Q2 2021 Bath & Body Works Inc Earnings Call

August 19, 2021

[music].

Yeah.

Yes.

Yeah.

[music].

Good morning, My name is Cedric and I will be your conference operator today at this time I would like to welcome everyone to the Bath and body works second quarter 2021 earnings Conference call. Please be advised that today's conference is being recorded all parties will remain in a listen only mode until the question and answer portion of today's conference to ask of.

Question from the phone. Please press Star then one I would now like to turn today's call over to MS. Wendy Arlen Chief Financial Officer at Bath <unk> body works Wendy you may begin.

Thank you good morning, and welcome to Bath <unk> body works second quarter earnings Conference call for the period ending July 31, 2021, I am excited to be with you today on my first earnings call. It's about somebody works CFO as a matter of formality I need to remind you that any forward looking statements we may make today.

Our subject to our safe Harbor statements found in our SEC filings.

And in our press releases.

Joining me on the call today are CEO, Andrew Maslow, and SVP of Investor Relations Amy Preston.

All results, we discuss on the call today are adjusted results and exclude the 2000 Twenty's special items described in our press release.

Our second quarter results include the Victoria's secret business.

Consistent with our previously excuse me disclosed intention to reduce debt by up to $500 million.

This morning, we announced a tender offer to purchase $500 million of our 2023, 2025, and 2027 outstanding notes, which commences today. Thank you and now I'll turn the call over to Andrew.

Thanks, Wendy and good morning, everyone welcome to our first earnings call as a stand alone public company.

We are thrilled to have reached this milestone and to launch Bath <unk> body works as a Standalone company <unk>.

Innovation remains at the foundation of Bath, and body works and with our leadership positions across key product categories strong performance across channels and a highly loyal and growing customer base. We are poised to continue our track record of industry, leading growth and profitability.

And behalf of the management team and the board I'd like to extend our sincere appreciation to all the associates, who have worked so hard on the successful spinoff of Victoria secret.

I am grateful to all of our associates for their contributions.

To the success of our business as we look forward to capturing the opportunities ahead, and we wish the Victoria secret business and associates as well as they embark on their journey as a standalone public company.

Turning to our second quarter performance, we delivered record results and we could not have done so without the continued hard work and commitment of all of our associates and partners.

We'd like to express our deep appreciation for their dedication and efforts.

We reported record second quarter earnings of $1.34 per share compared to adjusted earnings of <unk> 25 per share last year. These.

These bottom line results were driven by continued strong sales and better than expected margin rates at both Bath <unk> body works and Victoria Secret.

At Bath <unk> body works, we continue to deliver record results with sales growth of 54% compared to 2019.

All categories achieved solid growth and strong sales demand continue to allow us to pull back on promotional activity versus 2019.

The vast majority of our segment operating income in the second quarter was $431 million, an increase of 135% or $247 million compared to 2019, and an increase of 24% or $82 million compared to last year.

Our operating income rate for the quarter of $25 three increased 870 basis points compared to 2019 driven.

Driven by merchandize margin rate expansion and leverage in both buying and occupancy and SG&A on the highest sales growth.

We expect that the remainder of 2021 will not be easy as the world the retail environment and our business continues to evolve and as we lap a extraordinary 2020 results.

We are optimistic about our fall and holiday product assortment and our continued ability to execute against our plans in stores and online.

Risks related to Covid do persist and we will continue to operate both of our channels in a safe manner for our customers and our associates.

With continued smart and disciplined management of the business I know, we can proactively accelerate to our next phase of growth. Thank.

Thank you very much and I'll turn it over to Amy Preston.

Thanks, Andrew.

That concludes our prepared comments.

At this time, we'd be happy to take any questions you might have.

<unk>.

We plan to analyst call shortly before 930 in order to allow us to join the Victoria Secret earnings call in the interest of time and consideration to others. Please limit yourself to one question. Thanks ill now turn it back over.

To the upper <unk>.

Thank you and our first question comes from Kimberly Greenberger with Morgan Stanley. Your line is open.

