Kevin Wynk; Vice President of External Financial Reporting and Investor Relations; Victoria's Secret & Co
Timothy Johnson; Interim Chief Executive Officer, Chief Financial and Administrative Officer; Victoria's Secret & Co
Ike Boruchow; Analyst; Wells Fargo
Alex Straton; Analyst; Morgan Stanley
Corey Tarlowe; Analyst; Jefferies
Brooke Roach; Analyst; Goldman Sachs
Mauricio Serna; Analyst; UBS
Simeon Siegel; Analyst; BMO Capital Markets
Jonna Kim; Analyst; TD Cowen
Operator
Good morning. My name is Amanda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Victoria's Secret & Company's second-quarter 2024 earnings conference call. Please be advised that today's conference is being recorded. (Operator Instructions)
I would now like to turn the conference 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
Thank you, Amanda. Good morning, and welcome to Victoria's Secret & Company's second-quarter earnings conference call for the period ended August 3, 2024. As a matter of formality, I would like to remind you that any forward-looking statements we may make today are subject to our Safe Harbor statements found in our SEC filings and in our press releases. Joining me on the call today is CFO and Interim CEO, 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 releases 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 in the investor presentation posted on the Investors section of our website.
Thanks. And now, I'll turn the call over to TJ.
Timothy Johnson
Thanks, Kevin, and good morning, everyone. I'm pleased to report that second-quarter results exceeded or met our expectations for the quarter on all key financial metrics, and we delivered year-over-year quarterly operating income growth for the first time since 2021. We were encouraged by the continued sequential improvement in quarterly sales results in North America for the fourth consecutive quarter as sales trends improved in both our stores and our digital channels.
Our customers responded to new merchandise deliveries in events with particular success in the launch of our Victoria's Secret Dream bra collection, in apparel with our PINK Friday back-to-campus event in late July and through consistent steady improvement VS sport as we introduce the Featherweight Max front-close bra in a broader assortment of merchandise flow to stores and digital.
Sales for the second-quarter 2024 were $1.4 billion, a decrease of 1% to last year and at that better end of our expectations for the quarter. In North America, the improvement in sales trends was evident in both our stores and in our digital businesses. Momentum experienced at the end of first quarter and April continued into the month of May.
As anticipated, sales performance during our semi-annual sale period in the June timeframe was lower than that last year, driven by fewer units on sale, particularly in PINK apparel. We saw strength in July, driven by the introduction of product newness with Victoria's Secret for improved traffic, which outperformed the balance of the mall for the quarter and with meaningful outperformance in late July during PINK Friday.
In terms of our digital business, traffic levels improved in the quarter and were up compared to the second quarter last year, while conversion was down in the quarter, in particular, during the semi-annual sale period when year over year we had fewer units on sale in our digital channels.
From a market perspective, third-party market data indicates the sales trend in the overall insurance market in North America got a little bit softer in the second quarter and what was reported in the first quarter. Our combined Victoria's Secret and PINK market share in the intimates category remained at 20%.
We were encouraged to see our digital market share increase in both bras and panties, along with an overall increase in our sports bra market share for the second consecutive quarter. This was partially offset by a slight decrease in market share in the stores channel were value or low price points appear to be gaining share.
From a merchandise category perspective for Victoria's Secret, our beauty business continues to be our best-performing category with year-over-year growth for the fourth consecutive quarter, followed by strong expectance of VS sport as merchandise available for sale grew throughout the quarter in anticipation of an important event in Q3. In bras and panties, newness and innovation sold well, and several older legacy spouses were exited or down trended during the spring season.
PINK's sales trend overall improved in the quarter, both in total and in most major categories. Specifically in apparel, we were encouraged by the improving customer response to product newness during our PINK Friday back-to-campus event in late July as we ended the quarter. This strength continued into August to start the third quarter as the back-to-campus event continued in-stores and online.
