing.
So honestly, I think it's more about us than it is about the consumer behavior. So I would say nothing particularly meaningful. As we look across the different cohorts of customers, behaviors were broadly similar at the at the higher end of the income bracket as they were at the lower end of the income bracket.
As it relates to international, the headline is really about China, where our partnership with Regina Miracle continues to go from strength to strength, working closely with that team on digital experiences, direct-to-consumer experiences that are working extremely well. I think we're marketing the brand very well in China, and we still have a lot of growth still to come.
Across the franchise network, we saw health all around the globe. We're very pleased with our partner operations. Getting a store model that enables us to expand, we're going to open 70 to 90 stores this year. So a smaller footprint with a lower capital expense that enables us to get to more customers more quickly, and also embracing digital in the international space, be it operated by us or operated by our partners, a combination of both. All of those factors are driving growth.
We also see some opportunity in new markets in Scandinavia, Benelux, Balkans, again, both in digital and in stores. So all across the system, and I didn't mention Travel Retail, I should mention strength in Travel Retail as well. So all across the system, we see opportunity to continue to grow that business. So well done to the international team. Thank you for the question.
Our next question now is from Dana Telsey with the Telsey Group.
Martin, can you expand on the Store of the Future? How it's looking to you and any tweak since you first introduced it? And on the PINK apparel, the path to improvement there and how you're thinking about directional change, along with the marketing message with the Victoria's Secret Collective and how that's progressing and how you're utilizing that tool.
Yes. Thanks, Dana. Let's go to PINK first, and then I might ask TJ to comment on the retail -- on the Store of the Future question.
So in PINK, we identified -- or I don't know, about 15 months ago, the PINK business was under significant pressure. We didn't like the customer that we had developed in the PINK business. We needed to get back to PINK being an on-ramp for Victoria and very clearly targeting a younger consumer, a collegiate age consumer. So we set about rebuilding the brand the identity of the brand, the categories that we operate in, the way that we go to market, everything about the brand.
Because it was such a big rebuild, we decided to buy very, very conservatively and not swing for the fences. And what we found during the fourth quarter was we had an increase in the number of customers that came in to PINK, so that was good. Our brand equity improved markedly during the quarter. And the perceived worth of the brand was up a touch as well.
What we didn't see was awareness, top of mind awareness, we have lost top-of-mind awareness with that young consumer. How do we get it back? Well, it all comes down to the product, as you know. And so leading with intimates being strong and body suits, being strong in innerwear, having a really strong and compelling gift assortment, a strong sleepwear assortment. All of those things were positives in the brand.
The area that we found toughest is apparel, and I mean sort of outer based apparel. So we continue to lean into that. We continue to find new ways to go to market. We're particularly pleased with the Going Places campaign with Natalia Bryant, that looks like, that it's very positive for us.
So the drag has PINK has reduced, but we still have work to do, and we're taking it steadily and buying cautiously and giving ourselves opportunity to chase. We're in a better open-to-buy position right now than we've been at any time in the last 3 or 4 years. So we're almost completely open to buy for full, which we've not been in that position for a while. So really giving ourselves the opportunity to test and learn and then buy aggressively into the things that are working.
T.J., do you want to take the Store of the Future?
Absolutely. So Dana, we continue to be very encouraged by Store of the Future results, both in this new class of stores from 2023, as well as the class of stores that was executed in 2022, which are now in their second year. So the stores that have been remodeled the longest, continue to see double-digit sales increases. So that a very strong performance, very good do for us.
The stores that have most recently been renovated or more likely in the mid- to high single digits and growing. Again, same narrative as what we experienced in the 2022 stores. They start out at one level, and they continue to build, particularly through traffic over time. So we're very happy with the remodels and renovations.
What's changed or what's different? Candidly, we've tested and gotten comfortable that we can do a, say, a less disruptive remodel, meaning kind of utilizing or better utilizing some of the walls and fixtures that were in place. So there's less construction that needs to happen. So it's a less disruptive process at a lower cost. That's something that we've learned. And obviously, we like the lower cost element of it at the same productivity. So that's a good do.