Okay great.

Very nice quarter here and congratulations on the separation.

I wanted to ask.

About the.

Sort of.

Look forward, if we could into Q3 and Q4.

And how we should think about.

If you have any way for us to think about the standalone business and the financials.

And any comment you've got about help since we started that that would be very helpful.

Thanks Kimberly.

Two and Peru.

Hi, Kimberly thanks for the question so.

So the second part of your question in terms of how the quarter has gotten started and our guidance for the for the third quarter.

As we said in our prepared remarks. The first couple of weeks of August we've been very satisfied with.

And those results are incorporated in our forecast.

Again, those first two weeks, we have seen momentum that's quite similar to the performance we were seeing in the second quarter.

So that would potentially imply upside to the up $40 to 45% that we've guided the quarter or two.

But again those are two weeks out of 13 weeks and relatively small weeks relative to the overall quarter. So again that guidance that we've provided of up 40% to 45% on a two year basis for Q3 is a forecast that we feel very good about at this point.

I wasn't sure if the first part of your question you had questions around the financial structure of the business go forward.

Chuck.

Now that we're getting past the separation any additional color you can give us on the incremental overhead or the.

It's sort of all in SG&A burden and interest expense of the scandal.

Oh, sorry at the Standalone company that would be great.

Sure.

Two.

Kimberly yes, so as we talked about in our remarks. He does it go forward company, we'll have two pieces that will have the bath <unk> body works. The operating segment that we've reported extensively historically and also as we've disclosed will have about $25 million per quarter.

Corporate overhead expense that was previously reported in the other segment. The vast majority of that $25 million is SG&A. So it will be included included in SG&A, but the guidance. We shared last night is all inclusive of those two pieces, so the BBW segments and the corporate overhead.

<unk>.

The other point I would make go forward as we've also disclosed that as we look to separate the two businesses one of the key areas of focus is in the technology area. We do anticipate over a multi year period that we will incur $100 million to $150 million of.

Costs that will be both capital and expense.

That will be a multi year period, and we will be working with Victoria is to make sure that we separate the technology in a way that doesn't disrupt either business and minimize the deleverage, but that will be incorporated into our guidance as we go forth into 2022.

Great Great color for you.

Next question please.

The next question comes from Matthew Boss with Jpmorgan. Your line is open.

Great Thanks, and congrats on a nice quarter.

So Andrew on the top line and as we think about the consistency in trends that you continue to show I guess my question is beyond this year is there anything preventing revenue growth that you outlined mid to high single digit revenue growth algorithm as we think about next year and beyond and then Wendy just more near term on gross.

Margin what have you embedded from a promotional backdrop and the gross margin guidance for the third quarter and back half of the year.

Thanks, Matt.

Actually two answers for that.

Next question.

Thanks, Matt so on the.

On the top line growth.

Aspect again, we feel very comfortable with those three to five year targets that we provided as part of the investor.

Meeting and road shows over the last month.

So obviously.

2022, much like 2021 will be an interesting year as we lap extraordinary results. So it's a little hard to predict exactly what quarter to quarter might look like next year, but again, we feel very comfortable in those long term mid to high single digit revenue growth rate targets.

We provided.

On the promotional side.

I would say there is consistent with how we plan every season, we go into a season with what we hope is a conservative plan.

Lending to essentially anniversaried similar promotional activity from prior year, and then we use our in season read and react capability around testing and.

Constance.

Analysis of our results to determine whether or not we need to increase or have the opportunity to decrease levels of promotion as you'll remember in the back half of last year. We were in chase mode for the entire time frame and had very little promotional activity record low levels of promotional.

Activity and that's what we're lapping so our forecast does assume.

A return to a slightly more promotional environment than what we would have experienced last year and as we delineated in our prepared remarks, we are also seeing some.

Inflationary pressures that will impact our margin as well both of those factors are embedded in our guidance.

Great. Thanks, Matt next question please.

The next question comes from Steph Wissink with Jefferies. Your line is open.

Hi, Good morning, this is Sidney answer Paul.

