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Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Victoria's Secret & Co. First Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. All parties will remain in a listen-only mode until the question and answer session of today's call. I would now like to turn the call over to Mr. Kevin Wynk, Head of Investor Relations at Victoria's Secret & Co. Kevin, you may begin.

Thank you, Amanda. Good morning, and welcome to Victoria's Secret & Co.'s first quarter earnings conference call for the period ended May 3, 2025. 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, Hillary Super, and CFO, Scott Sekella. We are available today for approximately 30 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 and our SEC filings, as well as the investor presentation posted on the Investors section of our website. Thanks. Now I'll turn the call over to Hillary.

Good morning. I appreciate you all being here. We are pleased to kick off the summer on a strong note with solid first-quarter results that reflect continued progress against our strategic priorities. Our teams delivered a quarter marked by disciplined execution, a continued focus on innovation, and a deep commitment to serving our customers across all channels, which drove top and bottom line results exceeding our guidance and broad-based strength across both our brands. Excited by the momentum we are building in a challenging market environment and encouraged by what lies ahead. We have lots to share today, including Q1 performance, key strategic hires, and our balance of the year expectations. But first, I want to provide an update on a recent security incident. When we identified the incident on May 24, we immediately initiated our pre-established response protocols and third-party experts were engaged alongside our own security team. As a precaution, we took some internal systems and our e-commerce site offline. Throughout, we continued to serve customers in our Victoria's Secret and Pink stores. Our site was back online Thursday, May 29, and all of our critical systems are fully operational. We are now well into the recovery phase, which includes finalizing our investigation. While I won't share further details while that work is ongoing, I do want to take a moment to recognize the extraordinary efforts of our associates. Their quick, decisive action, collaboration, and resilience in the face of disruption was nothing short of inspiring. I've told you before how proud I am to be leading this business and working with this incredible team. I also want to thank our customers and partners for their understanding and support. Now let's discuss Q1. I am pleased to share we built momentum month over month and ended the quarter strong. While we are still in the early stages of our path to potential strategy, in Q1 we made progress across the four initiatives I outlined on our last earnings call. As a reminder, these are recommit to Pink, supercharged bras, fuel growth in lifestyle categories, and modernize our brand projection and go-to-market strategy. This progress was reflected in both net sales and operating income exceeding guidance. Net sales for the quarter were flat, and total comparable sales were down 1% compared to last year. As we shared on our Q4 call in March, the February macroeconomic environment presented headwinds as consumer sentiment softened and inflation concerns heightened. I'm pleased to share that our teams responded with agility, making impactful adjustments to assortment and marketing that, combined with softening headwinds, helped drive results that were mostly above expectations. What did we do? We increased our percentage of newness by pulling forward March and April floor sets in Versus, chasing into exciting fashion apparel for Pink, and accelerating our new Miss Collection launch for beauty. We re-shot portions of our creative content with an eye towards sexier and more joyful brand expression and worked across channels to highlight it. The launch of our Lacey Panty franchise exemplified this work and I am happy to report that we saw outsized returns with triple-digit comps in this franchise during its launch. Also, we rebalanced our marketing funnel, strategically leveraging events, activations, and PR to amplify brand love and began testing new paid search strategies that we continue to expand upon. Our quick response delivered strong results for the balance of the quarter. This reflects our disciplined approach in a dynamic environment and our continued commitment to strengthening the brand, leaning into emotional storytelling, and making agile business decisions when we see an opportunity. This is the BS & Co. mindset that I am so proud of. We have shown the team's capabilities to approach each season with a growth mindset, knowing we are never penciled down and can always learn and iterate on the business. We saw broad-based strength across both brands and made progress on our strategic priority of fueling growth in lifestyle categories, led by Pink apparel, beauty, and VSX. Pink Apparel delivered its third consecutive quarter of positive comps and significant margin and AUR expansion, driven by improved product, high emotion storytelling, and customer engagement. These efforts brought us closer to our goal of reestablishing the brand's magic and market position. The cross-functional team has done a great job reading and reacting not only to sales and consumer insights but also chasing into fashion ideas they are seeing out in the world. The result has been a more balanced assortment with a wider range of categories, sensibilities, and end uses that is resonating with our customer and driving a higher basket size versus last year. The team has successfully continued to grow our Pink Icon business and introduced new categories such as skirts, dresses, and denim, which our customers are loving. I am pleased that some of these ideas were created on the faster timelines that we have discussed on previous calls. We continue to push ourselves to be more agile in our product creation process and it is starting to pay off. Our Pink break event drove significant traffic and conversion across both stores and digital, as well as increased penetration of Gen

