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

Good morning, everyone. Thank you for joining us at the Goldman Sachs 31st Annual Global Retailing Conference. It's my pleasure to kick off the conference today with Bath & Body Works. We'll be moderating this fireside chat. Today, we have with us Gina Boswell, Chief Executive Officer and Director of Bath & Body Works. Gina joined the company and the Board of Directors in December 2022, previously serving as a Senior Executive with Unilever. And we also have Eva Boratto, Chief Financial Officer of Bath & Body Works, who joined in August 2023, previously serving as CFO of Opentrons Labworks and CFO of CVS Health Corporation prior to that. Thank you so much for joining us today. Pleasure to have you. It's exciting that you're the first meeting today. So thank you for that, too.

Thank you for having us, Kate.

We wondered if we could maybe just start out talking about your view on the health of the consumer. Bath & Body Works, I think, addresses a broad swath of consumer. And could you maybe walk through what you've seen throughout the year up until now? And what do you expect for the second half?

Sure. So during the second quarter, we experienced a more cautious consumer, and one that was seeking value for sure. And then also in the second quarter, we experienced some pressure on traffic, which we hadn't seen in the first quarter. So this traffic pressure though was consistent with what we had seen with external benchmarks in an off-mall. So that was one thing that we had noticed. And we also saw, as much as the customer was seeking value and being more cautious, they were also quite interested in innovation and newness, and that hasn't changed. So for us, we were leaning into our quality messaging, which when we think about the consumer seeking value, we don't think it is simply about price. We think it's about the best value, meaning the best quality for a price and the best experience, frankly. So what we're looking at, certainly, as we go forward against the health of the customer, is how do we play to our strength with that. And for sure, we've been focusing on newness and in innovation but also asserting our credentials as the category leaders in the categories that we are in, specifically home fragrance, personal care, soaps and sanitizers, et cetera. So that's sort of where we are doubling down our focus against that backdrop.

And maybe, could we just ask then within that. You said the consumer is responding to newness and innovation yet there's this attraction to value as well. So could you maybe talk to us a little bit about how you balance the two? Also sounds like the consumer is coming up for key shopping events to back-to-school, anything holiday related. And so could you maybe talk through how you're managing that? And then with regards to your guidance for the year, your net sales of down 4% to down 2%. Can you talk us through the scenarios in which you can get to a down 2% versus a down 4%?

Yes. Well, let me -- do you want to start with the back-end and we'll come back to newness and innovation?

Sure. Sure. So Kate, let me take a step back on the guidance, right? As we set the guidance last week on our call, right, there are a few factors taken into account. The year-to-date trends we were seeing and that more cautious consumer, a choppier macro backdrop that you've heard a lot talk about as well as the pace of growth of winning new customers. Think about it, which in part is attributable to the choppier macro, right? Are people sort of focused on their PocketBac going to go and try something new. So those are the factors that we took into account in our guidance. What I'd also like to say is, as you look at adjusted earnings per share, it was about a 1% reduction at the midpoint as a result of us controlling what we can control, improving our cost reduction initiatives, $30 million, improving our gross margin outlook and increasing our share buyback. So that's the broader picture. Now to your question, what would it take to be at the high versus the low. At the high, I would say, greater customer response to our newness, right? We talked about doubling down on core and the innovation, Everyday Luxury. We went full lights on a week ago, which was very successful for us in Q1 on a limited basis. Where our good, better, best pricing strategies, right? How do we meet the consumers' mindset and value. So responsiveness to our newness, I would say, drives us to the high end. At the low end, I would say, a worsening consumer environment or less responsiveness to our innovations.

And then to pick up on how does it all balance out, I would say that we focus on our strengths, right? So for us, good, better, best assortment, which Eva alluded to. That's an important part because good, better, best has both innovation and value in it, right? We also focus on our agile model, the vertically integrated model that allows us to sort of react to whether people are particularly seeking value or innovation or both. And then our nimble promotional capability, which is about as dynamic as any I've ever seen, literally looking at the elasticities sort of by the week. And I think beyond that, marketing and highlighting the product attributes, which brings all the quality credentials to bear. But we also use other levers, innovation and newness to us is as much about the product itself, which is, say from a candle perspective, it's about the fragrance throw, it's about the consistent and even burn, it's about the quality of the glass and so forth. So you're going to be seeing a bit more as we lean into asserting those leadership credentials. But in addition to that, as you probably know, we've been doing a lot of collaborations, which collaborations for us really focuses on the core, but it's an innovation in itself because it drives traffic, it drives deeper engagement and this supports both the core and more. So I think that as we lean into the second half, you'll see a bit more of that. Some of it was alluded to by Eva with respect to -- we just turned on the lights for Everyday Luxury. We've got Stranger Things Part 2, which drove a lot of engagement and so forth. So a lot going on to balance those two.