In addition to improving trends for Victoria's Secret and PINK, we experienced sales growth in the high-single digits for both our international business and Adore Me. International sales in the second quarter were driven by year-over-year growth with our franchise in travel retail partners. Our performance with our partner next was also strong in the UK, and we grew profitability in China, where our top-line trends were challenged by the overall market and economic softness in the country. We're optimistic about sales, profit, and growth opportunities for all of our partners around the world.
The retail environment in North America was challenging, and the promotional environment remains competitive, but improving product acceptance and disciplined inventory management led to adjusted gross margin dollar growth and 80 basis points of adjusted gross margin rate expansion year over year in the quarter. Adjusted SG&A dollars were down in the quarter, leveraging 20 basis points compared to last year and coming in better than our guidance due to disciplined and proactive expense management initiatives to drive incremental efficiency within our operating model.
You may recall at our Investor Day, we committed to transforming the foundation of our company and established a $250 million three-year goal, and we are on track to exceed that goal. I believe we have demonstrated our commitment to focusing on efficiencies within our model and improving the cost structure of our business.
Aside from the financials, over the last 90 days, we've executed several key actions in support of our strategy and brand positioning for the long term. Including in July, we introduced new news with the launch of the Victoria's Secret Dream collection, a collection of bras, panties, and sexy sleep that combines the ultimate experience in beauty and everyday comfort. Also in July, we added a new style to our top-selling sports bra with the launch of the Featherweight Max front-close for maximum support meets maximum comfort, now with an easy zip front closure. Additionally, within the US brand, we launched the Tease Sugar Fleur beauty collection, a limited edition version of our fan-favorite, Tease.
We continue to create meaningful and memorable connections with our customers, including the return of PINK Friday the last weekend of July as our collegiate customers get ready to head back to campus and with the celebration of National Underwear Day in early August.
You may have heard the Victoria's Secret Fashion Show is returning on October 15 in New York City with an amazing cast of talented women. The show's return will deliver precisely what our customers have been asking for: glamour, runway, fashion, fun, wins, entertainment, all through a powerful modern lens, reflecting who we are today. And we continue to further develop our understanding of our Victoria's Secret and PINK customer through our multi-tender loyalty program, which has now been active for just over a year. We have 32 million members who drive about 80% of our sales on a weekly basis. Through insights and data, we are focused on turning our understanding of our customers into world-class seamless customer experiences.
As we look forward, we're encouraged or North America business trends have continued to improve as we move through August in the start of the third quarter. Early customer feedback on fall assortments is encouraging for both the Victoria's Secret and PINK brands, and our beauty business has continued solid performance and is driving traffic to our stores.
Strategically, we have several exciting events planned for the balance of third quarter, including a major VSX sport launch and the return of our Victoria's Secret Fashion Show to kick off the all-important holiday season. While we're optimistic about the positive signs we're seeing in our business, we recognize the consumer environment remains challenging, and our customer is pressured economically. We remain focused on what we can control, which is leveraging our market position in intimates and delivering on multiple initiatives to drive growth in our business over the longer term.
Today for fiscal 2024, we're raising our financial forecast to reflect Q2 and spring outperformance to our original expectations and also some level of modest improvement in our fall assumptions. For the year, we now expect sales to be down approximately 1% to a comparative 52 weeks from fiscal 2023 compared to prior guidance of down low-single digits. This forecast reflects sequential improvement in North America, along with continued strength in our international business in tracks in line with a positive trajectory we've been discussing throughout 2024.
At this forecasted level of sales, we expect our adjusted operating income in 2024 to be about $275 million to $300 million compared to prior guidance of $250 million to $275 million. We also now forecast our adjusted free cash flow in 2024 to be approximately $200 million to $225 million compared to prior guidance of $175 million to $200 million. For the third quarter of 2024, we're forecasting sales to increase low-single digits compared to sales in the third quarter last year. And at this level of sales, we are forecasting a third-quarter adjusted operating loss in the range of $40 million to $60 million.
And finally, we're sure you also heard our recent announcement regarding the appointment of Hillary Super as our next CEO effective September 9. Once again, we want to thank Martin for his time with the company and his support, and we're excited for Hilary to take us into our next chapter.