My question is regarding buybacks I'm, just wondering kind of how the rebalancing of spend across stores.

That we saw in the Q2 results compared to internal expectations and then just as a follow up.

Could you provide some color on what's assumed in the guidance in terms of sales but of course monetization category. Thank you.

Thanks Sidney.

Andrew.

Yes, so to your question on channel mix within the.

The second quarter versus our expectations again, our total sale.

Sales performance for the quarter was slightly.

Above our expectations with I would say direct more or less in line, our digital more or less in line with our expectations and stores continuing to perform slightly.

Above our expectations, but again strong results out of both as a reminder, our digital business in the second quarter on a two year basis was up 128% to 2019 that was actually slightly better than the performance. It saw in Q1 and our stores were up around <unk> 30.

9% in Q2 very close to what we achieved in Q1 in terms of the soap and sanitizer business as we think about that.

As we mentioned in our prepared remarks, it did decline on a one year basis in Q2 of this year. However on a two year basis.

Continued to be up strongly up 58% to two years ago, which was higher than the total business. It up 54% to two years ago again as expected has declined year over year, where last year. It was experiencing explosive growth our forecast go.

Forward does assume that we will continue to see some softening in that business on a year over year basis, as we talked about at the end of last year subs and sanitizer in total had gotten to be about 20% of the total business up from roughly 14% of the business in the prior five years.

<unk> timeframe.

Would expect that it will normalize somewhere in the mid teens and thats consistent with what we've seen here through the first two quarters of the year, but again, what I would highlight is we were very pleased that even as that business as expected softened year over year, we were able to more than overcome that offset that with strong growth out of our other <unk>.

<unk> is leading to the total growth that we articulated.

Great. Thank you next question please.

The next question comes from Roxanne Meyer with MK and partners. Your line is open.

Great. Good morning, and let me add my congratulations on a really strong quarter congrats on the separation.

My question is on free cash flow I'm, just wondering if you could give us a sense of what the free cash flow that just bath and body works alone has thrown off over the past few years.

How much you expect it to generate and how youre looking to deploy excess cash going forward, obviously, you've got the debt buyback.

I announced today, but just generally what youre thinking about thank you.

Thanks, Alright, Sam Wendy.

Alright, then, yes, I guess, what I'd say about cash flow in our business well, we are a seasonal business and so typically as this business looks to Q3 as a period of.

Cash usage for us as we build our inventory going into the fourth quarter the.

Fourth quarter is extremely important to us in terms of cash flow generation and.

Im not sure history is.

<unk> is the best guide here, just given that the business has grown.

So much if as you look at it over a multi year basis. So I'd say, what we're planning to do is we will get through the important fourth quarter period to generate cash we are.

As we flip the calendar 2020.

Two we will look at our cash flow and we'll think about capital allocation and what that means going forward in terms of our plans for the fall season, we as we announced today, we are executing a tender offer for the $500 million. In addition, we have about $770 million remaining on our one.

$5 billion one.

$1 billion authorization that we announced in July so our intent is to execute that 770 over the fall season in a balanced way and again as we as we get to the end of the holiday period, we will work with our board of directors to determine capital allocation prospectively.

Great. Thanks, Brett Sam next question. Please yes.

Yes. Our next question comes from Omar Saad Evercore. Your line is open.

Yes.

Good morning, Thanks for taking my question I wanted to follow up on the category discussion, maybe getting a little bit more detail around home fragrance. Some of the consumer trends youre seeing that business, obviously, if soap and sanitizer down thats doing really well.

Especially any signs on what the new customers that the franchise has attracted how there.

Continuing to shop in the home fragrance category, especially as back to school and returned to office and the world Reopens, if that customer staying sticky. Thanks.

Thanks Meyer.

<unk>.

Thanks, Omar so on the category side.

You are right to infer that at home fragrance continues to be.

Strong and in the second quarter, where we saw the decline in service and Sanitizers. Obviously that was true I do think it's important to point out, though that body care or other big category actually seeing very strong year over year growth as well as on a two year growth.

