Victoria's Secret & Co

NYSE:VSCO

Earnings Call Analysis

Victoria's Secret Q3 Performance and Outlook

Victoria's Secret reported a strong November, marking the best sales and margin performance in two years, a sign that their growth initiatives are taking effect. North American trends are improving, with October and November showing increased sales momentum. The international business is expanding, especially in China, contributing to a high-teen system-wide retail sales increase. However, overall Q3 sales dropped 4% year-over-year. The loyalty program now has over 22 million members, driving around 75% of weekly sales. For Q4, expect sales growth of 2% to 4%. The forecasted adjusted operating income for Q4 is $245 million to $285 million, and for the full year, sales are projected to decrease 2% to 3%, with an adjusted operating income of $290 million to $330 million.

Executive Appreciation and Performance Highlights

The company expressed gratitude for the hard work of its associates and partners worldwide, particularly as they navigate the holiday season. In North America, November sales demonstrated the best performance in two years, driven by both in-store and online activities, as well as a strong international footprint, especially in China. Key initiatives are yielding results - from the introduction of new loyalty programs to enhancing the customer experience and revitalizing their merchandise strategy, such as the PINK brand reimagining, which is showing signs of recovery.

Financials and Forecast

Results for the third quarter were within the guidance range, with sales in North America improving monthly and a sizeable increase in international retail sales. The quarter saw a 4% sales decline year-over-year. Adore Me's sales increased, and Victoria's Secret maintained market share in the Intimates category. Looking ahead, for the fourth quarter, sales are expected to grow 2% to 4%, and the company forecasts an adjusted operating income of $245 to $285 million. For the full year, a sales decrease of 2% to 3% is expected, with adjusted operating income predicted to be between $290 and $330 million.

Strategic Approaches and Brand Initiatives

The company focuses on accelerating core operations, igniting growth, and transforming its foundation, all while emphasizing the North American business. It feels energized by the positive early holiday season results and remains committed to leveraging its market leadership and cultural influence to drive long-term financial growth.

Merchandising and Category Strength

Merchandise margin rates have improved year-over-year, and the company is excited about its Beauty business, which remains strong and margin accretive, with growth across all areas. Additionally, the Victoria's Secret Beauty business was identified as the best-performing category, with strength also in intimate apparel.

PINK Brand Recovery and Store Developments

The PINK brand is implementing new merchandising strategies with early positive signals, specifically in bras and basics, with more recovery expected by 2024. The company has controlled inventory better, leading to higher productivity.

Market Trends and Digital Enhancements

While the intimate apparel market has seen declines, the company reports stable market share and receptivity to new products leading to increased merchandise margins. Significant digital enhancements contribute to the growing digital business, which now compiles 35% of the total system, up from 30%, with much credit given to the Adore Me acquisition and ongoing digital improvements.

Focus on Sports Apparel and Market Share Strategies

The company acknowledges it needs to improve its sports bra market share and is launching new products like featherweight Max with further expansion planned for 2024. It emphasizes its expertise in bras and intents to utilize this knowledge, along with relationships with leading manufacturers, to regain market share in sports apparel.

Enhancing SG&A Efficiency

Growth in SG&A in the fourth quarter is attributed to several factors, including the inclusion of Adore Me in current numbers, an extra week in the quarter, investment in technology, and expected increases in incentive compensation based on performance improvements. These elements are managed with careful attention to core business operations to maintain fiscal discipline.

Holiday Sales Drivers and Beauty Performance

The holiday season presents unique promotional opportunities and newness in gift categories, a strategy the company intends to leverage in the face of economic challenges. Beauty remains a stalwart sector for the company, heralded by top-selling fragrances and strong global performance, illustrating the brand's historical strength and innovative approach.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. My name is Ivy and I will be your conference operator today. At this time, I'd like to welcome everybody to Victoria's Secret & Company Third 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 of Victoria's Secret & Company. Kevin, you may begin.

[Kevin Wynk, executive]

Thank you, Ivy. Good morning, and welcome to Victoria's Secret & Co's. Third Quarter Earnings Conference Call for the period ending October 28, 2023. 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.

[Martin Waters, executive]

Thanks, Kevin, and good morning, everyone. Before we dive right in, I want to first share my appreciation and gratitude for the hard work and dedication of our associates and partners around the world. I'm especially thankful for the team's continued commitment and for all they're doing as we move forward throughout the holiday season.

I speak to you today, very energized with our holiday season now in full swing and with excitement about our sales performance in November to start the fourth quarter. In North America, both in stores and online, the November sales and margin result was our best monthly performance in nearly 2 years which we believe is evidence our initiatives are working and is led by strong response to holiday, giftable merchandise assortment, improving customer experiences, a powerful marketing message with Mariah Carey.