Yes. The collaborations -- I'm going a little off-script, but the collaborations have been, again, you've seen it more frequently. What is the history of the brand with collaborations? Is this something that's newer for the company? And what makes it work?

Yes. So it's -- I believe there was likely to be a, I wouldn't call it a collaboration, but maybe a co-branding way back. But as far as we can tell, collaborations in the newest sense of the word when you think about any brand, has been pretty new for the company. What makes it work is that Bath & Body Works is -- the general awareness of Bath & Body Works as a brand is pretty significant. But the -- when you go further into the funnel of awareness to familiarity to conversion, we wanted to get sort of an expanded customer appeal, right? We wanted to make sure that we're looking at properties that allow people to reassess the brand and really bring in new customers as well. And so what we found is, yes, collaborations actually, our existing customers lean into them as well. For example, the very first collaboration that we did was in the first quarter, it was part of our Netflix partnership, it was Bridgerton, and we literally had people showing up in Bridgerton garb in the stores. So that's an existing customer, but very engaged with Bridgerton. And so what collaboration brings is, in addition to traffic, engagement, new customers, but really shining a light on the core, and this collaboration was focused on, for example, the core, candle specifically. So what we're trying to do is with the collab partner, what is the intersection between say, a Bridgerton fan base and the Bath & Body Works customer, and how do we sort of really engage with both? And I would say, following the first quarter, which Bridgerton exceeded our expectations, the second quarter, we had a relatively small collab with Crocs, and this was something we called the CrocketBac. So you may be familiar with our sort of award-winning PocketBac sanitizer. What we use is little Croc that houses the PocketBac, we call it CrocketBac, that's sold out in a week. So there's almost a scarcity and get off your couch, kind of go to the store because I really am into both Crocs and Bath & Body Works. Follow that up with Stranger Things Part 1, Strangers Things Part 2, where we had, I think, 20 million videos on TikTok. So incredible excitement and engagement. And then we have one more in store for the back half of the year.

If we could maybe pivot away from some of the newness and ask about the semiannual sale, because I know in the second quarter, you mentioned it came in below your expectations with the store presentation, not maybe necessarily screaming at value as much as you thought the customer needed to see. Can you walk us through what changes you made throughout the process, this particular semiannual sale? And what learnings do you expect to carry forward into the next semiannual sale?

Yes. Semiannual sale, for those not familiar, we do it semiannually, so twice a year, we do one in January and one in June. And these are real tentpole events. It's like you should really be screaming sale. And this particular time, we did have semiannual sale positioned in the front of the store. But we didn't -- the customer did not feel that we were pulling it through all the way through the store. And so with our agile model, quickly reacted because we needed this to be the 2 times a year that the store is effectively on sale. And so we reacted, we put red bins in the front of the shop, and we tried our best to pull it through. And so in the end, we reacted quickly, but the performance overall disappointed and it did not meet our expectations. Now to be clear, we ended clean with inventory and so that was an important piece as well. And there's lots of learnings that we will build into the next one, whether it has to do with the marketing, the messaging, the merchandising, the flankers. Sometimes people do come in semiannual sale for things other than sales. So what are the full price. And so all those learnings will be brought into our January and our next June sale as well, including timing.

One question that I had for Eva after the quarterly call was just July seems to be getting to be a very promotional month. Obviously, Amazon Prime has been doing their sale for a couple of years now in July. But now you have all the broadline retailers that are doing that as well. This year was a little unique because it wasn't on top of each other. It was kind of throughout the month. Do you think anything with regards to the timing could change with the semiannual sale, just given the amount of value that's being blasted at the consumer?

Yes. Gina just mentioned that, right? We're going to evaluate all aspects. Is June the right timing, what's the right duration, what -- how do we make our newness also successful in the shoulder period surrounding the sale? So they are all things that we're looking at. And to your point about being more promotional and different things going on in the market, we did introduce some new promotions surrounding Amazon Prime Day to bring our customers out to drive traffic, and we were pleased with that.

We wanted to ask a follow-up question about average unit retail. It was up 1% in the quarter following a decrease in the first quarter. We wondered if you could update us with the strategy, your strategy around AUR. Is it difficult to manage AUR, again, when you are being a little bit more promotional with the semiannual sale? And how should we think about it for the rest of the year?