Basis, as well, what's really yes, I think to the heart of your question around what have we seen in terms of the customers that we have gained through the pandemic and how is their behavior compare relative to our prior to pandemic existing customer base and I think the good news there is a couple of points.

One <unk>.

After seeing a year in 2020, where we actually saw fewer customers than we had in the prior year because of the 90 day closure of all of our stores in the first half of 2020, we have now seen four quarters in a row of customer growth and so on a rolling 12 basis.

We're now up in customers pretty.

Pretty significantly to where we had finished the year in 2019, and obviously in 2020 and in terms of the behavior and the profile of those customers I would say the good news is that the new customers that we've gained.

Along that journey.

While early in their spending habits with Bath and body works do appear to be performing very similarly to historical new customers.

Our existing customers as we've talked about on prior calls and in our Investor days, We've continued to see improvement in their engagement in terms of both there.

Are we going to shop across our two channels digital and in store as well as to shop across all three of our major categories. So again, we continue to see higher and higher ratios of our customers.

Performing in those two ways and when that occurs as we've shared customer spend is significantly higher than either a single channel or single category customer.

So very pleased with what we've been able to see so far in terms of the customer behavior that we're experiencing here as.

As we move into through 2021.

Great.

Thanks, Tim.

Next question please.

So next question comes from Susan Anderson with B Riley Your line is open.

Hi, good morning, Thanks for taking my question.

If maybe you could talk about product category.

VW places, particularly as it relates to beauty.

Expect to maybe start expanding more into beauty and then also any other categories and then also im not sure. If you mentioned AUR versus unit sales in the quarter.

Thanks, Andrew.

Andrew.

So on the first part of your question.

As we talked about pretty thoroughly in our Investor day, as we laid out our multiyear path too.

So driving Bath <unk> body works to become a $10 billion business over the next.

Three to five years.

We're really not all that reliance on seeing a yet to be determined category emerge as a strong driver of growth.

That said, we have lots of different ideas in the pipeline that we will be looking to test over the next several years.

And from a testing standpoint different than where we may have done things historically, which would have been small cells of store groups. We will also be looking to test new product categories in our online digital business as well as we've talked about those.

Those ideas run the gamut from potentially getting into the skin care business getting into the hair care business looking at further line extensions within the home business, whether thats into <unk>.

Cleaning products or <unk>.

Laundry products et cetera, so lots of different ideas that are again in the pipeline.

We will be testing those as we had discussed prior in both a.

Organic internal development way as well as partnering with third party brands to sell in our stores to understand which of those categories might.

Merge is something that the Bath <unk> body works customer has the most interest in so again lots of different things in the pipeline most of those tests that I'm, describing will be ramping up a little bit more in the back half of this year, but much more in 2022 and beyond.

In terms of your question on AUR, So AUR on a two year basis.

The business up over 20% and units up a comparable amounts on a two year basis on a one year basis, we did see more expansion out of units with obviously the stores having been closed.

Last year AUR was still up slightly to last year, but more similar in line on a one year basis.

Hopefully that helps.

Next question.

Yes. Our next question comes from Ike <unk> Wells Fargo. Your line is open.

Excuse me thanks for taking the question two quick ones.

Cost inflation guided for the $40 million to $60 million I'm. Just curious are you embedding.

Are you kind of just flowing those costs into the P&L or are you embedding any kind of offset on pricing or anything I'm, just kind of curious how youre planning the <unk>.

From a margin perspective, and then when do you just the 600 million cash in escrow use explain exactly what that is and what's going on there. Thank you.

Okay. Thanks, Doug.

Andrew first.

So on the inflation forecast range.

<unk>.

Part of the reason why it's a range.

We're working hard to obviously mitigate and offset as much of that pressure as we can but there will be there are and will be real cost increases that the business faces and they run the gamut from product input costs to wage pressure to transportation pressure to supply pressure.

On the product input portion as you know we work very hard on our ticketing strategy and our promotional strategies historically two two.