Thank you. That concludes our prepared comments. And at this time, we'd be happy to take any questions.
Operator
(Operator Instructions) Ike Boruchow, Wells Fargo.
Ike Boruchow
Hi, good morning, TJ. Congrats on the results. Two from me. Just first real quick on the model, you talked about international high singles. Sounds like you're confident. Can you just tell us what you're expecting from the international segment in the back half of the year?
And then, could you just elaborate further on the promo environment that you're seeing and what you're basically baking into your plan? I'm most curious what kind of promo/gross margin outlook you could maybe share with us for the fourth quarter specifically? Thanks.
Timothy Johnson
Yeah. Thanks for the question, Ike. First off, we've continued to be very, very, very excited about our international business really all around the world. As I mentioned in the prepared remarks, both the travel retail as well as franchise businesses were the strongest in second quarter. We continued to do very well with our partners in the UK. And the one area of the international business that softened a bit is in China, which is I don't think unique to our business. That does appear to be a more pressured consumer there in that country at the moment.
As we look forward, I would expect more of the same from our travel retail and franchise partners in the third quarter as well as our partners in the UK. I do think there's some timing on promotional events in China and some events that are more national in nature from an e-commerce perspective that will likely get pulled into third quarter because of the calendar shifts. So third quarter for our international business might be a little bit better than fourth, but I think that's largely due to calendar shifts in and around the China business.
From a promo perspective, as we look at third quarter and fourth quarter, our guidance assumes much of the same that we've incurred here in the front half of the year. We do think it will continue to be promotional. We're prepared to be more promotional if need be in the third and fourth quarter to drive our outcomes. I think what the business has gotten much, much sharper with utilizing key areas of the business. I mentioned the beauty business as a traffic driver. You've seen us be very successful leveraging our panty business as a traffic driver. Clearly, the size and growth of our loyalty program is also supporting level of traffic growth we're seeing that customers inside our loyalty program.
Now, we have some annual data are actually shopping more year over year and spending more year over year. That's a really good sign for us in terms of product acceptance and how we're reaching them. So I do think in each of the three of those items I mentioned have the opportunity to drive traffic in our business and might lead to a little bit more promotion here in the fall season.
Coming back up to a high level, I think the most exciting part about our business is really the early merchandise acceptance to newness, particularly in the VS and PINK brands. You'll recall that if you go all the way back to almost a year ago now, when we were in New York for our Investor Day and the team laid out some of the strategy from a merchandising perspective and the newness that would be coming and some of the adjacent category expansion work that would be coming. It's now starting to show up in stores here in July and August, and clearly, something is working. So we're excited about that. We think we're very early in that process. And again, merchandise product and newness, ultimately, we think will win the day in the back half of the year.
Thanks for the questions.
Ike Boruchow
Could you say gross margins will be up or down in the fourth quarter?
Timothy Johnson
Gross margins are guided to be up in the third quarter. I'd say embedded in the model is the rate might be down a little bit in fourth quarter, principally because you'll recall we had an extra week in our results last year, and obviously an extra week of selling and leveraging B&O has a pretty meaningful impact on margin rates. But I would suggest from a merchandise margin rate, when we think about from the fourth quarter compared to last year, it might be down a little bit. But the gross margin rate being down is more about the B&O rate than anything else.
Ike Boruchow
Perfect. Thank you.
Operator
Alex Straton, Morgan Stanley.
Alex Straton
Great, thanks so much. I just have a couple for you both. So just on the sales guidance raised for the year, I know you said you did that in bed, you know the back half outlook being slightly better than the previous. Can you talk to us about where you've grown more optimistic about banner or geography or category? Just so we understand that a little bit more.
And then just a quick follow-up on your promo color that you just gave, which was super helpful. I'm just wondering bigger picture or do you feel like you guys are at the right promotional levels or is it still too elevated compared to what you think of as like a steady state level for the brand? Thanks a lot.
