Operator:

Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Mike McGuire, Interim Head of Investor Relations. Mike, you may begin.

Gina Boswell:

Thank you, Mike, and good morning, everyone. We appreciate you all joining us. Today, we are pleased to report better than expected Q1 sales and earnings performance. Through strong execution, we continued our progress against our strategic priorities, managing our profitability and at the same time, building toward our anticipated return to sales growth in the second half. Before I get into the details, let me first say that our Q1 outperformance would not be possible without the tireless dedication of our exceptional team who consistently delivers tremendous service to our customers while remaining nimble in a dynamic environment to deliver our goals. Jumping into results. We were pleased to deliver net sales of $1.4 billion in the first quarter, down 0.9% from the prior year, which was above the high end of our guidance. First quarter earnings per diluted share of $0.38 was up 15% from the prior year's adjusted EPS, which was above our guidance. With our better-than-expected results in the first quarter, we've narrowed our full year guidance ranges for both the top- and bottom-lines, raising the midpoint while maintaining the high end for each. Keeping in mind that it's still early in the year and we remain in a dynamic consumer spending environment, we are taking a prudent approach to our guidance. Eva will share more details later. Now shifting back to the quarter, let me provide some color on what drove our Q1 performance. Of course, it starts with the customer and their favorable response to the level of newness and innovation we brought to them with compelling product introductions and new marketing activities that build the brand. We continue to grow our newer adjacencies such as men's, hair, lip and laundry, and we are excited to see all of these contributing more to the business. We're continuing to roll out our lip fixtures to nearly all North American stores and we're accelerating laundry to all U.S. stores in late fall. As part of our efforts to drive our core growth, we introduced a new brand collaboration with Netflix, starting with their hit series, Bridgerton. We also launched a new Everyday Luxuries collection, which generated some viral buzz that Julie will touch on a bit later. Together, we were delighted with the abundance of brand love demonstrated by customers for these products. The Home Fragrance category performed in line with our expectations with the year-over-year decline in candles consistent with the prior quarter's performance, as macro level normalization continued. Overall transactions were up for the quarter driven by conversion with dual channel traffic flat. Consistent with external market data, we are continuing to see customers carefully manage their spending, which has pressured basket size. Average unit retails declined 1% versus our expectation of flat. At the beginning of the quarter, we leveraged promotion to help drive traffic in light of a floor set that wasn't resonating with our customers. As the quarter progressed and demand grew, we eased off promotions, which allowed us to achieve flat AURs in the back half of the quarter. From a market share perspective, we maintained our strong unit share overall. Our international business was pressured given the war in the Middle East and related softness. Despite this near term pressure, international markets remain an attractive pillar of our overall strategy, and we are committed to growing outside North America. During the quarter, our partners opened stores in new markets, including our first standalone store in London. And just last week, together with our franchise partner, we opened our first store in South Korea. Our plan is to add at least 35 net new stores in international markets this year. As you know, over the past year, our team's efforts have been centered on elevating the Bath & Body Works brand and product, extending our reach, engaging with our customers, enabling a seamless omnichannel experience and enhancing operational excellence and efficiency. Building upon the strong foundation that Bath & Body Works had already established, our efforts are driving positive progress along our path to $10 billion in sales and operating margins of 20%. Last quarter, I highlighted several marketing and technology initiatives in which we're making important investments to fuel our growth. This quarter, I would like to focus on a key indicator of the success of this work, which we call customership. Customership essentially refers to the demand we generate among current and potential customers to drive sustained growth in the business. Simply put, our goal is to bring more customers to the brand more often and with more love for our amazing fragrance assortment and omnichannel experience. With the introduction of our full funnel marketing approach beginning in Q4 of last year, we have seen improving trends supported by greater top-of-mind brand awareness and engagement among existing, new and reactivated customers alike. Early results from our more fulsome approach have been promising. The trend on net customer count in the first quarter improved 10 percentage points when compared to the first quarter of 2023, fueled by better retention of existing customers and a trend improvement in attracting new customers to the brand. We saw our most promising performance within our most valued customer segment, which we call fragrance fashionistas. These customers consider fragrance to be an essential part of their identity and self-expression, and they're extremely invested in innovation, evidenced by their response to our newness in the quarter. We were also encouraged to see our new efforts lead customers to shop with us more often, with approximately 40% of customers visiting us nearly 7 times on average per year. And we're seeing brand love continue to build. Brand impressions generated in the quarter were up 43% versus the prior year and we saw key brand equities, such as likelihood to recommend Bath & Body Works, on the rise. Hand in hand with our marketing efforts in driving customership is our focus on loyalty. As of the end of first quarter, we had increased our active loyalty members by more than 18% year-over-year to approximately 37 million and they drove about 80% of our U.S. sales. The program also boasted an outstanding 93% satisfaction rating within its membership. While the scale and satisfaction of our loyalty program are strong, of equal importance is the stickiness the program brings to the business. In Q1, our overall customer retention rate was the best posted since 2021, which was a high watermark for the brand. As we look to a future built on strong customership, we see additional potential to drive even more enrollment in our loyalty program, particularly among new customers, who made up 43% of enrollees in the first quarter. In order to drive a new level of engagement in the program in 2024, we will offer more loyalty exclusive and early access events along with point accelerators. We introduced these in Q4 to foster reward redemption as that is a critical factor in incenting customer purchase behavior. As customership grows, it will enhance our potential to both drive short--term performance as well as sustain customer lifetime value. Turning briefly to our technology initiatives, our tech roadmap is on track, and we've made progress toward our goals. As you know, in standing up Bath & Body Works as an independent company, there has been and continues to be significant work required to bring the company's technology systems to where we need them to be for a leading omnichannel retail business of our size. We remain focused on investing in the foundational tools and systems need to support future growth, and have been engaging with world-class partners to do so. We continue to evolve the digital experience for our customers, and we look forward to sharing big wins from these efforts later in the year. With that, I'll turn the call over to Julie to provide the merchandising overview.

Eva Boratto:

Thank you, Julie. Good morning, everyone. Before I review our first quarter fiscal results and fiscal 2024 guidance, I will provide an update on capital allocation. Our top priority remains driving sustainable long-term profitable growth through investments in the business. To support this, we continue to plan for $300 million to $325 million in capital projects during the year. And our priorities remain investment in brick and mortar stores and technology. In the first quarter, our total capital investment was $46 million. After investments in the business, our expectation for full year free cash flow generation remains between $675 million and $775 million, and we'll put that towards our priorities of dividends, share repurchases and debt deleveraging. During the quarter, we paid out $45 million in dividends. Subsequently, a few weeks ago, we announced a quarterly dividend of $0.20 per share payable later this month. We expect to continue our annual dividend of $0.80 per share with the intention to increase the dividend over time with sustained earnings growth. During the quarter, we repurchased 2.2 million shares of common stock for $99 million at an average price of $45.61 per share. Our full year guidance continues to include the expectation to repurchase approximately $300 million of shares opportunistically throughout fiscal 2024. We also remain committed to our goal of reducing our leverage ratio to approximately 2.5 times growth adjusted debt-to-EBITDAR. In the first quarter, we repurchased $109 million principal amount of senior notes and our ratio held steady at 2.8 times on a four-quarter trailing basis. Now moving to the income statement. In the first quarter, we reported earnings per diluted share of $0.38, exceeding our guidance of $0.28 to $0.33 per diluted share. Our outperformance in the quarter was driven by better-than-expected net sales and to a lesser extent buying and occupancy cost. Net sales of $1.4 billion for the quarter declined a better than expected 0.9% compared to the prior year. The outperformance in net sales was driven by strong floorsets in March, reflecting the newness that Julie described. As expected, the change in year-over-year net sales benefited by approximately 200 basis points from the shifted fiscal calendar resulting from the extra week in 2023. The benefit was offset by weaker-than-expected international ship sales and a decrease in average dollar sale as we continue to see the customer carefully manage their spending. As Gina previously discussed, AURs decreased 1% in the quarter versus our expectation of flat. Transactions were up for the quarter, driven by conversion. In US and Canadian stores, net sales totaled $1.1 billion, an increase of 3% versus the prior year. This is in line with our performance in Q4 of 2023 on a comparable calendar basis. Direct net sales were $261 million, a decline of 7% compared to last year. BOPIS continued to grow as our customers appreciate the convenience it offers. Keep in mind, BOPIS net sales are recognized as store net sales and we delivered approximately 50% growth in demand year-over-year, and BOPIS now represents approximately 25% of direct demand. So, when adjusted for BOPIS, stores and direct growth are more comparable. Note, we lapped the BOPIS US national rollout during the quarter. We generated $58 million of international net sales, a decline of 29% from last year's first quarter, which negatively impacted the year-over-year change in consolidated net sales by 170 basis points. The decline was driven by the decrease in wholesale revenue generated by product shipments to our franchise partners due to the markets affected by the war in the Middle East as those partners continue to manage their inventory levels in the face of subdued forecast. Total international system-wide retail sales from which we collect royalties were roughly flat to the prior year. Compared to the prior-year period, sales were up mid-teens outside of the areas affected by the war in the Middle East, while sales improved sequentially in areas impacted by the war. We continue to believe in the international opportunity and it is an important driver of long-term growth. First quarter gross profit rate was 43.8%, an increase of 110 basis points compared to prior year. Merchandise margin rate improved 110 basis points year-over-year, driven by a lower mix of international sales and lower transportation costs, partially offset by the modest AUR decline. Buying and occupancy expense as a percent of net sales was flat to last year. The outperformance was driven by strong execution in our fulfillment operations. Total first quarter SG&A deleveraged by 60 basis points versus last year, in line with expectations, which included the lapping of one-time discrete corporate expenses recognized in the first quarter last year. The benefits of our cost optimization work spans across both gross profit and SG&A. We continue to expect approximately $100 million in additional annual cost savings for fiscal year 2024, with benefits being realized earlier than expected. In the first quarter, we delivered approximately $40 million. First quarter total operating income increased by 3.6% to $187 million or 13.5% of net sales. Moving on to inventory, we ended the first quarter with total inventory dollars up 6% compared to last year, in line with our expectations. The increase in inventory is to support new product launches and additional stores. As we head into the second quarter, our inventory levels are appropriately positioned. Turning to real estate, our portfolio remains extremely healthy with more than half our fleet in off-mall locations. In the first quarter, we continued to increase our North American off-mall penetration, opening 15 new off-mall stores and permanently closing 11 stores, primarily in malls. Internationally, our partners ended the quarter with 486 stores. Turning now to our fiscal 2024 financial guidance. As a reminder, we are providing our guidance with comparisons to 2023 that included the 53rd week, which added about $81 million to net sales and $0.05 to diluted earnings per share. With that as background, we are narrowing full year guidance ranges for both the top- and bottom-line raising the midpoint while maintaining the high end for each. For the full year, we now expect net sales result to range between down 2.5% to flat year-over-year. Adjusting for the 53rd week in 2023, we expect net sales results to range between down 1.5% to up 1% with the extra week representing a headwind of approximately 100 basis points to our 2024 growth. We continue to expect net sales growth at both the midpoint and the high end and to turn positive in the second half of the year on a comparable week basis, as our marketing initiatives and our product launches in our adjacencies are scale. We now expect gross profit rate to be approximately 43.7%, and SG&A rate to be approximately 26.7%. The benefits of our cost optimization work mentioned previously are now expected to be more weighted to gross profit than SG&A at a split of approximately 60% and 40%, respectively. Our guidance for net non-operating expenses remain unchanged from the guidance we provided on our last earnings call. Considering all of the inputs, our updated full year guidance for earnings per diluted share is between $3.05 to $3.35. As Gina explained, we are taking a prudent approach to our guidance keeping in mind it's still early in the year and we remain in a dynamic consumer spending environment. Turning now to our second quarter 2024 guidance, we are forecasting a second quarter sales range of down 2% to flat versus prior year, with the high end of the range reflecting a sequential improvement over the prior quarter. We expect second quarter gross profit rate to be approximately 40%, in line with Q2 of 2023. In the second quarter, we will begin to lap merchandise margin rate expansion in the prior year. Our forecast reflects moderate improvement in year-over-year merch margin rate, offset by deleverage in buying and occupancy expense as a percent of net sales, driven by investments in store real estate. AURs in the second quarter are expected to be roughly flat. We expect our second quarter SG&A rate to be approximately 29% of net sales with the rate increase versus the prior year, driven largely by higher marketing investment and wage inflation, partially offset by our cost reduction initiative. We expect second quarter net non-operating expense of approximately $65 million, a tax rate of approximately 27% with weighted average diluted shares outstanding of approximately 224 million. Considering all of these inputs, we are forecasting second quarter earnings per diluted share of between $0.31 and $0.36. And I'll now turn the call back to Gina for some closing remarks.