To try to offset cost increases and we will certainly try to do that again this quarter and the rest of this year I think it's important to understand though that the base from which we are coming is one where there was so much less promotional activity in the history last year already that.

Curtailing, even more promotional activity will be that much more challenging so long winded way to say that our margin forecast do assume that quite a bit of that inflationary pressure will actually come through to the bottom line.

Thanks, Andrew.

Yes, the 600 million so so.

Victoria Secrets.

Has disclosed they issued a $1 billion of debt.

600 of it was actually issued and completed prior to the spin and prior to quarter end. So it's essentially if you look at our reported consolidated balance sheet. It's essentially a gross up so we had the cash from the proceeds of the issuance sitting in escrow on a restricted basis and then the offset is down.

And long term debt.

<unk> both at those.

Both items went to Victoria's secret as part of the spend but since we had the cash in the bank so to speak at the quarter end.

It's sitting on the consolidated balance sheet great.

Great. Thanks.

Yes.

At a time, we have this morning.

We'd like to thank you for your continuing interest in Bath and body.

Thank you and that concludes today's conference.

You may disconnect at this time.

Yes.

[music].

Good morning, My name is Cedric and I will be your conference operator today at this time I would like to welcome everyone to the bathroom body works second quarter 2021 earnings conference call. Please be advised that today's conference is being recorded all parties will remain in a listen only mode until the question and answer portion of today's conference to ask a question from the phone. Please press <unk>.

And one I would now like to turn today's call over to MS. Wendy Arlen Chief Financial Officer at Bath <unk> body works. When do you you may begin.

Thank you.

Good morning, and welcome to Bath and body works second quarter earnings Conference call for the period ending July 31, 2021, I'm excited to be with you today on my first earnings call as the Bath <unk> body works CFO as a matter of formality I need to remind you that any forward looking statements. We may make today are subject to our safe.

Harbor statements found in our SEC filings and in our press releases joining me on the call today are CEO, Andrew Maslow, and SVP of Investor Relations Amy Preston All results, we discuss on the call today are adjusted results and exclude the 2000 Twenty's special items described in our.

Our press release.

Our second quarter results include the Victoria's secret business.

Consistent with our previously excuse me disclosed intention to reduce debt by up to $500 million.

This morning, we announced a tender offer to purchase $500 million of our 2023, 2025, and 2027 outstanding notes, which commences today. Thank you and now I'll turn the call over to Andrew.

Thanks, Wendy and good morning, everyone welcome to our first earnings call as a Standalone public company.

We are thrilled to have reached this milestone and to launch Bath <unk> body works as a standalone company in.

Innovation remains at the foundation of Bath, <unk> body works and with our leadership positions across key product categories strong performance across channels, and a highly loyal and growing customer base.

We are poised to continue our track record of industry, leading growth and profitability.

On behalf of the management team and the board I'd like to extend our sincere appreciation to all of the associates, who have worked so hard on the successful spinoff of Victoria's secret.

I am grateful to all of our associates for their contributions.

To the success of our business as we look forward to capturing the opportunities ahead, and we wish the Victoria secret business and associates well as they embark on their journey as a standalone public company.

Turning to our second quarter performance, we delivered record results and we could not have done so without the continued hard work and commitment of all of our associates and partners.

We'd like to express our deep appreciation for their dedication and efforts.

We reported record second quarter earnings of $1.34 per share compared to adjusted earnings of <unk> 25 per share last year. These.

These bottom line results were driven by continued strong sales and better than expected margin rates at both Bath <unk> body works and Victoria Secret.

At Bath <unk> body works, we continue to deliver record results with sales growth of 54% compared to 2019.

All categories achieved solid growth and strong sales demand continue to allow us to pull back on promotional activity versus 2019.

The Bath <unk> body works segment operating income in the second quarter was $431 million, an increase of 135% or $247 million compared to 2019, and an increase of 24% or $82 million compared to last year.

Our operating income rate for the quarter of $25 three increased 870 basis points compared to 2019.

Driven by merchandize margin rate expansion and leverage in both buying and occupancy and SG&A on the highest sales growth.

