The operator introduces the Bath & Body Works Third Quarter 2023 Earnings Conference Call and turns the call over to Heather Hollander, Vice President of Investor Relations. Hollander discusses forward-looking statements and non-GAAP financial measures before introducing Gina Boswell, Chief Executive Officer. Boswell provides a review of the third quarter results, discusses the fourth quarter and fiscal year 2024, and acknowledges the efforts of the team in executing their strategy. The third quarter net sales were in line with expectations and showed improvement from the previous quarter.

The team at the company has achieved strong merchandise margin improvement and cost optimization. Sales for soaps and wallflowers increased, while body care sales were flat and candles and sanitizers declined. The company has shown strength in seasonal merchandising and innovation, with successful Halloween results and new product launches in men's grooming, fragrant haircare, and laundry. Sales trends improved in August, but softened in September and October due to the macroeconomic environment and the previous year's loyalty program launch.

The company experienced positive traffic growth overall for the quarter, but saw a decline in September due to cautious consumer spending and market declines in certain categories. As a result, they are lowering their topline guidance for the full year. However, they are still focused on building capabilities to drive profitable growth and are confident in their ability to achieve sales and operating margin targets in the long term. The company is also making progress in their five key growth drivers, which include elevating the brand, expanding into new categories and markets, increasing customer engagement, improving omnichannel experiences, and enhancing operational efficiency.

The company is focused on improving customer engagement and increasing sales through targeted marketing and promotions. They are utilizing data analytics and customer segmentation to acquire new customers and increase spend from existing customers. They have also increased their testing capacity and are seeing positive results from shifting their marketing focus towards digital channels. The loyalty program has been successful with high enrollment rates and a significant portion of sales coming from loyalty members.

The company is focused on increasing engagement with their loyalty program and leveraging it to drive sales and customer value. They are implementing new strategies such as loyalty member appreciation days and personalized product recommendations to deepen customer engagement. They are also working on creating a seamless omnichannel experience through personalized landing pages, immersive content, and targeted offers, which has already shown success in increasing retention and sales. This is particularly important for their beauty and personal care customers.

The company is focused on improving the omnichannel experience for customers by reducing friction and offering convenient options such as BOPIS and buy now pay later. This has led to an increase in dual channel customers and a 50% increase in Focus orders. The company also added social proofing on their website to highlight trending and limited supply products. They are also implementing cost savings measures and continuing to drive positive traffic and customer response through innovation and seasonal events. Despite macroeconomic pressure, the company is taking action to drive long-term profitable growth.

The company is well-positioned for the holiday season with a clean inventory, diverse product assortment, and an omnichannel model. They have a strong foundation, healthy balance sheet, and confidence in their ability to reach their sales target. The third quarter saw a strong Halloween event with increased sales, and the company is making progress in elevating their brand and expanding their reach. They also thank their partners and teams for their hard work during the busy season.

In the third quarter, Bath & Body Works saw high demand for their premium accessories and fall fragrances. Soaps and body care sales were also strong, with a focus on sustainability and expanding their men's business. The launch of new men's grooming products has been successful, and the company plans to increase awareness and attract more customers in this market.

Wallflowers had a successful third quarter with low single-digit growth, driven by fall fragrant selling and increased AUR. Candles and sanitizers declined as expected due to post-pandemic normalization trends, but the company remains a market leader in both categories. The company is focusing on elevating their brand and expanding into adjacent categories, such as fragrant laundry, lip, and haircare. They have already had a successful limited launch of their laundry line and are planning to expand in the spring. Additionally, the company has relaunched their in-store assortment and visual presentation of lip products to attract younger customers.

In the paragraph, the speaker discusses the success of the new ritual-based assortment and presentation, as well as the continued strong performance of the fragrant haircare line. They also mention plans to expand internationally and their holiday offerings for the upcoming season. They express confidence in their ability to attract new customers and deepen relationships with existing ones. The speaker then turns it over to Eva to discuss the financial results and provide guidance for the upcoming quarters and fiscal year.

