The conference call for Bath & Body Works' second quarter 2023 earnings began with Ted, the conference operator, welcoming everyone and advising that the call was being recorded. Heather Hollander, Vice President of Investor Relations, then took over the call and discussed the risk factors associated with the forward-looking statements. Eva Boratto, the company's new Chief Financial Officer, was also introduced. Finally, Chief Executive Officer Gina Boswell thanked the team for their hard work and discussed the company's performance and progress in the quarter.

In the second quarter, Bath & Body Works' net sales declined 3.6% compared to the prior year and adjusted diluted earnings per share were $0.40. This outperformance was driven by cost optimization initiatives, increased AUR and improved merchandise margin. The company showcased its innovation capabilities with the rollout of new hand soaps, the addition of grooming products, the launch of a new fragrance haircare line and hand soap refill cartons. Body care sales increased while home fragrance and soaps and sanitizer sales declined due to post-pandemic normalization. Basket size was slightly down due to the challenging macroeconomic environment.

The company is focused on delivering innovation and building capabilities to position them for above industry growth when their categories normalize. They are making progress in five key areas, such as elevating the brand, extending reach, engaging with customers, enabling an omnichannel experience, and enhancing operational excellence. They are deepening their connection with customers through segmentation analysis and building their technology capabilities to implement a more personalized targeted approach to marketing and promotions.

The company is focused on increasing customer engagement through their loyalty program, enabling a seamless omnichannel experience, and testing personalized marketing and promotions. They have enrolled nearly 38 million members into their loyalty program, and are continuing to build on that success. They are also focused on integrating the loyalty experience across all channels and testing new capabilities such as accelerators in the third quarter.

In the second quarter, the company introduced personalized recommendations on their website and mobile app, and will begin delivering personalized e-mail content in the same month. Later in the third quarter, they plan to test immersive video content on their website and mobile app. The company also rolled out Buy Online, Pickup In Store (BOPIS) in the first quarter, which saw a 25% increase in orders in the second quarter. The company is aiming to convert single channel customers to dual channel customers, and is also working to enhance operational excellence and efficiency through $200 million of planned annual cost savings. Eva will provide an update to the fiscal 2023 guidance, which reflects the bottomline outperformance in the second quarter and sales expectations for the second half of the year.

Bath & Body Works has a vertically integrated supply chain which allows them to respond quickly to changing customer and macro trends. They had a strong Mother's Day, offering newness with their Gingham all back collection and a strong gifting assortment. They executed well in their June semiannual sale and delivered merchandise margin rates above their expectations by offering compelling price points on sale products and introducing full price new summer season product. Body care sales increased slightly versus last year, a sequential improvement from the first quarter.

In the body care sector, the men's business posted a double-digit sales increase and is one of the fastest growing product lines. Home fragrance and soaps and sanitizers categories declined due to post-pandemic normalization trends but Bath & Body Works still gained unit share. The company is focusing on innovating and positioning for future growth in these categories, such as increasing the assortment of in-control wallflower heaters and offering decorative innovations. Additionally, Bath & Body Works has rolled out foaming hand soap refill and recyclable paper cartons, as well as a new formulation of hand soap made without paraben, sulfates or dyes.

The company is innovating and elevating their product and packaging while staying true to their brand heritage. They are introducing new fragrances and packaging, as well as a sensitive skin product with colloidal oatmeal. They are also expanding their reach by leveraging their core strength in fragrance and innovation to expand into adjacent categories, including fragrance haircare, men’s, wellness and laundries. They are launching face and beard care in advance of Father’s Day and expanding into men’s hair and shaving in September. They are also testing fragrance haircare products and have launched shampoo and conditioner in five of their signature scents, as well as dry shampoos in three.