Yes. I guess I'd take a step back a little bit, Kate, right? As you look at our AURs relative to pre-pandemic levels, right? We continue to be up double digits from those pre-pandemic levels. So we've been able to hold on to much of the AUR increases. We see -- as we've said, it's a value-seeking customer out there, right? And as Gina said, value is not just about price, it's about quality as well. But we're going to work our agile promotion model to meet the customers where they are, where their mindset is. With that as a backdrop, we didn't provide an outlook for our AUR expectations in the back half of the year. Certainly, we have our internal plans. It's embedded within the overall revenue guidance and guidance that we provided, but we feel it's better to be able to be nimble and agile. We read and react every week in terms of how the customer is responding to our product, to our promotions. And that's how we're thinking about the back half of the year.

And thinking about that, I know technology has been a big investment for the company, as you've separated from Victoria's Secret. And along with that technology, we've talked about the opportunity to optimize promotions. So I wondered if you could talk to where you are in that journey, now that I think you've made quite a bit of progress. And how do you see it impacting your margins going forward?

Yes. So one of the things -- you're absolutely right, we separated from Victoria's Secret. It was actually substantially complete a year ago, literally this month, I believe it was. But actually, there were some residual that ended this past June. So now fully independent from a systems point of view. And so what we've been able to do from a technology, not only are we building some of the foundational capabilities, but we are also building some of the marketing capabilities. And specific to your question, around promotional capabilities. So we speak about it as sort of a more efficient way to target with personalized promotions. And what that -- and we have -- it's early innings, but what we have been able to do, which is to really pull back a bit from broad-based promotions, like direct mail. There were -- when I arrived, quite a bit of direct mail going literally into the post and that would go to some customers that maybe would have otherwise bought anyway. And so we have more and more test cases and pilots by using the data capture from our loyalty program, which, by the way, is just 2 years old. And so to get to that loyalty program driving 80% of our revenue in 2 years with 90-plus percent customer satisfaction means that we can actually take the technology, leverage the data and really run a couple of different, much more efficient and targeted promotions. These are things like, we can analyze somebody who is a one tripper, somebody who comes once a year for whatever it may be, how, based on their click stream and their purchase behavior, of that one trip are we able to get them to a second trip? We can also look at some of the redemption ladders of rewards. And this is very different for us. We always had transaction data, but we never had an ability to really target based on a customer segmentation and based on purchase behavior. So it is early innings, but promising results.

And you mentioned the loyalty program. I vividly remember the launch of that 2 years ago and the fact now that you have 80% of your sales coming from the loyalty program, 90% satisfaction. What's next for the loyalty program? What has been some things that have been big wins? Where do you think this can go?

Well, today, we have 37 million active loyalty members and that was up 8% over prior year. So certainly, enrollment will continue as customership grows. And -- but I would also say, the engagement grows even more. And so what are the kinds of things that we're doing, both within the app as well as the program as a whole to really get people engaged. And like I said, up this redemption ladder, which we know drives a multiple of overall spend. What we love about the loyalty program today is not only does it have high customer satisfaction, but we've got real measurable results on higher spend, higher retention, more trips. So what's next is we're going to continue to mine that and look at what are the other types of things we can do go forward, whether it's flexible rewards or tiering and things like that. So it's a whole other level now that we move into the next era of it. So stay tuned on that coming up in the next couple of quarters.

Gina, if I could just add, right? We've used loyalty members to get early access. If you think about Candle Day last year, right, day 1 was focused on our loyalty members, some of our collabs and access to those. So their engagement offering opportunities. And just we've given this stat before, but if an individual goes from redeeming 1 reward to 2 or more, to more than 2, excuse me, right, they spend more than double. And that's that engagement that Gina speaks about. So we have our members deciled. The teams are focused on them and how to continue to bring them up that ladder, yes.

And you will have seen it if you're on our app, you'll see point accelerators and some of these things that were tools designed to do just that.

And we've been very focused on newness. What's driving traffic to your stores. I'd be remiss if we didn't bring up the new categories. So we have a few questions on each. But as a reminder, the company has introduced new categories over the last few years, Men's, Fabric Care, Lip. And so I wondered, of the 3, which are you the most excited about? What do you think could be a bigger part of your sales a year from now than it is today? And could you just talk about maybe what is going to drive that growth going forward for each of those categories?

