Bath & Body Works, Inc.

Good morning. My name is Melissa, and I will be your conference call operator today. At this time, I would like to welcome everyone to Bath & Body Works' third quarter 2024 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 Luke Long, Vice President of Investor Relations. Luke, you may begin.

Good morning and welcome to Bath and Body Works' third quarter 2024 earnings conference call. Joining me on the call today are Gina Boswell, Chief Executive Officer, and Eva Barado, Chief Financial Officer. In addition to this call and this morning's press release, we have posted a slide presentation on our website that summarizes the information in these prepared remarks, in addition to providing some related facts and figures regarding our operating performance and guidance. As a reminder, Some of the comments today may include forward-looking statements related to future events and expectations. For factors that could cause the actual results to differ materially from these forward-looking statements, please refer to this morning's press release, as well as the risk factors in Bath & Body Works 2023 Form 10-K and our quarterly report on Form 10-Q, which will be filed this week. Today's call also 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. Fiscal 2023 was a 53-week year. To provide the best understanding of the business, all category sales results, year-to-date market share data, loyalty metrics, and selling metrics discussed during the call were on a comparable calendar basis. which is the 13 weeks ended November 2, 2024 versus the 13 weeks ended November 4, 2023. All other results discussed are on a reported basis, which is the 13 weeks ended November 2, 2024 versus the 13 weeks ended October 28, 2023. With that, I'll turn the call over to Gina.

