Bath & Body Works, Inc. (BBWI) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining us. We're very pleased to be joined this morning by Bath & Body Works' CFO, Eva Boratto. Bath & Body Works is a market leader in the home fragrance, body car and stuff and sanitizers businesses. They're one of the only vertically integrated retailer we cover, which gives them some key advantages with speed and also cost control, which we'll dive into shortly. [Operator Instructions]

So Eva, I just wanted to first start with your top line outlook. You're expecting a return to sales growth in the second half. Two of the big drivers there being a pretty big step-up in marketing, which started in December as well as some major new product launches. Can you give us an update on the impact you're seeing from those thus far? And how those initiatives and other drivers layer on to that sales outlook as we get into the second half?

Sure. Thanks, Warren. And before I jump in, hi to everyone out there in virtual land. And Warren, thanks for hosting us today. So I'm excited to talk about our top line, right? So we came out of earnings. We're pleased that we were able to narrow the range of our sales by increasing the midpoint and maintaining the high end of our guidance range. And the 4 key elements of our return to growth strategy remain intact. So just to get into those and our return to growth strategy. First, I'll speak to candles and sanitizers. We expect those to continue to normalize, but at a moderating rate. Second, growth from our core categories, supported by newness and seasonal storytelling. If you think about it, our outperformance in the first quarter was driven by that newness. So our new product strategies have proven successful. I'll start with everyday luxuries. It was a limited launch in about 1/3 of our stores. Our fine fragrance Mists Category outperformed the shop during that period. And we gained a new customer, a slightly younger and more diverse customer. Bridgerton, our first collab in a long time in recent history. Over the launch period, that represents 4% of the shop. It exceeded our expectations and really resonated with our core customer. And Warren, in your interim remarks, you spoke to our integrated model. Bridgerton is a great example of that as well as everyday luxuries, given the performance we have the ability to chase and drive further sales as we look throughout the year. Now let's go to our adjacencies, our third core element. We continue to roll out our adjacencies, and they're all in different stages of the rollout, our men's hair, lip, laundry. So I'll start with laundry. At the end of the quarter, we were in about 300 stores. We've been testing different assortments, how the display in the store, what's the right size of the assortment in the store. And we're pleased that we will roll laundry out to the full fleet in the fall. Lip, we've had great success with lip. Our new lip fixture, it was in about 1,000 stores at the end of first quarter, and we've seen consistent performance that we're able to double our lip sales with that fixture. And we expect, again, the rollout to nearly all North American stores by July. Men's continues to be one of our fastest-growing categories, benefiting from the new forms that we introduced last year as well as newness into the core, i.e., fragrances and what have you, continues to perform really well, and I would say, awareness amongst men continues to be low. So an area we're going after with our marketing investments. And finally, hair, we were in the full fleet early in the year. We put hair in our best-selling fragrances and it resonates with our customer. We brought -- of the hair customers, about 14% are new to brand, and we recently launched Travel Size that we think is a great way for new customers to try the product. And finally, more loyal and engaged customers, driven by our marketing, our full funnel marketing investments enhancing our loyalty capabilities and personalized digital experiences. So that's some of the things that we're working on, Warren, a lot's coming on, but we're super excited.

That's really good color. I just want to double-click on one element there. So one of the things that struck me about your business recently is the newness. So everyone likes to talk about newness, but it really seems like you've achieved something here. It's really been an effective sales driver for you the last several quarters. Can you just talk about how the processes around newness have changed to enable this higher frequency you're seeing, and is there any way to contextualize how much more newness is in the assortment today?

Yes. I'd say innovation has always been a core tenant of the company, and that has not changed. We have been increasing our innovation over the years. And I think it shows up in the adjacencies that I just spoke to, men's, lip, laundry, hair care. And what's unique to us is our vertically integrated model with Beauty Park, enables us to test and learn and expand our assortment quickly. And I'll point back to everyday luxury, right? 1/3 of our stores able to roll it out to the full fleet based on the strong performance that we saw. So the team, we win with our newness, it was an outperformance for the quarter, so that innovation is core to what we do and focus on each and every day.