I think another big win, as it relates to Store of the Future is our opportunity to consolidate stores. And what I mean by that is bring a freestanding PINK store together with a freestanding VS store and have a combined location. As the PINK business has been challenged, obviously, that challenges freestanding stores. And additionally, it just gives our team, Becky and her team an opportunity to really leverage and be more productive with the teams we have in place. So bringing stores together, we're seeing footage go down 20% or 30% in sales maintained, so sales per square foot are much, much higher.
And then the last point that I'll mention just to underline from Martin's comments on international, getting to a Store of the Future format, the smaller square footage easier to navigate and easier to shop, has really opened up the doors in a big way to expanding and increasing the number of new stores we're adding on an international basis. So it's a lower cost do for our partners and ever as productive.
So a lot of key learnings. I think -- as I think about new stores in the Store of the Future format, we've had very good success to date in off-mall, particularly in outlet centers. So as we work to decrease our mall exposure in certain locations or in certain markets where malls might be consolidating, we're finding off mall, particularly outlet center with the new Store of the Future format is a very, very good do for us. So a lot of good learnings and very encouraging results continue and store of the future. Thanks.
Our next question now is from Matthew Boss with JPMorgan.
So Martin, maybe on current initiatives, could you speak to initial customer response to the recent Body by Victoria bra launch? And just larger picture, if any way to elaborate on customer trends that you saw in February, early March.
And then just for TJ, what supports your view for back half improvement in the intimates category? Or what have you embedded for the promotional outlook in the first versus second half of the year?
Great. Thanks, Matt. Thanks for the question. Yes. The Body by Victoria launch was our biggest and most successful bra launch in 5 years. So we talked previously about Love and Power being a very big initiative for us. The BBV launch was even bigger and even better and visible lift technology meets endless comfort and very much on trend in terms of lighter, thinner memory pads. Plus we had innovation in the online segment of our bra category. We also had a minimizer bra in that assortment, which is very innovative and has proved to be very successful and with relatively low level of marketing customers finding it. Within BBV, we have expanded sizes and expanded skin tone coverage. And we've also seen success with the new shimmer panty that supported that launch. So kind of all across the franchise, we've seen strength, and we're very pleased with the performance of it.
To your point about trends, it definitely supports trends for lighter, more comfort for us. So we feel very pleased with that overall.
The challenge that we have is that while that bra launch has been very successful overall, we haven't been able to lift the overall bra business. So finding a way to unlock great launches and at the same time, maintaining the level of sale across the rest of the bra franchises where we're really, really focused.
And to your broader question about consumer trends, I think as we look at, say, the Valentine's Day period, what we would observe there is that we had more success with casual, blurty, comfort-driven merchandise than we did with sort of traditionally over more sophisticated overtly sexy and provocative merchandise.
Whether that's a long-term permanent trend or just the short term remains to be seen. We feel appropriately covered on both of those dimensions. As we talked about before, an important thing for the Victoria's brand is that we don't just show up as one way of being sexy, that we're sexy on her terms, and that means that we embrace all aspects of a women's journey through life and provide better comfort and sport bras rather than anybody else in the market.
So that's how I would respond to the customer trends. T.J.?
Yes. I think additionally, Matt, your question on February and early March, in the first quarter, what -- the basis for our guidance was really based on early results here in the first 5 weeks of the quarter. And what we really saw was the characteristics that were very similar to the fourth quarter, put aside the extra week for a moment, but characteristics that were very similar to the fourth quarter on the top line, but we were getting there a little bit differently.
So in the fourth quarter, where traffic in our stores and mall traffic was much better than earlier in the year. And conversion was a little bit lighter. We moved into first quarter and really mall traffic, and our store traffic is more challenged than it's down to last year and conversion is relatively flat. So it's producing a similar outcome on the top line. Certain of the key metrics are behaving a little bit differently here in the early part of Q1 relative to holiday. Holiday is just a much different proposition for us and for our customers.
The second part, or maybe third part of your question around assumption on go forward, we did make an assumption that the intimates market would continue to be difficult in spring. We made an assumption that it would stabilize, not improve, but stabilize as we move into fall. So that's a market assumption.
Inside the box in terms of what we're doing differently to try to get a different outcome, as we mentioned in earlier remarks, some of the new merchandising strategies that Greg spoke to at the Investor Day will be more in full flight in the fall season, and that includes sport bras.