Thanks, Hillary. I first want to echo Hillary's pride in our organization's exceptional resilience during these dynamic times. Our base business has remained strong despite the environment, navigating tariffs and a recent security incident. Our teams have demonstrated remarkable focus and have stayed disciplined on the fundamentals we can control while protecting strategic investments in our product innovation, brand strength, and customer experience. Investments that will drive sustainable growth and competitive advantage over the long term. Now, a review of our results. We delivered first-quarter net sales of $1.353 billion and adjusted operating income of $32 million, both exceeding our guidance ranges provided in early March. Our adjusted net income per diluted share came in at $0.09, shy of the upper end of our guidance range. On the top line, February's challenging results reversed sharply in the March-April period as we registered positive year-over-year growth, benefiting from an increase in traffic, with traffic in our stores nicely outpacing traffic for the balance of the month. From a brand perspective for the quarter, both Victoria's Secret and Pink registered a slight year-over-year retail sales decline, while Beauty was up low single digits. From a regional perspective, we registered strong high single-digit growth in our international operations, while our North American business was essentially flat for the period. For both Victoria's Secret and Pink, digital channels slightly outpaced stores. Total first-quarter comparable sales contracted 1% compared to the prior year, with a comparative low single-digit decline in traffic in both our stores and digital channels, largely offset by low single-digit growth in the average transaction value across channels. AURs were up 2% in the quarter, driven by Pink and Beauty increases, while Versus was flat. As I mentioned, we saw continued strength in our international business. Reported first-quarter international sales grew 9% to nearly $200 million, while systemwide retail sales increased by low double digits year over year. The strong growth was fueled by a combination of healthy high single-digit comparable sales gains in our existing fleet as well as continued real estate expansion. We saw particular strength in our China business, primarily driven by the digital channel, as we registered strong double-digit growth in the period. First-quarter adjusted gross margin dollars totaled $476 million, and our adjusted gross margin rate was 35.2%, a decline of 170 basis points compared to the first quarter of 2024 and below our guidance of approximately 36.5%. More than half of the gross margin rate pressure in the quarter was due to a combination of elevated and expected airfreight rates, some tariff-related order adjustments, and a higher penetration of GWP activity, partially offset by a reduction in traditional promotional levels. Favorable gross margin rate drivers included cost benefits from our prudent approach to non-customer-facing expense buckets, as well as buying and occupancy leverage from rent savings. Adjusted SG&A dollars were $444 million in the first quarter, and our adjusted SG&A rate was 32.8%, better than our guidance range of 34.5% to 35.5% and leveraging 120 basis points to the prior year's adjusted SG&A rate of 34%. Our better-than-prior-year and expected SG&A dollar and rate performance in the quarter was due in part to our accelerated efforts to pull back on non-product and non-customer investment and expense areas of the business, as well as a strategic shift in marketing spend from Q1 into Q2. In light of the uncertain tariff environment, we are doubling down on our disciplined expense management across all aspects of the business. Adjusted non-operating expenses, consisting principally of interest expense, were $14 million in the quarter, better than our guidance and down from last year, driven by a lower level of weighted average borrowings and interest rates. Our first-quarter adjusted tax rate was 34%. Turning to the balance sheet, total inventories ended the first quarter up 6% compared to last year and in line with our guidance for mid-single-digit year-over-year growth. From a liquidity standpoint, we ended the first quarter with a cash balance of $138 million, a strong balance sheet with sufficient liquidity to continue to execute on our strategic priorities. At the end of the first quarter, our outstanding balance was $105 million under our $750 million ABL credit facility, down $40 million from the first quarter last year, with seasonal borrowings as expected. In May, we successfully renewed our asset-based lending facility with a $750 million borrowing base and secured a five-year term extension with favorable enhancements and lower interest rates that will generate annual savings. This refinancing strengthens our liquidity position while reducing our cost of capital and providing greater financial flexibility to execute our plans. Now moving on to our updated outlook for fiscal year 2025 and our outlook for the second quarter. As Hilary mentioned, we expect net sales of $6.2 billion to $6.3 billion for fiscal year 2025, compared to net sales of $6.204 billion in fiscal year 2024, which excludes the gift card breakage benefit of $26 million recognized in the fourth quarter of 2024. At this forecasted level of sales, we now expect adjusted operating income to be in the range of $270 million to $320 million. The revised outlook includes the gross tariff impact of approximately $120 million, which assumes 30% China tariffs and 10% non-China, with tariff mitigation of approximately $70 million for a net impact to fiscal year 2025 of approximately $50 million. Our mitigation levers include cost optimization with vendors, additional sourcing diversification, a more efficient air-to-ocean freight mix, and