Operator:

Thank you. [Operator Instructions] Our first question is coming from Simeon Siegel of BMO Capital Markets. Please go ahead.

Gina Boswell:

Good morning.

Gina Boswell:

Thank you, Simeon. Nice to hear from you. I'll take the first part and ask that Eva speak to the B&O leverage. As far as the marketing and the new products and colabs, we have been investing in a full funnel approach and it's certainly driving top-of-brand awareness. You heard Julie mention the 800 million impressions from Bridgerton, so -- and the Everyday Luxuries that had all those viral impressions. So, whether it's colabs, whether it's the new media activities that we're engaging in, this is all inserting us into the cultural conversations that are most relevant for customers today, and we're monitoring reach as well as other key equity metrics. So, it's really exciting to see that it's working. It's working for us to gain more customers more often with more love, we like to say. So, it's still early in the journey, but we like what we see and we've got more excitement in store for our customers as we enter the fall.

Gina Boswell:

Thank you. We're ready for our next question.

Alex Straton:

Perfect. Thanks for taking my questions. Just a couple here. First, on the Middle East-driven pressure, can you talk to us about your assumptions on how that evolves in the second quarter as well as your ability to offset that all -- at all? And if you could provide how much that represents as a percentage of international that would also be helpful. And then maybe taking a look forward, looking at the first quarter outcome, the second quarter guidance, full year guidance, it seems like you're embedding that gross margin would fall in the back half compared to expansion in the front half. So, can you just talk to us about the assumptions there? Thanks a lot.

Eva Boratto:

Yeah. Thanks, Gina. And I'll add a few things, Alex. There's many parts to your question here. As you look at our guidance that we provided today, in Q1, international did underperform our expectations. Our guidance assumes a wide range of scenarios from the low to the high. And I would say at the mid and the high, you expect international to -- we expect international to improve beginning in Q2, and there are expectations in the guidance. In terms of gross margin for the year, we're expecting gross margin for the year comparable with 2023. I would remind you we began driving merch margin improvements of Q2 of last year and continued throughout 2024. So that -- those improvements continue, but obviously we're wrapping them as we get to the mid-year. Merch margin improved about 50 basis points for the year and that's offset by B&O deleverage, given our investments in real estate.

Operator:

Thank you. The next question is coming from Paul Lejuez of Citi. Please go ahead.

Gina Boswell:

Thank you. Thank you, Kelly. So, as it relates to AUR, AUR was under pressure in the very first start of the quarter. It was something that we actually foreshadowed in our last earnings call. You recall we had a floor set in February that wasn't resonating. So that's when we quickly pivoted and we pulled on the strategic promotion lever to build traffic. As we move through the quarter, we had strong floorsets with newness and that enabled us to achieve flat AUR in the back part of the quarter. So, we exited with flat AUR. So, other than the first part of Q1, we were no more promotional than we were last year and we're back on plan to our AUR flat expectations. And then the reminder here is on the full year guide is to expand AUR modestly for the full year. And then, for product cost, I'll ask Eva to chime in.

Gina Boswell:

Thank you. We're ready for our next question.

Amanda Douglas:

Great, thanks. It's Amanda Douglas on for Matt. So, Gina, could you elaborate on the drivers of 1Q's net sales outperformance versus your initial plan maybe as we think about by category? And just any changes in traffic or consumer behavior as you've progressed into May? And then Eva, just could you elaborate on the cost savings that you've identified within cost of goods sold to support your improved gross margin outlook on the year?

Julie Rosen:

Yeah. Hi, there. So, Body Care was low-single digits to the prior year and that was really driven by new and growing categories such as men's and lip, along with the performance in fine fragrance mist, including our Everyday Luxuries. Home Fragrance was down mid-single digits, while growing unit share, and this was really driven by continuing candle normalization. So, candles declined, and that was largely due to the narrowing of the assortment of the single-wick candles, which continued to decline, but we did maintain our market leadership. Our decline in candles was consistent with Q4 and we did grow unit share in wallflowers. From a Soap & Sanitizer perspective, the business was down low-single digits, in line with shop. And soaps actually were slightly above shop, and that was driven by the performance of our refills, which make up about less than 10% of our soap business. And we love our refills. It's a really great environmentally friendly way for our customer to partake in our soap business. And finally, sanitizers declined, and that was really driven by our decision to exit the full-sized form due to continued normalization in the category. Pocketbacs really performed quite nicely in the quarter, growing versus the same period last year and we really innovated here by introducing our moisturizing pocketbac.

Gina Boswell:

Thank you. We're ready for our next question please.

Lorraine Hutchinson:

Thank you. Good morning. I wanted to dig into the moving pieces behind your outlook on AUR for the back half. Are you raising ticket to ensure you're paid for some of the new formulation investments? Or do you plan to give some of that value back to the customer through price or promotion?

Gina Boswell:

And I'll also add that this is still materially up from the pre-pandemic, so our AUR increases relative to 2019 are quite healthy. So, thank you for the question. We're ready for our next.

Kate McShane:

Hi, good morning. Thanks for taking our question. We wondered if you could comment at all about occasion buying versus buying during a more shoulder period, which I think the second quarter is for you just with the events of Easter and Mother's Day and the like in Q1, there are not quite -- not a few -- as many occasions in Q2. So, could you maybe talk to us a little bit about, again, how you view Q2 playing out given that dynamic and how we should think about it?

Gina Boswell:

Next question, please.

Ike Boruchow:

Hey, thanks. Good morning. Eva, I have two for you. Again, I don't mean to beat a dead horse on the AUR, but my question is, which I think has been asked a couple of different ways, when you guys gave guidance on the last call, I believe you had guided AUR flat and it came in a touch worse. I know you guys are saying that it improved on the exit of the quarter, but it just seems like something wasn't to the degree that you'd hoped it was on the upside. So, just trying to understand if you could parse that out. And then a quick follow-up on the model, Eva. I know there's like 200 basis points benefit from the calendar in the first quarter. Could you kind of walk us through the next three quarters? I feel like it's a little wacky depending on the retailer in terms of like what benefits to expect I think in 2Q and 3Q, and then how big is the headwind coming in the calendar in 4Q? Thanks.

Gina Boswell:

And if I may add, we're always doing that up or down to meet the customer where they're at. So, I have been relatively still new to this model of agility where you can actually almost measure the elasticities within weeks. If we guide to flat and we feel the need to use promotion as a strategic lever to get that so long as the quality of everything else is intact, including by the way our gross margin, we can optimize the top-line. So, I just want to make sure that we're clear that when we guide to flat, we can sometimes be up as we were in the fourth quarter and we can sometimes be down, but the important point is that we're trying to get a good quality view and meeting the most customers where they're at. Thank you for the question. We're ready for our next.

Olivia Tong:

Great. Thank you. I wanted to better understand a few things, one of them being your view on the retail competition and how that might be impacting you. We've obviously heard a lot of comments from Ulta, some more in terms of the activity in Amazon and [off-price]within these categories. I know they're not direct competitors, but just thinking through how that may be impacting your business? And then, apologies for another question on AUR, but if you could potentially give us a little bit of color on what you saw in May, and then just talking about the second half initiatives that could drive the improvement that you're expecting? Thank you.

Eva Boratto:

Great. And I'll pick up on your question regarding what we've seen so far in May. The trends that we've seen so far are contemplated in our guidance outlook that we provided today both sales and AUR.

Operator:

Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Gina Boswell:

So, I'll start with the AUR category differences. We look at it in total, as you know, we do different ticket increases and then we have promotions throughout the year. So, no noticeable or planned differences as we move through the year. There'll be more surprise and delights, and those would be opportunities for us to move AUR up in those instances. But in general, we're trying to build really compelling baskets as well with cross category opportunities. In terms of direct versus stores, we try very hard to be an omnichannel player, meaning no specific advantage to direct or stores because what we really want to incent is dual shopping, because those are the most valuable excited about. And in terms of excitement about newness, Julie, if you want to comment on that? There's lots to be excited about.

Gina Boswell:

Yeah. And if I could just add, and I know that was described, but you can hear the passion in Julie's voice, I think what we try to think about in the newness category is its core and more. And we speak about growing the core, which these partnerships and collaborations do just that and then the more on the adjacencies is also critical. Both of these, these are two of the four levers, which we will rely on to inflect in the back half of the growth. And so -- that's why we're so excited about it, because it is truly driving the inflection point at the mid and high point of our guidance. Thank you. Next question?

Jonna Kim:

Thanks for taking my question. Just wanted to get more color on your expectations for the Home Fragrance category and your business in the back half, if anything has changed since last quarter there? And also your increasing marketing spend and talked about full-funnel marketing, but how are you measuring ROI and how are you allocating your spend across different channels in the back half? Thank you so much.

Gina Boswell:

Yes. And then, on the question about marketing spend, which we commented earlier and how that is driving the customership increases as well as the exciting engagement and the deepening of engagement, we are measuring ROI through a number of tools that people often use, which is the marketing model where we can actually attribute a dollar spend and what that drives to the top-line. But we're also using the technology as well to do some targeting and tools. Like for example, we have a targeting model now that uses machine learning algorithms and it can predict when a one trip customer can make their second purchase based on purchase behavior and the social engagement and the segmentation. And then, these customers are then targeted with personalized offers. So, there's early innings here and really promising results. So, I think of marketing hand in glove with technology so that we can actually optimize and get the highest bang for our buck with respect to those investments. So, you should expect more of that in the back half. I think we have time for one more question, please.