We expect that the remainder of 2021 will not be easy as the world the retail environment and our business continue to evolve and as we lap the extraordinary 2020 results.

We are optimistic about our fall and holiday product assortment and our continued ability to execute against our plans in stores and online.

Risks related to Covid do persist and we will continue to operate both of our channels in a safe manner for our customers and our associates.

With continued smart disciplined management of the business I know, we can proactively accelerated to a next phase of growth. Thank.

Thank you very much and I'll turn it over to Amy <unk>.

Thanks, Andrea that concludes our prepared comments.

At this time, we'd be happy to take any questions you might have.

We plan to analyst call shortly before 930 in order to allow us to join the Victoria Secret earnings call.

Risk of time and consideration to others. Please limit yourself to one question. Thanks, I'll now turn it back over to the operator.

Thank you and our first question comes from Kimberly Greenberger with Morgan Stanley. Your line is open.

Okay great.

Very nice quarter here and congratulations on the separation.

I wanted to ask.

About the.

Sort of.

Look forward, if we could into Q3 and Q4.

And how we should think about.

If you have any way for us to think about the standalone business and the financials.

And any comment you've got about <unk> since we started that that would be very helpful.

Thanks Kimberly.

Too Andrew.

Hi, Kimberly thanks for the question so.

So the second part of your question in terms of how the quarter has gotten started and our guidance for the for the third quarter.

As we said in our prepared remarks. The first couple of weeks of August we've been very satisfied with.

And those results are incorporated in our forecast.

Again, those first two weeks, we've seen momentum that's quite similar to the performance we were seeing in the second quarter.

So that will potentially imply upside to the up $40 to 45% that we've guided a quarter or two.

I wasn't sure if the first part of your question you had questions around the financial structure of the business go forward.

Yes.

<unk>.

Now that we're getting past the separation any additional color you can give us on the incremental overhead or the mist.

It's sort of all in SG&A burden and interest expense at the scandal.

Oh, sorry at the Standalone company that would be great.

Sure.

Two when you for.

Kimberly yes, so as we talked about in our remarks. He doesn't go forward company. We'll have two pieces that will have the Bath <unk> body works operating segment that we've reported extensively historically and also as we've disclosed will have about $25 million per quarter of corporate <unk>.

<unk> expense that was previously reported in the other segment. The vast majority of that $25 million is SG&A. So it will be included included in SG&A, but the guidance. We shared last night is all inclusive of those two pieces, so the BBW segments and the corporate overhead.

The other point I would make go forward. We've also disclosed that as we look to separate the two businesses one of the key areas of focus is in the technology area. We do anticipate over a multi year period that we will incur $100 million to $150 million.

Of course that will be both capital and expense.

That will be a multi year period, and we will be working with Victoria is to make sure that we separate the technology in a way that doesn't disrupt either business and minimize the deleverage.

But that will be incorporated into our guidance as we go forth into 2022.

Great Great color. Thank you.

Next question please.

Our next question comes from Matthew Boss with Jpmorgan. Your line is open.

Great Thanks, and congrats on a nice quarter.

No.

Andrew on the topline and as we think about the consistency in trends that you continue to shell I guess my question is beyond this year is there anything preventing revenue growth that you outlined mid to high single digit revenue growth algorithm as we think about next year and beyond and then Wendy just more near term on gross margin what have you embedded from.

Promotional backdrop and the gross margin guidance for the third quarter and back half of the year.

Thanks, Matt.

To answer for this question.

Thanks, Matt so on the.

On the top line growth.

Aspect again, we feel very comfortable with those three to five year targets that we provided as part of the investor.

Meeting and road shows over the last months.

So obviously 2022 much like 2021 will be an interesting year as we lap extraordinary results. So it's a little hard to predict exactly what quarter to quarter might look like next year, but again, we feel very comfortable in those long term mid to high single digit revenue.

Growth rate targets that we provided.

On the promotional side.

I would say there is consistent with how we plan every season, we go into a season with what we hope is a conservative plan.