Thank you, Luke, and good morning, everyone. We appreciate you joining us. I'll start with a high-level review of our third quarter results, including the customer behavior we're observing, the actions we're taking to drive growth, and the progress we've made against our strategic priorities. Then Eva will walk through our financials in more detail. We delivered a strong quarter. Net sales were $1.6 billion, up 3% versus the prior year, and earnings per diluted share were 49 cents. We beat our guidance on both the top and bottom line, and we are raising our full year guidance to fully reflect this outperformance. I've spent a lot of time in our stores over the past few months, and I've seen firsthand how customers are responding positively to our seasonal merchandise and storytelling. Witnessing our beautifully arranged floor sets along with our store associates' unique ability to meet our customers' needs is always a great reminder of the strength of our retail experience and the team that enables it. Our continued product innovation coupled with improved demand generation, the compelling value of our products, and our team's strong execution drove positive store traffic and conversion for the quarter. our store traffic exceeded the third-party benchmarks we track. Each of our categories, body care, home fragrance, and soaps and sanitizers grew low single digits year over year, and year to date we maintained our overall leading unit market share. And with this quarter's results, our net sales performance adjusted for calendar shifts has sequentially improved each quarter during 2024. Our strategic investments and focused execution of our 5E strategy are driving momentum toward long-term profitable growth. As a reminder, the 5Es of our strategy are elevating the Bath & Body Works brand and core products, extending our reach to new adjacencies and markets, engaging with customers in new ways, enabling a more seamless omnichannel experience, and finally, enhancing operational excellence and efficiency. All of this is underpinned by the hard work of our talented associates. We made progress on each of the five E's in the quarter, starting with elevating the brand and core products. We are innovating across our portfolio and are continually raising the quality of our products, including updating the ingredients, packaging, and fragrances to meet and create customer demand. Our home fragrance performance in the quarter was fueled by growth in the candle business. as we drove targeted marketing investments coupled with a successful new promotional event. The team strategically timed this new event to align with this year's holiday calendar. We executed well and met the customer mindset. As we noted when we reported our Q2 results, it is a competitive market with a value-conscious consumer, a trend that has continued. And as the category leader in home fragrance, we are reasserting our differentiation as America's most loved candle brand, through storytelling that conveys the quality and value of our products, through a compelling assortment at a range of price points, and by utilizing our speed and agility to meet the market where it is, driving unit share gains in the quarter. And while normalization of the candle market has impacted us this year, on a unit basis, it has moderated each quarter, and we do not expect it to have a material impact on our business in 2025 and beyond. Fragrance is core to who we are, and we drove growth in body care by delivering compelling fragrances. For example, customers responded positively to the full North American rollout of Everyday Luxuries. This helped drive double digit growth in fine fragrance myths during the quarter. Everyday Luxuries is connecting with a younger customer, and as a platform, it has the potential to drive growth for years to come. Body Care also benefited from our on-trend single fragrance launches of Vanilla Romance and Platinum. And we're excited about the launch of our latest cross-category fragrance, Perfect in Pink, which we debuted in the final week of the third quarter. Soaps and sanitizers growth was driven by strength in core sanitizers, moisturizing sanitizer forms, and a new one-ounce spray. I also want to spend a moment on collaborations. As a reminder, collaborations are a key element of our strategy to drive growth in our core products. They deliver highly differentiated storytelling that generates top-of-mind brand awareness with existing customers and attracts new customers. Our selective approach to collaborations not only drives traffic, it also enhances our brand's cultural relevancy. In the third quarter, we launched part two of our Stranger Things collaborations. This was primarily focused on the home fragrance category and generated buzz around our Halloween floor set, which exceeded last year. We also announced our Emily in Paris cross-category collaboration. This kicked off with a successful early access event at the start of Q4, and the full launch is just around the corner. On the second pillar of our 5B strategy, extending our reach, We are growing our new category adjacencies, opening additional store locations, and expanding in international geographies to drive growth. Adjacencies are an opportunity to expand and diversify our product portfolio, applying our fragrance expertise to large addressable markets. We evaluate adjacent category performance based on their incrementality to the basket, repeat purchase rates, and ability to attract new customers. Our adjacent categories of men's hair, lip, and laundry continue to perform well and year-to-date represent approximately 10% of our business, with potential to become a larger percentage of our mix in 2025 and beyond. I'll share a few of the highlights from the quarter. Today, men's, which is included in our body care business, is our largest adjacency, and we see significant opportunity as we continue to increase awareness. Momentum in the men's business remains strong this quarter as we continue to evolve our marketing and launch new fragrances. For example, customers responded well to our new Vanilla Noir fragrance. In lip, which is also included in our body care business, you can expect to see additional launches of exciting products like gloss and lipstick, which we're confident will continue to excite younger customers. In laundry, which is included in home fragrance, we completed the full U.S. rollout in September. We believe it is an exciting platform for long-term growth that capitalizes on our differentiated fragrance expertise. Moving to real estate, we continue to reshape the portfolio and move stores off-mall. Approximately 55% of our North American stores are in off-mall locations, and the portfolio remains very healthy. International markets are an attractive pillar of our strategy. International represents approximately 5% of our net sales, and there's significant long-term opportunity as we enter new markets and expand in existing markets. System-wide retail sales grew double digits in Q3 in the areas not affected by the war in the Middle East. While our business continues to be pressured in the regions affected by the war, where we saw system-wide retail sales decline double digits, the year-over-year impact began to moderate in October. At the end of the third quarter, we celebrated the opening of our 500th international store in London. Our partner store openings this year remain on track with approximately 50 net new stores this year. Next is our focus on engaging with customers and enabling a seamless omnichannel experience. Our teams have made strides in marketing, loyalty, and technology. We are employing multi-year strategies in these areas that are key enablers of sustainable long-term growth. And these efforts are already having a positive impact on the business. For example, during Q3, we achieved record-high customer retention rates and an improvement in attracting new-to-brand customers. We're especially encouraged by the strong growth within our highest-value customer segment called the Fragrance Fashionistas. This group, which purchases up to 30 fragrances a year, has grown every quarter this year. We also continue to advance our loyalty program, which has industry-leading satisfaction ratings and represents over 80% of our sales. In Q3, we had approximately 38 million active loyalty members, up 4% compared to the prior year. Loyalty customers visit us more frequently, spend more, have higher cross-channel and cross-category purchase behavior, and higher retention rates than those outside the program. Our technology roadmap is on track. We are building the foundational tools and systems to support long-term growth and enabling new capabilities to increase customer engagement and provide a more seamless cross-channel shopping experience. In Q3, we successfully launched our Everyday Luxuries line on TikTok Shop, allowing us to reach younger customers where they are. According to Fiverr, nearly 54% of Gen Z customers will discover holiday gifts on TikTok this season. We intend to continue to leverage this important platform to connect with this audience using highly engaging content to boost brand awareness throughout the holiday period. Finally, enhancing operational excellence and efficiency. While we execute initiatives to engage our customers and drive top-line growth, we continue to be focused on cost discipline. Our Fuel for Growth plan is progressing, and we now expect to deliver $150 million of incremental cost savings by year-end, bringing the two-year total to $300 million, significantly exceeding our initial targets. Additionally, our beauty part continues to be a significant competitive advantage, driving speed and operational agility. With around 85% of our products manufactured in North America, we believe we are relatively well positioned for any potential tariff fluctuations. To summarize the quarter, I'm pleased with our strong performance and the momentum we're building. As we enter Q4, our key holiday selling season, we're poised to drive strong demand and are excited to offer compelling products with gifts available at a wide range of price points. Our fulfillment centers and stores are fully staffed and ready to deliver an exceptional retail experience, while our omnichannel approach ensures customers can shop seamlessly, wherever and whenever they choose. Over the long term, our strategy and the actions we're taking position the company to return to sustainable, profitable growth, driving meaningful shareholder value creation. Before I turn the call over to Eva, I'd like to thank our teams for their outstanding execution, for delivering against our strategic priorities, and for consistently providing great service to our customers. With that, I'll turn it over to Eva.