a combination of select pricing adjustments through more targeted promotions and strategic price modifications where we see a value proposition gap in the marketplace. Adjusted non-operating expenses, consisting principally of interest expense, are projected to be about $70 million for fiscal year 2025, down from $84 million in fiscal year 2024, driven by expected lower levels of weighted average borrowings along with lower interest rates. We estimate our adjusted tax rate will be approximately 24% to 25% for fiscal year 2025. We estimate weighted average diluted shares outstanding of approximately 82 million for the second quarter, and 83 million for fiscal year 2025. Given these inputs, we are forecasting fiscal year 2025 adjusted net income per diluted share to be in the range of $1.80 to $2.20, compared to adjusted net income per diluted share of $2.69 in fiscal year 2024. In light of the uncertain macro environment, we now estimate capital expenditures of approximately $220 million in fiscal year 2025, down from our prior forecast of $240 million. Capital investments will be primarily focused on our store capital program along with investments in technology and logistics related to our strategic initiatives to drive growth and support productivity. Depreciation expense is estimated to be approximately $220 million in fiscal year 2025. We now expect adjusted free cash flow of approximately $150 million to $200 million for fiscal year 2025. In 2025, we plan to open approximately 16 new stores in North America, mostly in the Store of the Future designed in off-mall locations. We estimate approximately 30 to 40 store closures in 2025, which will mostly be consolidations of co-located Victoria's Secret and Pink stores. We also expect about 40 renovations in North America in the Store of the Future design in 2025. The majority will consist of square footage reductions or consolidations of co-located Victoria's Secret and Pink stores. Square footage in our North America stores in 2025 is expected to decrease by approximately 2% to 3% compared to 2024. At the end of 2025 in North America, we estimate our Store of the Future presence will be approximately 190 stores or approximately 25% of the fleet. Internationally, we estimate our Store of the Future presence at the end of 2025 will be approximately 230 to 250 stores or nearly 40% of the international fleet. Turning to our outlook for the second quarter, we are forecasting net sales in a range of $1.38 billion to $1.41 billion, compared to net sales of $1.417 billion in the second quarter of 2024. This forecast assumes an approximate $20 million net sales impact from the security incident. Our forecast also assumes down low single-digit top-line performance in our North American business, with the semiannual sales scheduled one week earlier than last year, running for the same duration, and positioned with units down double digits compared to last year. Our forecast assumes continued strength in our international business. At this forecasted level of sales, including known costs related to the security incident, we expect second-quarter 2025 adjusted operating income to be in the range of $15 million to $35 million, compared to adjusted operating income of $62 million in the second quarter of 2024. The tariff headwind built into our second-quarter forecast is approximately $10 million, the bulk of which is due to the timing of the rate changes we were not able to impact through the mitigation levers I just mentioned. In addition, the strategic marketing shift that we called out for Q1 will unfavorably impact Q2. Offsetting these higher year-over-year costs is our continued non-customer-facing expense actions, lower incentive comp, and a slight improvement in our selling margin due to the significantly lower level of units. This forecast also assumes an approximate $10 million operating income impact from the security incident in the second quarter, excluding any consideration of insurance reimbursement. We are forecasting second-quarter 2025 adjusted net income per diluted share to be in the range of $0 to $0.15, compared to adjusted net income per diluted share of $0.40 in the second quarter of 2024. We expect the second-quarter 2025 adjusted gross margin rate to be approximately 35%, compared to the second quarter of 2024's adjusted rate of 35.4%. The adjusted SG&A rate in the second quarter of 2025 is 33%, compared to the second quarter of 2024's adjusted rate of 31%. SG&A dollars are forecasted to increase by approximately 5%. We anticipate net adjusted non-operating expenses, again consisting principally of interest expense, to be approximately $17 million in the second quarter of 2025, down from $20 million in the second quarter of 2024, driven by expected lower levels of weighted average borrowings along with lower interest rates. We estimate adjusted tax expense in the second quarter of 2025 will be approximately $0 to $5 million. We expect total inventories in the second quarter of 2025 to be up mid-single digits compared to last year. In closing, I want to reinforce what we shared throughout today's call. While we continue to navigate an uncertain macro environment, with ongoing tariff dynamics and the impacts from our recent security incident, our base business fundamentals remain solid and resilient. We are maintaining our disciplined approach, focusing on what we can control: operational excellence, strategic capital allocation, and continued investment in the capabilities that differentiate us in the marketplace. The team's ability to execute through these challenges gives me confidence in our positioning as we move forward. We remain committed to delivering value for our shareholders while building the foundation for sustained long-term profitable growth. With that, we will open the lines for your questions. Operator?

