Bath & Body Works, Inc.

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath and Body Works first quarter 2023 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.

Good morning, and welcome to Bath & Body Works' first 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. Today's call contains certain non-GAAP financial measures. Please refer to this morning's press release and supplemental materials for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. Joining me on the call today are Gina Boswell, Chief Executive Officer, Julie Rosen, President, Retail, and Wendy Arlen, Chief Financial Officer. I'll now turn the call over to Gina.

Thank you, Heather, and good morning, everyone. We appreciate you all joining us today. I'll start this morning with a review of our first quarter results and then discuss the progress that our team has made so far in executing our strategy, as well as some of the opportunities that we see ahead. This quarter, we continue to leverage the agility of our vertically integrated supply chain, as well as our outstanding innovation capabilities from product development through design and merchandising. We delivered newness and increased unit market share across our three major product categories. While home fragrance and soaps and sanitizers at an overall industry level continue to contract, driven by post-pandemic normalization, we continue to gain unit share. Our customers remain highly engaged with the Bath & Body Works brand. A prime example of this is the excitement and strong sales of our single fragrance launches, including our new Gingham collection, which Julie will discuss in more detail. This successful launch once again showcased our team's ability to read and react, that is, to respond swiftly and effectively to customer signals. When we observed that Gingham's initial results exceeded our expectations, we quickly increased our supply to meet the heightened demand fulfilling our commitment to the customer. It's this ability to adapt quickly, coupled with our intense focus on efficiency, that helps us effectively manage the ongoing challenging macroeconomic environment. In the first quarter, net sales were in line with our expectations. Adjusted diluted earnings per share of 33 cents were better than planned, driven by our efforts to improve average unit retails, or AURs, and the early benefits of our cost optimization initiatives. Given that our earnings this quarter outperformed our expectations accordingly, we are increasing our EPS outlook for the full year, which Wendy will speak to in a moment. These results would not have been possible without our terrific team and their quick response to implement our plans to profitably grow sales and better serve our customers. Now I'd like to share an overview of the major elements of our strategy. Having spent my initial months at Bath & Body Works evaluating our business, I am confident that we have a diverse set of opportunities to grow the business and enhance profitability. Bath & Body Works has a highly differentiated business model, positioned at the intersection of consumer goods and retail, and we have a history of superior growth and free cash flow generation. The company's had a number of initiatives underway to drive top-line growth and profitability, and I don't see a need for major shifts in strategy. Instead, I see ways to build on the strong foundation that exists today. Importantly, our path to $10 billion in sales and industry-leading operating margins of 20% is not predicated on any one opportunity. Rather, we have multiple levers that we can pull to achieve our goals and we're pursuing them with focus and a sense of urgency. As we move forward, our team's efforts are 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. So touching on each of these and starting with elevating the Bath & Body Works brand and product, I can say, having been in the beauty and personal care industry for more than 30 years, I've never seen a more engaged fan base than what I've seen here at Bath & Body Works. Our loyal customers are highly engaged, whether they're camping out for our semiannual sale or celebrating International Fragrance Day or eagerly awaiting our next new mystery candle drop. However, there is opportunity to elevate the brand and product in a way that allows us to reach new customers, drive greater traffic, increase our pricing power, and extend our position as a market leader. Our brand elevation efforts can be broken down into product, packaging, and merchandising. First, we will continue to optimize our core product offering by leveraging and building on the company's rich history of innovation to introduce new products and formulations. An example of this is the expansion of our new soap formulation made without parabens, sulfates, or dyes. This work has been underway and will continue. Another innovation call out is our surprise and delight product launches. An example of this is our recent ice cream candle drop, which sold out in mere hours online and same day in store. We expect to increasingly leverage these types of events to drive traffic and generate brand excitement. In addition, we're continuing to develop and introduce new types of packaging while also staying true to the brand heritage. If you were to take a look at the product featured in our stores and online today, you would see items such as our white barn color run collection and our neutral assortment with elevated presentation and packaging. We see opportunities to bring this elevation to more of our products. And finally, merchandising, both in our stores and online. This will range from the look and feel of the floor sets in our stores to shop and shops and other enhancements. We'll extend our storytelling beyond our compelling seasonal experiences to broader inspirational product storytelling, including recommendations for selecting and using the product, as well as creating the perfect gift. Second, we plan to extend our reach. As one of the leading fragrance companies in the world, we deliver customers their favorite fragrances in multiple forms and categories and bring affordable luxuries in personal care and home fragrance to life like no other company. We're focused on leveraging our core strengths in fragrance and innovation to extend our product leadership into adjacent categories. Julie will speak to our product expansion strategy and exciting upcoming tests and launches in a moment. We're also committed to extending our reach geographically, and we have an opportunity to drive significant growth in our international business through market expansion, new stores, and digital growth with our partnership-based asset light model. Next, the tremendous opportunity that we have to better engage with our customer. Bath & Body Works has a long history of connecting with the customer through fragrance, high-quality products, and a terrific store experience. and we now plan to deepen our connection across the entire customer journey. This represents a significant unlock for us that we expect will benefit both the top line and operating margin. To drive this effort, we started by analyzing our core customer segments and developing a better understanding of their unique needs and desires and identifying the discrete customer segments that present the biggest growth opportunities. For example, we know that the customer that we've identified as a fragrance fashionista, she considers