Korinne Wolfmeyer:

Hey, good morning. Thanks for taking the question. First, could you just clarify the commentary on returning to growth in the back half? I assume that's assuming the high end of your guidance range. And how are you thinking about returning to growth from like Q3 and Q4 and kind of like the cadence there? And then separately, on some of the new product launches, could you talk a little bit about now that you have some of the more like loyalty membership data, how much of that new product uptake in sales is coming from customers maybe newer to those products versus customers who are now starting to replenish those products? Thanks.

Julie Rosen:

Yeah. And as far as customers are concerned with the new categories, from a lip perspective, we're seeing a younger more diverse customer. And as I mentioned from a hair perspective, 14% of those customers are new to brand, as well as men's, we're seeing some new customers and slightly younger coming to us for men's. That being said, as I said in my script, we still think we have huge opportunity to attract more men to the brand and you see us investing in more marketing and in more media to attract them.

Operator:

Thank you. At this time, I would like to turn the floor back over to Mr. McGuire for closing comments.

Gina Boswell:

Thank you.

Operator:

Good morning, my name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Fourth Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Michael McGuire:

Thank you, Paul. Good morning, and welcome to Bath & Body Works Fourth Quarter 2023 Earnings Conference Call. Joining me on the call today are Gina Boswell, Chief Executive Officer; Julie Rosen, President Retail; and Eva Boratto, Chief Financial Officer. In addition to this call in this morning's press release, we have posted a slide presentation on our website that summarizes the information in our prepared remarks as well as some additional facts and figures regarding our operating performance and guidance.

Gina Boswell:

Thank you, Mike, and good morning, everyone. Thank you for joining us today. Before we begin, I want to thank our outstanding teams, especially our store and distribution center associates. They do a terrific job delivering a great experience to our customers and executing on our strategic initiatives. Our fourth quarter performance is a great example of just that as we ended the year strongly, generating sales and earnings that both exceeded our expectations.

Julie Rosen:

Thank you, Gina. I would like to echo Gina and thanking our teams for delivering an exceptional experience to our customers and for their tireless work during the holiday season. As a result of their success, we are well positioned for a strong spring and summer and all the newness to come.

Eva Boratto:

Thank you, Julie, and good morning, everyone. Before I jump into the review of our fourth quarter financial results and fiscal year 2024, I first want to focus on our approach to capital allocation. Our top priority is to invest in the business to drive sustainable, long-term profitable growth.

Michael McGuire:

Thank you, Gina. For our Q&A session, we ask that participants limit their responses to one question and one follow-up. So we'll now move to the Q&A session. Paul?

Lorraine Maikis:

Can you talk about the drivers of the fourth quarter AUR up 2%? And then why AURs would go from flat in 1Q to up for the year? What are the key reasons for that?

Julie Rosen:

Lauren, I hope you are well. So we are constantly balancing the need to keep engagement and traffic strong with our desire to increase pricing as well as have a very agile operating model that allows us to increase or decrease promotional levels in a meaningful way to test for outcomes. So we've taken select price increases in 2023 to raise our AURs. You see that in more differentiated assortments that really drive pricing power, whether it be 3-wick lids, our new seasonal single-wick waffle, faceted bottles. Our AURs were up 2% and better than expected and we have a very thoughtful and planned pricing strategy and really levers that we pull to manage our AUR on a constant basis.

Operator:

Our next question is from Kate McShane with Goldman Sachs.

Gina Boswell:

Thank you for the question, Kate. I would say that we have -- clearly, we have the newness and the seasonal storytelling that Julie might speak to and she's already done so in the prepared remarks, but we also have the new adjacencies and those start to build over time. As you know, Men's is one and still a fairly low awareness. And so we've built out that assortment further, and that's why you saw sort of 2/3 of the growth coming from those new products and will continue in '24.

Dana Telsey:

As you think about the merchandise margin, which accelerated up 290 basis points, and it sounds like you're expecting some continued improvement in merchandise margin. Can you talk about the drivers and when you think about the test of pricing and level of promotions, how should we think about it differently this year as compared to last year? And does it differ by category?

Eva Boratto:

Sure. Dana, overall, I think we're really pleased with the progress that we've made improving our margins the last couple of -- the last several quarters. And as you look at the outlook for the year, merchandise margin, we expect to expand about 50 basis points. And that does reflect continued deflation as well as the cost reduction initiative. Now we will continue to reinvest and restage and reformulation. We're annualizing the changes that we made to Body Care and soaps this year. So that will continue to impact us.

Gina Boswell:

And one extra thing I would add is that even with some of these new adjacencies so forth and Julie spoke to, the margin profile of those over time improves as the product scales post-launch also contributing in bigger ways to the merch margin.

Simeon Siegel:

Really, nice job in the quarter. So great to hear about the Men's strength. Sorry if I missed it. Did you say how large Men's is. Maybe Julie gave the point you were bringing up with the other adjacencies or the new products and then where it goes in the mid- to long term. .

Gina Boswell:

Thanks, Simeon. Great to hear from you. I would say on Men's, we don't report the exact, but it is a single-digit percent of our sales, so still relatively small with lots of headroom with respect to the large addressable market of $12 billion. And as I said and Julie commented as well, ample distribution as well as new SKUs. As it relates to the B&O leverage and reformulation, I will ask Eva to please comment on that.

Operator:

Our next question is from Alex Straton with Morgan Stanley.

Eva Boratto:

Let me take it. Let me first speak to the high end of the guide. The high end of the guide down about 2%, right? We're assuming we continue to have a cautious consumer. It doesn't get worse. As you said, the performance trends are in line with Q4 on a comparable 13-week to 13-week basis. Good response to our product assortment and Mother's Day and introduction of partnerships.

Alexandra Straton:

For the full year gross margin, please?

Operator:

Our next question is from Matthew Boss with JPMorgan.

Olivia Tong Cheang:

I wanted to ask you about your pricing plans for the year? And how much of that pricing increase for the full year is new pricing and promo efficiency improvements, which you expect to build that have yet to be implemented versus actions that have already been taken? And then if you could just talk about the balance between achieving AUR improvement with what sounds like a bigger than expected softness in January that has continued into February. So can you talk about your promo levels versus your peers and how to think about the risk that you can hold on to those improvements that you were able to achieve in Q4?

Eva Boratto:

Sure, sure. As you think about the pricing overall, I'd remind you, we've said this a few times, right? on the mix we are reducing our reliance on direct mail. We're increasing leaning into loyalty and more personalization. So there are all factors that give us the confidence that we can have modest increases for the year. In terms of the overall competitive landscape, it is a competitive landscape. And our agile model and our product assortment enables us to respond while we're -- balance both margin and top line volume.

Operator:

Our next question is from Paul Lejuez with Citi.

Eva Boratto:

Thanks for the question. This is Eva. On the SG&A, as I referenced, we had a severance charge of about $10 million associated with our cost reduction initiatives. Also sales outperformed. So we had additional costs related to -- related to that. Could you repeat your other question?

Eva Boratto:

February traffic. Thank you. So overall, as I said, we came into February, traffic was pressured. We referenced that our initial floor set didn't perform to our expectations. We adjusted that, performance has improved during the month. It's reflected in our outlook and the guidance range that we provided.

Eva Boratto:

No, I apologize. That was not my message. Overall, we changed our floor set and promotions is always part of our strategy, but we're adapting and adjusting to our customers.

Operator:

Our last question is from Adrienne Yih with Barclays.

Gina Boswell:

As it relates to the categories, overall, we sort of look at the masstige sort of as the -- as the pricing sort of segment that we operate in and many of those categories, I mean, if you just think about the beautiful laundry package that we have and what that connotes and even the price value proposition there being sort of in that sweet spot of masstige. But you're right, there are other things like the beveling of some of the products. And then the reformulations as well, which is an important elevation from the customer's mindset.

Julie Rosen:

Thank you. I'll pass that on to the team. So that concludes our call. I want to thank you for joining today's call. Over to you, Mike.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning. My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Third Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions].

Heather Hollander:

Good morning, and welcome to Bath & Body Works Third Quarter 2023 Earnings Conference Call. Today's call may contain forward-looking statements related to future events and expectations. Please refer to this morning's press release and the risk factors in Bath & Body Works' 2022 Form 10-K for factors that could cause the actual results to differ materially from these forward-looking statements.

Turning now to some of the progress we're making. We continue to focus on our 5 key growth drivers:

first, elevating the brand through innovation and upgrades; second, extending our reach through new category adjacencies and international growth; third, deepening customer engagement through our loyalty program, enhanced technology and more personalization; fourth, enabling a seamless omnichannel experience; and finally, enhancing operational excellence to drive efficiency.

Julie Rosen:

Thank you, Gina. I'd like to go a level deeper in reviewing the results and trends in the third quarter and provide an update on the progress we're making in elevating our brand and extending our reach to accelerate growth. As Gina mentioned, we started the third quarter with a strong Halloween with event sales increasing 5% over last year's event. We positioned our Halloween assortment at the front of our stores for the first time to give it additional prominence. We also expanded customer favorites like Vampire Blood into more categories and offered new elevated accessories that met the customer mindset.

Heather Hollander:

Thanks, Eva. [Operator Instructions]. We'll now move to the Q&A session. Operator?

Simeon Siegel:

Nice quarter. So how are you guys thinking about the time line for the post-pandemic candle normalization? Because that's an interesting point. So just any thought on how close we are to that healthy reset. And then for my follow-up if I can, just a really nice job on the gross margins, maybe run through a bit more why the fourth quarter gross margin wouldn't see a similar or even a higher benefit just given increasing deflation benefits, better expected B&O, the extra week and the general trajectory you're on? So just thinking through that gross margin a bit.

Julie Rosen:

Simeon, as far as the candle normalization, I really cannot circle a date on the calendar for you. And in fact, no one can. That being said, I just want you to know that we are innovating in these categories. We are still the market leader as we hold our dominant market share in candles and we gained market share in sanitizers year-to-date. And we are also working very hard to diversify our sales mix.

Alexandra Straton:

Perfect. I wanted to start with just the sales outlook for next year. I know you guys have had a couple of years of post-COVID reversion. You're talking about that back half timeline to returning to growth. So can we just go through kind of what gives you confidence in that happening at that time period? Or what's underpinning that?

Gina Boswell:

Thank you, Alex, for the question. I will be happy to take the first part about the sales inflection and then ask Eva to give color on the long-term sort of EBIT margins. As you know, and we commented in our remarks, we are facing softer consumer trends. So in September, we saw the traffic pressure for the first time this year as the macro environment impacted our customer. And while October traffic was positive, the growth was lower than what we had seen year-to-date through August. So we have softer positive traffic. So through the year, we've seen consistently that the customer has been carefully managing their spending and that has pressured basket size and conversion.