To withdraw your question at any time, you may press star then two. Participant that may wish to participate in this portion of the call. For our first question, we will go to the line of Brooke Roach from Goldman Sachs. Your line is open.

Good morning and thank you for taking my question. Hillary, I was hoping you could dive a little bit deeper into the marketing strategy that you are planning for the rest of the year and into the future following the hiring of the new chief strategy. What plans do you have to engage customers in a stronger way to drive better comp sales in the back half of the year? And what changes should we expect in terms of the messaging for the customer on a go-forward basis?

Thanks, Brooke. I'm happy to talk about that. So as you know, Elizabeth joined us, I think this is the beginning of her third week. So definitely, she has been involved in the fall shoots and creative content. They were already in flight when she started, but she has definitely been involved. And what you will see creatively is an evolution; there's not going to be a flip of the switch and all of a sudden you feel something very different, but you will start to see the brands, both brands, being pushed farther apart. You'll start to see a visual evolution with Versus. You will start to see a younger expression in Pink. And in terms of the marketing strategies, I would just say we're very focused on number one: acquisition, targeted acquisition through a very segmented media plan. And that's really one of the first orders of business. Always on bra campaign, primarily. As we have said, we are not ready to talk about our plans to comp that, but we will have some sort of activation in the back half of the year that is entertainment-based. And I would just say much more optimization of the funnel. So less spend on creating the content, more spend on getting it out in the world, pullback in direct mail, and an optimization of lower funnel. So those are some of the things that are in works, and we're pushing very hard to impact as much as we can in the back half.

Great. And then just one follow-up for Scott. What level of price increases is embedded in your guide as a result of tariffs? And how are you thinking about elasticity of demand as you take some of those strategic price increases?

Yeah, I mean, from a pricing standpoint, the first thing we're doing is optimizing our promos. Both in Q1 and throughout the year, you're going to see a little bit more headwinds on GWPs (gifts with purchase) and a pullback on what I would say are traditional promos percent off types of deals. So that's the first way we are thinking about it. We're being very strategic across categories and mindful of opening price points and sort of not to exceed price points. And so we are going to sort of play in the middle where we see value. So and it won't be across all categories. As we think about our business, it's really that strategic case by case, category by category look that we're taking.

Great. Thanks so much. I'll pass it on.

Thank you. Our next question comes from Alex Straton with Morgan Stanley. Your line is open.

Great. Maybe for Hillary first. Just when you think about the evolution of the brands and the goals when you started here, can you just highlight where you made the most progress in the first quarter? And then I've got one follow-up for Scott.