Timothy Johnson
Yeah. Thanks for the question, Alex. I think raising the sales guide for the year was predominantly this spring outperforming coming in at the better end of the range two quarters in a row. Obviously pushed to the year up a little bit in terms of dollars. Let's say, generally speaking, the sales estimates for that balance of the year are largely unchanged where the model probably got a little bit stronger would be below the sales line and some of the margin elements or particularly at from an expense standpoint. The teams continue to do a great job managing costs and managing inventory and cash.
I think from a -- what I am most encouraged by, I'll just reiterate what I mentioned, that your product acceptance early in both the Victoria's Secret and PINK brands has been very encouraging. As I mentioned, we've been waiting for this inflection moment here in July and August for a long period of time in the newness that we were expecting, both in intimates and adjacent categories. The intimates has shown up and is doing well. I think that's the single most encouraging part of what we're seeing in the business, and the team has been working on that tirelessly has done a really, really good job.
I think from a promo color and kind of back half of the year or just in general discounting levels, it is true. Our discount rate is up a little bit year on year. I think it's also true that we don't believe that we should be at this discount rate forever and ever. I think this is a reflection of the environment. It's a reflection of where we are in terms of the evolution of the merchandising assortments and making sure that we're getting enough customers across the lease line or to our site for trial of the newness that the teams have delivered coming out of the holiday season. And going into next year, I think we would all like to believe that we could be a little less promotional as the brand, and I am sure we'll be working towards that.
I do think it's important to highlight, not mentioned this on previous calls, that we do have a fair amount of testing rigor around promotionality, and what I mean by that is we do have testing control groups or hold off routes where we are less promotional.
And in the current environment, what we're seeing is the promotions matter. Promotions matter -- customer, they're accretive to sales and accretive to margin dollars. So again, for the moment and where we are in the evolution of merchandising and where we are with the customer, we think the promotions makes sense longer term. I think we would all like to be a little less promotional than we are today.
Alex Straton
Great. Good luck.
Timothy Johnson
Thanks, Alex.
Operator
Corey Tarlowe, Jefferies.
Corey Tarlowe
Great. Thanks, and good morning. TJ, I wanted to ask about PINK because you highlighted an improvement there. And I know that you've used a fair amount of newness in that segment. Can you talk a little bit about what you feel is working with that segment and what you think that trajectory might look like into the back half? Thanks so much.
Timothy Johnson
Yeah, thanks for the question, Corey. We've been looking forward to talking about the PINK business in a positive light because there's been a tremendous amount of work to get us here. I think, in summary, tees, tanks, dresses continue to start off well for the business in July, in August, around the PINK Friday event. And as we deliver more and more newness and capsules to the front of store, we're seeing good customer response.
If you think about what you see on the front table, particularly end of July and early August, a fair amount of stores had sellout activity, but tees, tanks, and dresses were some of the early good winners for the business. You might have seen some denim shorts on the front table here in the third quarter, different types of pant inventory available for sale. And I'd be remiss if I didn't mention the PINK bra that delivered early in the season that has continued to sell through well. So I think there are a number of different category examples, Corey, that give us optimism as we move into the back half of the year. There's more opportunities to come with PINK.
For back to school, I'd be remiss if I didn't mention, we actually had backpacks of this year to drive customers to the store and to get that basket started and use it as a promotional items. So backpacks for back to school is a pretty novel idea, and the teams have done a good job executing against that, and it's been very well-received.
I think maybe one of the most encouraging part if you were -- and I know you're in stores almost every day, if not every day, but for those who are in-store, particularly end of July and for back to school, seeing a younger customer return to the PINK side of the store was very encouraging for our stores team and our merchant teams. So getting back to that younger customer that 18- to 22-year-old age demographic, you saw us significantly more of that type of foot traffic in our stores in late July and August than maybe you have in prior seasons. So a lot to like about what's happening so far in PINK, but more to come.
Corey Tarlowe
Great. Thanks so much and best of luck.
Timothy Johnson
Yes, thanks.
Operator
Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. Your line is open. Simeon, your line is open. You may need to unmute yourself.
All right, I'll go to the next question. Our next question comes from Brooke Roach with Goldman Sachs. Your line is open.