Our international business has great momentum. Our footprint is growing both in stores and online. Our partners are performing very well, and we continue to be excited about performance in China.

As I have consistently talked about, our teams have been working tirelessly on multiple growth initiatives designed to create momentum as we enter the second half of the year and into the holiday season, and we're delivering on those key initiatives. Initiatives such as new multi-tender loyalty program, new customer experience enhancements in our digital business, product improvements and launches to enhance Victoria's Secret brand and accelerate our beauty business, a reimagined merchandise strategy for our PINK brand and, of course, the return of the iconic fashion show with the Victoria's Secret 2023 World Tour.

Now turning to the third quarter for a moment. We delivered results within our guidance range, and our sales trend in Northern America continued to improve as planned each month throughout the quarter, with October being the strongest month of the year, now happily exceeded by November, of course.

Outside of North America, our business continues to provide profitable growth across stores and digital with international system-wide retail sales up high teens in the quarter, driven by growth in China and globally with our franchise partners. Our teams are doing an excellent job of managing selling margins, diligently controlling costs and delivered inventory levels at Victoria's Secret and PINK down 9% to last year, and we have agility heading into the holiday season and into the new year. Overall, sales declined 4% in the quarter compared to last year, which was at the midpoint of our guidance.

In North America, sales trends improved in the quarter in both stores and digital, driven by sequential improvement from last year in average basket size and in traffic. Conversion in our digital channel also improved as compared to second quarter, and it was roughly the same in our stores business.

Adore Me sales were up year-over-year again this quarter and represented about 5 percentage points of total sales growth for VS&Co in the quarter.

From a merchandising perspective, external market data indicates that sales for the intimate market in North America as a whole, decreased mid-single digits in the quarter compared to last year. Importantly, we remain the leader in market share for the Intimate category, including both bras and panties. Our share remained essentially flat with digital share up slightly and stores share down slightly.

From a merchandise category perspective, starting with Victoria's Secret, our Beauty business continues to be our best-performing category. We also saw a significant trend improvement in panties, bras and sleepwear in the quarter. Within PINK, Intimates and Sleepwear outperformed apparel. Our new reimagined PINK apparel assortment began delivering to our stores and digital customers during the quarter. We acknowledge that it will take time to turn around that business and believe we're on a path towards improvement with some definite green shoots of recovery. We estimate that the apparel challenges in PINK negatively impacted the third quarter sales results by approximately 3 to 4 points.

Aside from the financials, over the 90 days, we've executed several key actions in support of our strategy and brand positioning for the long term. For example, our loyalty program now has more than 22 million members who drive approximately 75% of our sales on a weekly basis. We kicked off the holiday season with new product arrivals and a powerful marketing message featuring Mariah. From a technology perspective, we launched over 50 new releases impacting the overall customer experience on our digital platforms and apps. And we expanded our store of the future fleet to 71 stores or approximately 8% of the fleet in North America and will be at 85 stores by the end of the year.

Looking forward, our outlook for the fourth quarter embeds results from November and overall for the quarter, we expect sales to increase in the range of 2% to 4% compared to last year. Quarter-to-date, through Cyber Monday, we estimate we have generated roughly 1/3 of our fourth quarter sales. And obviously, we have many very large days and weeks to come in December. We're forecasting an adjusted operating income in the range of $245 million to $285 million for the fourth quarter. And for the full year 2023, we're forecasting sales to decrease in the range of 2% to 3% compared to last year, and we expect adjusted operating income to be in the range of $290 million to $330 million.

At our Investor Day in October, we discussed 3 strategic approaches: Number one, accelerate the core; two, ignite growth; three, transform the foundation and in particular, spent a lot of time on our plans for our key area of focus, which is obviously the North American business.

With the long-term health of business in mind, we're energized by the start of the holiday season and the positive signs in the business and remain committed to our initiatives designed to leverage our market leadership position and unlock our opportunity to convert significant cultural influence into long-term financial growth.

Thank you, and that concludes our prepared remarks. At this time, we'd be more than happy to take whatever questions you might have.

[Operator]

[Operator Instructions] Our first question is coming from Simeon Siegel.

[Simeon Siegel, analyst]

Congrats on the progress quarter-to-date. So Martin, the quick growth in the loyalty program is really great to see. Can you elaborate on what you're seeing in terms of the revenue impacts from that multi-tender loyalty program? Maybe just speaking to any changes or just early learnings you're seeing? And then congrats on the ongoing success in Beauty, just what is the Beauty margin versus the other categories?

[Martin Waters, executive]

So thank you for the question, Simeon. Not much extra that we can give you, I'm afraid, at this point. I'll go to TJ on the margin question. But loyalty, as I said, we're over 22 million customers now, it's 75% of our revenue. It's kind of the bedrock of the business. The most important aspect of that program is the data that it gives us and our ability to match data about sales with data of our customers, which enables us to personalize experiences and personalize marketing. The upside for that will really be in 2024 rather than in December of this year. But it's laying the foundation for the future. And that program was a long time in the build. So we're super excited to have it launched and so well received.