Sure. Happy to. I continue to be really bullish on Pink. I'm sure that's not a surprise. We've made incredible progress, especially as it relates to the apparel piece of that business. I would also say that beauty continues to be an absolute standout with year over year growth and lots in the pipeline to further those efforts. And we are really starting to dig into Versus. We see that we have an opportunity to have a more energetic, more joyful expression of Versus. We think we got just a little bit too serious in past seasons. So we are seeing that the more energy we bring, the more joy we bring to our campaigns, the more color and pattern we bring to our assortments, we're really seeing payback. Early stages in VS, but definitely lots of progress on the Pink side.

Great. And for Scott, just on the gross margin, the qualitative commentary was helpful in the quarter. But is it possible to quantitatively break down the components of that 170 basis point decline, as well as how those should evolve for the remainder of the year? It looks like you're embedding less compression in the second quarter, but I'm just curious if that could change with perhaps the expansion in the back half?

Yes. So in the quarter, the biggest headwind year over year was sort of inbound rates, both air and ocean. I do expect that to subside and potentially even be a slight tailwind in the back half of the year, but it will continue to be a headwind in Q2 as well. The next biggest piece in Q1 was a headwind on the tariff. We had some tariff-related order cancels that we had to take on raw materials. So as we resourced product out of China, given the tariff changes, we did have to write off some raw materials there. The other piece in the quarter, and I touched on it a little bit on the pricing question, was that as we did more GWPs, it was partially offset by a pullback in traditional promos. I do expect that construct to continue through the balance of the year. We really like what the GWP brings even if it's a slight headwind on gross margin because it drives a higher basket size as well as is a little bit of a marketing vessel for us as the consumer takes that product out into the world. We did have some favorability in the quarter from a B&O (buying and occupancy) standpoint, so I think that construct will largely continue for the year. So when you balance up the full year, the biggest headwind we're going to have year over year is tariffs. Expect that to be over 100 bps headwind. Then we'll have a little bit of the residual inbound headwind that I talked about in the first half of the year, partially offset by some favorable B&O.

Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. Your line is open.

Thanks, Andrew. Good morning. Hillary, as you work through your progress, any way to help frame how you're thinking about sizing the revenue opportunity at PACE? And then just, Scott, how are you thinking about revenue by brand and gross margin embedded within the full-year guide that you gave? Thanks.

I didn't catch what your first question was. Could you repeat that?

Sure thing, Hillary. I was just curious if you thought about how you see the revenue, just how you would size the recapture opportunity? Over the long term?

Exactly. Very, very significant. We are still in the process of modeling that, but at this moment in time, Pink's top line volume is significantly below its high. Over $1 billion below its high. So there is an incredible amount of runway there, and I think as we start to build out the full lifestyle component, there's a beauty opportunity in Pink. There's an accessories opportunity in Pink. There's an enormous opportunity to regain share in apparel and to maintain our intimate business in that brand. So I see this as our number one volume opportunity.

When you think about gross margin by brand, not much differentiation between Versus and Pink, but Beauty is several points higher, and so as we continue to grow there, that mix will be a positive benefit to gross margin rate through the balance of the year.

Thank you. Our next question comes from Dana Telsey with The Telsey Group. Your line is open.

Hi. Good morning, everyone. Hillary, as you think about the intimates market and how it's performing, you had mentioned before the slow start, it got off at the end of the fourth quarter. Where is it now? And how do you think of your core categories of bras and panties and what you're seeing in terms of performance? And then Scott, in terms of tariff mitigation measures, when do they come into play and how do you think about that opportunity going forward? Thank you.