Intending to essentially anniversaried similar promotional activity from prior year, and then we use our indices and read and react capability around testing and and Constance.

And that's what we're lapping so our forecast does assume.

Both a return to a slightly more promotional environment than what we would have experienced last year and as we delineated in our prepared remarks, we are also seeing some.

Inflationary pressures that will impact our margin as well both of those factors are embedded in our guidance.

Great. Thanks, Matt.

Question. Please.

The next question comes from Steph Wissink with Jefferies. Your line is open.

Hi, Good morning. This is Sidney answer Paul Mike.

My question is regarding buybacks I'm, just wondering kind of how the rebalancing of spend across stores.

All that.

That we saw in the Q2 results compared to internal expectations and then just as a follow up.

Could you provide some color on what's assumed in the guidance in terms of sales and of course, the monetization category. Thank you.

Thanks Anthony.

Andrew.

Yes, so to your question on channel mix within.

The second quarter versus our expectations again, our total <unk>.

Sales performance for the quarter was slightly.

Above our expectations with I would say direct more or less in line of our digital more or less in line with our expectations and stores continuing to perform slightly.

9% in Q2, very close to what we achieved in Q1.

In terms of the soap and sanitizer business as we think about that.

As we mentioned in our prepared remarks, it did decline on a one year basis in Q2 of this year. However on a two year basis.

<unk> continued to be up strongly up 58% to two years ago.

Which was higher than the total business it up 54% to two years ago again as expected has declined year over year, where last year. It was experiencing explosive growth.

Our forecast go forward does assume that we'll continue to see some softening.

In that business on a year over year basis, as we talked about at the end of last year subs and sanitizer in total had gotten to be about 20% of the total business up from roughly 14% of the business in the prior five year timeframe.

We would expect that it will normalize somewhere in the mid teens.

That's consistent with what we've seen here through the first two quarters of the year, but again, what I would highlight is we were very pleased that even as that business as expected softened year over year, we were able to more than overcome that offset that with strong growth out of our other categories, leading to the total growth that we articulated.

Great. Thank you next question please.

Next question comes from Roxanne Meyer with <unk> and partners. Your line is open.

Great. Good morning, and let me add my congratulations on a really strong quarter.

That's on the separation.

My question is on free cash flow I'm, just wondering if you could give us a sense of what the free cash flow that just bath <unk> body works alone has gone off over the past few years how.

How much you expect it to generate and how youre looking to deploy excess cash going forward, obviously, you've got the debt buyback.

I announced today, but just generally what youre thinking about thank you.

Thanks, Alright.

Alright, Dan Yes, you can say about cash flow in our business well, we are a seasonal business and so typically as this business looks to Q3 is the period of <unk>.

Cash usage for us as we build our inventory going into the fourth quarter.

The fourth quarter is extremely important to us in terms of cash flow generation and.

I am not sure history is.

<unk> is the best guide here, just given that the business has grown.

So much if as you look at it over a multi year basis. So I'd say, what we're planning to do is we will get through the important fourth quarter period to generate cash.

As we flip the calendar 2020.

One 5 billion $1 billion authorization that we announced in July so our intent is to execute that 770 over the fall season in a balanced way and again as we as we get to the end of the.

Holiday period will work with our board of directors to determine capital allocation prospectively.

Great. Thanks, Brett next question please.

So next question comes from Omar Saad Evercore Your line is open.

And especially any signs on what the new customers that the franchise attracted how there.

Continuing to shop in the home fragrance category, especially as back to school and returned to office and the world Reopens as that customer staying sticky.

Thanks <unk>.

Thanks, Omar so on the category side.

Youre right to infer that home fragrance continues to be.

This is well what's really.

Yes, I think to the heart of your question around what have we seen in terms of the customers that we've gained through the pandemic and how is their behavior compare relative to our prior to pandemic existing customer base and I think the good news there is a couple of points. So one <unk>.

After seeing a year in 2020, where we actually.

Fewer customers than we had in the prior year because of the 90 day closure.

All of our stores in the first half of 2020, we have now seen four quarters in a row of.