The company reported adjusted diluted earnings per share of $0.48 for the third quarter, exceeding their guidance. Net sales were $1.6 billion, in line with expectations, with a decline of 2.6% from the previous year. US and Canadian stores saw a decrease of approximately 1% in net sales, while direct net sales decreased by 8%. International net sales declined by 5%, but total international systemwide retail sales showed double-digit growth. Wholesaler revenue declined due to inventory management and conflicts in the Middle East affecting sales for certain franchise partners. The company is monitoring the situation and supporting their partners accordingly.

In the third quarter, the company saw a significant increase in gross profit rate and merchandise margin rate compared to the previous year. This was due to deflation benefits, lower product costs, and reduced transportation costs. However, there were also investments in product formulation and packaging innovation. SG&A expenses were slightly leveraged, driven by cost optimization initiatives and marketing and technology investments shifting to the fourth quarter. The company also repurchased senior notes and maintained disciplined inventory management. The majority of the company's off-mall stores are profitable and outperforming pre-pandemic levels, and they have increased their off-mall penetration by opening new stores and closing mall stores.

In the third quarter, the company opened 16 new stores internationally and ended with a total of 458 stores. For fiscal year 2023, the company is providing guidance with a 53rd week included. The impact of this extra week is estimated at $85 million in sales and $0.05 in earnings per share. The guidance does not include any future debt or share repurchase activity. For the fourth quarter, the company expects a decline in sales of 1% to 5% due to soft consumer spending and industry normalization post-pandemic. The company plans to leverage their supply chain and agility to chase demand and maximize sales. They also aim to deliver $50 million in cost savings, with 35% coming from reduced transportation expenses. The gross profit rate for the fourth quarter is expected to be 44%, with a 100 basis point improvement in merchandise margin rate. This is partially due to $55 million in deflation benefits and cost optimization efforts, but will be offset by investments in formulation and packaging upgrades.

The company expects flat buying and occupancy expenses in the fourth quarter due to the benefits of a new fulfillment center. They anticipate a higher SG&A rate due to increased marketing and technology spending. Their fourth quarter earnings per diluted share guidance is $1.70 to $1.90. For the full year, the company is revising their sales decline forecast and adjusted earnings per diluted share guidance. They also expect slightly elevated inventory levels and maintain their free cash flow forecast. The company's main priorities include investing in the business and returning excess cash to shareholders.

The company plans to continue paying dividends and reducing debt while also investing in growth initiatives and expanding product lines in the face of a challenging market. They expect to see improvements in customer retention and acquisition through personalized marketing and loyalty programs, as well as growth in product adjacencies such as men's grooming and fragrant haircare. The company is also focusing on their position as a fragrance market leader by expanding their fragrance portfolio.

The company expects positive sales growth in the second half of the year as they implement new capabilities and benefit from cost optimization work. They are focused on driving future growth, expanding their product offering, and managing through a dynamic environment. They are well positioned for the upcoming holidays and are taking questions during the Q&A session. The timeline for post-pandemic candle normalization is uncertain, and the company has seen strong gross margins in the current quarter but does not expect the same level of benefit in the fourth quarter due to factors such as deflation and the extra week.

The speaker, Julie, discusses the category normalization reset and the company's efforts to innovate and diversify their sales mix. Eva then talks about the gross margin benefits in the fourth quarter, including expected deflation and investment in formulation and packaging upgrades. The company expects merchandise margin to expand and flat AURs in the quarter. They also expect flat buying and occupancy, with a focus on driving gross margins during the holiday season. The next question is about the sales outlook for next year.

The speaker responds to a question about the company's projected sales growth and EBIT margin target. They explain that while there has been a post-COVID reversion, they are confident in a return to growth in the second half of the year. They attribute the current softer consumer trends to macroeconomic factors and industry-wide category normalization. However, they are implementing strategies and launching new products to drive sales and increase profits. The speaker also mentions that they cannot provide a specific date for when the inflection point will occur, but they are actively working towards it.

