Bath & Body Works, Inc.

Good morning. My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Third 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 and Body Works' third 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 and 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 Eva Barado, Chief Financial Officer. I'll now turn the call over to Gina.

Thank you, Heather, and good morning, everyone. Thank you for joining us today. I'll start this morning with a review of our third quarter results then discuss our view of the fourth quarter, provide some initial perspectives on fiscal year 2024, and discuss the progress our team has made in executing our strategy. Before we begin, I'd like to thank our teams who continue to deliver on our initiatives and commitments and control what we can control. Now for the results. Third quarter net sales were in line with the higher end of our expectations, declining 2.6% compared to the prior year, and representing 100 basis points of sequential improvement versus the second quarter. The team delivered strong merchandise margin improvement and continued benefits from our cost optimization initiatives. In fact, our year-over-year merchandise margin rate increased 200 basis points in the third quarter, and we generated flat AURs, or average unit retails, in line with our plan. From a category perspective, in the third quarter, sales of soaps and wallflowers increased versus the prior year, body care sales were flat, and candles and sanitizers declined as expected. While we continue to see post-pandemic normalization in candles and sanitizers, we held unit share in candles and gained unit share in sanitizers year-to-date. Throughout the third quarter, we continue to demonstrate the strength of our seasonal merchandising and exceptional innovation capabilities. We were pleased with our Halloween results, delivering a 5% sales increase over last year's event. Our team remained focused on delivering newness with elevated single fragrance launches, such as Luminous. Our men's business continued to outperform, and customers responded positively to the addition of men's grooming to our product line. We're leaning into this growth opportunity with new marketing programs to drive increased awareness and customer acquisition. Consistent with the trend of fragrance from head to toe, customers responded well to our launch of fragrant hair care, now in approximately 30% of our U.S. stores. Finally, the limited launches of laundry and our new expanded lip collection also performed well, which Julie will discuss in a moment. Turning to sales, year-over-year trends improved at the beginning of the quarter, with roughly flat sales in August driven by strong Halloween performance. Sales then softened in September and October as the macroeconomic environment pressured consumer demand and we lapped the national launch of our loyalty program last year. Although we experienced positive traffic growth overall for the quarter, traffic softened in September in line with mall and off-mall traffic. Additionally, as expected, we continue to see the customer carefully managing their spending, which pressured basket size and conversion. Based on what we are seeing with the cautious consumer and continued market declines in two of our categories, we anticipate a continuation of softer top line trends in the fourth quarter, and we are lowering our top line guidance for the full year. We are also raising the midpoint of our diluted earnings per share guidance to reflect merchandise margin outperformance and the benefits of our capital deployment in the third quarter. Eva will provide more details in a moment. I also want to take the opportunity to provide some early views on 2024. We continue to invest and focus on building capabilities to better serve our customer and drive profitable growth. Keeping in mind where we are in the implementation process for our strategic initiatives, as well as the current macro environment and continued industry level category pressure, we see a path to positive sales growth in the second half of 2024. Of course, we'll continue to focus on driving efficiency in our business throughout 2024 as well. Looking out longer term as we execute our strategy and scale initial benefits from all the great work the team is doing, we are increasingly confident in our ability to achieve our sales and operating margin targets. Turning now to some of the progress we're making. We continue to focus on our five key growth drivers. First, elevating the brand through innovation and upgrades. Second, extending our reach through new category adjacencies and international growth. Third, deepening customer engagement through our loyalty program, enhanced technology and more personalization. Fourth, enabling a seamless omnichannel experience. And finally, enhancing operational excellence to drive efficiency. Julie will speak to our progress in brand elevation and extending our reach, but first, I'd like to expand on the other three. As we work to better engage with our customer, we have a tremendous opportunity to leverage sharper tools and more targeted marketing to attract new customers and increase spend and share of wallet with our existing customers. We are building technology capabilities to implement a more personalized, targeted approach to marketing and promotions rooted in data analytics and customer segmentation. Through this work, we plan to acquire new customers and increase spend by incenting trial of new product, increasing cross-channel and cross-category shopping, growing basket size, and driving incremental trips. This year, we've also increased our testing capacity to allow for greater agility. With our technology separation