Customer growth and so on a rolling 12 basis, we're now up in customers pretty significantly to where we had finished the year in 2019 and obviously in 2020.

And in terms of the behavior and the profile of those customers I would say the good news is that the new customers that we've gained along that journey.

While early in their spending habits with Bath and body works do appear to be performing very similarly to historical new customers and our existing customers as we've talked about on prior calls and in our Investor days, We've continued to see improvement in their engagement in terms of both there.

Sure.

Willingness to shop across our two channels digital and in store as well as to shop across all three of our major categories. So again, we continue to see higher and higher ratios of our customers.

Forming in those two ways and when that occurs as we've shared customer spend is significantly higher than either a single channel or a single category customer.

So very pleased with what we've been able to see so far in terms of the customer behavior that we're experiencing here.

As we move into and through 2021.

Great.

Next question please.

Yes. Our next question comes from Susan Anderson with B Riley Your line is open.

Hi, Good morning, Thanks for taking my question I was wondering if maybe you could talk about product category.

VW, principally particularly as it relates to beauty.

Do you expect to maybe start expanding more into beauty and then also any other categories and then also im not sure. If you mentioned AUR versus unit sales in the quarter.

Thanks, Steve.

Andrew.

Yes, so on the first part of your question.

As we've talked about pretty thoroughly in our Investor day, as we laid out our multiyear path too.

So driving Bath <unk> body works to become a $10 billion business over the next.

Three to five years, we're really not all that reliance on seeing a yet to be determined category emerge as a strong driver of growth.

We have lots of different ideas in the pipeline that we will be looking to test over the next several years.

And from a testing standpoint different than where we may have done things historically, which would have been small cells of store groups will also be looking to test new product categories in our online digital business as well as we've talked about.

Laundry products et cetera, so lots of different ideas that are again in the pipeline, we will be testing those as we had discussed prior in both a.

Organic internal development way as well as partnering with third party brands to sell in our stores to understand which of those categories Mike.

Emerge is something that the Bath <unk> body works customer has the most interest in so again lots of different things in the pipeline most of those tests that I'm, describing will be ramping up a little bit more in the back half of this year, but much more in 2022 and beyond.

In terms of your question on AUR, So AUR on a two year basis.

For the business up over 20% and units up a comparable amounts on a two year basis on a one year basis.

Did see more expansion out of units with obviously the stores having been closed last year AUR was still up slightly to last year, but more similar in line on a one year basis.

That helps.

Next question.

Yes. Our next question comes from Ike <unk> Wells Fargo. Your line is open.

Excuse me thanks for taking the question two quick ones.

Cost inflation guided for the $40 million to $60 million I'm. Just curious are you embedding.

Are you kind of just flowing those costs into the P&L or are you embedding any kind of offset on pricing or anything I'm just kind of curious how you're planning the business from a margin perspective, and then when does the 600 million cash in escrow use explain exactly what that is and what's going on there. Thank you.

Okay. Thanks, Andrew.

Andrew first.

So on the inflation forecast range.

Sure.

Part of the reason why it's a range as we're.

On the product input portion as you know we worked very hard on our ticketing strategy and our promotional strategies historically too.

Thanks, Andrea Wendy, yes, the $600 million so so.

Victoria Secrets.

Has disclosed they issued a $1 billion of debt.

600 of that was actually issued and completed prior to the spin and prior to quarter end. So it's essentially if you look at our reported consolidated balance sheet. That's essentially a gross up so we had the cash from the proceeds of the issuance sitting in escrow on a restricted basis and then the offset is down.

And long term debt.

<unk> pulled that those.

Both items went to Victoria secret as part of the spend but since we had the cash in the bank so to speak at the quarter end.

It's sitting on the consolidated balance sheet great.

Great. Thanks.

Sure.

So at the time, we have this morning.

We'd like to thank you for your continuing interest in Bath and body work.

Thank you and that concludes today's conference.

You may disconnect at this time.

Q2 2021 Bath & Body Works Inc Earnings Call

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