Operator:

Our next question is from Paul Lejuez with Citi.

Gina Boswell:

Okay. Thank you. Thanks, Paul, for the question. First, we'll go to Eva around the margin and then come back to your question on the quarter.

Operator:

Our next question is from Kate McShane with Goldman Sachs.

Gina Boswell:

Thank you, Kate, for the question. I'll be happy to take that and ask maybe Julie to chime in a bit. The product formulations that we've been doing really throughout the notable one, of course, that we've spoken about earlier this year is around our soaps, which are now free of parabens, sulfates, dyes et cetera. This is an ongoing aspect to our overall strategy about elevating the brand and the product and packaging and even some of the packaging that you saw with our most recent single-fragrance launch on Luminous, which I think depicts the fact that we're investing in the product as we need to, to make sure that we elevate and meet the customer for the innovation component of that.

Julie Rosen:

Yes. I think from an investment perspective, we also have invested in some other formulas, we're in the process now of finishing the rollout of our shower gel, which is also in a cleaned-up formula. I will say that we also believe that we have the ability to grow our AURs over time. The brand has a very strong track record of low single-digit AUR growth, and we believe we will get back to that.

Matthew Boss:

Great. So a 2-part question. Gina, I guess, first, what do you attribute to the softening in September and October? And then maybe if you take that, could you just elaborate on what you're assuming from both a macro and category level in this bridge from the front half of next year to the back. And then Eva, as we think about the balance between the continued tech investments and the cost savings, what is the fixed cost leverage point in the business? Or what sales growth do you need to leverage SG&A going forward?

Gina Boswell:

And I think you had another part of your question embedded that it had to do with sort of as we turned the corner. And obviously, we have a very big quarter in front of us. So we're looking forward to talking to you more about that as we get into 2024.

Gabriella Carbone:

I was wondering if you can dig a little further into adjacency categories such as men's hair care and laundry. Are these categories driving new customers? Or do you view them being more additive to the basket? And then just on the laundry side, maybe how do you kind of view the addressable market there?

Operator:

Our next question is from Lorraine Hutchinson with Bank of America.

Gina Boswell:

Thank you, Lorraine. Nice to hear from you. I will ask Eva to provide color on that.

Operator:

Our next question is from Adrienne Yih with Barclays.

Gina Boswell:

Thank you, Adrienne. I'll take that question and may go to Julie as well. Our view on AURs, you're absolutely right. We have a read and react approach and this quarter is a perfect example of that. So based on what we saw, we expected flat AUR, we delivered that. Our agile model allows us to flex. And so we were pleased to optimize top line and bottom line while not being more promotional than the prior year. So that's certainly how we look at it. From a product margin perspective, I don't know if there's anything further that, Julie, you wanted to comment on.

Eva Boratto:

And we always work on the cost side of the equation as you think about margins and we spoke to the deflations that we expect in fourth quarter as well as our cost-reduction initiatives to help drive improved margins.

Mark Altschwager:

I guess just another one on promotions. I know you've been doing a lot of personalization tests. Hoping you could share a little bit more there. What's working? What are the key learnings? And is there any indication you have that the reduction in direct mail was a factor that contributed to the softening traffic and basket size trend? And I have a follow-up on margin.

Gina Boswell:

Yes. I should say the loyalty platform is going to be today, for sure, with all the enrollment speed. But as we push engagement even further levering the tools that we've just been implementing, frankly, in the last 11 weeks. We see the spend, the engagement, the retention of the trips being a nice way to address the promo optimization as well. So you're absolutely right. Thank you, Eva for the comments on what redemption truly does to drive customer annual spend.

Julie Rosen:

Thank you. Mark, for the second part of that question. I think we do have a big quarter ahead of us. So we're not really speaking specifically to '24, but I'm not sure on B&O if there's anything you'd like to add Eva.

Gina Boswell:

Thanks, Mark. Operator, I think we have time for 1 more question.

Dana Telsey:

As you think about the performance in the third quarter, the off-mall locations versus on-mall, was there any difference in terms of cadence or what you saw there. And then Julie, as you think about the new launches that you have and the new product assortment, any thoughts on 2024 and what the launches will look like? And the launches that you introduced this year, how are prices would you say on average versus your core product?

Julie Rosen:

Dana, nice to hear your voice. So as far as the performance of mall versus non-mall, off malls outperformed mall stores and just for a little more color performance between the regions and the income cohorts were relatively uniform. As far as the new launches, they are all at various stages of rollout. So as Gina mentioned, hair is in about 30% of our stores. We will complete the North American rollout of hair in spring. .

Gina Boswell:

Thanks, Dana, and thank you, everyone. That concludes today's call. I want to thank you for joining us and extend our best wishes for the holiday season.

Operator:

Good morning. My name is Ted and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Heather Hollander:

Thank you. Good morning, and welcome to Bath & Body Works Second Quarter 2023 Earnings Conference Call. Today's call may contain forward-looking statements related to future events and expectations. Please refer to this morning's press release and the Risk Factors in Bath & Body Works 2022 Form 10-K for factors that could cause the actual results to differ materially from these forward-looking statements.

Gina Boswell:

Thank you, Heather, and good morning, everyone. Thank you for joining us today. Before I discuss our performance and progress in the quarter, I'd like to thank our teams for consistently delivering terrific service to our customers, remaining agile in a dynamic environment and executing on our strategic initiatives. We're also very pleased to have welcomed Eva Boratto as Bath & Body Works new CFO at the beginning of this month. She is a seasoned executive with over 3 decades of financial, operational and retail experience. and she's already hit the ground running. You'll of course hear from Eva on today's call.

Julie Rosen:

Thank you, Gina. We started the second quarter with a strong Mother's Day, delivering newness with our Gingham all bag of collection and a strong gifting assortment. As you know, our vertically integrated supply chain allows us to read and react to trends quickly, and we've leveraged this capability as we chased winners and delivered additional inventory to meet customer demand. As Gina mentioned, we executed well in our June semiannual sale, and we're pleased to deliver merchandise margin rates above our expectations. We were very intentional in structuring this year's event to drive early interest by offering compelling price points on sale products and introducing full price new summer season product alongside the event. We then took fewer markdowns over the course of the event and delivered better-than-expected merchandise margin rate.

Eva Boratto:

Thank you, Julie, and good morning, everyone. I'm excited to join you today and honored to be part of this outstanding company. Over the past several weeks, I've spent my time immersing the business while engaging with the executive leadership and finance teams. I've also had the opportunity to participate in the financial planning process and observe the progress the teams have made on the company's strategic initiatives. The last few weeks have reinforced my belief that Bath & Body Works is on the right path to capitalize on the tremendous opportunities ahead and create significant long-term value for shareholders.

Heather Hollander:

Thanks, Eva. [Operator Instructions] We'll now move to the Q&A session. Operator?

Katharine McShane:

It was really encouraging to see that you grew AURs in the quarter. We wondered if you could talk to us a little bit more about this and what role it plays in your updated guidance today.

Katharine McShane:

And then if we could just follow up with a question on the candle, soaps and sanitizers. Can you talk about what that category looks like on stack or versus 2019 and just how it performed also versus Q1?

Heather Hollander:

All right. Thanks, Kate. We'll take the next question please.

Alexandra Straton:

Great. I've got two for you, one on guidance and then one on the longer-term outlook. So on guidance, it seems like the full year update implies a deceleration in quarter over growth in the fourth quarter and I think a little bit lower sales than prior. So what's driving that more conservative view on the fourth quarter. And then secondly, on the long term, I know you guys have that 20% EBIT margin target out there. What do you view as the key factors holding you below that rate right now? And how do you think about the time line to getting back to that goal in the future?

Julie Rosen:

And as it relates to Gina as it relates to your question around the 20% operating income margin long term, there's a few things we feel very comfortable that as a long-term target. That's the right one. 20% is the best-in-class operating income rate for our sector. And we don't want to limit ourselves to 20%, but we do think that, that number over time, best balances the investment in the business to drive future growth while maximizing shareholder return. Clearly, in the last couple of years, there have been step function increases in input costs and labor and certain parts of our business like technology, they require additional investments to fuel our growth. And those are very important as we evolve our marketing program, our loyalty and our omni-channel. But I'm pleased with the track that we have on our initiatives. I'm pleased with what we expect in terms of margin recovery and a very disciplined approach to expenses. So very comfortable with that.

Operator:

Next question is from Ike Boruchow with Wells Fargo.

Eva Boratto:

This is Eva Boratto. From a deflation perspective, we saw -- we experienced about $20 million of deflation in the Q2, and we expect $30 million in Q3. We expect that benefit to increase throughout the remainder of this year. As you look at raw materials, I'll just add a few comments. Overall, we did see most prices peak in 2022 with expected deflation in 2023. [ Wax ] has been outlier with significant price volatility up and down year-to-date. We saw a spike in soy over the past 60 days with some concerns over dry weather impacting the crop. We've seen an impact being smooth via commodity risk mitigation processes and I think they are the key things that I would highlight. I think it's premature to comment on what we expect in 2024 and will certainly come back as we are ready to provide our '24 outlook.

Operator:

Next question is from Dana Telsey with the Telsey Group.

Julie Rosen:

Thanks, Dana. Nice to hear your voice. So starting with the new products, we have launched a lot of adjacencies that we are starting to test, optimize and roll. So I just want to review them very quickly. and then I'll talk to your margin question about them. So in men's, as you know, in the second quarter, we successfully launched men's grooming. And in September, we're following with men's hair and shave. We continue to focus on APDO as it is the #1 form in the men's market. And men's continues to be our fastest growing category in body care. The men's margin is commensurate with the shop.

Julie Rosen:

No. I think I think that you have absolutely answered that question. We do have opportunities with new stores as they continue to drive a great return for us.

Operator:

Next question is from Matthew Boss with JPMorgan.

Gina Boswell:

Sure. We can talk to normalization as well. Julie, you might want to start with the home fragrance in...

Operator:

The next question is from Lorraine Hutchinson with Bank of America.

Julie Rosen:

So Lorraine, it's Julie. From a promotional -- sorry, from a promotional perspective, we are actually looking at promotions being in line with last year. as you know and have seen, we are incredibly, incredibly agile in our promos. So when we need to add something and we do and when we need to pull something out, we do. So we see it actually in line.

Operator:

Next question is from Adrienne Yih with Barclays.

Julie Rosen:

Yes. So I'll start, Adrienne, with the merch margins since pre-pandemic. It is still downside slightly from pre-pandemic given the inflation that we've experienced over the last couple of years.

Julie Rosen:

Yes. Just one final point on that is just promos will still be a traffic driver for our business. But I do believe, as Gina has said, by sharpening our approach with the right technology in place, we're going to really leverage that data and analytics to deliver that more personalized targeted messages to our customer. And what the hope is and what we know will happen is that we'll increase trips, spend and engagement while reducing our reliance on those broad-based promotions.

Operator:

The last question is from Olivia Tong with Raymond James.