Thank you, Gina, and good morning, everyone. We executed well in the third quarter and delivered earnings per diluted share of 49 cents, beating our guidance of 41 to 47 cents per diluted share. This outperformance was driven by net sales and our ongoing cost discipline. As discussed earlier, consumers responded favorably to our product innovation and compelling value proposition. We delivered net sales of $1.6 billion, an increase of 3% versus prior year, beating our guidance on the top line as well. As expected, the calendar shift benefited net sales by approximately 200 basis points in the quarter. In U.S. and Canadian stores, net sales totaled $1.2 billion, an increase of 4.4% versus prior year. Direct net sales were $321 million, an increase of 1.5% compared to last year. As a reminder, BOPUS net sales are recognized as store net sales. When adjusted for BOPUS, direct outperforms stores. Focus demand increased approximately 40% in the quarter, and year-to-date represents approximately 25% of total digital demand. International net sales were $69 million, down 11.1% from the prior year. The decline was entirely driven by the markets affected by the war in the Middle East, which currently represents about half of our total international business. Our system-wide retail sales performance continues to be strong in areas not affected by the war, growing double digits year over year. International was an approximate 70 basis point headwind to Q3 net sales growth. Third quarter gross profit rate of 43.5% was in line with expectations and a decline of 10 basis points compared to prior year. Gross profit benefited from continued cost savings, offset by strategically planned promotion activities in the quarter. AURs increased 1% in the quarter, driven by mix. We will continue to utilize our agile business model, and we will take the appropriate pricing actions to maximize sales and margin for the company. Our nimble supply chain allows us to quickly respond to the competitive marketplace and consumer preferences and demand. SG&A as a percentage of net sales of 30% was better than our expectations, a result of our discipline management of our home office costs. There were also some shifts in the timing of spend from Q3 into Q4. Finally, I would note that third quarter SG&A reflects an incremental year-over-year 100 basis point of marketing investments, consistent with prior quarters. The benefits of our fuel for growth cost optimization work spans across both gross profit and SG&A. In the third quarter, we deliver benefits of approximately $35 million. As Gina mentioned, the expected 2020 fuel, 2024 fuel for growth contribution now totals $150 million, up from our prior estimate of $130 million. The increase is largely a margin. I am pleased with our team's outstanding work on this initiative. Third quarter total operating income of $218 million decreased 1.3% and was 13.5% of net sales. With respect to inventory, we ended the third quarter with total inventory down 2% to last year. Heading into the holiday season, our inventory levels are well positioned. For real estate, in the third quarter, we opened 35 new off-mall stores and permanently closed 19 in-mall stores in North America. Internationally, our partners opened 13 net new stores in the third quarter, resulting in a total international store count of 510. Turning now to our financial guidance. Our Q4 sales expectations include some unique elements given the calendar shifts, the 53rd week last year, and the five fewer shopping days between Thanksgiving and Christmas. The midpoint of our Q4 net sales guidance assumes growth that is consistent with our Q3 results when adjusting for these calendar impacts. Our reported sales are expected to be down 6.5% to down 4.5% versus the prior year. We expect fourth quarter gross profit rate to be approximately 46.3 percent, an improvement of 40 basis points versus prior year, reflecting our fuel for growth savings and distribution productivity. We expect fourth quarter SG&A rate to be approximately 22.4 percent, up approximately 40 basis points to last year, largely due to our marketing investments, which we begin to lap in the quarter. We expect fourth quarter net non-operating expense of approximately $70 million, a tax rate of approximately 26.4%, with weighted average diluted shares outstanding of approximately 217 million. Considering these inputs, we are forecasting fourth quarter earnings per diluted share of between $1.94 and $2.07. Now I will highlight our fiscal 2024 guidance. For the full year, we now expect net sales range to be down 2.5% to down 1.7%. The 53rd week in 2023 added $81 million to net sales and represents a headwind of approximately 100 basis points to our 2024 growth. We have provided the quarterly impact on net sales due to the calendar shifts in our slide presentation. We continue to expect gross margin rate of approximately 44% and SG&A rate of approximately 27%. We are raising and narrowing our full-year guidance for adjusted earnings per diluted share to between $3.15 to $3.28, up 2% at the midpoint versus our prior guidance, reflecting the Q3 outperformance and our Q4 outlook. Now for a quick update on capital allocations. Our top priority remains driving sustainable long-term profitable growth through investments in the business. Year-to-date through the third quarter, our total capital expenditures were $166 million. Our full-year capital investment plan remains approximately $250 million, the vast majority of which will be reported as capital expenditures in our cash flow statement. During the quarter, we paid out $44 million in dividends, and we have paid out $134 million year-to-date. Additionally, we recently announced a quarterly dividend of $0.20 per share, payable on December 6th. We expect to continue our annual dividend of $0.80 per share with the intention to increase the dividend over time with sustained earnings growth. During the quarter, we repurchased 3.2 million shares of common stock for $99 million at an average price of $30.87 per share. Year-to-date, we repurchased 9 million shares of common stock for $348 million. Our full-year guidance reflects the expectation to repurchase $400 million. Our gross adjusted debt to EBITDA ratio is 2.7 times on a trailing 12-month basis. Year-to-date, we repurchased $200 million principal amount of senior notes, and in July of next year, we have $314 million of debt maturing, which we will pay down. After investments in the business, we continue to expect to generate full-year adjusted free cash flow between $675 and $775 million. As outlined, we'll put that towards our capital return priorities of dividend and share repurchases. Lastly, we will not be providing any guidance on 2025 until we report our Q4 2024 results. I am pleased with the momentum in the business we are building as we head into the holiday season and execute against our strategy. With that, I'll turn the call back to Gina for some closing remarks. Thank you, Eva.