The company is pleased with the results of their strategic initiatives and expects them to drive improvements in customer retention and acquisition. They also plan to drive growth through product adjacencies and are encouraged by the early benefits they have seen. They believe these capabilities will lead to positive sales growth in the second half of 2024. The company remains focused on achieving their target operating income ratio and cost reduction initiatives, and is looking for additional efficiencies to fuel investments for growth. They have a range of outcomes for 2024 topline but see potential for an inflection point in the second half of the year.

Kate McShane asked about the investment in product formulations in the quarter and whether it was for a specific product. Gina Boswell mentioned that they are focused on driving performance in the fourth quarter and delivering on expectations. Eva Boratto added that they are confident in their ability to deliver cost savings initiatives and that technology spend will remain elevated to support growth capabilities. Kate also asked if the product formulation and packaging innovation investment should be considered ongoing or at a higher level this year compared to next year. Gina mentioned that she would be happy to take the question and asked Julie to chime in.

The company has been focusing on elevating their brand and product formulations, with a notable change being the removal of parabens, sulfates, and dyes from their soaps. They have also invested in other formulas, such as a new shower gel, and believe they have the ability to grow their average unit retail over time. The company has seen a softening in sales in September and October, and is assuming a challenging macro and category environment in the bridge from the first half of next year to the second half. The company is continuing to invest in technology and cost savings, and is aiming for fixed cost leverage in order to see SG&A growth.

In the paragraph, the speaker discusses the company's performance in September and October, stating that they saw negative traffic and pressure on customer spending. They attribute this to the customer being under pressure and categories normalizing. They also mention that they need 3-5% growth to achieve SG&A leverage. The speaker also addresses the potential for growth in adjacency categories such as men's haircare and laundry, and notes that they are either driving in new customers or adding to the basket. They also mention the potential for growth in the laundry category.

The company is focusing on increasing awareness for their men's line through marketing campaigns and influencer partnerships. They are also excited about the potential for their hair and laundry products, as they attract new customers and offer differentiated fragrances. The company used their loyalty program to gather customer input on which signature scents to offer for their laundry products.

The company had a successful limited launch of a new laundry detergent in the third quarter, with positive feedback from customers. They are currently testing and optimizing the product for a broader launch next spring. The addition of new categories is expected to attract new customers and increase sales. The company expects similar free cash flow drivers for next year, with no major changes or one-time events. They plan to continue generating cash, driving growth, and working on their balance sheet. The company will provide more guidance on their Q4 call and will evaluate the best ways to return capital to shareholders.

Adrienne Yih from Barclays asks about the company's read and react promotional strategy and its impact on average unit retail and merchandise margin. Gina Boswell, the company's representative, explains that their agile model allows them to flex and optimize both topline and bottom-line without being more promotional than prior year. Julie Rosen adds that they constantly balance the need to keep engagement and traffic strong with their desire to increase price, and their testing agenda helps them achieve the best outcomes. Gina Boswell also mentions their cost reduction initiatives to improve margins and expects deflation in the fourth quarter. Mark Altschwager from Baird is the next questioner.

Mark Altschwager asks about promotions and personalization tests. Gina Boswell and Eva Boratto discuss the success of their loyalty program and how it has offset the reduction in direct mail. They also mention the potential for increased customer spending through the program.

During a Q&A session, a question was asked about the company's gross margin and if there would be continued efficiencies next year. The company did not provide specifics for 2024, but mentioned that they were pleased with the flat buying and occupancy leverage for the upcoming quarter. The company also mentioned that scaling their new customer fulfillment center would help with leverage. The last question was about the performance of off-mall locations versus on-mall locations in the third quarter, and the company stated that off-mall locations outperformed mall stores. The question also asked about new product launches and their prices compared to core products, which the company's representative, Julie, answered by stating that the new launches were performing well and had relatively uniform performance across regions and income cohorts.

The company is in the process of rolling out new products, including hair, laundry, and lip items. These products are performing well and attracting a younger customer base. The company's long-term strategy is focused on off-mall locations, and their new stores have strong returns and a quick payback period. The real estate team has been doing an excellent job with the company's portfolio.

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