Bath & Body Works, Inc.

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. During the question and answer portion, you may ask a question from the phone by pressing star 1. I will now turn the call over to Ms. Heather Hollander, Vice President, Investor Relations at Bath & Body Works. Heather, you may begin.

Thank you, Danielle. Good morning and welcome to Bath and Body Works' fourth quarter and fiscal 2022 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 and Body Works' 2021 Form 10-K for factors that could cause the actual results to differ materially from these forward-looking statements. Today's call may contain certain non-GAAP financial measures. please refer to this morning's press release for important disclosures regarding such measures, including reconciliation to the most comparable GAAP financial measure. Joining me on the call today are Gina Boswell, Chief Executive Officer, Julie Rosen, Brand President, and Wendy Arlen, Chief Financial Officer. All of the 2021 results we will discuss today are adjusted and exclude the significant items detailed in our press release. Additionally, the results represent results from continuing operations and exclude the discontinued operations related to Victoria's Secret in 2021. I'll now turn the call over to Gina. 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 ETFs that exceeded expectations. This was despite a challenging macroeconomic environment. And to share a bit about why I chose to join Bath & Body Works, through nearly three decades in the consumer industry, I have developed a true love for beauty, personal care, and fragrance, where customers are passionate and engaged, and quality and innovation are critical. And I was immediately drawn to Bath & Body Works as a company with its history of superior growth and a highly differentiated business model. This is a company truly positioned at the intersection of consumer goods and retail. The company is a market leader and innovator, with leading share in its major categories of home fragrance, body care, and soaps and sanitizers. And we have a top position in the U.S. in 10 forms. This includes body lotion, shower gel, pre-wet candles, hand soaps, and hand sanitizers. And we have also gained significant share in the men's category. These are all growth categories with a long runway ahead in large, addressable markets. As one of the premier fragrance companies in the world, we deliver customers their favorite fragrances in multiple forms and categories with industry-leading speed and innovation. We bring affordable luxuries in personal care and home fragrance to life like no other. Our strong relationships with our domestic vendor partners and fragrance houses enables us to continually deliver newness and meet the demands of an omnichannel customer. We manage every touchpoint throughout the customer journey to deliver a highly differentiated shopping experience. As I was visiting stores, I was also struck by the fact that Bath & Body Works offers products for the whole family, and we're part of so many people's lives, we estimate that our products are in 40% of American households. And in my first three months, I've immersed myself in the business, having visited our stores and distribution centers and meeting with our supplier network at beauty parks. I've also had an opportunity to engage with customers and store associates across the country, as well as talk with investors to hear their perspectives. I've conducted detailed business reviews with each of our functional leaders, and I've been impressed with the talent in our company and how engaged, knowledgeable, and dedicated our associates are. This holiday season, I saw firsthand how our passionate sales force brings our seasonal storytelling to life in our stores. I've seen the strong connection customers have with our brand, which is underscored by our best-in-class brand engagement and loyalty. And I'm excited to see customers celebrate our events. I was delighted to learn that many customers consider our Candle Day a national holiday. Overall, I'm pleased with the reach of Bath & Body Works with top brand awareness in our industry and customers indicating a strong propensity to recommend our brand. During the pandemic, our integrated and predominantly domestic supply chain positioned the company to meet elevated customer demand, which enabled us to drive significant growth in 2020 and 2021. In 2022, the company continued to grow unit share across our three major categories of body care, home fragrance, and soaps and sanitizers. This team has demonstrated remarkable innovation capabilities, delivering a pipeline of newness in fragrance and product forms, that powers our deep customer connections. Our product offering serves multiple customer occasions, including gifting, replenishment, and self-purchase. We also connect with customers across touchpoints by telling stories through our fragrance and packaging. And finally, I've witnessed the company's key competitive advantage in bringing products to market with industry-leading speed. Our vertically integrated supply chain allows us to respond quickly to changing customer and macro trends. So my early days at Bath & Body Works have reinforced why I joined the company and reaffirmed the opportunity that we have to strengthen our position as a leading global omnichannel home and personal care brand. At the same time, there are areas where we can improve to drive top-line growth and increase profitability. Looking forward, key areas of focus for us will be driving growth by expanding our customer base, delivering effective personalized marketing, optimizing our product offerings, expanding our international reach, advancing our digital capabilities, and unlocking the potential of our omnichannel model, all while focusing on improving profitability. So just starting with the customer, we have a large, loyal customer base, and we have diversity across income levels, age groups, and ethnicities. I see a significant opportunity to acquire new customers, increase spend, and further diversify the space. As you know, our loyalty program launched nationwide in August, and we've seen great early results. Our enrollment speed is one of