Acquisition

3 Months Ended

Apr. 29, 2023

Business Combination and Asset Acquisition [Abstract]

On December 30, 2022, the Company completed the acquisition of 100% of Adore Me. Adore Me is a direct-to-consumer lingerie and apparel brand with technology driven commerce service and a series of innovation-driven products. The acquisition creates the opportunity for the Company to leverage Adore Me's expertise and technology to continue to improve the Victoria's Secret and PINK customer shopping experience and accelerate the modernization of the Company's digital platform.

Under the terms of the definitive agreement setting forth the terms and conditions of the acquisition (the “Merger Agreement”), the Company made an upfront cash payment of $391 million at closing and will pay further cash consideration in an aggregate amount of at least $80 million, consisting of a fixed payment to be made on or prior to January 15, 2025, and up to $300 million based on the performance of Adore Me and achievement of specified strategic objectives and certain EBITDA and net revenue goals within the two-year period following closing of the transaction. Under the terms of the Merger Agreement, up to $60 million of the further cash consideration is subject to the continued employment of a certain Adore Me employee (“Contingent Compensation Payments”). These Contingent Compensation Payments are not included as consideration when applying the acquisition method of accounting and are recognized as compensation expense within General, Administrative and Store Operating Expenses in the Consolidated Statements of Income if and when earned in future periods.

The total consideration when applying the acquisition method of accounting was $537 million, net of $22 million of cash acquired. The gross consideration as of the acquisition date of $559 million consists of $391 million in cash paid at closing, $98 million which represents the fair value of the contingent cash consideration and $70 million which represents the fair value of the future fixed payment.

The Company accounted for the acquisition of Adore Me using the acquisition method of accounting. Assets acquired and liabilities assumed have been recorded based on their preliminary fair values, and as a result, the estimates and assumptions are subject to change. The Company is still in the process of finalizing the valuation estimates and final purchase price allocation which includes potential adjustments related to the final working capital settlement and amounts allocated to intangible assets. The Company expects to complete this process no later than twelve months after the closing of the acquisition. In the first quarter of 2023, the Company recorded certain measurement period adjustments based on additional information, primarily related to assumed deferred income tax liabilities and acquired accounts receivable, resulting in a $3 million increase to Goodwill, a $1 million increase to Deferred Income Tax Liabilities, a $1 million increase to Accrued Expenses and Other and a $1 million decrease to Accounts Receivable.

The following is a preliminary purchase price allocation of assets acquired and liabilities assumed as of December 30, 2022 related to the Adore Me acquisition:


	Initial Allocation		Measurement Period Adjustments		Adjusted Allocation
	(in millions)
Accounts Receivable	$	1	$	(1)	$	—
Inventories	105		—		105
Other Current Assets	7		—		7
Property and Equipment, Net	12		—		12
Operating Lease Assets	5		—		5
Goodwill	365		3		368
Trade Name	43		—		43
Other Intangible Assets	137		—		137
Other Assets	1		—		1
Accounts Payable	17		—		17
Accrued Expenses and Other	88		1		89
Current Operating Lease Liabilities	2		—		2
Deferred Income Tax Liabilities	21		1		22
Long-term Operating Lease Liabilities	3		—		3
Other Long-term Liabilities	8		—		8
Net Assets Acquired and Liabilities Assumed	$	537	$	—	$	537

The following table represents the definite-lived intangible assets acquired, the preliminary fair values and respective useful lives:


	Useful Life	Preliminary Fair Value
		(in millions)
Customer Relationships	7 years	$	81
Developed Technology	6 years	56
Trade Name	10 years	43
Total Definite-Lived Intangible Assets		$	180

The Company used the multi-period excess earnings method to value the customer relationships intangible assets and the relief from royalty method to value the developed technology and trade name intangible assets. The significant assumptions used to estimate the fair value of customer relationships included forecasted revenues, customer attrition rates and a discount rate. The significant assumptions used to estimate the fair value of developed technology and the trade name included forecasted revenues, royalty rates and a discount rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The estimated weighted-average useful life was 7.4 years for definite-lived intangible assets.

Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of net assets recognized for Adore Me, and represents the future economic benefits, including synergies, and assembled workforce, that are expected to be achieved as a result of the consummation of the acquisition of Adore Me. The goodwill arising from the acquisition is not expected to be deductible for tax purposes.

The Company consolidates Adore Me's financial information on an approximate one-month reporting lag. Accordingly, given the acquisition closing date of December 30, 2022, the operating results of Adore Me for the three-month period subsequent to the acquisition date are recorded in the Company's consolidated financial statements in the first quarter of 2023.

In the first quarter of 2023, the Company recognized the financial impact of purchase accounting items and additional acquisition-related costs, including recognition in gross profit of the fair value adjustment to acquired inventories as it is sold, income related to changes in the estimated fair value of contingent consideration and Contingent Compensation Payments, as well as amortization of acquired intangible assets. During the first quarter of 2023, the Company recognized total related costs of $17 million, including $9 million in Costs of Goods Sold, Buying and Occupancy, $7 million in General, Administrative and Store Operating Expenses and $1 million in Interest Expense. See Note 12, “Fair Value of Financial Instruments” for further information on the contingent consideration. The deferred consideration liability for the future fixed payment is included within Other Long-term Liabilities in the Consolidated Balance Sheets and was $72 million as of April 29, 2023 and $71 million as of January 28, 2023.