Brooke Roach
Good morning, and thank you for taking our question. I was hoping you could speak to the drivers of the better SG&A cost control that you saw in the quarter. Could you provide a few examples of where you're finding those efficiencies? And then as you look ahead, how are you thinking about the cadence of SG&A dollar growth in the back half of the year and any additional leverage that you might be pulling there?
Timothy Johnson
Yeah. It's a little soft, but I think you're asking about cost opportunities and kind of what drove the outcome in second quarter and our outlook for the balance of the year. I think that's what the question was.
Brooke, there were a number of different areas within the business. I wouldn't want you to think that there was one big thing that drove the cost outperformance in second quarter. I think the best way to think about it is the teams have rallied around keeping costs under control as we've kind of come into this inflection point.
They understand that driving profitability is important while we're in this inflection moment, and keeping costs under control is one thing that we can do to help in that regard. So there are a number of different areas throughout the business, whether it's closely monitoring travel and headcount or whether it's really looking at our ship commitments and promised dates and how we deliver to the customer differently from a digital and distribution standpoint or whether how we're managing our store payroll or what we're expecting of our stores in terms of changes and frequency of change and kind of monitoring that closely.
There are a number of different areas throughout the business where we were able to keep costs in check here in the second quarter have every expectation that will continue on into the third quarter. You've probably worked through your model at this point and the leverage that we're guiding to. On the sales, we're guiding to has SG&A dollars relatively flat year over year. And I'd expect there will probably be a little bit of growth in SG&A dollars potentially as we move into the fourth quarter. When you account for the extra week last year, that growth in fourth quarter candidly is probably as much about the good start to this season and the expectation that you know we will be providing for more incentive compensation in the back half of the year than last year than anything else. We're not doing anything differently or adding cost to the business in the fourth quarter differently than we have in any prior years. So I feel very good about the cost outlook.
And maybe, again, most importantly, I just want to underline that this is something that the teams have rallied around. It's not always the most fun part of what we do, but it's necessary in the environment that we're in, and this has been a multiyear journey. This isn't something that's been new to VS & Co., in just the last quarter or two. This has really been something we've been after for a while. So I feel very good about how the teams are managing cost and managing inventory.
You didn't necessarily mention, but I mentioned it any way, we do have costs that sit inside of both gross margin component in the business buying and occupancy costs and those costs were down year over year, and I expect there would be flat to down as we move through the balance of year. So again, much the same disciplines around all areas of the business plus some pretty meaningful positive movement from a co-occupancy costs, meaning lower rents, working on locations, and getting better terms on a go-forward basis, looking at things like co-tenancies as anchors have gone out and things like that. So really there's no stone unturned right now from a cost perspective to keep things heading in the right direction.
Brooke Roach
Great, thanks so much. I'll pass it on.
Timothy Johnson
Yes, thank you.
Operator
Mauricio Serna, UBS.
Mauricio Serna
Great. Good morning. Thanks for taking my questions. I wanted to ask. About you know the third-quarter guidance, you know, it calls for a sequential improvement. I just want to understand like from a business from a segment standpoint, what segments are driving that improvement? Is it like across the board? Or anything in particular?
And then like as you think about that improvement, just focus on the North America intimate market, you were mentioning that it got softer, kind of slightly softer in second quarter, what are your expectations for like the industry growth of the intimate -- North America intimates industry growth for the second half of the year? Thank you.
Timothy Johnson
Yeah, thanks for the question, Mauricio. When we think about third quarter, if I could just maybe stay at a high level for the moment and use big round numbers, we were down 1% in Q2 as a business on the top line. We've guided to low-single-digit growth in the third quarter. So 1% to 3% is how we define low-single digits. So if I just take the midpoint of that at plus 2%, so really what we're talking about is going from down 1% to plus 2% in the third quarter.
In our prepared remarks, we talked about the retail calendar shift that is happening for us in all retailers this year. And as it relates to the third quarter, that's about 2 points of positive impact. So really, that plus 2 in my example without the retail calendar shift would be more like flat. So on an apple-to-apple basis, you might be talking about going from down 1 to flat, again, on a reported basis will be from going from down 1 to plus 2 because of the calendar shift.