Got it. And you just talked about how Beauty Park allows you to test and learn. I think one of the things that sets Bath & Body Works apart is it also allows you to read and react at a speed that other retailers can't. So how quickly can you react if something isn't working? And can you maybe just walk us through an example of a time recently that if somebody -- a product or collection wasn't working, how that read and react capability kicked in?

Yes. Sure. Warren, I'll focus on the positive areas first, where we've been able to read and react and respond quickly. It's Bridgerton and everyday luxuries. So we were able to, what I'll refer to as chase additional units given the customer response we were driving and seeing. Everyday luxuries, we did our limited launch and able to get ourselves by fall into a position that we can be confident in launching in the full fleet of stores. And I will say an underpinning tenant of this company is not to disappoint customers, to making sure based on the demand that we have the confidence that we will be able to provide the product in a consistent manner for our customers. On products where the take-up isn't as quick, given our capability, we're able to, I'll say, not build toward our full sales expectation because we can chase that we can pivot and look at a low end of the range and the high end of the range. Thus, if you have something that doesn't perform as expected and every company has that, you don't have as much inventory there because of our ability to pivot.

That's really useful color. And then if we can just pivot to promotions and some of the new tools you gained since you've launched your loyalty program, it's ramped up to 80% sales penetration in less than 2 years. Can you just talk about how that's changed your approach and capabilities with promotions? What's changed? What's still to come? And what are your expectations around promotional pressure for the year?

Yes. I think -- so there's a few pieces to that question, right? I'd say personalization is a key element and part of our return to growth in the back half of the year. And we're on track with our personalized marketing, which enables us to capture data from the loyalty program. I would say a couple of examples I would give is, one, we've used machine learning algorithms to predict when a one-tripper, one-trip customer is about to make their second purchase or about to drop off and using this personalized data to engage them in a very targeted way to drive another trip. I'd say we're in the early innings, but the results are promising. Another example is use of clickstream data, customer value filters. And again, we are able to test these areas, learn as we go and then scale with effective tactics. In regards to promotional pressures this year, I'd say we expect promotion as we look forward in the year to be pretty comparable. We've spoken to AURs as flat in Q2 with modest expansion for the year. And we'll use our promotional tools to drive traffic to engage the customer and drive ultimate performance.

Great. And maybe if we switch to AUR for a second. In 1Q, it was just a touch later than you guided. The quarter before, it was a couple of points better. I know it's hard to be too precise here because there's just a lot of factors that feed into AUR. I think your latest thinking is for some improvement in the second half. How should we think about the biggest headwinds and tailwinds to AUR, as we think about the second half and the year playing out?

Yes. Warren, I'm going to go back and speak to Q1 in the context to talk about our confidence in the back half of the year. As you look at Q1, I would break the quarter into 2 halves, right? As a reminder, we were pressured at the start of the quarter. We spoke to a floorset and our marketing didn't resonate, didn't drive the call to action as we expected. We pivoted quickly, but we did continue to use our agile promotion model into the early part of March. As you think about how March progressed with our new floorsets and the newness that came in, right, between that time and the end of the quarter, we were able to achieve flat AURs in the back half of the quarter. So that gives us confidence around our customer engagement when we bring the product, the newness that they're expecting. I would also say we continue to see customers carefully manage their basket and that their spending, which pressures our basket, that's been no better, no worse, but that's what we're seeing. In the back half, we do expect modest increases. And I'd say it's a function of our good, better, best pricing strategy, the new products, the newness that you heard Julie and Gina talk about on our earnings call, enables us to take price. We continue to test for opportunities where we can do better. And I would just provide one other broader context data point relative to pre-pandemic levels, AURs remain elevated double digits.

Got it. Okay. So AUR is going to be one component of the merch margin algorithm in the second half. So if I just zoom out, you're lapping some pretty tough merch margin compares starting in the third quarter. Your guidance implies still some expansion in the second half, something along the lines of 30 to 50 basis points. Can you just parse out for us other than AURs, some of the other moving pieces that are driving that merch margin outlook as we get into the second half of the year?