The launch of the company's laundry line has been a success and they plan to expand their reach to all U.S. stores by next spring. They are also expanding their in-store assortment and visual presentation of their lift products across a limited number of stores this fall and plan to extend their reach geographically. Additionally, they are launching Halloween one week later this year and expanding their most loved scents, such as Vampire Blood, across categories. They are also bringing back their iconic fall scents in new and elevated packaging.

Bath & Body Works reported strong financial results in the second quarter, exceeding their guidance range. This was due to cost optimization initiatives, increased AURs, and improved merchandise margins. They are also celebrating Hispanic Heritage Month by featuring Patty Hidalgo and her contribution to their fragrance portfolio. Eva Boratto then took over to review the second quarter financial results and provide an overview of their guidance for the third quarter and fiscal year 2023.

In the second quarter, EPS benefited from interest expense and tax rate favorability. Net sales totaled $1.6 billion, a year-over-year decline of 3.6%. U.S. and Canadian store sales decreased 1% and direct sales decreased 10%. International sales declined 4%, but on a year-to-date basis they increased 4%. Gross profit rate decreased by 90 basis points compared to the prior year, representing a year-over-year improvement of 255 basis points from the first quarter. Merchandise margin rate also improved modestly year-over-year.

In the second quarter of fiscal 2023, the company saw an improvement in their merchandise margins, driven by deflation benefit, increased AUR, and reduced transportation costs. SG&A deleveraged by 200 basis points, however, technology expense was a driver of deleverage due to IT separation costs and strategic investments. The company also repurchased $115 million of senior notes principal for $106 million and decreased inventory levels by 16%. Additionally, 30 new off-mall North American stores were opened and 16 new stores were opened internationally. Fiscal 2023 guidance was provided with comparisons to 2022.

The company is updating its fiscal year guidance to reflect Q2 performance, narrowing its sales range, raising its gross profit expectations and factoring in the benefits of the debt and share repurchases. Sales are expected to decline 1.5-3.5%, with approximately $100 million in cost savings in the second half of the year. Gross margin rate is expected to be approximately 43%.

This paragraph discusses the company's expectations for the second half of the year and for the full year of fiscal 2023. They expect merchandise margin rate to expand by 100 basis points in the second half of the year, and they expect buying and occupancy expense to deleverage for the year. They also expect an adjusted net non-operating expense of approximately $295 million and an effective tax rate of approximately 26%. For the fiscal year 2023, they are increasing their adjusted earnings per diluted share guidance range to $2.80 to $3.10, plan for $300 million to $350 million of capital expenditures, and expect to generate free cash flow of $675 million to $725 million. For the third quarter of 2023, they are forecasting a sales decline of 2.5% to 4%, a gross profit rate of approximately 42%, and an SG&A rate of approximately 31% of sales.

In the third quarter, the company is expecting net non-operating expenses of $75 million, a tax rate of 26%, and weighted average diluted shares outstanding of 229 million, resulting in earnings per diluted share of between $0.30 and $0.40. The company is prioritizing investing in the business while also returning cash to shareholders through dividends and share repurchases. The company is also aiming to return to a leverage ratio of 2.5 times gross adjusted debt to EBITDA over time and is taking a balanced approach to capital allocation. In the second quarter, the company saw encouraging growth in AURs.

Julie Rosen and Eva Boratto discussed the role of semiannual sales in their updated guidance, noting that sales were below last year's event but still in line with expectations. They also noted that AUR increased slightly this quarter and significantly compared to 2019, and they are assuming flat AURs in the back half of the year. Rosen then discussed the performance of the candle, soaps, and sanitizers category, stating that it performed well compared to Q1 and 2019.

Kate mentioned that all categories have seen significant growth year-to-date in the double digits and that they are focusing on innovating and growing in the home fragrance, soaps and sanitizers categories. Eva addressed Alex's question regarding fourth quarter guidance, explaining that the back half of the year guidance is more conservative due to the current environment. Eva also discussed the 20% EBIT margin target and the factors that are currently holding them below that rate, as well as the timeline for achieving that goal in the future.