Again, to be clear, the calendar shift is really about removing week of the first week of November last year into the third quarter this year. First week in November, as you know, is a big holiday week or holiday volume starts to ramp in our business, so you can kind of hopefully visualize the positive impact there.
To the to the heart of your question, what's going to drive that? From our view, we're already seeing some of that in our business in the month of August. I would expect the month of August will be positive in the low-single digits, if not, a little bit better based on the strength of PINK Friday and National Underwear Day to start off the month and then just better core business here as we're finishing the month. So feel good about August.
And what's driving that and what we anticipate will drive the third quarter is all about newness and product acceptance, major VSX launch coming in September, kick off at the fashion show, which will be commercialized this year, live and commercialized this year to drive hopefully positive results from a sales perspective and really kick off the holiday season for us in a major, major way. So that's what we anticipate will drive from a product perspective.
We do think that North America, you know Victoria's Secret and PINK, the brands in North America, again, business gets sequentially better from second to third quarter. Again, that would be the fifth quarter in a row. I do think North America in total will get closer to flat in the quarter or maybe down slightly, but again sequential improvement year over -- or quarter over quarter for the fifth quarter.
And then we have every expectation the international business and our partners that are normally will continue to grow in the high-single digits or better. So those are kind of the building blocks of third quarter, but I think it's important to understand the calendar shift does need to be accounted for there.
On the last part of your question, as it relates to the domestic market share, you're coming into the year. We had to make some assumptions on the domestic intimates market and performance. We said at that time we expected the market to be softer here in the front half of the year and then stabilize in the back half of the year. I guess that's as good of an assumption as any. Still, maybe it continues to be a little bit softer in the back half of the year. I'm not quite sure. But what I am confident in is here in the second quarter, where the market was tougher, our business has still got better in North America.
And even if in the third quarter, the domestic intimates market is difficult. I'm seeing our business get better in the month of August, and we have every expectation that it'll get better in September and October. So well, we prefer it to be a tailwind. We just have to kind of keep our heads down and push through it with all of the newness, innovation, and initiatives that we're launching in our business. So feel comfortable with where we are to start the Q3 timeframe, and we'll see how we do in September and October.
Mauricio Serna
Got it. And just a quick follow-up on gross margin. One of the things I noted in the in the commentary provided for Q3 is you called out transportation costs on ocean and air. Maybe you could elaborate a little bit more like what kind of impact that you expecting in Q3 gross margin and that's only like a one-time thing or is this something that we should be maybe considering for Q4 and maybe going into fiscal year '25? Thank you.
Timothy Johnson
Yeah. I wish my crystal ball was that clear on forecasting transportation rates. I can only see, for sure, a month or a few weeks out, Mauricio. But what we really saw was that transportation rates were down significantly as we exited 2023 and in the front of 2024. And those transportation rates were being down or what will through our margin and was a tailwind in the spring season.
As we started to work through the second quarter and in the June/July timeframe and even here in August, what we've seen is that in transportation rates, whether it's ocean or air, start to spike in the spot market for a number of different reasons, some capacity related, some movement between East Coast and West Coast related. But regardless, we're seeing the overall rate environment pick up here over the last few weeks in the last couple of months.
Our expectation in our guidance is that likely continues through the balance of the year. So what was the tail end will likely be a little bit of a headwind as we move into the fall season and potentially even a little bit more than that as we move into fourth quarter. Where it goes next year, your estimate might be as good as mine. But here in the near term, in our guidance, we've assumed that transportation rates are a bit of a headwind in the back half of the year.
Mauricio Serna
Got it, very helpful. That's also why you think like merchandise margins in Q4 might be down a little bit?
Timothy Johnson
It's certainly an element that is new and different. I mean, last year, transportation rates were probably close to a historical low level. And as I mentioned, since they've been spiking here of late, we do think it likely continues through the fourth quarter. So that's probably one change from maybe our beginning of year expectation to where we are currently.