Yes. So overall, as you look at margin, I'll level it up to gross margin. I know you specifically spoke to merch margin. We continue for the full year and Q2 to expect about 50 basis points of margin expansion. We -- in Q2, we start to wrap the improvements we drove last year. And additionally, as you -- we expect international sales to improve throughout the back half of the year, Q2 forward, so relative to Q1 expansion that is an offset there. We're also lapping our reformulations we did last year in our body care and soaps and sanitizer products. I would think about body care, we're annualizing in the back part of Q3 as well as soaps and sanitizers in Q4. So that investment we made, we have the impact this year. I'd say they are the key drivers. I'll wrap it up with B&O. We do expect B&O deleverage given our real estate investments.

Got it. And your latest guidance -- or I think the latest long-term guidance you've given, implies there's still some margin opportunity relative to -- I think the latest goal is 45% gross, 20% EBIT. Is that still your latest thinking in terms of the margin structure that the business can maintain here? And can you walk us through the multiyear path from here to there?

Yes. Warren, it continues to be our North Star. We think it's -- we're confident in our ability to achieve it over time, gross margins of 45% SG&A rate of 25%. And I'd say, as you think about leveraging your cost to leverage B&O, you need 2% to 3% sales growth, SG&A 2.5% to 3.5%. So growing the top line is a critical component of those. But we'll always look to drive efficiencies, cost improvements. As we've done over the long history of the company, but I'll speak to our $250 million program over the past 2 years last year and this year to drive savings to also enable us to deliver on those goals.

Okay. Yes. So that was actually -- the next question I had was just on the cost savings plan. So it was originally $250 million last year. I think that came in a little bit faster than expected. You added on another $100 million. You're almost halfway through that in the first quarter. How should we think about cost efficiencies as a driver of margin going forward? Could this be a normalized component of the algorithm as we look ahead?

Yes. I think, Warren, so if we go all the way back to last year, the initial program targeted $200 million of cost improvement, expecting to deliver $100 million last year and $100 million this year. We exceeded that goal, delivered $150 million last year and increased the goal by $50 million to deliver an incremental $100 million this year, that's 60-40 gross margin. It's things like value engineering, transportation costs, efficiencies in our fulfillment centers, we were able to exit a fulfillment center. On the SG&A side, managing -- better managing our store labor with traffic, optimizing that without sacrificing customer experience, improving our indirect procurement capabilities are a couple of the areas that I would highlight. And I think as you think about cost, you can never say you're done, you have to think about it as ongoing opportunities to improve the overall underpinnings of the business. So I don't have more to announce here today, but we will always continue to look for opportunities and are focused on delivering on our commitments for this year.

Got it. And maybe if we just shift to the store opportunity. One thing that stands out about your story, there's a very healthy new store component of the algorithm in the last couple of years. Can you just give an update there? Where are you building these new stores that are still driving such solid returns? And how much runway do you see from here?

Yes. So -- overall, we're really pleased with the performance of our store fleet, with their profitability, with their positive cash flow and we do still see opportunity. And we view the stores as a critical element of our omnichannel experience. Sitting here today, our fleet is more skewed to off-mall than on-mall locations regarding -- if you think about our long term, we think the right algorithm is 2/3 off-mall, 1/3 mall. So we'll continue to migrate more of our stores to off-mall location. As I think about square footage growth this year, I would think about is pretty comparable to last year in that 4-ish percent, 3.5% to 4% SIC code. And in terms of locations -- follow the people, follow -- if you think about our customers, we want to target a Hispanic customer as you think about certain geographies there where we're penetrated. Our real estate team just does a tremendous job evaluating what are the right areas, regions and locations to enter into.

Got it. And as you approach that 2/3 goal, 2/3 off-mall goal over time, can you talk about how much of that is going to be a shift from existing mall locations? How much is going to be greenfield? I think today, it's about half and half. So as I think about progression. Is there - is that a net number -- or sorry, is the -- is there a big net opportunity? How much closures are embedded in that algorithm?

Yes. I think -- more to come longer term, certainly, as we think about the closures, think about them as [ our DNS ] mall location small locations and they're still are a number of those to close. I would think about it over the coming years. I'm focused around the square footage growth. And I think as you look here in the near term, that 3.5% to 4% is the right metric to use.