To close, I'd like to thank our teams for delivering Q3 net sales and earnings above the high end of our range, and I am pleased to raise our full year guidance to reflect the outperformance. We are laser-focused on executing the all-important Q4 and building on our momentum. Our focused investments are working, and we're beginning to see results. We have the right strategy in place and are taking the right actions to position the business to navigate this volatile near-term environment and to return to long-term, sustainable, profitable growth as we enter 2025. We have a best-in-class team executing, and as we look to the new year, we have a lot to be excited about. I will now turn the call over to the operator for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Good morning. You said on the slide deck that you don't expect candle normalization to have a material impact on the business in 2025 and beyond. Is this a change, and what drives your confidence that this pressure is behind you?

Thank you, Lorraine. Great to hear from you. We, as I said in the remarks, we are the candle category leader, so we're looking at the market as a whole. We've been exerting our leadership, and as a result of amplifying also our quality messaging and meeting the customer where they are, we've seen the candles certainly gain share, unit market share, and we drove growth. The comment that we made was we don't expect candle normalization impact beyond. We have seen some of the levers, for example, for us when we shine some of our collaborations on candles, Stranger Things Part 2, fall seasonal assortment. The customers really responded to some of these seasonal bringbacks as well, and that throws growth in the candle markets. So effectively, we see that as behind us. It had been normalizing and impacting us in 2024, moderated, and we're all about putting the innovation, the collaborations, and the marketing brand building activities behind this leading. Having leading market share as well allows us to see that picture. Thank you for the question.

Thank you.

Thank you. Our next question comes from the line of Mark Bolchwager with Baird. Please proceed with your question.

Good morning. Thank you. I wanted to ask on gross margin. I think this was the first quarter in quite some time where you didn't deliver upside to the gross margin guidance and even with some of the outperformance in the fuel for growth initiative. So hoping you can just talk us through some of the puts and takes there. And then just bigger picture, guidance implies about 17% EBIT margin this year. Is that the right level for this business, or do you think the sustainable top-line growth will require higher levels of investment moving forward? Thank you.

Thanks for that question, Mark. This is Eva. I'll take that one. We delivered right in line with our expectations on gross margin. We benefited from the cost savings. We are lapping significant improvements last year in gross margin. It was about 140 basis point expansion. And we did have some incremental strategically planned promotions that were pleased with the returns on both the top line as well as the bottom line. So we're pleased with our margin performance. As you ask your question longer term, our target gross margins are 45%. Our guidance for this year implies about 44%, so we're pleased with the progress we've continued to make to improve our margins and remain focused on moving toward those target margins of 45% and 20% at the OI level. Thank you. Next question, please.

