Victoria's Secret Q2 2025 Earnings Call: Contradictions on Inventory, Pricing, Marketing, PINK Turnaround, and Tariff Strategies

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: $1.459B, up 3% YOY; comps up 4%; negatively impacted by ~$20M from a May security incident
• EPS: $0.33 per diluted share, significantly above the high end of guidance
• Gross Margin: 35.6%, up 20 bps YOY and 60 bps above guidance

Guidance:

• FY25 net sales raised to $6.33B–$6.41B (from $6.2B–$6.3B)
• FY25 adjusted operating income maintained at $270M–$320M despite ~$(100)M net tariff impact (up $50M vs prior); ~$70M mitigation
• FY25 adjusted EPS $1.80–$2.20 (maintained); tax rate 24%–25%; non-op expense ~$(70)M; capex ~$(200)M; FCF $(150)M–$(200)M
• Q3 net sales $1.39B–$1.42B vs $1.347B LY; adjusted operating loss $(35)M–$(55)M
• Q3 gross margin ~34% (down vs 34.8% LY); SG&A rate flat to +100 bps vs 36.8% LY; non-op ~$(19)M; tax ~22%; EPS loss $(0.55)–$(0.75)
• Q3 inventory up high single digits; international system-wide retail sales planned up low teens

Business Commentary:

* Sales Growth and Market Performance: - Victoria's Secret & Co. reported a 3% increase in net sales for Q2 compared to last year, with comp sales growth of 4%, despite a 22% increase in international sales. - The growth was driven by disciplined execution of their Path to Potential strategy, which includes re-energizing the Victoria's Secret and PINK brands and expanding Beauty and digital channels.

• Inventory Management and Pricing Strategy:
• The company noted improved inventory management, with adjusted gross margin dollars up $18 million and gross margin rate rising by 20 basis points.

• This was attributed to a healthier inventory position, strategic promotional adjustments, and increased regular priced selling, which helped mitigate tariff impacts.

• International Market Expansion:

• International net sales grew 22% year-over-year, with retail comps up high single digits, driven by strong performance in China and other digital channels.

• The international growth was supported by effective global partnerships and innovative marketing strategies, reflecting the company's global brand relevance.

• Brand and Product Innovation:

• Victoria's Secret saw a breakthrough in bra sales, gaining market share by approximately 0.5 point, with a significant improvement in North America.
• This success was driven by new product launches like the FlexFactor bra and the company's focus on innovation and customer-centric product development.

Sentiment Analysis:

• Management beat Q2 top and bottom-line guidance, grew net sales 3% and comps 4%, and expanded gross margin to 35.6% (+20 bps YOY). Adjusted operating income was $55M, exceeding guidance, with July the strongest month and momentum continuing into August. They raised FY25 sales outlook while maintaining operating income despite higher tariffs.

Q&A:

• Question from Lauren B. Levine (Morgan Stanley): How do you view the implications of the end of the de minimis exemption for the industry and your business?
  Response: De minimis is not material for VS&Co; e-commerce distribution is domestic, so impact is negligible.

• Question from Marni Shapiro (The Retail Tracker): How should we think about the cadence of fashion and technical innovation across VS, PINK, and Beauty into the back half and 2026?
  Response: VS and PINK will deliver a faster, steady drumbeat of fashion and technical innovation; collaborations and drops will continue, sustaining momentum into 2026.

• Question from Dana Lauren Telsey (Telsey Advisory Group LLC): Outlook for pricing/promotions and Store of the Future impacts on traffic and customer mix?
  Response: They will continue pulling back on promos with selective price moves; Store of the Future remodels drive double-digit sales lifts via higher traffic and better assortments.

• Question from Michael Vu (Barclays Bank PLC): What’s driving international growth by category and is the go-to-market different from domestic?
  Response: International growth is led by intimates and Beauty; marketing/go-to-market approach mirrors North America.

• Question from Mauricio Serna Vega (UBS Investment Bank): Will the fashion show include PINK, and how does SG&A investment compare to last year?
  Response: Details to come; activations will touch all businesses; total marketing spend is flat YoY with timing shifts.

• Question from Juliana Duque (Wells Fargo Securities, LLC): Update on intimates, especially panties, through the quarter?
  Response: Core intimates improved meaningfully; panties were very strong across VS and PINK; bras had positive full-price selling but total bra comp lagged due to a smaller semiannual sale.

• Question from Unidentified Analyst (TD Cowen): Holiday plans and what’s different in fashion vs last year; key learnings?
  Response: They’ll maintain a continuous newness/content cadence—front half driven by holiday and fashion show, then pivot to sport and Valentine’s; PINK will lean into timely cultural moments.

• Question from Evan Dorschner (Goldman Sachs Group, Inc., Research Division): Tariff impact this year and outlook into next year with mitigation?
  Response: FY25 net tariff impact is ~$100M with ~$70M mitigation; 2026 mitigation to increase via more ocean, resourcing shifts, promo pullbacks, and expense control.