It also will be the basis for many new customer experiences that will come in 2024. The first being leverage from the Adore Me acquisition, try on at home. But there will be other member services that will be linked to the loyalty program that we'll be excited to launch in 2024.

TJ, do you want to take the margin question?

[Timothy Johnson, executive]

Yes. I think on the second part, Simeon, the Beauty business tends to be favorable margin rate relative to the company average. I think it's important to note that as we move through the third quarter and on into the fourth quarter, we expect Beauty to be a leading category in the store. It is one of several contributors to why we believe Q3 was a bit of an inflection point for us and seeing merchandise margin rates go higher year-over-year. So we're excited about the Beauty business. We've got big plans for the holiday season, margin accretive. And based on everything we've seen in Red was very top of mind during the Black Friday week with customers.

[Martin Waters, executive]

We might also say -- I agree with all that, T.J. The strength in the Beauty business is coming across all areas. It's in fragrances, it's in [indiscernible] -- it's in all areas really pulling forward. So very pleased about that. Next question, please, Ivy?

[Operator]

Next, we'll go to the line of Dana Telsey from Telsey Group.

[Dana Telsey, analyst]

Nice to see the progress. As you think about PINK and apparel, any update on the progress there, timing of some of the newness, I think some of it was coming in the third quarter and what you're seeing? And then just on the store of the future, how did those stores perform relative to the base even during the weekend?

[Martin Waters, executive]

Yes. Thanks for the call, Dana. As you know, we identified a year ago that the PINK business had some challenges, had some difficulties, and we re-committed to the role and purpose of the PINK brand being the on-ramp for Victoria's Secret. And we talked about that at our investor conference. We also clarified the market that we're serving and the market that we're not serving and both of those 2 statements require a significant adjustment in the merchandise that we were offering.

We identified 4 chapters that we'll focus on, the player, the code, the base [indiscernible] and we've had some really good hits in our first run of merchandising to that new agenda. Some of the green shoots that we've seen have been in bras and bralettes, in basics, in skin tones and nudes, some of the fun and whimsical product we put out for Halloween just blew out, was gone by the end of September. The Chloe and Halle merchandise is a very clear hit, specifically the fold over cotton flare pant has been a very big hit and sold out straight away. So we know we're going in the right direction. But as I said at the investor conference, we decided to buy PINK very cautiously. It didn't make sense to me, to us as a leadership team, to swing for the fences and assume recovery straight away. So we've been very cautious in our buys and we look forward to chasing into what's working for spring '24. So don't expect an enormous amount of recovery in the balance of this quarter, do expect us to continue to make progress into 2024. I hope that helps.

We also made progress in reducing the size of the inventory in PINK, which had got away from us a little bit. So significantly higher productivity coming out of a smaller number of choice counts.

TJ, do you want to take the Store of the Future?

[Timothy Johnson, executive]

Yes. On Store of the Future, Dana, we haven't necessarily broken things out, I'll say, by quarterly performance. I would just suggest to you that the overall trends of Store of the Future that we called out at Investor Day at -- particularly around store remodels getting a low double-digit lift. That is holding and actually building as we move through the third quarter. So I would take that as a good early indicator from a holiday perspective. And then the teams have done a very nice job of keeping us on track for 2023 in terms of both new store openings and store remodels. So feel very confident by the time we get to the end of the quarter, we'll have about 10% of the fleet or about 85 stores, as Martin mentioned, in the new Store of the Future format.

So yes, good point. Martin is whispering to me here, International. I'd be remiss if I didn't mention that Store of the Future has been equally well received around the world from our international partners and also our customers as we continue to grow out the store fleet there. And as you know, we have plans for upwards of 100 stores a year over the next 2 to 3 years to build out the international fleet. So all signs pointing green on Store of the Future performance and opportunity.

[Operator]

Next, we'll go to the line of Alex Straton from Morgan Stanley.

[Alexandra Straton, analyst]

Congrats on the acceleration you're seeing. I wanted to focus in on that. Like how do you think of it in aggregate? Is it a function of just the initiatives flowing through? Is the category at all improving? And did you change your promotional strategy at all? I'm just wondering if that's factoring in.

[Martin Waters, executive]

Yes. Thanks, Alex. Good question. And of course, a question we ask ourselves continuously. I'll tell you on the -- I'll repeat what I said on the market size. So for the quarter that we just completed, the market declined at a very similar rate to the decline that we saw in Q2. So low- to mid-single-digits decline. We held our share during that period. The way we see it is that we've seen receptivity to newness that we brought into the business. And that shouldn't be a surprise to anybody who's followed the company for a long time. This category -- our categories respond well to newness, and we've seen that in beauty. We've seen it in PJs. We've seen it in core bras. We've seen it in panties, we've seen it in novelty. So when we get new product that resonates with the consumer, that's the biggest single thing we can do.