Eva Boratto:

Sure. This is Eva. I'll start with trends exiting the quarter. Sitting here today, as we look at our August performance for the first half of the month, it's right in line with the expectations that we provided today. If your question was more asking about second quarter, our second quarter sales normalizing for timing of events that we have performed right in line with our expectations, and there were no trends to really -- there were no trends month-to-month to call out.

Gina Boswell:

Yes. And I was simply going to say you mentioned the magic word for me, which is it is really about the core and more. And so -- and as much as we talk about how the customer develops around reaction to lip or men's and younger and more diverse. There are certainly opportunities and our customer segmentation work is indicating that. The core categories are also supportive of our customer expansion, and we think there's equal amounts there that we can lease. So...

Heather Hollander:

All right. Thanks, Olivia. We want to thank you for joining today's call. A replay will be available for 90 days on our website. Thank you for your interest in Bath & Body Works. Have a great day.

Operator:

Good morning. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Fourth Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Ms. Heather Hollander, Vice President, Investor Relations at Bath & Body Works. Heather, you may begin.

Gina Boswell:

Thank you, Heather, and Good morning, everyone. Thank you for joining us. First, let me say how thrilled I am to be here at such a dynamic time. It is an honor to lead Bath & Body Works and the more than 55,000 associates worldwide. I look forward to working with this team, our leadership and our Board to capitalize on the tremendous opportunities that I see for the business and for creating long-term shareholder value. On today's call, I'm going to talk about why I joined Bath & Body Works, discuss some of my early observations and then outline my initial areas of focus to drive growth and profitability. But before I dive in, I'd like to first thank the team. Their efforts enabled us to deliver fourth quarter sales at the high end of our guidance range and EPS that exceeded expectations. This was despite a challenging macroeconomic environment.

Wendy Arlin:

Thank you, Julie. Starting with our fourth quarter results, we were pleased to have exceeded our beginning of quarter guidance. We generated earnings from continuing operations per diluted share of $1.86. These results exceeded our guidance of $1.45 to $1.65 per share. This was primarily driven by a better-than-expected margin rate due principally to transportation cost improvement and a favorable inventory position leading to less clearance activity as well as lower SG&A expense compared to our expectations.

Heather Hollander:

Thanks, Wendy. Before we open it up for Q&A, we want to briefly address the recent disclosure by Third Point. We issued a response last night. The Board will respond in due course to Third Point as appropriate. With that said, the purpose of today's call is to discuss our fourth quarter and fiscal year results, and we ask that you keep questions focused on those results. [Operator Instructions] We'll now move to the Q&A session. Danielle?

Jay Sole:

I guess what I'm curious about is some of the cost inflation and maybe what's been incremental that you've seen over the last 90 days. Just help us understand sort of the difference between the margin outlook for this year compared to the margin outlook for last year?

Wendy Arlin:

Yes. Great. Thank you, Jay, for the question. Yes. So in terms of inflation, as we've talked about in previous calls, there's 3 main groups of pressure points for us, raw materials and components, transportation and I would say wages and other. So first, I'll cover raw materials. We have specifically -- and one of our key raw materials is candle wax. And we are seeing, and I think I mentioned this in the last call, some improvement in costing in candle wax. So we are down to 2022 levels but still up to pre-pandemic, but we are seeing some green shoots.

Jay Sole:

And if I can just ask one more. I think you mentioned you're still targeting 20% EBIT margin. Did you put a time frame around that? Around when you believe the company will get back to that level?

Operator:

Our next question comes from Alex Straton with Morgan Stanley.

Heather Hollander:

Thank you, Alex. Wendy, do you want to take that one?

Wendy Arlin:

Absolutely. So I would say through -- the beginning of the year through end of summer, we are focused on separation from Victoria's Secret. So our -- the majority of our spend is to that end. And we're also in the process, obviously, as we'll be ending that TSA of establishing our own organization, our team, our partners, et cetera. So that is where we're focused on for the first part of the year.

Operator:

Our next question comes from Matthew Boss with JPMorgan.

Heather Hollander:

Okay. Thanks for the question, Matt. Actually, Wendy, do you want to start with that?

Julie Rosen:

Yes. So I just want to mention that we have been very slowly and methodically been raising our prices this spring. So our everyday price ups have actually been performing very well. For example, we have soaps that 5 for $27 from 5 for $25 or wallflowers in that same deal 5 for $27, where they've been 5 for $25. And we're not seeing any price resistance from our customer. We've also increased prices across the board where we are implementing a good, better, best strategy, and we believe that, that will help us.

Wendy Arlin:

Well, I would say a couple of things. As you know, the reality is, in the last 2 years, we've seen some major type of increases in input costs that I just talked about, labor and we've also recognized as we've worked on separation and thought about the future that there are certain parts of our business like technology that require additional investment to future growth. So I think it's both wanting to invest and also just a recognition that we've had major inflationary pressures in the business.

Operator:

Our next question comes from Kate McShane with Goldman Sachs.

Heather Hollander:

All right. Thanks, Kate. Wendy do you want to take that one?

Julie Rosen:

Yes. So we can tag team on this one. So we are very pleased, very pleased with our enrollment in the program. We projected to be about 30 million members by the end of the fiscal year, and we enrolled 33 members with more than 75% of those members, having shopped with us in the last 12 months. And as we've discussed on other calls, we all know that loyalty members outperformed nonloyalty in spend, trips, retention and cross-channel shopping behavior. So I think that we have a huge opportunity. We think about '22 as the year of enrollment, and we're thinking about '23 as our year of engagement.

Wendy Arlin:

Thanks, Julie. The only thing I would add, Kate, to your question is we did -- as you know, we had a loyalty program in test before we did the nationwide launch in August. So we did have some markets that were in test where we could measure the performance on a pre-post basis. So when we did that, we did see a moderate lift in the fall season on a pre-post basis, and that's good.

Operator:

Our next question comes from Paul Lejuez with Citi.

Wendy Arlin:

Yes. So as you think about a multiyear model, I mean, we are still focused on, as you mentioned, delivering comp growth, and we believe, over time, we can do that in the, let's say, low single digits, we are always chasing for mid-single digits or higher. And what we've been able to do the last couple of years is we've been able to do that in a balanced way through both units and AURs. So that -- if we can do both units and AURs, obviously, we can get to a low to mid comp growth, but we're focused on doing both on a multiyear basis.

Kelly Crago:

And Wendy you mentioned that in 1Q that the cost inflation was going to be a $20 million headwind to gross margins but that shouldn't stay as we go forward. Does that turn from a headwind to a tailwind in 2Q? Or is it just less of a headwind? And I guess, how does that -- how should we kind of think about the gross margin progressing throughout the year?

Operator:

Our next question comes from Lorraine Hutchinson with Bank of America.

Heather Hollander:

Thanks, Lorraine. Wendy do you want to take that one?

Simeon Siegel:

Gina, I was hoping just higher level, maybe what you think about the right price versus 2019 architecture should be. Just curious how you're thinking about maybe the right balance between revenues and gross margin? Clearly, you guys got a lot of really nice AUR, you got great brand equity. You also may have had a little bit of over purchasing through the pandemic. So just any thoughts there on how to balance revs and gross margins.

Gina Boswell:

So just so I'm sure -- clear on the question. Did you say the balance between revenue and gross margin in [ 2023 ]?

Gina Boswell:

Yes. So we -- you probably hear it in not only maybe all 3 of our remarks around promotions and how we're trying to -- well, first of all, Julie, just talked about testing some of the lifts and so forth. But really, it's not -- it's more about broad-based promotions and which are kind of a blunt instrument. And so what we're trying to do is leverage the data and analytics to target the promotions to where they're needed most. One of the things that I've been focusing on since arriving is really building the marketing sort of infrastructure. We're doing some really exciting customer segmentation that's linking with our loyalty program. And inside of all that capability is really driving much more effective and efficient promotions.

Heather Hollander:

That answer your question, Simeon?

Wendy Arlin:

So our -- yes, our occupancy expense for full year, we've got a forecast at plus 5%. So it's about around 50, 60 basis points of deleverage.

Operator:

That concludes today's conference. Thank you all for participating. You may disconnect at this time.

Operator:

Good morning. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Third Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Wendy Arlin:

Thank you, Danielle. Good morning, and welcome to Bath & Body Works Third Quarter Earnings Conference Call for the period ended October 29, 2022. As a matter of formality, any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings and in our press releases.

Julie Rosen:

Thank you, Wendy. For the third quarter, we saw customers responding well to our iconic fall sense in multiple forms of fragrances and packaging. Our top fragrances such as Leeds, Pumpkin Pecan waffles and sweater weather in multiple categories in forms continues to be a unique point of differentiation for the brand.

Wendy Arlin:

Thanks, Julie. That concludes our prepared comments. At this time, we'd be happy to take any questions you may have. [Operator Instructions] Today, we are going to go to about 9:45. Danielle, I'll turn it over to you.

Wendy Arlin:

Sure. Thanks, Jay. Yes. So as we look back on Q3, what we saw during the course of the quarter was that the customer really did respond to promotion. On the days that we were incrementally promotional year-over-year where we had sharp price points or compelling deals, those days outperformed. And on the days that we were flat last year or less promotional, those days under formed.

Operator:

Our next question comes from Korinne Wolfmeyer with Piper Sandler.

Wendy Arlin:

Sure. Thanks, Korinne, for your question. Yes. As we've talked about in the last several calls, input costs, in particular, in raw materials for us continue to be a challenge. The markets are volatile. They continue to be very elevated in pricing compared to prepandemic. And so it continues to be a pressure point for us, almost -- just over 50% of our inflation pressures that we've quantified our raw materials. And it just does continue to be a pressure point. We have seen a little bit of green shoots in candle wax, but I would describe it as modest and our other input costs continue to be challenged. Now that being said, we're working with our suppliers to mitigate those price increases.

Operator:

Our next question comes from Olivia Tong with Raymond James.

Julie Rosen:

Yes. So for our loyalty program, we are absolutely thrilled with the program. We're pleased with enrollment and engagement, evidenced by our 65% total company sales.

Operator:

Our next question comes from Ike Boruchow.

Wendy Arlin:

Thanks, Jess, for your question. So I would tell you a couple of things. Number one is you will definitely hear from us in terms of guidance for next year in February. We are thoughtfully thinking about our plans for next year. In terms of things that we're focused on that will impact how we think about our long-range planning, 2 major things come to mind, actually 3.

Paul Lejuez:

I just want to go back to the loyalty program for a second. I'm curious if what you're seeing is when you have a customer, are you seeing that customer actually spend more than they did previously? Or is it more that the folks that are signing up just happen to be your higher-spending customer? I'm kind of curious if you have any data that might show that once you get somebody kind of over that line that they increased their spending anything you could provide there?

Paul Lejuez:

Any quantification of the list?

Operator:

Our next question comes from Jonna Kim with Cowen.

Wendy Arlin:

Great. We will go to Julie.

Julie Rosen:

Yes, you will see marketing initiatives around men's. It's incredibly important business for us, particularly in the fourth quarter because we sell a lot of gifts. We sell gifts at multiple price points. We will have gift sets in men's. And we also launched for the first time this Q4, our first single fragrance launch in men's After Dark.