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great, thanks. So, Gina, could you elaborate on category trends versus plan that you saw in the third quarter and maybe the cadence of traffic that you saw as the quarter progressed, what you're seeing so far in November? And then for Eva, just on gross margin, if you could maybe bridge the 40 basis points gross margin expansion in the fourth quarter, just maybe walk through the drivers.

Thanks, Matt. I will start and I'll ask Eva to chime in as well. As we said, the categories themselves, the body care, home fragrance, and soaps and sanitizers grew in the quarter compared to last year. So low single digits. It was great, actually, to see the positive response that customers had to our seasonal merchandise categories. They continue to seek our newness and innovation, and so things like Everyday Luxuries, which was lifting the fine fragrance mist very nicely, and our seasonal fragrance launches like Vanilla Romance and Platinum. These are on-trend fragrances, which lifted those categories. Overall, it was great to see the categories as a whole respond to this level of newness and innovation, and it's supported by the competitive value proposition. that we provide, and also increasing the demand-driving investments in the marketing side. So that's it on the category side. Over to you, Eva, for the remainder.

Sure. So on the gross margin, Matt, overall the 40 basis point expansion is largely driven by B&O, continued benefits from our direct fulfillment as we optimize our network. We also do have some home office cost reductions that benefit the B&O line as well. So we're pleased with the Q4 gross margin expectations. In terms of traffic trends in the quarter, overall, we were really pleased with traffic throughout the quarter. Traffic was up in our stores throughout the quarter. And it was driven by the newness that we brought. Everyday Luxuries launched, drove traffic, our fall candles, our traffic exceeded external benchmarks. And finally, I'll go back to Halloween. It feels like a long time ago, but our Halloween performed really well, up double digits, which was amplified by our Stranger Things Part 2 collab. So as you have Three legs of the stool working together, our promotion, our product, amplified by our marketing. We're really pleased with the response we got from customers. Thank you. Take our next question, please.

Thank you. Our next question comes from the line of Alex Drayton with Morgan Stanley. Please proceed with your question.

Perfect. Thanks so much. Just first on revenue, it looks like when you adjust out the 53rd week dynamics, you actually are delivering that growth you hoped for in the back half. Do you see it that way? And then what's holding you back from the mid single digit to high single digit hopes you have longer term? And then one quick final one is just on anything you can provide on the margin profile of the adjacencies as they become a bigger part of the revenue base. Thanks a lot.

Hi, Alex. This is Eva. I'll take the first couple parts of the question, and Jean will take the third part. As you looked at our Q3 performance and our expected Q4 performance, when you normalize for the calendar shifts, what we delivered in Q3 as well as at the mid and the high, we continued to drive growth. Obviously, on a reported basis, Q4 has a significant number of calendar shifts, the 53rd week, and the shorter shopping time between Thanksgiving and Christmas. So, overall, we're pleased, and we're pleased how we're entering the quarter and the momentum that we've built. On the adjacencies, you know, overall, it's factored into our gross margin outlook. I don't want to comment specifically on any given product, but a A typical rule of thumb is as products mature, as they scale, we can improve our gross margins. And I'll turn it back to Gina looking longer term.

So thank you. I think let me just comment on adjacencies and go longer term as well. As it relates to adjacencies, we mentioned that it was in aggregate about 10% of our business. And just to remind us about the goal of adjacencies, it's really to extend our reach, increase penetration, diversify the portfolio while still growing the core. And in this quarter, adjacencies in the aggregate grew above shop. That is consistent with the first half of the year. So the sequential improvement was driven by the core. And so to have both adjacency and core driving is really important. You know, on the, as I said, Eva said as well, we're not going to comment specifically on 2025, but we should expect to see improved health in our core categories. We should see the adjacent categories continue to grow in both size and contribution. And we're really pleased with where we sit right now. Thank you. Next question, please.

Thank you. Our next question comes from the line of Paul Lejouet with Citi. Please proceed with your question.

Hey, thanks, guys. Sorry if I missed it, but what was the third quarter merge margin and what is your plan for merge margin in 4Q? And anything you can share on AUR on like for like and what's driving that mix, the AUR being up one, what is driving that higher?

Yeah, Paul, this is Eva. On the margin, I would say Merch Margin was flattish to last year. And as I said earlier, we continue to benefit from some of our initiatives to improve costs. We're lapping a very strong improvement last year, offset by some of the promotional activities. As you look at Q4, I would say Merch Margin pretty flattish as well. And really, the improvement year over year, we're driving from our B&O efficiencies.