from Victoria's Secret substantially complete, we began testing personalized emails in the third quarter, which allowed us to adjust email timing and offers to meet the customer mindset while reducing reliance on broad-based promotions such as direct mail. As we sharpen our approach to promotions and customize offers to the individual customer, we plan to drive incremental sales at a higher margin. For example, in the third quarter, we shifted a portion of our direct mail spend toward new customer acquisition via digital marketing channels and we're already seeing positive results. Our loyalty program is another critical tool for engaging with our customers and meeting them where they are. In August, we anniversary the national launch of our loyalty program. Since the launch, we've had industry leading enrollment speed. We have nearly 41 million members and loyalty sales represent approximately three quarters of our US sales since the national launch. Though our speed of enrollment has been impressive and we continue to grow our loyalty member base, we are still only in the early stages of leveraging the program and driving member engagement. We increased engagement this quarter by offering our first loyalty member appreciation days with early access to exclusive shopping events and offers and testing loyalty accelerators, starting with a double points day designed to move customers closer to reward redemption, which drives higher customer value. As we test more loyalty benefits in the future, such as tiering and flexible rewards, we are confident in our ability to deepen customer engagement and increase both sales and merchandise margin. Next, we are enabling a seamless omni-channel experience. Though we have a strong profitable digital business, we have a significant opportunity to drive future growth by moving from a largely transactional website and app to more personalized, experiential, and integrated platforms. By adding personalized landing pages, immersive content, and product recommendations, we plan to drive higher sales, more discovery, and larger baskets. In the third quarter, we added personalized product recommendations based on shopping behavior and a customized header to welcome recognized users by name and highlight their loyalty account balances. We also implemented a customer retention pilot powered by machine learning, which drove 7% greater retention for the targeted audience. To target customers who were inactive or who had abandoned their carts, we tested new retention and win-back offers, which increased sales. Importantly, beauty and personal care customers value a seamless omni-channel experience by reducing friction throughout the customer journey from browse to shop to purchase and offering convenient options like buy online, pick up in store or BOPUS, as well as Instacart and buy now, pay later, we can convert more single channel customers to dual channel customers, which on average increases spend threefold. BOPUS orders increased approximately 50% in the third quarter versus last year as customers continue to opt for convenience. When picking up their order, Approximately 30% of Bocas customers made an additional purchase in-store, a testament to the power of the omnichannel model. This quarter, we also added social proofing badges on our website, highlighting trending and best-selling products, as well as those products with limited supply. Given our customers' strong desire to obtain their preferred fragrances, we knew that alerting them to decreasing availability would incent them to lock in a purchase. Having implemented these initiatives to improve our omnichannel experience, digital conversion, inclusive of BOPIS, increased 4% in the third quarter versus the second quarter. Finally, we are enhancing operational excellence and efficiency through $200 million of planned annual cost savings across the company. We are on track to deliver approximately $150 million of those savings in 2023. And Eva will share additional details in a moment. As I touched on earlier, the customer has been cautious in managing their spending amidst macroeconomic pressure, but we are still driving positive traffic and customers are responding to newness, innovation, and our compelling seasonal events. We are taking action to deliver innovation and build the capabilities that will allow us to drive long-term profitable growth, even amidst external pressures. As we enter the critical holiday season, we are well positioned with a clean inventory position, a compelling product assortment, gifts at a variety of price points, a transportive store experience, and stores that are staffed and ready to serve, and an omni-channel model that allows customers to shop whenever and however they want. Bath & Body Works has a strong foundation with leading market share, top brand awareness, and a competitive advantage in our vertically integrated supply chain. which allows us to respond quickly to changing trends. We have a healthy balance sheet, strong free cash flow generation, and balanced capital allocation plans. Despite what remains a challenging macroeconomic environment, the initial results we're seeing from the implementation of our strategic initiative gives us even more confidence in our ability to reach our $10 billion sales target and deliver industry-leading operating income margins of 20% over time. I'd like to conclude by saying a big thank you to our outstanding partners and teams, especially our store and distribution center associates during this busy holiday season. They do a terrific job delivering a great experience to our customers and dedicating themselves to executing on our strategic initiatives. With that, I'll turn the call over to Julie.