You asked about promotionality. Our promotionality in the quarter was about the same as it was year-over-year. Our adjusted product margins were up slightly and I will tell you that in November, we had a strong performance in November that our margins were up slightly in November. So even though we appear to have been really quite promotional, we were more surgical and more targeted. And I think the team did a really good job of managing the big moments very aggressively and preserving margin.

We've also seen digital enhancements helping our position. So our digital business is now 35% of our total system. It was 30% last year. That's coming from growth in our North American business with VS and PINK. Many of the enhancements that Chris Rupp has been working on with her team. So lots and lots of digital enhancements, plus, of course, great performance from Adore Me weighing in to help that with 5 points of our growth.

And also, I'd be remiss if I didn't mention store traffic, that store traffic, particularly in November, was strong for us and ahead of where mall traffic came in. So across the board, there are lots of things that are coming together to help that momentum. And perhaps most importantly, I should say, is the team. Under Greg's leadership and Chris' leadership and the entire leadership team, things are really starting to gel. We feel like we have the right people at the table, and we're making good choices and planning well for 2024. Hope that helps.

[Operator]

Next, we'll go to the line of Matthew Boss from JPMorgan.

[Matthew Boss, analyst]

So Martin, what would be your best assessment or maybe just an update on the health of the North America Intimates category? Maybe what inning would you call your initiatives today? And then, T.J., how best to think about the balance between driving top line relative to profitability given the elevated marketing and technology investments?

[Martin Waters, executive]

All right. I think that's 3 questions. I'll take the first 2. So how do I feel about the category, it's difficult to know. We were very surprised by the decline in the category that we saw in Q1 that we hadn't seen that coming. During good times and bad, the Intimates category has been very stable over the long run. So to see a high-single-digit decline in Q1 and then mid-single digits in Q2 and Q3. It's unusual, and I've talked a little bit about this at an investor conference. Do we think that it's structural that somehow women are going to be wearing bras less often or replacing them less frequently, that there is a structural decline in the market. I have a hard time believing that.

So there is definitely some fashion trend around young women to not wear bras all of the time. And there's definitely a trend towards more sports bras and more lounge bras, less constructed bras but none of those things I see as being structural threats to our business. I think we're in a good position to take advantage of whatever the trends are in the market and to respond to them accordingly, whether it be with bralettes or with the rebirth of our sport business. I think just innovation is the most important thing that will drive the category.

And as we're the largest player in the category by some distance, it's up to us to drive the market as a whole. And we used to do that in the old days, and we're determined to do that in the new days.

What innings are we in, in terms of the health of the company and the rebuild of the company overall, probably mid-innings, I would say. I think we've made good progress. We feel good about the foundational work that we've put in place in transforming the way in which we do business. I think we feel very good about our growth initiatives. Our international business is on fire. The Adore Me business is fantastic and bodes incredibly well for the technology we can borrow from them and leverage from them. The team there are working incredibly well. So we feel really good about that.

But there are so many things ahead of us. We've only just begun the journey on personalization. We're only just beginning to look at how AI can dramatically impact the way we go to market. We're only just beginning to look at how this new team and the new merchandising initiatives can show up and how the House of Victoria can come to life and how the Store of the Future and all the digital sense that we're making can make a difference to the customer. So there's a lot more to come for us. So I think my -- probably my best assessment is mid-order.

TJ, do you want to take the last question?

[Timothy Johnson, executive]

Yes. So from a top line perspective, Matt, I think building on Martin's comments, I think, in terms of identifying the opportunities and executing against them, we're probably middle innings as he mentioned, I think in terms of seeing the benefits start to flow through the P&L, which I think is where your question is going, I'd say, from our perspective, third quarter is some of the early innings of that. So we've been working on a number of the initiatives throughout this year and investing in them, particularly around technology and some of the brand repositioning efforts and seeing an inflection point in third quarter in terms of growth in merchandise margin rate. Seeing an inflection point in terms of the trend of the business in North America and seeing that continue on into the early holiday season, I think tells us that we're on the right track.

I think the challenge has been and will continue to be seeing the North America business continue to build into the fourth quarter and build into spring season. I think we've demonstrated a willingness and an ability to hold cost and we've got new cost initiatives coming online here just in the fourth quarter around cost of goods that Chris and Dein and their teams have been working on.

So I feel like we are right where we want to be in terms of that inflection point and seeing the flow-through happen in the business as we start to see improvements in North America business. So again, some of these initiatives are just now starting to show up in the top line and starting to flow through in the P&L although we've been working on them for months.