Sure, Dana. Let me start by saying in the quarter, we definitely I'll start with non-intimates and then go to intimates. We saw share growth in sports bras, beauty, Pink apparel, really nice gains there, as you know and as we've talked about in previous calls, the intimates market continues to be a little bit pressured. I think some of that is about it going to value, some of that is about a younger consumer interacting with intimates, specifically bras in a different way. So we have seen a little bit of a decline in our intimates share this quarter. I would say it's the tail of two stories: bras versus panties. In bras, I think it's very much isolated to that February challenging business and that miss Valentine's Day that I talked about on the last call. We rebounded in March and April. We had positive business in bras in April. As we think more about how she's wearing bras, so shifting a little bit into sports bras, looking for comfort, looking for wireless, we are in the process of we have a very, very robust innovation pipeline. I actually just came back from a trip to Asia to review all of that, and we have the ability to move and shake and pull things forward. So we are in the process of really thinking about comfort and what role that plays in our total ecosystem. We're seeing lots of positive results and we have all kinds of innovation in the pipeline there. In panties, a little bit different of a story. Our business was softer throughout the quarter in panties. We were less promotional in panties than a year ago, while our competition was more promotional. So I think as we move forward, we have to internally answer the question, do we want to continue to gain share or do we want to pull back on promos? We know that it drives traffic and it is an entry point to our brand. So it is a more in some cases down to two-week lead times to get back into things. We can be very agile here and think through the strategy as we move forward.

And then on the tariff mitigation, the bulk of the mitigation is in the back half. I did call out that we do have an impact in Q2. There's a little bit of mitigation in that number. But when you think about when the rate changes took place, those first goods before we could have any mitigation impacts are starting to roll through. The actions we did take early on, resourcing out of China, while those actions took place in Q1 and here into Q2, it's going to take some time for those to roll through as they're produced in their new origins and all that. So when you think about just how it flows, but once we get to that back half, the mitigation really comes into effect.

Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is open.

Great. Thanks. So, Hillary, how do you see the product assortment positioned today at both Versus and Pink? Or where do you see the largest low hanging fruit with your strategic priorities across categories that you could impact either in the back half of this year versus opportunities you see slated for next year? And then Scott on SG and A, what's the best way to think about permanent savings you've realized relative to reinvestments in the business that you see over time or what's the level of revenue growth to leverage fixed costs in the business over time?

Thanks, Matt. I'll start. Where do I see the lowest hanging fruit? First and foremost, it's marketing optimization. It's developing a very focused acquisition strategy. We continue to do very, very well with our existing customer. We're at sort of all-time level with AOVs, profitability trips, so it's a very healthy current file. We're very much focused on acquisition as a priority in marketing. We also know that we can optimize our spend. We know we can be more targeted in our media spend and have bigger tentpole moments throughout the year. So lots to do there. That's not even covering the creative piece of things, pushing the two brands apart, utilizing collaborations in a very strategic way. So tons of things to do on the brand and marketing side. In terms of categories, we are bullish about Pink, we are bullish about Beauty, and we believe that we have made a number of corrections and innovations, including some innovation launches in the back half of the year and intimates that we do think will show up in the intimates business and further differentiate us in the space. So very excited about the back half of the year overall.

On the SG&A part of the question, what we've been driving through Q1 and the mindset we're taking is finding those efficiencies in non-customer areas. So those we do expect to be permanent savings. Things that won't impact, you know, the customer experience, the brand, the product. The other thing we're doing is what I would say is sort of fewer projects or being very selective with our investments. We want to do fewer, but do them better and have them have better return and improve the customer experience. So think some of it is not necessarily a cost takeout, but some of it is just being very selective with what we're making those investments in, in these uncertain times. As far as our leverage point from both B&O and SG&A, it's around a 1% to 2% growth rate. So if we're growing 1% to 2%, we're going to really start leveraging, and with some of these savings, we're realizing that leverage point is going to continue to go down.

Thank you. Next question comes from Corey Tarlowe with Jefferies. Your line is open.

Great. Thanks. Hillary, I was wondering if you could just talk about your team. Do you feel like you have the the right team in place at present? I know you mentioned that you made a couple of hires and would just be curious to get your perspective there. Is this the the final team that you feel is best positioned to take the company into the future? And then just Scott on the inventory for the balance for the quarter, is there any sort of guardrails or guidance that you can give us around what we might expect for the path for inventory growth for the year going forward? Thank you.

Sure. I'll start. I don't know if you saw the article that referred to our team as a super squad. But they truly are a super squad. The entire ELC I think we have built a best in class team who really complement each other, a good combination of tenure and new, a good combination of operational excellence of getting to know each other and gelling as a team. It's very early days, but I feel very passionately that this is the team that will drive the strategy forward.