Got it. And then maybe we'll shift to a higher-level question. What's your assessment of the overall health of your core consumer and maybe you could just add a category lens to that, which categories do you think are most discretionary, which are more stable if we're in a value-seeking environment, consumer environment here?

Yes. On the consumer, we've talked about for a number of quarters now around, we see our consumers seeking value, right? I would say that hasn't changed materially to one end or another from a positive or a negative. And that's what we expect as you look at our outlook. In terms of our categories, I wouldn't say we're seeing discerning pressure in one category versus another based on consumer behaviors. We are seeing within our shop, we aren't seeing a trade-down. We've used this example a lot. We don't see a customer putting a three wick candle back to get a single-wick candle, right? But we do see them managing their basket size, so putting a product back, which is where we're focused on how do we drive more trips, how do we drive engagement through our loyalty program, right? We have 37 million active loyalty users and engaging them to bring them in for more trips, redeem their rewards that they've earned are opportunities for us to continue to drive the customer.

Maybe we can just double-click on loyalty. You're at 37 million new members. As we talked about before, 80% penetration, even though it's only launched less than 2 years ago. Can you talk about what's you're most excited about in terms of the loyalty program looking forward? I think you've kind of done a really good job of step 1 of increasing the penetration and the usage of the loyalty program. But now as you roll out the capabilities and look to drive engagement, change the processes, what are you most excited about?

Yes. So Warren, I would put it into 2 buckets of where we're focused and are super excited, right? As we grow our customership, bring new customers to the brand, there's opportunities to convert those to loyalty members. I think this is evidenced by -- we cited a stat that 40% of our new loyalty members were new to brand in the first quarter. So we have a proven track record. Then you want to deepen your engagement, quantity and quality. So we decile out our active loyalty members. We know active members spend materially more in the shop than those that are in your lower deciles. So we'll look for opportunities to keep moving our members up on that activation and engagement. And I think we'll do that. You'll see more loyalty exclusive opportunities. Julie likes to say or they want to be -- they want to have early access, so they get the right product. They get the candle that they wanted on Candle Day. So more loyal exclusive, early access events, along with point accelerators. It's a way to drive engagement, a way to bring them back to the store. We introduced that in Q4, and we think it's a critical aspect to engaging those customers.

Thanks, Eva. And then maybe we'll just shift to international. How different is the behavior there for the international consumer? How different is the brand positioning and if we look at the last results, obviously, the conflict in the Middle East had a huge impact. Is there a way to parse out the impact there? Is there a way to look at kind of what the ad retail sales trends look like, excluding the Middle East?

Sure. So a few pieces to that. I'm going to take your second set of questions first, and then we'll come back to the consumer, Warren. As you look at our international retail, system-wide retail sales, i.e., the end market sales, for the quarter, our total portfolio was flat in Q1. And that was a slight improvement from the decline that we experienced in Q4. Now when you piece-part the regions, those areas not affected by the war in the Middle East, they continue to grow a very healthy mid-teens in those regions. So as we look at the health of our brands outside of the U.S., that's a key data point that says our brand resonates, people want our products and there's tremendous opportunity. We opened our first stand-alone store in London in the first quarter. We also -- in Q2, we opened our first store in South Korea in the Shinsegae Mall, and we're super excited to expand markets and continue to penetrate our markets. And we see ourselves opening at least 35 net new stores internationally this year. And we're in 6 of the top 10 markets today. So there's tremendous opportunity. Going back to the consumer, I'll speak -- I'd say customers are pressured. You see outside of the U.S., inflationary pressures as well. So I wouldn't really call out any discernible differences of our international customers versus our U.S.

Got it. That's very helpful. And can we just talk a little bit about the new categories. First, how did you kind of calibrate these were the correct categories? Or these were the right categories to pilot? And you've now a few months in stores for some of the new categories like laundry and hair. Can you talk a little bit about what you're learning about the purchase behavior there? How much is core customers expanding the basket versus new customers?