I think the other piece that you missed if I didn't mention and you'll recall the fourth quarter of last year is when we started seeing meaningful cost of goods sales, cost of goods sold reduction, or reduction in average unit costs, and that's something that the teams have been working on production, sourcing, merchant teams, and others had been working on. It's something that's part of our transform the foundation goal.
You may recall us talking about an annual opportunity of probably $130 million to $140 million or more in the form of lower unit cost. That kicked off last year in fourth quarter. And obviously, we'll have our full 12 months here wrap up in third quarter of this year, so we will start to go up against that. But in terms of year-over-year change, the transportation rates is probably the one piece, Mauricio, that's certainly different. So going from historic lows, last year fourth quarter to a spiking market here in the fall season. We've tried our best to reflect that in the fourth-quarter guide.
Mauricio Serna
Got it. Understood. Very helpful. Excellent. Thanks.
Timothy Johnson
Thank.
Operator
Simeon Siegel, BMO Capital Markets.
Simeon Siegel
Thanks. Hey, guys. Morning. Hope you have a nice summer, and congrats on some really nice improvement. I apologize I got disconnected. So if you already answer any of these, just disregard. I'll get it from the transcript. Sorry about that.
So could you quantify the puts and takes behind the gross margin improvement this quarter and how you're thinking about those drivers going forward? What do you expect buying and occupancy dollars to look like going forward, recognizing the comment from this quarter? And then with the fashion show returning, how are you thinking about marketing dollars this year? So have any -- have you said any of those before, I'll get them again.
And then just higher level -- or I'll get them from the script, [to save] again. And then just higher level, the EBIT dollar growth was great, so that was really encouraging. Could you speak to your comfort in continuing that inflection going forward? Is this the beginning of that turn? Thank you.
Timothy Johnson
You made up for lost time there, Simeon. I think I got three or four things. I'll try to address all of them. But puts and takes here in the second quarter from a margin perspective, as I just mentioned with Mauricio, significantly, up to last year from a rate perspective, up about 80 basis points gross margin dollar growth in excess of sales activities, so good performance in the quarter. The teams managed inventory. Inventories ended down 2% in line with our guidance. So everything seemingly moving in the right direction.
The positives here in Q2 were mostly about the cost of goods sold work that I mentioned and lower average unit cost because of the lag and how kind of things to sell through from a margin perspective and how they recognize cost of goods. We still did have some favorable transportation activity from the front half of the year flowing through in the second quarter. Again, it gets more challenging as we move forward. Those were probably the two because in the quarter from a margin perspective.
And then a third would be just overall for the second quarter, buying and occupancy dollars were actually down year over year, and again, that helped flatten out the B&O impact on a down one sales number.
The one item going the other way is, it was a promotional quarter across our category and across retail. I mentioned earlier discount rate was up a little bit year over year. We did our best to try to target that discount rate in a couple of key areas namely beauty, namely panties. So this discount was not about liquidating poor performing inventory at all; this is about trying to drive trial and traffic.
You know, as we look forward from a margin perspective guiding the margin rate up year over year. And third quarter, again, cost of goods sold there will be the primary driver there, and lower average unit costs will start to see transportation rates turn from a tailwind to a bit of a headwind in Q3.
And then I'd say from our promotion standpoint, probably pretty similar year over year or maybe slightly more promotional in our guide. So just same sort of elements, just moving slightly one way or the other. From a buying and occupancy standpoint, I would expect dollars to continue to be flat or down here in the third quarter and likely in the fourth quarter as well.
Again, to Brooke's question earlier, we managed all costs in our business, not just the ones that show up in SG&A, and the teams doing a great job in that. So I feel good that a low-single-digit sales increase will leverage B&O with B&O dollars being down. So those are kind of some of the puts and takes from the margin perspective.
You might not have picked up on, I think Mauricio's last question on Q4. We talked about the margin rate in Q4 likely being down a little bit. As we anniversary last year's cost of goods sold work, but probably more importantly, just some of the expectation that transportation rates could remain elevated for the balance of the year.