Wendy Arlin:

Yes. And Jonna, the only other thing I would add as we go into Q4 is we are really excited about our gifting [ at for men ]. So we know gifting is a huge part of Q4, and we have really been thoughtful about our price points on gifting and showing a guess everybody at every price point. So we think we're well positioned to win in the gifting time of the year.

Operator:

Our next question comes from Lorraine Corrine Hutchinson with Bank of America.

Wendy Arlin:

Yes. Thanks for your question, Lorraine. So the program does have a cost as you can imagine. So the program design has a reward aspect to it, where when a customer hits $100 threshold, they earn a reward. The program also has a birthday component to it and a welcome offer component to it. So those elements of the program do at cost, it is under a point which is good, and we think it's margin accretive in terms of dollars because we -- as I said earlier, we know those customers spend more and visit us more often.

Alexandra Straton:

Congrats on a great quarter. I think some of the script last night mentioned that you all adjusted the pricing architecture for the consumer being more price sensitive. Perhaps you could just elaborate on what you did and how you're thinking about that heading into holiday? And then just one other one for me is on inventory. You had a great decel this quarter from last quarter's levels. but it sounds like you expect that to tick up a little bit next quarter. Could you just talk to us about what's driving that uptick.

Julie Rosen:

So from a pricing and promo related question, as we enter this holiday season, we are absolutely confident in our strategy to read and react with agility and speed. Our operating model really enables us to effectively manage pricing and promotions to meet the customer minds that and drive profitability. So we are taking a very strategic lens to our pricing architecture Currently, as we've all been saying, the customer is very price sensitive to higher prices.

Operator:

Our next question comes from Warren Cheng with Evercore ISI.

Wendy Arlin:

I would call nothing unusual about this year. I mean, what's unusual is if you -- our growth during pandemic was accelerated. And extremely strong. And over the last 2 years, did vary dramatically as stores during certain periods or reopened, and we were lapping restrictions, et cetera, et cetera. So I think if you go back and look at our business prepandemic versus now, the seasonality is generally consistent.

Matthew Boss:

Great. So Wendy, a number of moving parts in this year's P&L. I guess, is there a way to help quantify the costs that you see as more onetime or more contained to this year? If we think about CEO transition, separation costs versus maybe the IT investments in SG&A, and we have the elevated transportation and the loyalty deferral.

Wendy Arlin:

Sure. Well, I wish I had perfect visibility to the next year, but I'll try and help you out as much as I can. So you heard my conversation a few minutes ago on raw materials. I'm just kind of working my way down the P&L. Raw materials, like I said, they continue to be challenging, and it's a volatile market. And as I said, we'll continue to try and mitigate those costs as best we can. Transportation, we are seeing some favorability in transportation. I'm optimistic that, that will continue into 2023. But TBD on that, but we are seeing some signs that transportation is peaking and potentially will abate in 2023.

Janet Kloppenburg:

And congratulations on the progress. A couple of quick questions. Last year in the fourth quarter, the semiannual sale, I believe, did not meet your expectations. Perhaps you could talk about what's embedded in guidance this year and what some of the opportunities might be year-over-year in terms of promotions and content, et cetera. And just on the men's business, nice rollout. I noticed that perhaps the Cologne ASP is higher on average versus women's. And I wondered if you could talk about that opportunity.

Julie Rosen:

Yes. As far as the sale goes this year, it will not be quite as long as last year. We have tightened that up. We know that our customer response to newness. So we have a different flow strategy this year to throughout January, be dropping in small drops of newness to offset sales. We also are committed to having clean units at the end of the year. So we are highly cognizant of what we bought for sale and using our agile supply chain to ensure that we're not overbought and that we end clean.

Janet Kloppenburg:

Packaging is beautiful, really beautiful, Julie.

Wendy Arlin:

Danielle, I think we have time for one more question.

Marni Shapiro:

Congratulations on a great quarter and the launch of MOXY. I actually wanted to ask you a little bit about MOXY. I guess, how long has it been in development what costs were associated with it? And is that embedded -- it's obviously been going? And how should we think about that going forward? And specifically, what are you doing about marketing this brand will it be pushed through? I know it's tiny, but will it be pushed for the marketing cost be pushed through BBW? Or are you thinking as a separate entity? Like could it be sold third-party? Just where your bigger picture head about this? And then what do the finances look like?

Julie Rosen:

Yes. Marni, one thing to say about MOXY is this is our first foray in a very long time into what we call above the neck. So the Bath & Body Works has always been below the neck. So we are really learning a lot about face and hair and supplements. We will be delivering body in MOXY in the new year. So right now, the strategy is to focus on our channels, stores and website.

Marni Shapiro:

That's great. It was the Instagram account that caught my eye that maybe wonder that this is bigger than just a little launch into BBW. Best of luck for the holiday season, guys.

Operator:

That concludes today's conference. Thank you all for participating. You may disconnect at this time.

Operator:

Good morning. My name is Madison, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Second Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Wendy Arlin:

Good morning. Welcome to the Bath & Body Works second quarter earnings conference call for the period ended July 30, 2022. As a matter of formality, any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings and in our press releases. Joining me on the call today are Executive Chair of the Board and Interim CEO, Sarah Nash; and Brand President, Julie Rosen. All results we discuss today represent the continuing operations of the Bath & Body Works business. The results of the Victoria's Secret business have been classified as discontinued operations.

Sarah Nash:

Thanks, Wendy, and thank you, everyone, for joining the call today. I am delighted to be here speaking with you in my role as the company's interim CEO. The more time I spend in the day-to-day operations of the business, the more I appreciate the talented and experienced management team who lead this business. I also have been so impressed by the associates in our business and our customer-first focus. The time spent with our team has only reinforced for me how the company's innovation capabilities and predominantly North American supply chain provide us speed and agility that set us apart. And I would also like to appreciate all our vendor partners who support us in bringing our products to our customers.

Wendy Arlin:

Thank you, Sarah. I will be providing financial highlights, but I encourage you to review our slides, posted remarks and press release, which each contain additional details.

Julie Rosen:

Thank you, Wendy. I'm excited as we enter the second half of the year. I'm thrilled to be leading this customer-focused organization. With merchandising, marketing, planning and the channels all under my purview, we will be able to put the customer at the forefront of everything we do. This will accelerate our journey and provide the best omni experience for our customer.

You might recall, we had another single fragrance launch success last quarter with Butterfly. These 2 launches are terrific proof points of our strategy going forward. We know how to leverage our product, innovation capabilities in combination with our unique ability to introduce fragrance throughout the shop in every category:

body care, home fragrance, soaps and sanitizers. And the customer clearly told us that they love our bold, cross-category offering. Increasingly, we plan to leverage the fact that we own the entire shop and have the unmatched ability to bring fragrance to many facets of our customers' lives.

Wendy Arlin:

Thanks, Julie. That concludes our prepared comments. At this time, we'd be happy to take any questions you may have. We plan to go to about 9:45 this morning. [Operator Instructions] That -- Madison, we are ready to go to Q&A.

Lorraine Maikis:

There are a lot of outsized SG&A pressures this year, seem to be particularly accelerating in the third quarter. As you look out to your longer-term plan or algorithm, can you talk about where you expect that SG&A rate to settle? And then also from a near-term perspective, just some of the larger drivers of that accelerated growth in 3Q?

Jesse Sobelson:

This is Jesse Sobelson on for Ike. We noticed that 2Q gross margins were under pressure but remained above 2019 levels, while the second half gross margin guide implies a material decline versus 2019. This is despite similar AUR, mid-single-digit decline embedded in the plan and we're looking at slightly less inflation. Is this just conservatism? Or I guess, could you guys just kind of help us with the pieces there and understand the moving parts, please?

Operator:

Our next question comes from Simeon Siegel from BMO Capital Markets.

Wendy Arlin:

Yes. Why don't we go to Julie for that question and I can add some color at the end.

Simeon Siegel:

Sure. So I think price versus units versus prepandemic, I think you said sales were up 45%. So just trying to think through the AUR that you've been able to get and retain and how you're thinking about that going forward?

Julie Rosen:

Yes. So we are seeing pressure, Simeon, in our lower income customers spending less. That is where the pressure is, which is why we are diligently working and doing aggressive testing to figure out what is the sweet spot. That being said, it is very clear to us that our customer comes to us for fashion trend and newness. And if they love it, they're going to buy it. So there are a lot of pressures out there macroeconomically, and we're just trying to balance all of those things and figure out the sweet spot and ensure that we're delivering enough newness to capture their share of wallet.

Operator:

Our next question comes from Alex Straton from Morgan Stanley.

Wendy Arlin:

Sure. So I would say that our overall business trends so far in the month of August is generally consistent with what we saw in July. So we were generally seeing consistent trends. Keep in mind, though, we're only 2 weeks in, in the month of August. We've got a lot of quarter left and a lot of key weekends and events in front of us. And we think that we're well positioned, but we also think that our guidance is prudent given the quarter to come. So more to come.

Leah Jordan:

This is Leah Jordan on for Kate. Our question is around the improvement opportunities for the merch margin. What are you primarily focused on in the near term? And how should we think about any timing impacts? Also, the review that you're undertaking seems fairly comprehensive. Should we anticipate more initiatives as the year goes on?

Olivia Tong Cheang:

I want to ask you a question about the reduction in management. Obviously, based on the anticipated savings from the role reduction, it looks like fairly senior positions. So could you discuss if there are any specific functions or categories and whether it suggests any change in terms of your strategic initiatives?

Stephanie Schiller Wissink:

Hopefully, these will be 2 quick ones, but I wanted to just hear a little bit about your customer file size, the 60 million that you quoted, how that's changed over the last couple of years. And Wendy, I think you mentioned that the $6 million onetime cost for the restructuring is included in your EPS guidance. I just wanted to clarify that, that your EPS is GAAP and not non-GAAP. Would you like us to back that out or keep that in the EPS estimate for the third quarter?

Julie Rosen:

Yes. I mean, as we all know, we had explosive growth in our customer file during the pandemic. So in 2019, we had about 53 million customers, and we got upwards of 60 million during the pandemic. And I am thrilled to say that we have lost very few customers. So we feel that while we grew our customer base, they're still coming back. They still love us. And with the addition of this loyalty program that we'll be launching next Monday, live, I think that the opportunity to get the 60 million enrolled in the program and incredibly loyal will only reap great benefits for us in the back half.

Alec Legg:

Alec Legg on for Susan. On the trends throughout the quarter, can you talk about store traffic and online traffic and how that trended throughout the quarter in addition to the conversion rate as you rolled out newness and saw gas prices coming down?

Julie Rosen:

Yes. I think that what we really saw was that the customer got a little bit tired of the semiannual sale. And while they are slightly price-conscious, they still want fashion trend and newness, and we deliver that for them. So we've taken a look at our flow calendar through the rest of the quarter and the year. And we will be, as usual, delivering new themes, single fragrance launches and ideas every 4 to 6 weeks, but you will see other drops basically every week just to get that excitement and to garner more traffic.