And I'll add on the like for like and the mix. It's great to see mix driving AUR up 1%. And really, it's a function of the combination of product price and marketing coming together. But, you know, we have a good, better, best product mix, and that's great to see in this you know, with a wide variety of price points. We're elevating the value that we deliver to our customers and the innovation. So overall, you know, we're pleased with where we sit in this environment and excited to see the results show up in the P&L. Thank you for the question. Next question, please.

Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Thanks. Hey, good morning, everyone. Nice to see the progress. Eva, how much was marketing as a percent of sales? How are you thinking about that going forward? And then, Gina, just can you maybe to dig into the collab learnings a little bit? I know it's still relatively early, but you have a few in place. I know you're great with data. So I'm just curious how you would frame the learnings and the benefits maybe you're seeing so far. Would you characterize them as driving new customers, driving greater frequency of existing, boosting the current shopper's annual spend? Does it smooth out otherwise seasonal purchases? I'm just trying to think through if you could share It seems like you're creating catalysts as opposed to relying on what advanced specific holidays or seasons do that for you. So any color there would be helpful. Thank you.

Yes, I mean, I'll start with the marketing. Overall, on an annual basis, it's about 3.5% of our sales. In the quarter, it was about 100 basis points step up from LY. And you see in Q4, right, we're beginning to lack. the marketing investment, but there's still a step up bringing us to the full annual 3.5%.

And as it relates to your question on CoLab learnings, you know, this is really driving the growth in the core products, and it's generating that top-of-mind awareness with both existing customers and attracting new customers as well. And on top of that, really delivering a highly differentiated storytelling. So we've got a selective approach when it comes to collabs. Not only does it drive traffic, which is a measure that we use to answer your question, but it's also enhancing our brand cultural relevancy. So examples of that, Stranger Things Part 2 really generated buzz in the Halloween floor set, which exceeded expectations, as Eva discussed. Our Emily in Paris cross-category collaboration kicked off with a successful early access event at the start of this quarter and the full launch of that. is right around the corner. And so in total, the metrics of traffic, their brand building relevancy, particularly for the 18 to 34-year-old customer, because the way we choose these is the complementarity of what the Bath and Body Works customer is and the Netflix property, in this case, that we would be working with. So that's the overall CoLab learnings, and we're really pleased with success so far. What's great about having Bridgerton out of the gate success is that there's a pipeline of people who would want to work with us, and we can be very choosy from that perspective. Thank you for the question. We're ready for our next one.

Thank you. Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Hi, good morning. Thanks for taking our question. Last quarter, you mentioned that the adjacent categories were performing well, particularly with existing customers, but it was taking some time to build the brand awareness and generate a greater number of new-to-brand customers. I don't think we've heard similar language today and just wondered if anything has changed there.

Actually, the adjacencies are delivering as we expected, and there's a strong delivery there. Nothing's changed from that perspective, although what we do watch is for adjacencies, we want to make sure that we've got the incrementality that is building the baskets. So no change there it is. Repeat rates are still very strong, so we're excited by that. And depending on the category, whether it's men's, hair, lip, and laundry, varying degrees of the percentage of customers that are new to the brand. So, we're pleased, actually, with the progress. These are still at varying degrees of penetration and percentage of our total portfolio, but no change, and they're contributing as well as the core, so it's great to see that. Thank you. Next question, please.

Thank you. Our next question comes from the line of Jonah Kim with TD Cowan. Please proceed with your question.

Thanks for taking my question. Obviously you have some nice momentum with newness this year. Could you talk about how much of the sales is driven by newness now? And as we think about next year, if you plan to ramp that up and, and just also wanting to get some color on the cadence of newness as well, as far as you can provide some, some color around it. Thank you so much.

Yeah. Thank you for the question. We, you know, talk quite a bit about the core and more. And that usually refers to, you know, the core categories, which we commented on all three big categories being up in sales. We also talk about more. And more is the adjacencies, but it's also around the level of newness. And we are every bit as driven by newness as we have in the heydays of BAP and Body Works, which I'm pleased to see. The customer will always come for newness and innovation. It is especially scalable, relevant newness. And so we're going to continue to work that winning recipe. There's no particular ramp on newness next year, but as a percentage of the portfolio will continue to be the lifeblood of this business. And we're excited by the pipeline that we see. Thank you. Next question, please.

Thank you. Our next question comes from the line of Ike Bartow with Wells Fargo. Please proceed with your question.