Your question on marketing, I'd say we're spending an appropriate level of marketing from our view. Yes, our marketing dollars in total were elevated a bit last year, with the world tour this year, with the fashion show. So the fashion show is not the same cost as the world tour. It's lower than the world tour. So overall, marketing dollars will likely be down year over year. But again, from our view, still an appropriate budget.
When we look to the third quarter, we're really excited to see what type of, not just positive sentiment, we've already got a pretty good indicator on that based on yesterday's Instagram post of announcing the date and a couple of key people associated with the program. So very positive sentiment. Customers are super excited about it. We're really looking forward to seeing what we can do to generate new customer trial through the fashion show and through the launch of the VSX sport in third quarter. So a lot to like about what's coming from a marketing perspective.
And I think I lost the last question.
Simeon Siegel
Yeah. the EBIT dollar from our growing the inflecting. So just comfort in that continuing this being the beginning of a trend because that's obviously very encouraging.
Timothy Johnson
Yes. You say either, at least we can operating dollars since a lot of our incentive programs are tied to operating profit dollars. Yes, the inflection point for the first time since really Q3 of 2021, I think you got it right in your note. This morning was the last time operating income dollars were up year over year. Our guide for Q3 suggests that should continue into this quarter.
The fourth quarter is a little bit tough to look at because of the extra week year over year, which we did quantify that you drove about. Helped $20 million of operating income last year do the extra week. So we've got some work to do to get fourth quarter back to last year's first -- fourth quarter from an operating income perspective, but there's a lot of dollars at play there from a volume perspective.
You'll note in squeezing the model a little bit, our sales expectation for Q4 is a little bit lower from a growth perspective than Q3. Again, Q3 being aided by the calendar shift. Calendar shift kind of works against [you]. And Q4, again, that November week one moves into Q3 and you replace it with a February week and those volumes are not the same.
So we've got a little bit of work to do yet on Q4. But I think the biggest opportunity there for us is such strong early acceptance of your new product on both the VS and PINK side really is where the opportunity sets to drive better sell-through, higher sell-through, better margin, lower promotion, or all of the above. So, lots to like about how we're positioned for the balance of this year.
Kevin Wynk
Hey, Amanda. We're running out of time here. Let's go with one more question, please.
Operator
Jonna Kim, TD Cowen.
Jonna Kim
Thanks for taking my question. Just a quick one for me. You mentioned Adore Me grew [hiking] revisit this quarter. Just curious what were the drivers behind it when what you're assuming for the back half for the brand? Thank you.
Timothy Johnson
Yeah, thanks for the question, Jonna. In the Adore Me business, I think most people know there are actually two brands, which fit inside the Adore Me business as we report it. There's the Adore Me brand, which focuses primarily on intimates, but does present other categories. And then there's a second business called Daily Look, which also features a home try-on model, but more focused on the apparel side.
In the last couple of quarters, we've seen outsized growth in the Daily Look business that's driving the growth in total or overall at Adore Me. So having two different businesses, two different brands inside of that business gives the team the opportunity to toggle investment dollars from a marketing perspective and to what's trending, what's working best. And I think they're doing a really, really good job of doing that. So putting the investment where the customer is in the near term. So the Daily Look or apparel side of the business is driving the majority of the growth there.
Having said all of that, they're managing to -- the total business to high-single-digit growth on the top line and pretty meaningful growth here in the second quarter from an operating income perspective.
Looking forward, I'm comfortable that they have both plans here for the third quarter. You may recall that they actually are on a one-month leg to our business, so we report them on a one-month leg. So we've already seen load the first half of their third quarter. And the business is off to a good start and is on forecast to not only grow in the top line but be profitable in the quarter. Again, so happy with where we are in the near term in the Adore Me business.
Kevin Wynk
All right. Thank you, everyone. That concludes our call for this morning. We appreciate your interest in VS. Have a great day. Thank you.
Timothy Johnson
Thank you.
Operator
Thank you for participating in the Victoria's Secret & Company's second-quarter 2024 earnings conference call. That concludes today's conference. Please disconnect at this time.