the fastest in the industry, and just last week, Newsweek named us one of America's best loyalty programs. We've enrolled a total of 33 million members to date, and more than 80% of these are active. This is a testament to our customers' passion for our brand. Our loyalty sales represent approximately two-thirds of our U.S. sales since launch. And our loyalty customers also have higher spend, greater retention rates, and make more trips. And while these results are certainly impressive, we are still only in the early innings of the program. We're confident that more opportunity lies ahead. For example, we can drive more value and attract more customers to the program by increasing engagement through personalization, by fully integrating our loyalty program across social, physical, and digital interactions and making future program enhancements like tiered accelerators and flexible rewards. We also have an opportunity to leverage data and analytics to build deeper customer connections and deliver more personalized marketing and a more targeted promotion strategy. As Wendy will explain, relative to 2019, product cost inflation has exerted over 500 basis points of pressure on our operating margins. And though we've taken price increases to offset a portion of that pressure, in 2022, customers became increasingly price sensitive. I believe we can grow our customer base, increase engagement, and drive incremental trips, all while decreasing our reliance on broad-based promotions. We can capture this opportunity by implementing a more targeted marketing approach that is rooted in advanced analytics and customer segmentation. Our product offering and assortment strategies are key to elevating our brand, as well as increasing our pricing power and extending our reach. We're focused on leveraging our core strengths in fragrance and innovation to extend our product leadership into categories such as men's and wellness, both of which currently represent a small portion of our total business today. And Julie is going to speak in a bit about our product and marketing strategy. We also have an opportunity to drive significant growth in our international business, which on a reported basis is approximately 4% of our sales. This business leverages a partnership-based asset-light model. In 2023, we expect our international business to continue to accelerate with double-digit top-line growth and operating margins that are accreted to our overall business. We're committed to expanding our reach and strengthening our position as a leading global brand through market expansion, new stores, and digital growth. Beauty and personal care category customers value a true omnichannel experience. To that end, we have a strong fleet of profitable stores, both off-mall and in-mall, and these position us close to the customer. We also have a strong digital business. We see a significant opportunity to better connect our stores and e-commerce platforms to deliver a seamless experience and increase our customer lifetime value. As an example, dual-channel customers than three times more than single channel customers. But dual channel customers represent less than 15% of our customer base. So increasing penetration by just one percentage point could drive up to $50 million in sales. Technology is a key enabler of our growth, and as the team has shared, we are in the process of separating our IT systems from Victoria's Secret, and we expect to complete that transition this summer. but we're also assessing and investing in the foundational tools and systems that we'll need to support the company's future growth. We're focused on building out incremental capabilities to enhance the customer experience, evolve our loyalty program, support advanced analytics, deliver more personalized marketing, and strengthening our omnichannel capabilities. We also remain committed to driving margin expansion and cost savings through effective management of pricing and promotions, along with finding additional ways to operate more efficiently. Following my functional business reviews, I see meaningful opportunities to reduce expenses and improve operating efficiency. I'm mindful that we've increased revenue 40% since 2019, and while our team has done an excellent job accommodating that growth while separating from Victoria's Secret, we now have an opportunity to position the business for margin expansion and efficiency. To that end, we are targeting $200 million of annual cost savings across the company. We expect to realize over half of those savings in 2023 and a substantial portion of the remaining savings in 2024. We've engaged external advisors to assist in a top-to-bottom review of the business. As we pursue opportunities for both growth and margin expansion, we are prioritizing actions which we believe will create durable value for our shareholders. While we're focused in the near term on optimizing the core business, we'll continue to explore longer-term opportunities, such as adding new adjacent categories. With respect to 2023, we expect that ongoing macroeconomic challenges will continue to impact customer spending. At the same time, we expect that we will continue to see inflationary pressure on our input costs in the first quarter before beginning to see some relief as we move through the year. And we are pleased to enter this year in a clean inventory position. Regarding SG&A, the technology investments we're making to separate our systems and develop critical capabilities will help to reinvigorate growth and support the long-term success of the business. This will, however, create cost pressure in 2023. We're focusing on what we can control, and we're taking aggressive action to drive profitable growth in the future. And despite near-term macroeconomic pressures, I'm very optimistic about our future and our ability to reach our $10 billion sales target and deliver industry-leading operating margins of 20%. We look forward to updating you on our progress as we work to realize the full potential of our omnichannel model and profitably grow our business and deliver long-term shareholder value. So with that, I will turn the call over to Julie, who will review our brand and category performance.