From an inventory perspective in the quarter, as I said, we were up mid single digits. We basically expect that trend to continue through the year. However, the color is a little bit different. So in the first half, the up sort of mid single digits will continue, but we've been bringing our European distribution center up. So you think about building that, and that'll start to lap in the back half of the year. And then in the back half of the year, inventory will be up basically on a rate basis because of tariffs. If you exclude tariffs, inventory by year-end would have largely been flat.

Great. Thank you so much and best of luck. Thank you. Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open.

Thank you. Good morning. Hillary, you made a comment earlier that younger customers are interacting with the Intimates business differently. Can you elaborate on that? And also, how this plays into your AURs, margins, and attachment rate for the intimate business?

Sure. Yes, we know that the younger customer is wearing traditional bras less frequently. She's wearing sports bras; in some cases, she's wearing bra tops. She's thinking differently about end use. I think also just in the post-COVID days, sports bras are definitely part of her work-from-home wardrobe. So we are seeing some level of shift out of traditional bras into sports bras. But we also know that wireless is a huge piece of that and a category that is growing for us, and we're continuing to invest in as well as other comfort technologies. So I think it's just generally no longer acceptable to not be comfortable, especially with this younger generation. And we know that and have known that for some time and have a number of innovations in the pipeline to address that.

From a margin perspective, that switch, I mean, sports bras are lower margin, but when you look at the size of bras versus sports bras, the impact that will have on the total business is kind of minimal.

Thank you. Our next question comes from Mauricio Serna with UBS. Your line is open.

Great. Good morning. Thanks for taking my question. Maybe can you talk about what you're seeing for today's quarter? I know you included like a $20 million impact on the Q2 guide based on the security incident. But just thinking of you know, excluding this impact, do you have any sense of how the quarter-to-date trend is is going? And I'm also just going back to the Q1 gross margin result. I guess, just relative to your expectations when you provided the guidance, is it fair to assume that the biggest unexpected thing was the freight, or was there anything in particular that drove the misrouted to your expectations? Thank you.

I'll start and then hand it over to Scott. We saw our business trajectory turn in March. It was positive in March for all brands and it continued into May independent of the cyber event. So we are seeing our base business—it has strengthened over the course of the spring season and we see that to have been sustained through May. So we are feeling really good about the base business.

In terms of the Q1 gross margin versus expectations, we largely expected the inbound headwind. What we didn't expect was the raw material write-off from resourcing out of China. We also made the call we were expecting favorable promos, which on traditional promos, they were favorable, but we amplified our GWP a bit in the quarter more than expected given how things started and then just reacting to what the consumer was reacting to. So those were the biggest differences versus expectation on gross margin.

Got it. And then a quick follow-up on the tariff impact. You expect a $50 million net impact. You said Q2 will include $10 million. Is it fair to assume the rest of $40 million is mostly skewed towards Q4 given the volumes? Or is there a way, maybe, that you might have more of your mitigation strategies fully applied that would lead to a more balanced impact in the second half of between Q3 and Q4?

Yes. I think it's going to be over Q3 and Q4 and it will fluctuate with the size of the volume in each of the quarters is how I would think about it. So there's more of an impact dollar-wise just because it's a bigger quarter in Q4, but from a rater basis point impact, it should be relatively similar across Q3 and Q4.

Thank you. Our next question comes from Marni Shapiro with Retail Tracker. Your line is open.

Hey, guys. Congrats on building a really exceptional team with so many women leading a broad business and loving that. Can you talk just a little bit about Pink? Because I've been very impressed with the drops that you've had there. Are you getting a new shopper in? I'm assuming so because they're younger. But are you also getting back the lapsed shopper? And when they come in to buy those fashion like the spring break set, are they also buying bras along with the fashion? Could you just give us a little color as to what this is looking like?

