Bath & Body Works, Inc. (NYSE:BBWI) Q3 2022 Earnings Call Transcript

Bath & Body Works, Inc. (NYSE:BBWI) Q3 2022 Earnings Call Transcript November 17, 2022

Bath & Body Works, Inc. beats earnings expectations. Reported EPS is $0.4, expectations were $0.2.

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. I will now turn the call over to Ms. Wendy Arlin, Chief Financial Officer at Bath & Body Works. Wendy, you may begin.

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. Joining me on the call today are Executive Chair of the Board and Interim CEO, Sarah Nash; and Brand President, Julie Rosen. All of the results we discuss today are adjusted and exclude the charges related to the early extinguishment of debt in 2021. Additionally, the results represent results from continuing operations and exclude the discontinued operations related to Victoria’s Secret. I will now turn the call over to Sarah.

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Sarah Nash: Thanks, Wendy and thank you everyone for joining the call today. Let’s start with our third quarter results. We are pleased to have delivered EPS of $0.40, double the high-end of our guidance range. Given the strong bottom line results, we are raising our full year EPS guidance to $3 to $3.20 from our prior guidance range of $2.70 to $3. Our sales for the quarter were at the high-end of our expectations and reflected our team’s closeness to our customer, our focus on innovation and newness, and our success in leveraging our vertically integrated supply chain to chase key winners. Our nationwide launch of our loyalty program has been a great success. We achieved industry-leading speed in customer adoption in our program with over 21 million members enrolled to-date.

Loyalty members now make up more than a third of our overall customer base and loyalty sales represent about two-thirds of our total U.S. sales since launch. We are excited about the potential of this program as our loyalty customers spend more, visit us more and have significantly higher retention rates than those not in the program. We continue to take rigorous actions to improve profitability, including proactively revisiting our promotions and pricing plans as well as product costing to improve merchandise margins. Additionally, we are actively working with our vendor base to streamline operations to combat inflationary pressures and improve product cost without compromising our focus on quality. We have also implemented several expense reduction actions during the quarter, including optimization of corporate overhead and store selling expenses.

We will continue our focus in this area given the challenging business environment. Before I turn it back to Wendy, I’d like to share my perspective on our recent CEO announcement and the company’s overall positioning. Our Board was very thoughtful as we conducted the search for our next CEO. We were delighted that we found in Gina, the global omnichannel personal care company leader that we were looking for. Gina brings more than 30 years of experience, including leadership roles at global companies such as Unilever, Alberto Culver Company and The Estee Lauder Companies. She has deep expertise in sales, marketing, brand building and business development and strategy, along with strong operational experience and a demonstrated track record of delivering successful business outcomes.

The Board is confident Gina is the right leader to drive the company’s next chapter of growth across our channels and categories globally while delivering enhanced value for shareholders. During my time as Interim CEO, I have been impressed by the talent and dedication of the Bath & Body Works team. I’d like to thank the company’s management team and all our associates for their commitment to driving innovation and agility and to enhancing our customers’ experience. I am confident that Bath & Body Works will continue to capitalize on our tremendous potential to expand our brand globally. Wendy?

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. For the third quarter, as Sarah said, we reported EPS of $0.40. These better-than-expected results compared to our guidance of $0.10 to $0.20 per share were driven primarily by a better margin rate due principally to category mix and transportation expense favorability, together with SG&A expense favorability. In U.S. and Canada stores, third quarter sales were $1.18 billion, a decrease of $60 million or 5% compared to last year. Sales were up $306 million or 35% compared to 2019. Third quarter direct sales were $345 million, a decrease of $24 million or 6% compared to 2021.

Customers continue to choose our omni-focused option of buy online, pickup in store or BOPIS. We ended the third quarter with BOPIS availability in more than 1,280 stores. Our international business sales for the third quarter were $81 million and increased 10% compared to last year. Our international business continues to perform consistent with expectations. Our third quarter recognized revenues were negatively impacted by timing shifts related to product shipments. Now to guidance for the remainder of the year. For the fourth quarter of 2022, we expect sales to decrease between mid single-digits to low double-digits carried to 2021 sales of $3.027 billion. We are forecasting fourth quarter EPS to be between $1.45 and $1.65 per share. For the full year, we are forecasting sales to be down mid single-digits compared to $7.9 billion in 2021.

