Net income rose 1,044% in the six months ended August 1. Victoria’s Secret shares fell 13.4% at the latest close anyway, ending at $73.51.
The operating business did improve on the surface. Revenue rose 10.4% to $1.6 billion, while gross profit climbed 46.2% to $759 million. That pushed gross margin to 47.1% from 35.6% a year earlier, a large change for a retailer whose annual operating margin was just 4.1% in the latest fiscal year.
Then comes the receipt that gives the surge a less straightforward shape. Management attributed part of the gross-profit increase to a tariff recovery, alongside fuller-price selling and fewer promotions:
"The increase in gross profit dollars compared to year-to-date 2025 was primarily due to the increase in merchandise margin dollars which was driven by an increase in net sales, a $135 million benefit from the recognition of IEEPA tariff refund recoveries, an increase in regular-priced selling and a decrease in promotional activity."
10-Q 2026-09-04
The refund is not the whole improvement. Revenue increased, regular-priced selling improved, promotions declined, and the company said expenses benefited from sales leverage. But $135 million is about half of the $272 million increase in reported operating income, so the reported 16.0% operating margin contains a benefit that does not describe an ordinary selling season by itself.
The company’s reconciliation makes the distinction visible. Reported operating income was $333 million for the six months, versus $204 million after removing tariff refund recoveries and other adjustments. That is still a substantial improvement from $87 million on the comparable adjusted basis, but it is a different scale of comeback.
Management also pointed to lower borrowing costs. Year-to-date interest expense fell $5 million to $30 million, primarily because of lower average debt and a lower borrowing rate on the term loan. The expense line helped, but it is not where the six-month swing was made.
Cash generation followed the income statement. Operating cash flow reached $265 million, up from $6 million a year earlier, and cash ended at $522 million. Inventory still rose 8.3%, while capital spending increased 15.3%, so the balance sheet shows a business generating cash while continuing to fund its stores and merchandise base.
That combination matters because the annual record is not yet one of uninterrupted margin expansion. Revenue reached $6.6 billion in the latest fiscal year, but annual operating margin was 4.1%, below the 7.5% recorded in fiscal 2023. The latest six-month result is much stronger, though the filing gives readers two different ingredients to track: recurring merchandise improvement and a sizable tariff-related recovery.
At a market value of $6.1 billion and 37.9 times earnings, the accounting distinction has a practical consequence without requiring a forecast. The question is less whether reported earnings jumped, which they plainly did, than how much of the new margin level belongs to the merchandise business after the refund is removed.
Victoria’s Secret’s next quarterly report will provide the next comparison for regular-priced selling, promotional activity, and tariff refund recoveries. How much of Victoria’s Secret’s 16.0% six-month operating margin remains after the $135 million tariff refund?