Matthew Boss:

So Julie, could you just maybe elaborate on the demand that you're seeing across categories in August, maybe early customer response to your fall assortment? And what do you see as the constraint to traffic that you're seeing versus the first quarter? And then, Wendy, I guess, maybe just high level. On AUR growth relative to 2019, what do you believe is the fair number to hold on to over time relative to the 20% growth that we entered the year at?

Julie Rosen:

Yes. So I mean I think that traffic was a bit up and down in the quarter. I think that where we saw traffic softening, as we have said, is during our semiannual sale. I think that we have always put a semiannual sale that was anywhere from 28 to 35 days. This sale, quite frankly, was 30 days, so not longer than in past, but the customer got tired of it. So what is happening is the mindset is shifting. And they're sort of moving on to new ideas and new items sooner.

Wendy Arlin:

Great. Thanks, Julie. And Matt, to the second part of your question, I would say it's upper teens to 20. It's generally consistent with what we've been saying in terms of what number you should look to for AUR growth.

Dana Telsey:

As you moved up the introduction of the Halloween collection that seems to have garnered a lot of interest, how are you thinking about the cadence of other collections moving forward in terms of timing? And then as you think about promotions and the cadence of promotions and the depth of promotions relative to last year, how are you planning it and how are you thinking about the AUR as a result of that?

Julie Rosen:

It's nice to hear your voice. So yes, we did move Halloween up a week. The thing to note is this year, we had planned 2 drops of Halloween. So we had the opportunity after we pulled the first drop up to then follow through with the second drop. So that was very successful. As I mentioned, we will be delivering every couple of weeks a new idea, whether it's a cross-category single fragrance launch or whether we deliver our best in fall with our favorite fall scent, an early Christmas preview. So we have a lot of ideas every couple of weeks to spark newness and excitement. So we are not worried about that because as you know, we're about to go into Q4, which is our largest quarter, as Wendy likes to say, the Super Bowl of our...

Julie Rosen:

Of our -- of quarters. And we will have our Christmas preview late in September and then in October, really go out full on with Christmas. So we feel like we're covered with many, not only great themes, ideas in single fragrance launches, but the scents and the olfactive spaces that our customers love from us and expects to find.

Operator:

Our next question comes from Jonna Kim from Cowen and Co.

Wendy Arlin:

Yes. So maybe I'll start and then Julie can add comments. So we are -- even though we are planning to be more promotional compared to LY, our promotional levels in the back half will still be substantially less than they were in prepandemic time periods. So our strategy is still less than what we saw during that time period. Julie?

Operator:

Our last question comes from Korinne Wolfmeyer from Piper Sandler.

Wendy Arlin:

Thanks for your question. So on BOPIS, well, first of all, we are so excited to roll this capability. Right now, in the U.S., we're basically in every store where we want to be. And we have had really positive feedback from our customers. They like the capability, and they enjoy coming into the store. And in many cases, our store associates are able to convert them to buy even more goods when they come into the store. So we think that BOPIS, not only is it a great omni initiative for our customer, we think it's also great for us because we're able to get them to experience the store, and our store associates are fantastic at converting them to buy even more stuff.

Operator:

Good morning. My name is Madison, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works First Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Wendy Arlin:

Thank you. Good morning, and welcome to Bath & Body Works First Quarter Earnings Conference Call for the period ended April 30, 2022. As a matter of formality, I need 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.

Wendy Arlin:

Thank you, Sarah. I will be providing financial highlights, but I encourage you to review our slides, posted remarks, and press release, which each contain additional details. We exceeded our sales and earnings guidance for the first quarter, as Sarah noted. In the quarter, we increased net sales by 2%, excluding the estimated first quarter 2021 sales benefit of $50 million related to government stimulus payments. The company's net sales in the first quarter of '22 is on top of 53% net sales growth between fiscal 2019 and fiscal 2021. We are confident in our ability to maintain and grow sales and our customer file over time.

Wendy Arlin:

Thanks, Julie. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. We plan on going to about 9:45 this morning. In the interest of time and consideration to others, please limit yourself to one question. Madison, I'll turn it over to you.

Irwin Boruchow:

Wendy, just 2 quick ones for you on the expense line. On the tech spend, so $25 million higher that you're pulling forward, $100 million total. What is the tech spend that you guys have? Just remind us what's laid out for next year to kind of complete that transition? And then on the other side of the cost, the CEO transition costs and retention, I think that is around $50 million, if I'm doing the math right. Can you just explain what exactly that -- those dollars are basically being allocated to just so we know what the rationale is behind that $50 million?

Irwin Boruchow:

No, I was -- just sorry, a quick follow-up on the tech spend for next year. Is it $100 million again? Or is it less than $100 million? I'm just trying to see if there's a net benefit on the cost side from net spend next year.

Operator:

Our next question comes from Kimberly Greenberger from Morgan Stanley.

Wendy Arlin:

Sure. I think, Alex, I'll take the question and then I'll turn it over to Julie, maybe for some color or commentary. So in terms of pricing, pricing is something that we are continuously testing in this business. One of the advantages of our business is that we have a very robust testing program, a very consistent testing agenda. Every weekend, we're out in our stores, testing different pricing. And what that enables us to do is it enables us to see how our customer responds to certain pricing offers. And our pricing really is a component of 2 things. We have ticket, and then we also have our sharp price points or multiple deals that we're running any given day.

Julie Rosen:

Yes. I mean I agree with Wendy. We are constantly testing and reading and reacting to those tests. I think that any time we invest in products, we're always looking at pricing. So as we're reformulating our formulas to be better for you, we will be taking those forms up $1 as they enter into our store.

Lorraine Maikis:

You mentioned in the prepared comments that you've committed to the profitability algorithm. Can you talk about what are the best opportunities to get back to that low to mid-20s EBIT margin goal?

Operator:

Our next question comes from Stephanie Wissink from Jefferies.

Wendy Arlin:

Great. So as we said in our prepared remarks, at the end of Q2, our forecasted inventory levels are higher than they would normally be in any given second quarter. And that was a strategic planned thoughtful decision. And the biggest thing to go that went behind that is we wanted to pull some production into the second quarter to make sure that we mitigated any risk of disruption and also to make sure that by having some of our core production pull forward, our supply chain will have more agility going into the holiday period for us to read, react and chase into winners.

Julie Rosen:

Yes. And just to add to that, Wendy, this read and react is a competitive advantage for us. It's something that we can do that nobody else really can do. So we were able, in this last quarter, to read and react and order about 10% of our total production on this 4- to 6-week chase time line. And that is a strategy that we will continue to use throughout the end of the year. I think a couple of things. What that does for us is it ensures that we are in the product that the customer loves the most. So we're really going after the winners.

Operator:

Our next question comes from Simeon Siegel from BMO Capital Markets.

Wendy Arlin:

I think I got all that, Simeon, but you're probably going to have to repeat some of it. So in terms of inventory, if there wasn't any major call out. A lot of it was just -- it was components coming in a little bit favorable than what we expected because some of that's in transit. And at the end of the day, it was just a little bit better than forecast. No major call-outs on the variants to our initial call out on Q1 inventory.

Operator:

Our next question comes from Jonna Kim from Cowen.

Wendy Arlin:

Okay. First, we're going to go to Sarah and then Julie can add on. Sarah?

Julie Rosen:

Yes. So just to give you a little bit context on unit sales, unit sales were up low single digits. And so just to give you a couple of color areas where we saw this, soap were up against last year. And we were in a much stronger inventory position than we were last year, and we believe the business is starting to stabilize and the customers coming to us. So as Sarah mentioned, we believe that we are a use up business. Our products are meant to be used daily and replenished frequently. And what we're finding is they're coming back to replenish. And when they come to our stores and they come to our site, we are great with conversion.

Matthew Boss:

Great. So Wendy, on the margin side, 2 questions. What is your AUR forecast for the back half of the year relative to the front half and just any drivers supporting it? And then on the expense front, multiyear, is there a base case way to think about SG&A dollar growth relative to revenue growth if we're thinking beyond this year's investment bill?

Janet Kloppenburg:

Sarah, I was wondering, I heard what you said about freight and raising gas prices. I'm just wondering, as we look into the back half, if you look for the increases to moderate, if that's assumed in the guidance, we're getting mix reads, some reporting companies are saying they're looking for freight to moderate in the back half and others are saying that it's not going to moderate at all. In fact, it might be worse.

Janet Kloppenburg:

Yes, on freight and transportation, that outlook. As we go through the year, do you expect it to continue to be at the level it was in the first quarter or do you expect it to moderate as we go through, particularly in the back half?

Julie Rosen:

Janet, it is nice to hear your voice again. So can you just repeat the question because you sort of went out and I want to make sure I'm answering it correctly.

Julie Rosen:

Yes. We absolutely are seeing great new learnings in olfactive spaces, which is very exciting. So when we have things like JCB, which we repackaged, which has been with us since 2006, it continues to be a top 10 fragrance. The great thing is we can have something like Butterfly, which is a new olfactive space for us, which was a fruity floral also be in the top 10. The other thing to say is we launched a line of gender-neutral White Barn handle this particular quarter and saw huge success from an olfactive space in Amber and Ooze.

Operator:

That concludes today's conference. Thank you for participating. You may disconnect at this time.

Operator:

Good morning. My name is Cedric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Fourth Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Wendy Arlin:

Good morning. Welcome to the Bath & Body Works Fourth Quarter Earnings Conference Call for the period ending January 29, 2022. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings and in our press releases. Joining me on the call today are CEO, Andrew Meslow, and SVP of Investor Relations, Amie Preston. Sarah Nash, Executive Chair of our Board is also with us this morning.

Andrew Meslow:

Thank you, Sarah. So now turning to our performance. 2021 was a historic year for Bath & Body Works. We made incredible progress across the company to build on our already strong foundation, ensuring that our brand and business remain healthy and relevant well into the future.

Operator:

[Operator Instructions] My first question comes from Roxanne Meyer with MKM Partners.

Amie Preston:

Thanks, Roxanne. Andrew?

Andrew Meslow:

Thank you, Roxanne.

Stephanie Schiller Wissink:

Andrew, our best wishes as well to you. We want to ask a multifaceted question on the loyalty program, if we could. The first is just as you conceived of this program, give us some sense of some of the key attributes that you think are important to your customer in terms of their loyalty and engagement. If you can give us some sense of the way in which you expect to launch and roll that out and how you're communicating with your stores and your customers. And then the last feature within loyalty is just what you're doing with respect to building a data warehouse. And how do you expect to leverage data as you think about some adjacent categories in your future growth?

Andrew Meslow:

Thank you, Stephanie. I appreciate the thoughts. Yes. Yes, so on the loyalty program, as we've mentioned on prior calls, it is an application-based program. It's one that we've been piloting in about 1/4 of our stores, a little less than 1/4 of our stores for the last several years. It is a points-based system where customers spend and get rewarded for those spending. And once you reach certain thresholds, you then get free items as your reward, in addition to you get both an introductory award and a birthday award. So that is the nature of the program.