Yes. I would -- how we determine these categories. We have an unbelievable merchandising team that is out scanning, what is going on in the marketplace worldwide, right? What are trends with consumers, what fits with our brand, what is a natural expansion to our brand, what are customers asking us for? They are all factors that play in. And we also, as we bring categories, new categories in, we test like you saw us do with laundry using that as an example. So just to highlight a few key areas with that as background, Men's continues to be one of our fastest-growing categories introduced -- we expanded the portfolio last year with grooming and antiperspirant deodorant as well as expanding the fragrances in our core collection. We're super excited about this category. It's -- women continue to be the larger shoppers, women shopping for men. So we see a real opportunity of gaining awareness amongst men, and that's where we're investing marketing dollars. You saw some of our influencers back during the NFL season, during the NBA, but driving that awareness, we believe there's considerable opportunity remaining. Hair, we rolled out to the fleet and in our best-selling core fragrances. This was an opportunity to enable our customers continue to use their favorite fragrance in just another part of their daily routine. Performance to date, we've brought in about 14% new customers. I think I said that earlier. And now we have Travel Size. So it's going to enable new customers to -- it's a great way for new customers to enter the brand. And finally, I'll say on laundry, we're pleased with all of the testing we've done with the optimization of the portfolio, what's the right fragrances to put into the stores. And we are confident in our inventory position that gave us the confidence to accelerate our rollout to the full U.S. fleet in late fall of this year. So there are some of the highlights, Warren, that I would bring.

Great. [Operator Instructions] So we'll go through a couple of audience questions here. The first one, just a follow-up on your earlier comments that the second half outlook embeds some normalization, candles and sanitizers. How much further normalization might we see from here? And can you talk about the plan for managing the floor space as some of these new categories come online? So I guess the floor space for candles and sanitizers.

Yes, sure. So as we look at candles and sanitizers, -- we -- as I said before, we don't expect it to return to growth, we do expect the declines to moderate. As you look at the last 3 quarters of performance, Q3 to Q4, we did see moderate -- modernization, moderation, excuse me, and Q1 was comparable with that we experienced in Q4. As you look at the floor space, we highlighted on the earnings call that we did rightsize our single-wick portfolio. We had 2 versions of our single-wick, a more recently introduced tumbler as well as an older, I'll say, more dated mason jar. What we did was we rightsized that, removing the mason jar from the portfolio, while still maintaining the olfactive breath that our customers expect from us. And what that really enables us to do is to free up that shelf space to hire more productive categories, think about the new adjacencies that we're bringing in. So while they cause a little more pressure in the near term, we believe it's the right decision for driving growth over the long term.

That's perfect. Another question that came in is on a couple of components of the cost structure here. freight and labor. There were some big investments in labor early last year. What are you seeing in terms of wage pressures, what's embedded in the guidance? So the question there is on both freight and labor pressures in the second half?

Yes. I would say on both of those, I would consider this year, our expectations is it's a more normal year. From a wage rate pressure, I think about it more in line with normal merit type of cycle, certainly, in different pockets through regulation, you could have some hourly wage pressures. We watch those where we manage those. But overall, I would think about it as a more normal year for us. And then on transportation, again, you saw outperform in terms of transportation costs throughout the back part of last year. We also over-delivered on transportation benefits in the first quarter, and it's -- I'd say, it's embedded in our run rate.

Got it. And I think we just have time for one more question. This question is on the technology investments. So you made some heavy technology investments in the last year. What are the capabilities gained? How should we think about the technology investments this year versus last year? And how do you measure the returns on those investments?

Yes. Thanks for that question. Overall, as you think about total technology investments, I would think about 2024 pretty comparable to the 2023 levels, which was a step-up given we were investing in separation. We've now pivoted from investing in separation to investing in -- I'll bucket them into 2 key areas, value-creating capabilities to improve our omnichannel experience, whether that's data and analytics, whether that's personalization, whether that's point of sale to create better integration of our data to service that customer in a meaningful omnichannel way as well as foundational back-office systems that we need to invest in to modernize that technology. So they are the 2 key areas. We always look to measure returns. Some of these are fundamental capabilities that you need in this decade and going forward, but where there is the opportunity to measure we are and we look to really prioritize to drive the highest returning items first to help us fund the journey, if you will.

Perfect. That's all the time we have. That sounds like a perfect stopping point. Thanks, Eva, for all the great insights. Have a nice day, everyone.

Thank you. Thanks, everyone. Have a great day.