As we've talked about on a number of occasions, the market is growing in sport, and we're underpenetrated. The market for sport as it relates to overall bras is in the range of about 30%, and it's not 30% in our stores. So as we move towards a similar market representation of product and go after the sport business, we think that ought to help in the intimates category as well. And that's, again, newness in the back half of the year.
So there are things we're doing that hopefully change the trend in the intimates performance, and we are assuming, at some point, a stabilization and we picked fall for that stabilization in our guidance assumptions. So when you work through the overall model, what you kind of get from a top line perspective, you got down mid-singles here in the first quarter, and you've got down low singles for the year. So it's not as if we have a significant hockey stick, but we are assuming some level of stabilization in the back half of the year.
Our next question is from Marni Shapiro with Retail Tracker.
Just touching on this whole sales notion, because it sounds like the goal here for '24 is to drive sales. Martin, could you touch on a little bit some of the new products, like Fun and Flirty, like Wink like Body by Victoria. I know they're newer this year, but are they driving traffic to the stores? And are they driving sales? And it sounds a little bit like even as some of the new stuff is selling, it's not driving the rest of the store, do we hear that right? And then I noticed in a couple of stores you have Adore Me in the Victoria's Secret stores, could you talk a little bit about the strategy there as well?
Marni, thank you for the question, and thank you for noticing the newness that there is in store. When our brand is at our best, we have abundant newness. We have newness across every category. That's what drives the business.
And so over the last few years we've been putting in place an innovation pipeline to get back to having multiple bra launches per year. BBV bra launch was probably the most important because it's our biggest franchise, and it was overdue and overhaul. All of our bra franchises need an overhaul. We have to be continually renewing and refreshing.
The good news is, and you hinted at that when we do that, the customer notices. So BBV, biggest and best launch we've had in over 5 years. The Wink bra, customers, noticed, immediate impact. The PINK team was there, noticed, the Featherweight Max Sports bra, noticed.
So yes, the customer finds the new product and appreciates the new product and our stores feedback channel tells us straight away when she sees it. The challenge is we've got to get more people into the franchise overall. So that means more relevant marketing. It means targeting our spend to get new people into the file.
And the good news for us is one of the key ways that we have to do that is the loyalty program. Our loyalty programs now to 26 million people, over 26 million people. That enables us to be much more surgical in the way that we target, so that we can point the appropriate products at the appropriate people. And that means just a more structured marketing investment and more targeted marketing investment.
So I think there's significant reasons to be cheerful when we develop the new products that you've referenced and others, and we have lots more in the pipeline that we can market them to the right audience in an effective way.
You have a real eagle eye for spotting what's going on in stores because we have a domain just 5 stores out of 850 so [indiscernible] We have about 3 cabinets in those stores as the owner of the Adore Me brand and we're very, very proud to be the owner of that brand.
It's important that we test every aspect to how the consumer responds to the brand. The brand is in growth. It grew in the fourth quarter. It grew in the full year. It's well positioned for 2024 there. In peak marketing right now, building that file for the balance of the year, both across Adore Me and DailyLook. And Adore Me continues to expand into new channels of distribution through wholesale and license and so on. And they're doing a really, really cool work. I don't know if you saw the fashion show which was a great success, embracing inclusivity and diversity, was the only fashion show event in New York Fashion Week that has shoppable online content. So doing some really cool stuff supported by Gen AI in that brand.
Being part of our stores business is not the main thing at all. That is a digital business. But as the owner of the business, it makes sense that we test every possible way in which our customer will interact with it. So don't expect to see an enormous amount more of Adore Me in stores, but do expect us to continue to mine for opportunity to work that brand as hard as we possibly can and to embrace it as part of our family of brands going forward.
Great. And can I ask one more follow-up on bras? There is a broad trend bubbling up that bras are actually coming back in style, push up bras are actually coming back in style, not the way they were back in the day. But what could this mean for your brand? Because it feels like if this trend continues to bubble up, it could be pretty significant for you guys, because bras have been out of style for a couple of years now.
Yes. I mean, look, if you think about what the different trends at bras have been over the years, the one that we would like to come back, the most and the strongest would be the push-up bra because we dominate that part of the market. Our share and push up is significantly higher than it is in online or in sport or any other aspects of bras.
So yes, that would be great. I don't see that as a structural change right now in the data that I'm looking at. But from your lips to God's ears is that if that is a trend, we'll be very, very well positioned to take advantage of it, Marni.