The company has narrowed their sales range to the midpoint of what they had previously provided which reflects their performance in the first two quarters and the cautious consumer. Gina Boswell then commented on the company's long-term goal of 20% operating income margin, which is the best-in-class for their sector. Lastly, Ike Boruchow asked about the costs of key raw materials, primarily soy, and how they will affect the P&L come next year.

Eva Boratto discusses deflation and raw material prices, noting that wax prices have been volatile and soy prices have risen due to dry weather. Julie Rosen then talks about new products they have launched, which have a similar gross margin to the core business, and how they have seen loyalty members accept the new products. Lastly, she mentions the productivity rates of their off-mall stores and how they are dealing with shrink and organized crime.

Bath & Body Works has successfully launched Men's Grooming and Men's Hair and Shave in the second quarter. They are focusing on APDO as it is the number one form in the men's market, and Fragrance Haircare was launched to 560 stores and online in July. Laundry is launching this month with positive customer feedback from preview sample events. Margins are commensurate with the shop and with scale, they can get better. External pressures have adversely impacted their shrink rate this year.

Bath & Body Works is proud of their loyalty program, which has seen significant enrollment in its first year. They are using the loyalty platform to build excitement around product launches, and are offering exclusive offers to reward loyal customers. They are pleased with the traffic both in-mall and off-mall, with off-mall sales performing better than in-mall. They are continuing to open new stores to drive a great return.

Gina Boswell and Julie Rosen discussed the relative performance of different categories in the second quarter. Body care was the top performing category, with Fine Fragrance Mist Travel and double-digit growth in the men’s business. Home fragrance experienced declines due to pressure in candles, which is an industry-wide trend. Wallflowers performed above the shop and better than handles. Soaps performed in line with shop, and the company is still the market leader in the category, gaining unit share in versus mass.

Gina Boswell and Matt Boss discussed the successful rollout of new formulations and foaming hand soap refills, as well as the normalization of the sanitizer category. They noted that their strategies are focused on building capabilities to achieve above industry growth, and that they are gaining market share in categories that are declining. They believe that pandemic trends like wellness and healthcare will endure, and they are confident that their track record will continue to lead to success in gaining market share.

Julie Rosen and Eva Boratto both discussed the promotional environment for the holiday season, which is expected to be in line with last year. They also discussed the expected improvement in gross margin for the fourth quarter, attributing it to improved supply, price, B&O deleverage, and SG&A deleverage. Finally, they mentioned their focus on reducing costs and driving top line growth in the future.

Julie Rosen and Gina Boswell discussed the merchandise margin relative to pre-pandemic levels, which is slightly lower due to inflation. They also discussed how the company plans to move from broad-based promotions to more personalized ones in order to eke out the margin and elevate the brand and product. This transition is already underway as they have completed the separation from Victoria's Secret.

The company has been putting tests in place, such as personalized recommendations for the website and mobile app, to drive efficiency and increase average unit retail without impacting merch margin. Julie Rosen stated that while promotions will still be a traffic driver, they are sharpening their approach with the right technology to deliver more personalized messages to customers to increase trips, spend, and engagement. Adrienne Yih and Gina Boswell discussed their expectations for back-to-school and their view of providing AUR in the second half.

Eva Boratto and Julie Rosen discussed the trends exiting the quarter and the new customers that men's is bringing in, including younger customers and customers who identify as male. Gina Boswell added that there are opportunities for customer expansion in the core categories too. Eva Boratto also mentioned that the guidance for flat AURs.

Bats & Body Works thanked Olivia Tong for joining their call and informed participants that a replay of the call would be available on their website for 90 days. They also mentioned that their guidance assumption for the back half of the year was flat AURs, but they would continue to test for opportunities to increase the AUR and margins. Finally, they thanked everyone for their interest and ended the call.

This summary was generated with AI and may contain some inaccuracies.