[Operator]

Next, we'll go to the line of [ Alex Shaw ] from Bank of America.

[Unknown Analyst]

On your strategic focus in reclaiming the sports bra category, can you talk about how the category did in the quarter versus the market? Have there been other notable launches since the featherweight Max? What is your sports bra launch calendar like compared to your core bra launch calendar? And then just lastly, in your view, what differentiates or is most attractive about a VS sports bra versus a pure offering?

[Martin Waters, executive]

Thanks for the question, Alex. This is a very sore subject with me because as the team hear from me just about every day banging the table on sport, we need to be better at sport. One of the missteps of the Victoria's business back in 2016, '17 and beyond, was not participating in the sports bra market. We had -- back in 2015, we had 16% share of the sports bra market. Today, we have a 3.5% share of the sports bra market. So we're not really in the top 10. And we've got to rebuild. We have got to be right at the top of that list, and that will take -- that will be a multiyear endeavor. The very first meaningful change that we made was the launch of featherweight Max, as you mentioned, and it was very successful. The next phase is to expand that color multipliers, line expansions, and we'll be facing into that in January and pulling forward as much sport as we can for the new year new you momentum that there is in the market. So some more newness coming in January. But honestly, the big relaunch of sport for us will be later in the year. And that's just because it takes time to make a really good product.

We're not looking to compete with tubes and with unstructured sports bralettes, that's not where we will win, we will win by leveraging technology with the best vendors in the world. So you asked the question, why would we be good at it or I'm paraphrasing slightly, but what gives us confidence that we can be good at that.

Well, bras is a technical product. It's particularly technical product when there's excessive movement required. And that's what sports bras are for. We know more about bras than anybody else on the planet. We have better and longer relationships with the best manufacturers in the world. They have the access to the best technology, and they'll give it to us first. We have access to the best raw materials. You put all of that together with our design capability, it's a category where we should be the best and we know we can do it because we've done it in our history.

So for us, it's a full court press to get after sport in the broader sense starting with sports bras but I wish I could wave a magic wand it'd happen more quickly. It will be through the balance of 2024, and we're taking a long term view of the opportunity rather than just rushing to newness for the sake of newness. So that's probably not the answer that everybody wants because we'd all like to click our fingers and see us be aggressive in sports bras quickly, but it will take some time to get back to full strength in that business. I hope that helps.

[Operator]

Next, we'll go to Irwin Boruchow from Wells Fargo.

[Irwin Boruchow, analyst]

I guess 2 questions for TJ or Martin, actually. Just first, when we think about the improvement in comps, both digitally and in-store, and let's take out the extra week for 4Q. When you take out a dormy, your digital comps were down roughly high singles, the stores are down low doubles. Which of those channels would you expect to improve the fastest or improve the most as you guys continue to work on improving the business? Is there a reason why one channel would outperform the other?

And then the second question would be TJ, on the $250 million COGS benefit that you have spoken to at the Analyst Day, can you remind us the timing of that? When will those start to flow into the P&L? Do those start to benefit you into next year? Is there anything -- at this point, you can talk about next year on margin as it pertains to those cost savings?

[Martin Waters, executive]

You sounded surprised that the question came to you. I'm happy to take the first and TJ will take the second.

So as it relates to the difference between the 2 channels -- and 2 channels is kind of an old fashion way of thinking about it as there are more channels emerging all the time. But let's take it as digital and stores. Historically, we were in a very strong position in digital. We got there early. However, over the last 4 or 5 years, other people developed capabilities in digital that we didn't have. And when this management team took over, one of the first things we identified is that we were not world class in digital experiences. Other people were further ahead of us. We had to catch up.

Also, as you know, most of the new competition that has come to market in the last 5 years is digital, there aren't many new store entrants, but there are loads of digital entrants. So the focus for us has been in the digital arena. For those 2 reasons, stronger competition and our offering was substandard and underweight.

So in building new capability, our biggest area of focus is that digital channel. And we've been adding things like fewer clicks to get to products, removing category landing pages, visual search, shoppable video, barcode scanning, I don't know, noncrawlable text, enhanced linking capabilities. All that kind of stuff using AI-powered personalization, those sorts of things we're getting into. And that's some of the stuff that's been in the 50 releases that we had during the third quarter. So just really accelerating the pace. And it's starting to work. And as I mentioned in prepared remarks, our share in digital increased slightly during the quarter.

So I think overall, in terms of the market, the forecast -- industry experts' forecast is that the category will move from 31% in digital where it is now to about 41% over a 3- to 5-year period, we expect to at least keep pace with that, maybe accelerate faster, we certainly expect to gain share in digital.