Ike Bartow Hey, good morning, everyone. Eva, maybe first one for you. Just on the international side, maybe excluding the calendar shifts, what's the expectation for 4Q and the timing of return to growth given the headwinds there? And then this follow-up for Gina, it doesn't sound like it, especially based on your tone and your Q4 outlook, but just because of the gross margin, the lack of robust upside you guys have been putting up, but also the revenue upside, just trying to understand, is there any kind of strategic shift in your view where you need to give up a little bit more of the gross margin to drive more productivity and more market share gains? It doesn't sound like that's what you're trying to message, but I just want to double-click into that. Thanks.

Thanks, Ike, for the question. Overall, as we look at international, a couple things I just want to highlight for you. First, in the areas not affected by the war, system-wide retail, sales grew double digits. We actually saw an acceleration, and that's underpinning the health of the business, right? And that was store openings and comps, and we feel really good about the acceptance of of the brand there. Now the war affected regions represent about half of our business and they continue to be pressured. In October, we saw a bit of relief as we began to annualize the start of the war, but it's really difficult to predict the dynamics there. For the fourth quarter, from a reported sales perspective, I would expect sales to be down mid-single digits, and if you think about our commentary last quarter, if you look at the back half of the year, we're largely in line with our commentary last quarter. So, we'll have more to say about 2025 on our earnings call, but we see international as a great opportunity for longer-term growth and entering new markets. Thanks.

And, Ike, to your question about the growth margin, I think you know, the gross margin that we spoke about that Eva talked to is on top of already very healthy gains in the anniversary. There's no strategic shift of giving up on gross margin. We came in line with expectations and gross margin. But what we are doing is we're leveraging our core strength, which is we have this very agile model, as you know, in supply chain, and we can leverage that and chase best sellers and winners and so forth. And so if I go back to the real core performance levers that we have, I think of it as four legs to a chair. We've got the scalable relevant newness. We've got the competitive value proposition. We've got the increased demand driving investments. But above all, we also have this agile supply chain model that allows us to react to customer demand and meet them where they are, both in our core categories as well as our adjacent. Thank you for the question, and we will take our next question.

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.

Great. Thanks. Good morning. I want to ask you about loyalty as it's continued to gain some really nice momentum, and what your thoughts are from here, how much more opportunity is there to leverage your program, learnings that you've made from them. In terms of the manufacturing, great to hear about the 85% that is in the U.S. I was wondering if you could just discuss your competition, if there's any color that you can provide and how much exposure your competition has to overseas manufacturing. That would be very helpful. Thank you.

Thank you. Well, let me start with loyalty, which we're really pleased about. Our loyalty program, as you know, has very high member satisfaction rates of 93%. and accounts for over 80% of our U.S. sales. As we move forward, we're going to get even more out of the approximately 38 million active members of our program, and as we said in our remarks, it's up 4% compared to the prior year. But this is also about deepening the engagement in the program. We know that loyalty members visit us more frequently. Our goal is to get customers' earnings and redeeming their points with greater frequency because we know when customers go up that redemption ladder, They're even more valuable to us, and we're pleased to say that actually that happened. We call this the loyalty flywheel, actually. This is when reward redemptions increases, which it did, when attached sales to the loyalty program increases, which it did, and then when newly enrolled active members, you know, loyalty members enroll with the app, they're proven to have an even higher engagement and spend. So overall loyalty delivering on the metrics that, you know, we have, and we're really pleased to see that progress. I think on the manufacturing point, all I'll say is I don't have any color on the competition. We're just pleased with the advantage that we have having here in our backyard beauty park, but also together representing 85% in North America.

Gina, I'd just add, we've worked diligently as a company over the last several years to reduce exposure and to increase our agility. We believe it puts us in a very good place. Great, thank you. Next question, please.

Thank you. Our next question comes from the line of Christina Katai with Deutsche Bank. Please proceed with your question.

Hi, good morning, and thank you for taking the question. I wanted to ask about your recent launch of TikTok Shop and then just building on that early success. Can you share maybe what the plans are to further leverage this platform to reach younger demographics, particularly during the holiday season? And then secondly, within that, just what are some of the key metrics that you are using to measure the effectiveness of these campaigns? Thank you.