Our next question now is from Warren Cheng with Evercore ISI.
I was wondering if you guys can walk us through the shaping of the gross margin through the year a little bit in a little more detail. It sounds like leverage picks up a little bit in the second half. I think you said promotions will be higher in the first quarter. I know there's some moving pieces with cost savings, but maybe if you can contextualize for us the drivers this year? And any callouts on shaping?
Yes. Warren, this is TJ. I'll do my best there. So I think at a very high level, we would expect the margin rate to be up for the year, largely driven by the cost of goods sold initiatives that we have in place as part of transforming the foundation.
Additionally, here in the early part of the year, we continue to see favorability from a transportation standpoint. So transportation rates that are embedded in our inventory are lower year-over-year. So that's a net positive. On the flip side, as Martin mentioned, we are seeing slightly more promotional activity here in the front part of the year.
So those are the, I'll say, the key elements from a margin perspective. And then the last one would be deleverage, which is really going to follow sales. So if you think about how we just talked about the sales trend or what the embedded sales trend is for the year, I would expect us to have cost of goods sold initiative benefit throughout the majority of the year, especially the first 3 quarters. When we get to the fourth quarter, we start to anniversary which just happened in this most recent fourth quarter. So it's more present in the first 3 quarters of the year.
The transportation opportunity, we still think is available to us in first quarter and potentially second, we don't necessarily have a crystal ball and where transportation rates will go in the back half of the year. So that benefit likely impacts spring in a positive way.
From a promotional standpoint, Martin mentioned, we do expect to be a little more promotional than last year here in the first quarter. As we move through the year, if our assumptions are correct, and the intimates market stabilizes, hopefully, that promotional need abates a little bit.
And then as I mentioned, B&O will attract where sales are going and what sales trends look like. So down mid-single digits here in the first quarter, down low single for the year or slightly better as we move through Q2, 3 and 4. So that's kind of how I would think about the key drivers. I do think there's an opportunity for the margin rate just in total, obviously, to be up in the first quarter and potentially up in the second and third. We had a very strong gross margin performance in the fourth quarter that we just came across, so I think we -- anniversary that might be a little bit more challenging, but we'll see what we can do when we get there. So I feel very good about the gross margin opportunity, again, on lower sales based on how the teams are managing inventories in our stores and our distribution centers.
And I just also just wanted to say an earlier comment on the impact of the CFPB ruling. It sounds like you're saying the late fees don't flow directly into the P&L, I wanted to clarify whether they flow indirectly or are you seeing just on an input to your [indiscernible] arrangement?
It's not an input to our P&L. That's something that is between our provider and the customer.
Fran, I think we have time for one more question.
Then our final today is from Mauricio Serna with UBS.
I just wanted to ask about the operating margin outlook. Maybe you could help us reconcile on the SG&A. As you were mentioning earlier in the call, I think you called out first quarter, it seems that SG&A dollars are up like $10 million, $15 million year-over-year in Q1, which is roughly like 2% to 3%. Just wondering if that should be like the run rate we should assume for the rest of the year, excluding the impact of the additional week on Q4? Just wanted to get more sense. And like is that increase, like what kind of -- like where is that coming from? Is it technology, marketing, what would be like the building looks for that?
Yes. We're not breaking down Q2, 3 and 4 at the line item at this point where you see us. So I can't really help you too much further than what we've done. Other than you say expense dollars being up slightly here in the first quarter is really being driven by 2 or 3 things.
I think first off, we're continuing to lean into investing in technology and customer experience initiatives that were talked about at the Investor Day. I think the second piece that Martin referred to a moment ago, we are seeing some timing on marketing spend, principally at our Adore Me business to grow the file and grow sales over the entirety of the year. We will still have some level of merit pressure across our 800-plus stores and distribution centers and 25,000 associates or more.
So there are some level of merit pressure. So I think on a base of roughly $450 million or so in the prior year, being up slightly, we think is managing the business pretty tightly in a difficult environment. So feel very good that the team is able to accomplish an SG&A leverage point in that 1% to 2% range throughout on an annual basis for the year.
Okay. Thanks, everyone. Appreciate the time today. Have a great day.
Thanks, everybody. Thank you.
We are now concluded. Again, thank you very much for your participation. Please disconnect at this time. Have your great day.