Let me address stores. Stores is an area where we were kind of overweight. We feel that we had a better store experience than anybody still do. So how come we've lost a little bit of share? That's a surprise to us. It's a significant area of focus for Becky Behringer who leads that business, and we're leaning into it to be the best that we can possibly be. I see no structural reason why we should give an inch of share away in stores. We have a better store fleet than anybody else in the market. We're renovating that fleet as fast as we possibly can. We're adding new technology like Crave, now in 181 stores. So both channels are important to us, and I'm expecting that we will gain share in each of them.

TJ, do you want to take the other question?

[Timothy Johnson, executive]

Absolutely. And I agree with Martin's comments on the different channels. Ike, you're referring to the transform the foundation goal that we put out at Investor Day that was $250 million over a 3-year period 2023, 2024, 2025. That combination of both expense and cost of goods. We did comment that cost of goods would be the majority of it. As it relates to 2023, we did say about 1/3 or a little less than 1/3. So I think $80 million of benefit in 2023. We did mention that the majority of that would be expensed particularly through the first 3 quarters of the year. And then as we get to the fourth quarter, which is where we are now, that's when the cost of goods sold benefits would start to show up, and that is happening. So the teams are delivering as expected, on time line, on target from a dollars perspective, and that was one of a couple of different enhancers in our fourth quarter forecast.

So as we move into 2024, the large majority of the benefit from a transformative foundation standpoint will be cost of goods and this, again, one of the reasons why we believe the margin inflection point at third quarter will continue through fourth and on into 2024. So we're on track. We feel good about $250 million over a 3-year period. Feel good about how it's cadencing through the P&L as expected.

[Operator]

Next, we'll go to the line of Mauricio Serna from UBS.

[Mauricio Serna Vega, analyst]

I guess just wanted to understand first, if you could talk about what was the underlying sales growth in the Adore Me brand in the quarter? And then on PINK apparel, I think the previous quarter, the drag on sales was 2 to 3 percentage points and this quarter was 3% to 4%. So I just want to understand what was the driver behind that? And then just very lastly, on the SG&A front, I think if I look at the guidance for 4Q, I think it implies SG&A dollars will be up mid-teens in 4Q. So -- and that seems elevated to -- compared to what the growth rate was in the first half of the year. And I know the third quarter was like the fashion show, but I just want to understand what is embedded in that SG&A dollar growth?

[Martin Waters, executive]

Yes. We can be very quick on the first 2. And then TJ, you can take the third, if you wouldn't mind. So we're not pulling out the underlying sales growth for Adore Me. We're not giving that level of specificity of the business of that size. Suffice to say that Morgan and team are running the business in a very smart and intelligent way. We're seeing growth year-over-year. We're seeing profitability. We are -- Morgan and I had a conversation about this earlier this week. We're seeing very smart investment in marketing. If the investment makes sense, if the ROAS is there, then we'll make it. If it's not, we won't. So I feel very good about that management team and the capability that we have in that team, and we can learn an enormous amount from them. So super excited about Adore Me, but not breaking out any specificity for that business.

As it relates to PINK apparel and the drag, there isn't really a material difference between Q2 and Q3. There's maybe a point either way, but it's not material. The extent of the decay in that business is a significant cause for concern. It was identified a year ago. We've been putting strong steps in place. As I said earlier, we've seen some green shoots that we're focused on. The main recovery will come in 2024 when we can really start to be more aggressive with our buys.

TJ, on SG&A?

[Timothy Johnson, executive]

Yes. On SG&A, Mauricio, the growth year-over-year in the fourth quarter is a combination of probably 4 or 5 different factors. I think the first one is obvious in that Adore Me is in our numbers this year, was not in our numbers last year. I think the second one is also pretty clear that we have an extra week of both selling and expense that flow through the fourth quarter this year compared to last year. Next, continuing the trend of the year, investments in technology, which are showing up in enhanced digital capabilities and also completing separation efforts. That's an ongoing activity. I think the next item of note, it would be based on the improvements in trend in the business in third quarter and in early fourth quarter. We do believe that incentive compensation expense will be up year-over-year. Again, last year at lower levels, this year performing closer to our internal budgets and expectations.

So those are probably the 4 or 5 biggest items, Mauricio, and then some other items down below or smaller in nature would be timing between third and fourth quarter or going into next year. So we feel very comfortable that the core operations of the business from an expense standpoint. So how we operate stores, how we operate our distribution centers, how we're managing headcount and costs, I feel very good about those disciplines throughout this year and as we head into next year.

[Operator]

Next, we'll go to the line of Jonna Kim from TD Cowen.

[Unknown Analyst]

This is Katie on for Jonna. Just first on the holiday season, what do you believe will be the key drivers there? And how much of that is related to promos versus newness and just category strength? And then my second question is on Beauty category. What do you think is driving strength in that category? And how do you see that assortment fitting into the larger Victoria's Secret and PINK brands over time?