Thank you, Christina. The launch of TikTok Shop that happened this quarter was exactly that, right, to allow us to reach the younger customers. And we're learning. It's early, but we like what we're seeing. We are making this channel and, more importantly, this marketing medium part of our holiday season activations. We're going to complement it by other social media strategies as well to sort of amplify our brand awareness. And as you know, those are things like Instagram, YouTube, and so forth. So it's a combination of all the social media strategies directed towards a broader reach, particularly with the younger customer. And the metrics we're using to measure the success of all of these is a return on ad spend. We're also seeing customer metrics by demographic category, whether they're listing as a result of how we're targeting the social media to them. And so there's a number of metrics that, and we're very, very disciplined with those. They have to hit a certain threshold before we continue to spend it. But we're excited by both the spend levels and the ROI on that. Thank you for the question. Next question.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi, good morning. Nice to see the progress. As you think about the increase in store traffic that you mentioned, off-mall versus on-mall, were there regional trends to that? And following on the digital performance, what did you see in BOPIS?

Hi, Dana and Siva. Thanks for the question. Overall, all small stores performed better than mall-based stores. It was traffic and conversion. I'd say there was no notable variance across different regions or tiers. Focus continues to be strong. Focus grew 40% in the quarter year over year. It now represents 25% of our of our digital demand. So we're pleased with offering our customers this choice. And we've said this many times, but about a third of the customers make an incremental purchase when they come into the store. So we're very pleased with Focus. Thank you. Take the next question, please.

Thank you. Our next question comes from the line of Marnie Shapiro with the Retail Tracker. Please proceed with your question.

Hi, guys. Congratulations on a nice quarter. Could you talk a little bit about something I've noticed? I can't remember the exact name of it. I think it's called Senscriptions. I'm curious, when you rolled that out, if there's been good uptake, and is it across all the products? It was on a bunch of the ones I clicked through once I found it. I was curious about that.

Yeah, thank you for the question. So, Senscriptions is actually something we had in beta for a while. We've had mainly wallflowers in the subscription, right? The idea that if your wallflower bulb is running low, you'd want to have something readily available to sort of, you know, screw into wallflower heater, and that you could get that on an automatic delivery, right? It was actually called auto-replenish. We rebadged its transcription. And now we're offering a broader assortment, so you're correct. There's, you know... couple hundred minimum on products and SKUs that are on that sanscription. And we're pleased to offer that. You'll see that it's just another way to have a relevant but a seamless shopping experience that's very convenient. We know our customers are value-seeking, and convenience is part of value. So we're excited to have sanscription available to them. Thank you for the question.

Next question, please. Thank you. Our next question will be from the line of Corinne Wolfmeyer with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking the question. So, AUR is trending nicely. It seems like primarily due to mix. Can you just speak to a little bit or speak a little bit on how you're viewing the AUR opportunity both in the near and longer term? How much more room do you have to drive up those price points from a mixed standpoint? And then from just general pricing actions, how much more flexibility do you think you have there? Thanks. Yeah, thank you.

So overall, as I mentioned, AUR is something that is a function of our Agile model as well. We want to meet the customer where they're at. We want to continue to be nimble because we're trying to optimize our top and bottom line. And I want to note also that our AUR is actually still up double digit relative to pre-pandemic levels. We have a number of other things going on. We have a good, better, best strategy. We have a wide variety of price points. But this Agile model is about reflecting the current environment. We do rigorous testing on these promotions, which impact AUR, and we're ensuring that they're accretive to both sales and margin dollars. So we're going to continue to leverage that model, that speed and scale and the promo capabilities that we have to position the company for top and bottom line growth. And the second question that you had, I think that was it. Thank you. Next question, please.

Thank you. Our final question this morning comes from the line of Ashley Helgens with Jefferies. Please proceed with your question. Ashley?

Oh, can you hear me now? Now he said yes. Okay, great. This is Sinead for Ashley. I had my line on mute. Just looking at the everyday luxuries line, a lot of the content around that has been kind of about scent dupes. Can you talk a little bit about your philosophy towards dupes versus proprietary scents and just kind of how you think about that?

Thank you. Thanks for the question. So everyday luxuries is very much about bringing great fragrances to our customers, especially it's been a hit with the younger customers as well. And as I said, it really delivered against the fine fragrance mist bump that we had in this quarter. What we're trying to do is just make sure, as we always have, that we have the kind of fragrances that people want at approachable prices. And we have you know, there's this whole area of proprietary sense and you see a lot out there These are really unique fragrances for us our fragrance houses, which as you know are the very same They continue to provide really high quality fragrance and it hits the mark with our customers And I think we're seeing that in terms of everyday luxuries lifting the shop So it's thank you for the question. I think that's our last question. So with that I will wish everyone a very happy Thanksgiving and And over to you, Luke.

We want to thank you for joining today's call. A replay will be available for 90 days on our website. Thank you for your interest in Bath and Body Works.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.