Yes. So newness in general to us is newness in the core, which we do, and we need to make sure that the core is always protected. But what you're referring to now is more. And so these new adjacencies, they really play well with respect to attracting a newer to brand customer, a basket building opportunity for an existing customer. And really just a broadening of the brand proposition. So it's hard to pick your favorite child, I suppose, but the teams have been very busy. Men's, we can focus on Men's. Men's is still a single-digit percentage of the business as a whole. So a big, big total addressable market, obviously, a different customer. So there's an incrementality there as well. And I always like to think of Bath & Body Works, if you're coming to the front of the store, you shouldn't have to leave any family member behind. And Men's allows the entire family to come in as well and there's something for them as well. So you'll see a Men's shop. So Men's, as strong as the growth has been in Men's, the awareness is still pretty low. And so we will continue to drive marketing in ways. And just as a reminder, beginning Q4 of last year, our marketing spend is up 100 bps. And that's designed to both serve the core, but also to get these new adjacencies up and running. So Men's, I would expect will continue to drive growth going forward as our fastest-growing category. But honestly, these others are very important as well for different reasons. Lip, so Lip is something that we had just launched and now in full distribution. But when we last spoke, I think we talked about, you put these Lip fixtures, which has a regimen by the way. It's basically a scrub, a mask and a tint. Anybody that has sort of a Gen Z, you will know what I'm talking about with a full lip regimen. This is literally a playground inside of our stores. So now you have fixtures in pretty much every store. There's a dwell time, there's some experimentation. What we're doing there is we are bringing, not only the customer experience to a whole other level, but we're bringing a younger customer in. And when we talked last time, it was in a more limited distribution of our stores and the sales of our lip products were doubling in those stores. Well now, we're [ chain-wide ] and the doubling still exists in those stores. So there was no sort of degradation there. So I think Lip brings a different customer, a younger customer as well in a category that is highly replenishable. There's multiples there. And then I think -- did you mention Laundry or maybe you skipped Laundry.

Fabric was on the list, yes, Fabric Care.

Yes, so Fabric Care, if you think about what the power of fragrance is and what we know about our customers, our customers want fragrance head to toe. And Laundry became a category that more and more people were even investing in their laundry rooms. And so from customers wanting us to get into the Laundry category and having 30 years in the business, but also understanding Laundry, I thought, well, this is great, especially not just the detergent but the fragrance booster. So the role of fragrance in laundry is real, it's compelling. And so the team was incubating this before I arrived, frankly, and then came here and thought that this would be another incremental way to bring fragrance and build baskets. So we're happy with what we see. I look at things like new-to-brand customers, repeat rate and incrementality. And while it's early days, we're excited by that as well. We were in 800 stores, I think it was the end of the second quarter, and will be full chain-wide by the end of September, this month, September.

And Kate, these are -- Men's, Laundry, these are large addressable markets, right, both in excess of $10 billion. With Men's, I believe, in excess of $12 billion, Laundry, $14 billion. So these are real opportunities for us.

And you didn't mention hair either.

I didn't mention Hair, no, no.

They come -- these adjacencies come in four for us. That's Men's, Laundry, Lip and Hair. But Hair is also a fragrance positioning. Our best-selling fragrances are available in shampoo and conditioner as well as dry shampoo. And recent in the last quarter or so has been a travel size, which is a wonderful way to try and travel. And watching the adoption of that trial, TSA-friendly, et cetera, to the larger size. And Hair has about 13% of new-to-brand customers. So we know we're also not only satisfying an existing customer that wants head-to-toe fragrance, but attracting new as well.

So there's so much going on. You guys have introduced so much just over the last 2 years. The one other new initiative I wanted to make sure I asked about was TikTok Shop. And you announced on the second quarter call that you'll be launching a TikTok Shop this quarter. How should we think about the potential lift from that over time? And are there any specific categories that you're going to be rolling out with the shop before holiday or for holiday?

Yes. So TikTok for us is we, obviously, we've been on TikTok. Certainly, Everyday Luxury is back in the first quarter and went viral. And so we've been on TikTok from that, but this is TikTok Shop, which, for those of you who aren't familiar, this is really a discovery vehicle and a convenient shopping channel. And so what we're planning to do, leveraging everyday luxuries would be the first step is to use that sort of limited approach to seeking to serve a younger customer but with TikTok Shop. And so it is -- I wouldn't expect it to be a meaningful driver of our sales in the quarter. But for us, it's new and different. It opens up a different channel. We are excited by both the influencer element that they have and that we have in combining that. And so it's, for us, one of our things that we do really well as a company is we test and learn, and that's what we're doing with TikTok Shop as well.

That's great. I wanted to make sure, Eva, that we talked about the cost savings that you have worked on. You had a 2-year plan to deliver $250 million in annual cost savings, which recently increased to $280 million, including $130 million this year. Can you walk us through the opportunity here? Where the biggest buckets of cost savings are coming from? And maybe about the longer-term or how you view the longer-term opportunity for cost savings?