[Martin Waters, executive]

Thank you for the question. Great question about what are the key drivers in the holiday season. It's a really interesting period we're in because I don't know if everybody knows, but this particular calendar year has the longest number of days between Thanksgiving and Christmas, which is 31 days. So we have kind of a long season. Is that a good thing or a bad thing? I think it's a good thing. It gives us opportunity to really tell multiple stories. And the truth is between the balance of the 2 things you mentioned, newness and promotions, it's some of both. It's some of each.

Generally speaking, when people are looking for gifts, they go to tried and tested categories like PJs, but they want new PJs. They want different PJs. They want something different, something they've not seen before. And so carefully adjusting the assortment to bring newness that's skillfully done that represents something that's new and different, maybe in fabrication or fit or design to a category that's an established gift giving category is a good place to be, and we feel very strong about -- feel very good about the assortments that we have. I was in store last night looking at what we have and seeing the customer reaction, and I think we're very well positioned, and we've seen early strength in those giftable categories.

The second part is that times are tough. We are in a difficult economic environment. And when those kind of conditions exist, people do lean more into value for money. And so being at the kind of -- in the ring for the fight, so to speak, is important to us, and we're not just competing against other people in our category. We're competing against jeans, against apparel, against beauty, against all sorts of different players. So our goal is to balance the mix of storytelling between newness and innovation and hard hitting value for money, get it now while its here promotions. And we should tell both of those stories equally well during December.

Your question about Beauty. Beauty has always been a big part of the Victoria's Secret business. We have over $1 billion business in Beauty. It has a very close -- fragrance has a very close adjacency to lingerie. We're genuinely really good at it. We have the #1 selling fragrance in North America. The line extent in Bombshell -- the line extensions that we've had of Bombshells, the seasonal extensions have been terrific. Really, really strong. And the team continue to bring newness to the category, particularly in [indiscernible]. So we have a great team with great capability and a really good, strong brand. And by the way, that's a global business. The strongest part of our international businesses in our Beauty business. It was the foundation, the start of the international business with Beauty.

And we know that the brand competes against the best brands in the world. When we put Victoria's Secret Beauty and Arun and his team are responsible for this. When we put Victoria's Secret Beauty into department stores worldwide against the best brands in the world, we're right up there in the top 1, 2, 3 brands. So Beauty isn't in any way an aferthought for us, it's absolutely central to what we do, and I'm very proud of the team that's leading that.

Okay, next question, Ivy?

[Operator]

Next, we'll go to the line of Janet Kloppenburg from JJK Research Associates.

[Janet Kloppenburg, analyst]

Congrats on the progress. I was encouraged at the Analyst Day or the Investor Day that you had seen some green shoots in PINK apparel, but maybe your inventory levels were too light, Martin. And I was just wondering if that's a constraint right now or if you're still working through some of the merchandising challenges there? And if you're pushing out the churn in PINK apparel to later in '24 as opposed to earlier in '24? And then I think you're calling for comps in December to moderate versus where they are right now, and I'm wondering if that's because you think that -- if you have tougher comparisons or if you think that you'll [indiscernible] pressure because of promotions picking up?

[Martin Waters, executive]

Thank you, Janet. Good to hear from you. I'll take the second part, and then TJ, I'll maybe ask you to take some of the second part.

In terms of our plan for the year, it's not unusual after a very strong Black Friday and Cyber Monday to see a kind of a lull during the early part of December and things to slow down. As we look at historical patterns, we've seen that before. So we're not being overly optimistic about what we see for December. But equally, there's opportunity in that. So that's probably all I can tell you about the outlook for December, TJ feel free to add in a minute.

As it relates to PINK, your 2 observations are, yes and yes. I mean, both right. Are we constrained on inventory on the best product? Yes. The best stuff that we put out blew out really quickly, and we wish we had more. We can't get any more. And are we still working through what the assortment should be? Yes, we are. It's not 100% right. It's better. As I look at the assortment, I feel significantly more proud of the way we show up now. I think it's more relevant to the Gen Z consumer. I think it's a better fit with Victoria, but there's still significant areas for opportunity and the team that are responsible for it, see that completely, and we're all aligned on where it is that we need to go to get after it.

I don't think we're pushing back the time line to late '24, our expectation is that all through '24, we should be making continuous improvement. Some of the things that have worked well are actually relatively short lead time, like panties, so expect to be quickly into those businesses in spring. Other items, the longer lead time, as you know, may take a bit longer.

So it's a work in progress. I'm pleased with the progress that we've made. It's kind of a no-regrets decision that we didn't go full on and buy too aggressively for the full season. I think that would have been a mistake. So we live and learn. And -- thank you for your encouragement.

TJ, anything else to add on December?