Our full year guidance contemplates inflationary costs, totaling $220 million to $230 million and the estimated revenue deferral impact from the loyalty program rollout of approximately $40 million. Now on to the balance sheet. Total inventories ended the quarter, up 10% compared to last year, better than expectations. Finished goods retail units were up 7% compared to last year in line with expectations. The difference between dollar growth and unit growth is due primarily to inflationary pressures and product cost partially offset by lower component inventory compared to last year. The finished good unit increase relates to categories that were very lean last year, particularly soaps and body care. We are confident that our inventory is well positioned to support a strong holiday season.

We believe our guidance reflects a disciplined expense and inventory management approach in light of the dynamic operating environment. At the same time, we continue to be strategic about the investments we make to support the growth of the business, including investments in products, technology and omni capabilities. I will now turn the call over to Julie.

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Julie Rosen: Thank you, Wendy. For the third quarter, we saw customers responding well to our iconic fall sense in multiple forms, fragrances and packaging. Our top fragrances such as Weave, Pumpkin Pecan Waffles and Sweater Weather in multiple categories and forms, continues to be a unique point of differentiation for the brand. Our men’s business continued to significantly outpace the shop as we test new forms and merchandising ideas to further fuel this growing business, including through the launch of Leather & Brandy and Coffee & Whiskey. In the fourth quarter, we launched After Dark, a new single fragrance for the men’s business. Soaps also continued to perform well, outpacing the shop as we continue to expand our new formulation that is made without parabens, sulfates or dyes.

Our relaunch of gel soap has been performing very well and we see opportunities for meaningful growth through this form. As expected, we continue to see a shift out of our sanitizer business, which accelerated during the pandemic. Body Care also outpaced the shop in the third quarter. Fine Fragrance Mist had a strong quarter that was bolstered by our new fragrance Fall & Bloom that met the customer mindset during this time of year. As part of our effort to focus on customer and deliver on innovation and newness, we launched our aluminum vessels and soaps this past quarter and expect to begin testing cartons that will enable our customers to refill their soap containers in 2023. In men’s, we introduced antiperspirant deodorant, which is already in 650 stores and will roll to the balance of chain in the spring of 2023.

We also recently launched a test of MOXY, our new line of face and hair care products and dietary supplements, online and in 11 stores. We are in the early stages of this launch and we are listening and learning. This is always an exciting time in here. We have a mix of returning holiday favorites and new giftable offerings. As an affordable luxury brand, we have gifts at all price points. As we further expand our loyalty program and introduced compelling new product assortment, we are confident that we will continue to deepen our relationships with our existing customers and attract new customers to our brand. With that, I will turn it back to you, Wendy.

Wendy Arlin: Thanks, Julie. That concludes our prepared comments. At this time, we would be happy to take any questions you may have. As a reminder, in the interest of time and as a courtesy, please limit yourself to one question. Today, we are going to go to about 9:45. Danielle, I will turn it over to you.

Q&A Session

Operator: Thank you. Our first question comes from Jay Sole with UBS. Your line is now open.

Jay Sole: Great. Thank you so much. Could you just talk about how the sales trended through the quarter and what you are seeing here in November? A lot of other companies have talked about a big slowdown in traffic in the last 2 weeks of October and beginning of November. Can you just talk about what you have seen and sort of what’s implied to the guidance for 4Q? Thank 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 to last year or less promotional, those days underperformed. So for us, the story of the quarter was really promotion and meeting the customer where their mindset is. Clearly, the customer is very price sensitive. And we saw that. We had planned for it and we are planning for that in 4Q as well. So in terms of November, our guidance is €“ incorporates what we are seeing month to date and we are prepared to be very sharp and have deals that resonate with our customers during the all-important fourth quarter.

Jay Sole: Got it.

Wendy Arlin: Thank you. Next question, please.

Operator: Our next question comes from Korinne Wolfmeyer with Piper Sandler. Your line is now open.

Korinne Wolfmeyer: Hey, good morning all. Thanks for taking the question and congrats on the quarter. So I’d just like to ask a little bit on what you are seeing in terms of input costs? I mean that’s been a pretty hot topic this quarter for a lot of players, especially within the fragrance category. Can you just talk about any kind of challenges or headwinds you are seeing that and how you are combating that? Thank you.

Wendy Arlin: Sure. Thanks, Korinne, for your question. Yes. As we have 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 pre-pandemic. And so it continues to be a pressure point for us, almost just over 50% of our inflation pressures that we have 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. We’re looking at opportunities to be smart and how the product cost out, and we’re looking for value engineering opportunities as well to mitigate those prices, but the raw materials do continue to be a pressure point for us in our business.

Korinne Wolfmeyer: Thank you.

Wendy Arlin: Thanks, Korinne. Next question, please.

Operator: Our next question comes from Olivia Tong with Raymond James. Your line is now open.