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Victoria's Secret & Co. (VSXY) had a rough Thursday. The lingerie giant reported second-quarter results that were, to put it mildly, a mixed bag. Earnings crushed expectations, but sales came up short, and the company's full-year outlook didn't exactly inspire confidence. Investors responded by sending the stock down more than 10%.
Let's break down what happened.
Adjusted diluted earnings nearly tripled to 95 cents per share, easily beating the 77 cents analysts were expecting. That's the kind of number that usually gets investors excited. But sales rose 10% year over year to $1.611 billion, just shy of the $1.619 billion estimate. It's a small miss, but in the world of retail, every dollar counts.
Comparable sales were up 9%, and two-year comparable sales rose 13%. Traffic was up both in stores and online, with digital traffic growing at a faster clip. So the underlying business seems to be moving in the right direction, even if the headline number didn't quite hit the mark.
The real star of the quarter was margin expansion. Adjusted gross margin expanded by 320 basis points to 38.8%, which was 30 basis points above the high end of the company's own guidance. About two-thirds of that improvement came from higher merchandise margins, with buying and occupancy leverage making up the rest.
There was a $10 million incremental gross tariff headwind, but the company's mitigation efforts actually produced a net benefit of about $20 million. So they managed to turn a potential negative into a positive.
Adjusted operating income jumped 125% to $124 million, blowing past the high end of the company's $90 million to $100 million guidance range by $24 million. That's a solid beat, no two ways about it.
One interesting note: Victoria's Secret received more than $140 million in IEEPA tariff refunds during the quarter. Those refunds covered more than 95% of tariffs paid and were excluded from non-GAAP results. So that's a nice cash boost, but it's not something they're counting on for ongoing operations.
The company didn't buy back any shares during the quarter, but year to date, it has repurchased 2.2 million shares for $100 million, leaving $150 million under its authorization. Inventory was up 8% year over year, while cash rose $334 million to $522 million. So the balance sheet is in decent shape.
Digging into the segments, Victoria's Secret retail sales grew in the mid-teens. Pink sales were up in the high single digits, and Beauty sales rose in the mid-single digits. The core bra business and VS Intimates in North America both grew in the mid-teens, while Pink Intimates increased in the high single digits.
Beauty had its 12th consecutive quarter of sales growth, which is a nice streak. International sales jumped 20%, helped by strength in China and European digital channels. So there's a lot of good stuff happening under the hood.
The customer file grew in the mid-single digits for the fourth straight quarter, and new customer acquisition was up in the high single digits, outpacing overall customer growth. That's a good sign for future sales.
Regular-price average unit retail (AUR) increased in the high single digits, which suggests they're getting better prices for their products. Total units rose in the low single digits, but regular-price units climbed in the high single digits. So customers are buying more at full price, which is exactly what you want to see.
Now for the part that spooked investors. During the earnings call, Victoria's Secret warned that margin expansion will slow in the second half as heavier holiday promotions and higher costs pressure profitability.
Chief Financial and Operating Officer Scott Sikella noted that promotional favorability had contributed nearly 100 basis points to margins in each quarter through the third quarter. But that benefit is expected to fade in the heavily promotional fourth quarter, and cost pressures are adding another headwind.
For the third quarter, the company expects sales of $1.57 billion to $1.60 billion, compared with the $1.568 billion analyst estimate. That's actually a bit above, so not bad. But adjusted results are expected to range from a loss of 9 cents per share to earnings of 1 cent per share. That's better than the loss of 27 cents per share a year earlier, but still not great.
Third-quarter operating income is expected to be between $10 million and $20 million, down sharply from the $124 million they just reported. That's a big drop, and it's probably what's worrying investors.
Victoria's Secret raised its fiscal 2026 sales outlook to $7.10 billion to $7.18 billion, up from $7.03 billion to $7.13 billion. But the new range still falls short of the $7.201 billion analysts were looking for. So even with the raise, they're not meeting expectations.
Shares were down 10.58% to $77.59 at the time of publication on Thursday, according to market data. It's a rough day for a company that otherwise delivered a pretty solid quarter. But investors are clearly focused on the road ahead, and the holiday season is looking like it might be a bumpy ride.
So what's the takeaway? Victoria's Secret is making progress, but the second half of the year is going to be tougher. Margins will be under pressure, and the full-year outlook is still a bit disappointing. It's a classic case of good news being overshadowed by what's coming next.
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