[Timothy Johnson, executive]

Yes, absolutely, Janet. So after a slightly positive November in North America, we do expect that December will be down year-over-year. As Martin mentioned, we come off of Cyber Monday and typically, the customer takes a bit of a break. And we do have a longer period between Thanksgiving and Christmas this year. So we do expect the customer to come back in abundance as we get closer to Christmas. So from a planning perspective, we think it's prudent to set our expectations accordingly with that in mind.

I think additionally, just setting our operational expense plans at that lower level of sales also helps us and you know what, if we're a little bit off and the customer comes back sooner and stronger than we think in December, then the flow-through will be very high, and we'll be very happy with that.

I think additionally, what you might also be seeing in the guidance is we do have expectations that the month of January will also be down to last year. And part of that, Janet, is because semiannual sale is such a large part of what happens in the month of January and coming into the quarter with inventory levels in our VS and PINK business is down high-single digits. We think sets us up well to have a very profitable semiannual sale and not have to move as many units and maybe have some opportunities to be a little less promotional in semiannual sales. So that does have an impact on the top line.

So I feel as if we've set our expectations very diligently for the balance of the quarter and positioned the business that in the event that things are more robust than we think the flow-through would be very high, and that's a good position to be in.

[Martin Waters, executive]

The other opportunity that we have, Janet, as TJ said, our inventories are -- we're expecting our inventories to be clean is to pull forward spring fashion. So we're actively looking at ways in which we can pull forward newness to help that January period with full price selling.

I think we have time for one more, Kevin, do we?

[Kevin Wynk, executive]

Yes. Thank you, Janet. And Ivy, I think let's go with one more question please.

[Operator]

And our final question comes from Marni Shapiro from Retail Tracker.

[Marni Shapiro, analyst]

Congrats on stores, it was a pleasure having to wait online to get in on Black Friday, I have to say.

You have made some big investments in the third quarter marketing moments, I would call them, from the show, Netflix, et cetera. I'm curious if you could just talk a little bit about the halo effect? Did you see a bump in traffic around those events? Did you see the sell-through that you were expecting? And curiously, millennials grew up with Victoria's Secret. It was where they went. It was their be all, end all. PINK was their baby brand. But Gen Z less so as they were growing up, Victoria's Secret was sort of hitting a lot of speed bumps, I guess, is the way to put it. So I'm curious if you're now starting to win over Gen Z now and is PINK the vehicle to do that? If you could just talk about that under the guise of marketing.

[Martin Waters, executive]

Yes. Great questions, Marni and thank you for asking. Look, we did a lot of resetting of the marketing agenda during Q3 and particularly in October -- September and October with the world tour. Our objectives on the world tour, as I said at Investor Day, were: create a media frenzy, mission accomplished; be part of the conversation of what popular culture looks like now, where we were outside of that conversation previously; and thirdly, to create assets -- marketing assets that we could use over a consistent period of time. And we've been able to do all of that. We then followed that moment quickly with the My Wings, My Way campaign, which was kind of a different articulation. And then Mariah popped out with a very big moment. And so a lot of attention to the Victoria's brand.

The key metric that we look at is brand sentiment, and we're sitting at about 80% positive in brand sentiment, which is good. We look at and we track independent research on all of the other metrics like relevance, like intent to purchase, like gets me, there's a whole series of ways in which we measure those. And we're much more focused on how those are moving over time than we are about -- did you see a lift in traffic? Did you see a lift in traffic is really more about promotional marketing and about performance marketing in the digital arena and in social channels. The moment I just spoke about a more tent pole moments where we're looking to grow the halo that there is around the brand for the long term. And the decision about whether those have been good investments or bad investments will take time to reveal themselves. And we're now at the point of deciding what we want to do for 2024. So we're actively thinking about what the anniversary moment for the world tour will be in 2024, and we'll make some choices about that in the coming weeks and months.

You asked about Gen Zs and millennials. I'm delighted to say that we're over-indexing with Gen Zs. So we're strong with Gen Zs. Gen Zs like Victoria's Secret, we're under-indexing with PINK. The reasons that we've spoken about. So that just brings even more opportunity when we get PINK back on its game, I'm super confident that we'll get Gen Zs and Gen Ys to come in strong. The area of opportunity for us has been Millennials where we've been underweight with young Millennials, and we continue to look very hard at that cohort. And our personalized marketing capability will enable us to market differently not just by generation, but also by psychographic behavior.

And as we talked about at Investor Day, we've identified specific target customers that we want to and we'll be marking to them differently depending on their preferences.

I think we'll call that a wrap and thank you for that question, Marni. Thank you all for your interest in our brands. Wish you all a very happy holidays.

[Operator]

Thank you all for participating in today's third quarter 2023 earnings call. That concludes today's conference. We disconnect at this time, and enjoy the rest of your day.