scent to be an essential part of their identity and a form of self-expression. The fragrance fashionista values quality over quantity and are immersed in the world of fragrance. Because they're extremely invested in newness, they buy on average more than 30 uniquely fragranced items from us annually. and are more likely to purchase our core fragrance categories as well as our newer categories. Their motivations are different, for example, from the customer that we've identified as a casual fragrance explorer who enjoys fragrance and the experience of shopping for new products and is drawn to products that connect them to experiences and seasons, but does not necessarily consider fragrance to be part of their identity. Our customer segmentation analysis is informing our innovation, our merchandising, and our marketing to build deeper connections that drive more profitable customer relationships. Further, as we customize our merchandise and marketing to specific customer segments, we can be more effective and efficient in reaching them. As we've discussed previously, we're also building our technology capabilities to engage with individual customers through more personalized, targeted marketing. By leveraging data and analytics, we expect to induce trial, encourage cross-channel and cross-category shopping, increase trips, build the customer's basket, and deliver a more targeted promotion strategy to reduce our reliance on broad-based promotions. Though promotions will still be a traffic driver for our business, we're working to sharpen our approach make it more targeted to the individual customer, and drive incremental sales at a higher margin. With our IT separation from Victoria's Secret expected to be substantially complete this summer, we will begin testing personalized marketing and optimized promotions. Our loyalty program is, of course, another critical tool to engage with our customer and meet them where they are. As you know, our loyalty program launched nationwide in August, with one of the fastest enrollment speeds in the industry. We've enrolled a total of 37 million members to date, and our loyalty sales represent approximately two-thirds of our US sales since launch. Our loyalty customers also have, on average, higher spend, greater retention rates, and they make more trips. And while we're very pleased with our speed of enrollment, we are still only in the early stages of deriving value from this program. We're testing new loyalty capabilities in the second half of the year and focused on fully integrating our loyalty experience throughout our channels. Working in concert with more personalized marketing, we're exploring future program enhancements like accelerators and flexible rewards. Next is enabling a seamless omnichannel experience. Though we have a strong digital business, we have a significant opportunity to drive future growth by moving from a largely transactional website and app to more experiential platforms. Our stores and our talented associates deliver an engaging shopping experience, and we expect to leverage our digital assets along with customer data and analytics to expand that experience both inside and beyond the walls of our stores. We're working over the longer term to drive discovery and inspiration through personalized landing pages, video content, and product recommendations that result in more exploration, increased basket size, and ultimately more purchases. Beauty and personal care customers value a seamless omnichannel experience. We are pleased to have completed our national rollout of buy online, pick up in store, or BOCUS capabilities to our U.S. stores this quarter. And we're focused on better connecting our stores and digital channels and eliminating friction in the customer journey. We know this is a significant growth opportunity because dual channel customers spend three times more than single channel customers. Yet dual channel customers currently represent less than 15% of our customer base. Finally, we're enhancing our operational excellence and efficiency by continuing our top to bottom review of the business to identify opportunities for margin expansion. As you know, we are targeting $200 million of annual cost savings across the company and are well on track to delivering over half of those savings in 2023. We recently announced changes to our leadership team, which support our strategy to accelerate our growth and improve profitability. Tilana Gunasinghe joined us last month as our Chief Digital and Technology Officer, and he has hit the ground running leading our digital and technology strategy, our digital operations, and data and analytics. Also, Maurice Cooper will be joining us next week as our Chief Customer Officer. Maurice will be responsible for elevating the brand and developing a personalized and compelling end-to-end customer experience. As we recently announced, Wendy Arlen will be stepping down as CFO by the end of July, and we have initiated a search for her successor. On behalf of the entire Bath & Body Works team, I want to reiterate our sincere thanks to Wendy for her significant contributions to the company, as well as her commitment to making this a seamless transition process. Looking ahead, we are moving with purpose, focused on taking actions and building the capabilities that will drive profitable growth. Despite the current macroeconomic pressures, I continue to be confident in our ability to reach our $10 billion sales target and deliver industry-leading operating margins of 20% over time. We have a diverse set of opportunities and multiple strategic initiatives to support long-term top-line growth and margin expansion with five key areas of focus. First, elevating the brand by optimizing our core through innovation and upgrades to our forms, packaging, and merchandising. Second, extending our reach through adjacencies and international growth. Third, engaging with our customers by fully leveraging the strength of our loyalty program, enhanced technology, and more personalization. Fourth, enabling a seamless omnichannel experience by elevating our digital platform and better connecting them with our stores. And finally, enhancing operational excellence to drive efficiency. Bath & Body works as a strong foundation with leading market share, top brand awareness in our industry, and customers indicating a strong propensity to recommend our brand. Once our categories normalize and return to a growth path, we are confident our strategic initiatives will position us well for consistent, above-industry growth. Our team continues to leverage the key competitive advantage of our vertically integrated supply chain, which allows us to respond quickly to changing customer and macro trends and fulfill our promise to the customer by bringing products to market with industry-leading speed. We're moving forward through the remainder of the year with a clean inventory position, a strong balance sheet, a favorable debt maturity schedule, and very strong free cash flow generation. We're confident that we have the financial strength and the strategic capabilities to manage through a rapidly evolving environment. As we strengthen our position as a leading global omnichannel home and personal care brand, we are prioritizing actions which will deliver long-term shareholder value. With that, I'll turn the call over to Julie, who will review our category performance and product expansion strategy.