Yes. I think if you rewind even a little further, Kate, right, the initial program announced was $200 million over 2 years. And I'm really proud of what the organization has been able to do on this program and now 2 years up to $280 million, right? We think about this as durable cost savings, right, driving efficiencies, how we do our work, where we're able to improve our underlying cost structure to flow to the bottom line or enable investment back in the business like we've done with marketing or tech. As you think about the more recent increase in savings, it's come from areas like move and transportation, also in our value engineering, supply chain areas as well as, I'll say, G&A opportunities. We embarked on a new procurement initiative for our nonmerchandising and that's getting up and rolling and enabling us to drive savings. So as I think about this, A, we're focused on executing and delivering what we just announced, but this has to be a continuous improvement mindset, right? It's not, you go on a diet for a year, right, and then you allow your cost structure to expand again. We've got to continuously be thinking about areas that we can drive improvements and efficiencies, and that's what we're doing.

And if I could just add to that, we think about cost savings sort of as a muscle, but we also, at the same time, as I mentioned, our spending in marketing, and so there, we're doing marketing mix modeling because we are able now to discern the difference between, I would call it, waste or efficiency and investing in the top line. And I'm very -- we're sort of tag team on this as CEO, CFO, that were quite clear what should not be cut, whether it's store labor levels or something that would affect the customer experience or product innovation or full funnel marketing. And so I have confidence that because we're able to model the impact on the top line that we can discern the difference between them.

We're just down to 5 minutes left, actually. It's gone very quickly. And we are asking 5 questions of every company during our conference. So it's kind of lightning round type questions. So the first question we had is just your expectations for the environment in 2024 relative to recent results. Would you say same, better or worse -- consumer environment.

I would say at the midpoint of our fiscal '24 guidance, the environment, we would expect the first half trends to continue. And you know what we're doing against that with respect to good, better, best, and leaning in and nimble in all of that.

The second question is on the topic of margins, which is more of a '25 question, but how are you thinking about cost pressures, materials, labor, tariffs, same, better or worse in 2025?

Yes. I'm not going to be able to hit on the same, better or worse, Kate. But as we think about it, we're looking at a stable cost environment right now. Our raw materials costs are flat to declining. And on your tariffs point, right, 85% of our product is North American sourced or produced. So we see ourselves at an advantage on that front should the environment change.

Our third question is, and this might be a slightly longer answer than like a short answer, but this consumer behavior of looking for value that we've talked about that we've heard from many other companies in the last couple of quarters. Do you think this is a cyclical or a secular trend? In other words, do you believe it's a function of the macro? Or do you think there's been some permanent shift in what the consumer wants?

Yes. I would say, great products, high quality, great products at good prices has never -- will never go out of style. It's never been out of style. I do think though that we have seen a customer focused on value in part due to the choppier macro environment. So it's hard to sort of tease these 2 apart, and it's because consumers are smart. They are spending where they believe the product can deliver, but they are also doing that with newness and innovation. So to me, it's a 2-headed, right? It's newness and innovation and value and the collection together. So that's why we think our products are in a unique position to deliver because we're at this intersection of mass and prestige, and we offer incredible value for the price. And that's why you'll see more of those assertions going forward. And it gets back to the power of fragrance, but also who we work with and all of that. So long answer, I suppose, but it's not something that I think the customer has ever not done, but they are definitely being choosy with where they're spending their money.

Okay. Our fourth question is around distribution. We've seen, especially in beauty, I think more distribution points pop up over the last couple of years. How do you envision that? Do you see more people looking to sell beauty over the next couple of years, more points of distribution?

Yes. Listen, you've seen it over the last several years, it's competitively intense, right? We see our stores and our real estate as a huge competitive advantage, the experience that we create. We're growing square footage, 3% to 4-ish percent. And as we look out into the near-term, I would expect that to continue. And obviously, it's probably more a North American question that you had, right? But if you look internationally, we haven't had a chance to speak about international. That's a huge opportunity for us, right? We're only in 6 of the top 10 markets. Our partners, we select great partners. We're expanding in those regions, driving growth, and we're excited about that opportunity as well.

Great. And then the last question, which we've kind of touched on already, but just promotionality. Do you expect to be more or less promotional this holiday season versus last year?

Well, as I said, our ability to promote is one of our strengths, and we'll continue to do that to meet the customer where they're at. But in addition to promotion, regardless of the environment, price, promotion, experience and quality is the way we lean into a highly promotional environment. So you should expect all of the above.

Great. Well, thank you for joining us today. This has been a pleasure. Have a good rest of the conference.

Appreciate it, Kate. Thank you.

Thank you, everyone.