Sure thing. I would say the strength that we're seeing right now is coming primarily from existing/lapsed customers and less from new than we would like. So as I speak to Elizabeth's focus really being on acquisition for both brands, it is an uptick in consideration for actually both brands. So I think that's probably a leading indicator, but definitely a little bit of work to do on new. We are seeing this primarily being driven by apparel and swim. We had AURs up almost into the 20% range, so very, very strong AUR performance. The intimates business is a little bit softer but continues to be very significant. The Everywhere bra is our number one bra and continues to be. So there's some real strength in that intimate business, but also I would say a little bit pressured by the macro things we saw going on. We're working to definitely defend that business.

And could we also follow-up in Pink about the active segment? Pink has, at times, had a very strong active business and then it's been pulled back. What are your thoughts on Pink Active?

I think it's a little bit less about true sport and performance and a little bit more about lifestyle and how she's dressing. I think in the past, we've done a lot of sort of head-to-toe matching set look, and that seems to be losing a little bit of relevance with her, and she's looking to mix and create more dynamic interesting outfits. So we're seeing that active business being mixed into what we call the more apparel side of the business, and quite honestly, we think that looks fresher and more modern. So we're still working on it, but seeing some success in the mix of apparel.

Great. Thank you so much. Best of luck in the next quarter. Our next question comes from Jonah Kim with TD Securities. Your line is open.

Thank you for taking my question. Just curious on the performance of swim, what you're seeing there? And then just the second question is around beauty. How big is the business now, and where do you think that could go?

Sure. I'll start with swim. Swim was a growth vehicle in both brands. I would say we were super, super pleased with Pink swim, both in our iconic Pink branded swim at Pink Break—that's a lot to say in one mouthful—as well as the Frankie's Bikinis collaboration, which I talked about on the last call being, you know, great for basket size and customer acquisition. On the Versus side, it was definitely a growth story. I think we have learnings there. We definitely have some store real estate learnings. We have some assortment learnings. Really, the more classic core side of that business outperformed. So lots and lots to build on there. I'm already looking forward to swim next season. Beauty is very significant, about 25% of our business and even stronger on the international side. We see lots of opportunity to innovate and expand here. We have a new product category dropping in fall that we're excited about. Amy and team have really hit the ground running, and I think there's still a tremendous amount of runway there, and it's something that drives incredible loyalty in our brands.

Thank you. Our last question comes from Janet Kloppenburg with JJK Research Associates. Your line is open.

Hi, everybody. Thank you for taking my time. Questions. Hillary, I wondered what you thought of the general pricing structure at BS Pink and your major competitors. Is the customer looking for the same quality at a lower price? Do you have to adjust your sourcing and your vendor partnerships to achieve that? You know, it just feels like there's been a lot of pricing pressure in the sector for a while. And on the marketing side, with the increase in the GWPs, does that make does that pressure your gross margin going forward? Is it a vehicle to drive traffic, and something that you think is a permanent part of the marketing mix? Thank you.

Sure. Happy to talk about those things. There definitely is pricing pressure in the intimate sector. We know that a big piece of the share is in value and off-price. I do not think that our pricing strategy is inherently wrong, but I think that we need to do a better job of expressing, showing that value, and creating that emotional connection and storytelling with our brand rather than thinking about how to elevate and differentiate. I think that for a long period of time, we were attempting to compete with value, and I think that sure, there are categories that will be value driven, panties being one, this collection being another that are really traffic driving and basket building items. I think it's all about the storytelling and the brand positioning and the product, and making sure that it is so clearly differentiated. As it relates to GWPs, we definitely like them better than traditional promos. As an example, in this quarter, we actually did six days less of entire BOPCs. We were much less promotional in categories like Pink apparel, like I said, we were less promotional in panties. We could debate whether or not that's the right thing going forward, and we're going spend some time strategizing that. It is a shift. So do I think that it will put pressure on promotions? It is a more profitable traditional promo, which I like because it feels better, and it does drive traffic. It drives a higher basket size, and it's a walking billboard. I mean, in New York City alone, you see these totes everywhere, and I think that's a good thing. The team has done a really good job, I think, making them much, much, better looking. And so all in all, we view that as progress in our journey to reduce promos.

Great. Thank you very much, and lots of luck to you and the team.

Thanks, Janet. Okay. Thanks, everyone. That concludes our call this morning. We appreciate your time and interest in Victoria's Secret & Co. Have a great day.