Operator:

The next question comes from Simeon Siegel with BMO Capital Markets.

Amie Preston:

Sure. Thanks, Simeon. We're going to go to Wendy.

Kimberly Greenberger:

Andrew, we are really going to miss you, and we wish you all the best. I know that you are leaving BBW in really great shape. I'm wondering if you can just talk about the team that supports you, Andrew. Give us a little bit of an idea of the sort of tenure and experience on that team. And Sarah, as you begin your executive search, what is the Board focused on as you look to replace the very, very big shoes that Andrew is leaving?

Andrew Meslow:

Kim, thank you very much for your thoughts and for your question. Yes. So the reality is we have a very, very deep and talented group of talent across the business and within our senior leadership team. So if I focus on our most senior leaders first, because I think that's probably the nature of your question. We've got a good mix of folks who have been here with BBW and/or L Brands for a long time. So people like Wendy, who's on the call today is relatively new in the BBW CFO chair, but has been with the enterprise, as we call it, for 16 years and played a very close, supporting role to Stuart Burgdoerfer in all of his time as the corporate CFO.

Sarah Nash:

Thank you, Andrew. And nice to meet you, Kimberly. The Board will conduct a comprehensive search process to identify Andrew's permanent successor. And as we stated yesterday, we do plan to retain a national search firm to help us in that effort. We will be looking for an experienced public company executive, preferably female, with very strong global brand experience. I hope that answers your question.

Irwin Boruchow:

Andrew, [indiscernible]. I guess that I just wanted to zero-in a little bit to go back to the holiday update when you guys talked to us about a little bit of variability in performance. You guys have been beating plan by leaps and bounds earlier in the year. Holiday, you had a little bit of an issue post-Christmas heading into January. You kind of commented in the script that things improved through January.

Amie Preston:

Great. Thanks, Ike. Andrew?

Operator:

Our next question comes from Lorraine Hutchinson with Bank of America.

Amie Preston:

Thanks, Lorraine. Andrew?

Mark Altschwager:

And best wishes to you, Andrew. I wanted to ask about some of the inflationary headwinds. You mentioned in the prepared remarks that Q4 came in at the high end of the range. I'm curious, in retrospect, how much of that were you able to offset through pricing and promotional actions?

Amie Preston:

Great. We're going to go to Wendy for that question.

Andrew Meslow:

I think Wendy hit all the high points there. Again, I think it's important to recognize on a multiyear basis, as I described earlier, we have taken a lot of pricing opportunities. And we've also dialed back on promotion levels in literally almost every category and in almost every vehicle. But that is, as we've described, something that we are very nimble on and we'll continue to test, read and react to what the customer -- how the customer is behaving, how the customer is responding to all of our categories. And certainly, do our best to offset as much of the price increase as we are able to.

Operator:

Our next question comes from Matthew Boss with JPMorgan.

Amie Preston:

Great. Thanks, Matt. Andrew, do you want to start?

Amie Preston:

Thanks. Wendy?

Operator:

Our next question comes from Jay Sole with UBS.

Wendy Arlin:

Sure. So a couple of things. So when you look at our SG&A expense, the biggest component of SG&A expense is store labor. So as you can imagine, as our store sales grow, the store labor associated with those sales grows. So that, on a multiyear basis, is the biggest driver of dollar change. We work real hard well to gain efficiencies and keep the overall rate at a level that is consistent. But that is our -- on a year-over-year, that's our biggest driver.

Omar Saad:

I was wondering if you guys could talk about -- sounds like you've got a lot of good data on your customers' kind of spending pattern. Maybe you could talk about the categories they were spending in pre-pandemic and how that evolved during COVID. And as we come out and markets reopen, are you seeing any sort of category shifts in terms of where people are spending, especially as it relates to the home fragrance? Any changes around how people are spending their money in your store, whether you're in the lockdown period or coming out of it?

Andrew Meslow:

Yes, Omar. So to the first part of your question, the good news is that the customer profile of the customers that we've gained over the last year relative to the profile of our customer file prior are absolutely very similar in nature. And the good news is that the performance of those new customers that we've gained has also been in line with existing customers, therefore, at a very healthy level as opposed to the -- one might have thought we gained less valuable customers through the pandemic. So again, our retention rates are high and the performance of those new customers, also very high.

Andrew Meslow:

Appreciate that, Omar, very much.

Operator:

Thank you. And that concludes today's conference. You may all disconnect at this time.

Operator:

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Third Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Ms. Wendy Arlin, Chief Financial Officer at Bath & Body Works. Wendy, you may begin.

Amie Preston:

Thanks, Andrew. That concludes our prepared comments. At this time, we'd be happy to take any questions you might have. [Operator Instructions] Thanks, and I'll turn it back over to Julie.

Irwin Boruchow:

Congrats on the sustained growth. I guess, Andrew, I'm sure someone is going to ask this, so I'll just be the one. I mean, your margins were very elevated last year. You guys really were a key beneficiary. But you're really sustaining those levels of profitability in a way that I think most people did not think was likely.

Andrew Meslow:

Yes, sure. Thanks for the question, Ike. So yes, we've said pretty consistently on earnings calls and in investor meetings that we believe that an operating margin in the low, mid-20 range is appropriate for this business because we think it affords us the right balance of investing in our products, our customer experience, our capabilities while also generating a very high return on sales.

Irwin Boruchow:

Yes. Appreciate it.

Amie Preston:

Great. Thanks, Ike.

Lorraine Maikis:

Andrew, can you talk a little bit about some of the pricing actions that you have taken and what the consumer response has been? And then also, if you'll continue to adjust pricing and promotions on a go-forward basis to offset some of these supply chain issues?

Amie Preston:

Great. Thanks, Andrew. Thanks, Lorraine.

Kimberly Greenberger:

Okay. Great. Really nice results here. Andrew, I wanted to ask about the sort of degree of magnitude that you're considering or contemplating for the fourth quarter gross margin.

Amie Preston:

Okay. Kimberly, we're going to go to Wendy.

Amie Preston:

And then Andrew, do you want to talk about potential upside to the forecast?

Operator:

Our next question comes from Simeon Siegel with BMO Capital Markets.

Amie Preston:

Okay. So let's start with Andrew.

Simeon Siegel:

I thought I -- whatever it was, I think you called out a pretty nice [indiscernible].

Andrew Meslow:

2-year. Yes. So when we think about the business on a 2-year basis in general, the growth that we've seen in stores has been phenomenal. And really, that started with the reopening trend from last year in the July, August, September time frame. And from there, we saw continued strength through the balance of the year.

Amie Preston:

Great. And we'll go to Wendy for the question about cost.

Amie Preston:

Thanks, Wendy. Thanks, Simeon.

Amie Preston:

Thank you.

Matthew Boss:

Congrats on another great quarter.

Matthew Boss:

Andrew, can you speak to growth in the customer files that you've seen during the pandemic? How do you think this translates to market share opportunity by category going forward?

Amie Preston:

Thanks, Matt. Andrew?

Andrew Meslow:

The second question was about Q4 guidance. So...

Amie Preston:

Great. Thanks, Matt.

Grace Marie Menk:

This is Grace Menk on for Steph. I'm wondering if you could talk about the trends that you're seeing in sanitization and the outlook for that part of the business going forward?

Andrew Meslow:

Yes. So we looked at the soap and sanitizer business together and really think about how that's performed during the pandemic relative to where it was prior to the pandemic. And as we've shared in the past, in 2019, for example, the soap and sanitizer business was right around 14% of our business, total business for the year. Last year, it got up to almost 20% of the business, obviously driven by, really, the pandemic buying that was occurring in Q2 and in Q3.

Amie Preston:

Great. Thanks.

Roxanne Meyer:

Congrats on the improved sales and full-price selling in third quarter. My question is on White Barn. You still have a nice runway for growth in your remodels. Can you remind us of the productivity of these, how much more productive they are than your stores without an attached White Barn and how you see the path for growth over the next year and few years?

Amie Preston:

Thanks, Roxanne. Andrew?

Operator:

Our next question comes from Jay Sole with UBS.

Andrew Meslow:

Thanks, Jay. So on sanitizers, obviously, the market in 2020 saw an explosive growth. And I think as we've talked about on a prior call or 2, that included many, many people who historically have not been in the hand sanitizer business getting into the hand sanitizer business as a reaction to that tremendous increase in the market that was occurring, driven by customer demand, obviously.

Amie Preston:

Thanks, Andrew.

Paul Lejuez:

Just one quick short term and one longer term. Short term, were there ticket changes that were taken for the fourth quarter this holiday season that had not taken effect in 3Q? So just curious if you've made any changes recently.

Amie Preston:

Thanks, Paul.

Operator:

Our last question comes from Marni Shapiro with Retail Tracker.

Amie Preston:

Thanks, Marni. Andrew?

Andrew Meslow:

And that's all embedded in our guidance as well.

Andrew Meslow:

We do like a frenzy as long as we're all safe and socially distant.

Andrew Meslow:

Thanks, everybody.

Operator:

Good morning. My name is Cedric, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands First Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

Amie Preston:

Thank you. Good morning. Welcome to L Brands first quarter earnings conference call for the period ending May 1, 2021. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings and in our press releases.

Operator:

[Operator Instructions] Our first question comes from Kimberly Greenberger with Morgan Stanley.

Stuart Burgdoerfer:

Probably so, Kimberly. We'll see. Probably so. Thank you very much. It's been a real joy and pleasure and real honor. Thank you.

Operator:

Our next question comes from Lorraine Hutchinson with Bank of America.

Amie Preston:

Thanks, Lorraine. Andrew, do you want to start?

Amie Preston:

Thanks, Andrew. Martin?

Amie Preston:

Thanks, Martin.

Dana Telsey:

And Stuart, certainly has been a pleasure. Best of luck. As you think about the Victoria's Secret brand and the new marketing that you've put in place, you mentioned the strong Mother's Day that you've had. What -- marketing as a percent of sales, how are you thinking about it? What are your other initiatives with marketing that we should be looking forward to as we move on this year? And BOPIS was something that was mentioned as an initiative, where are you in each brand? And how does that come to fruition?

Martin Waters:

Yes. I'll try and remember those questions in order, but you might need to prompt me, Dana. So our intention over the long run is to get back to investing about 5% to retail sales in the Victoria's Secret brand. So if you think about us aspiring to a $7 billion brand, we'd be spending $350 million supporting that brand across a wide range of activities. What's different about that is the way that we spend money in the modern era is completely different than the way we spent money historically. So you should see very significant change there.

Andrew Meslow:

BOPIS.

Martin Waters:

Was that it? Other marketing initiatives. I think it was -- what else we should expect for the marketing initiatives. So you should expect that we will start to invest in digital media more fully than we have historically. You should expect that we will have people representing for our brand who are more inclusive and more diverse, who represent our customer base in a much more inclusive way than we have done historically. I think those are the key points to note.