Q4 2022 Bath & Body Works Inc Earnings Call

Good morning, My name is Danielle and I will be your conference operator today at this time I would like to welcome everyone to the Bath and body works fourth quarter of 2022 earnings Conference call. Please be advised that today's conference is being recorded during the question and answer portion you may I ask a question from the phone by pressing star one I will now turn the.

Call over to Mrs. Heather Hollander, Vice President Investor Relations at Bath and body works either you may begin.

Thank you Danielle good morning, and welcome to Bath and body works fourth quarter in fiscal 2022 earnings conference call today called May contain forward looking statements related to future events and expectations. Please refer to this morning press release, and a risk factors and Bath and body works 2021 Form 10-K for factors that could cause the actual.

The results to differ materially from these forward looking statements.

Today's call may contain certain non-GAAP financial measures. Please refer to this morning press release for important disclosures regarding such measures, including reconciliation to the most comparable GAAP financial measure joining.

Joining me on the call today are Gina Boswell, Chief Executive Officer, Julie Rosen brand, President and Wendy Orleans, Chief Financial Officer.

All of the 2021 results, we will discuss today are adjusted and exclude the significant items detailed in our press release. Additionally results represent results from continuing operations and exclude the discontinued operations related to Victoria's secret in 2021, I'll now turn the call over to Gina.

Thank you Heather and good morning, everyone. Thank you for joining US first let me say, how thrilled I am to be here at such a dynamic time. It is an honor to lead Bath and body works and the more than 55000 associates worldwide.

I look forward to working with this team our leadership and our board to capitalize on the tremendous opportunities with ice tea for the business and so creating long term shareholder value.

Today's call I'm Gonna talk about why I joined Bath and body works discuss some of my early observations and then outline my initial areas of focus to drive growth and profitability.

But before I dive and I'd like to first thing the team they rappers enabled us to deliver fourth quarter sales at the high end of our guidance range and Ecf's that exceeded expectations. This was despite a challenging macro economic environment.

As a share of it about why I chose to joined Bath and body works for nearly three decades and the consumer industry I have developed a true love for beauty personal care and fragrance.

Where customers are passionate and engaged in quality and innovation are critical and I was immediately drawn to Bath and body works as a company with.

With a history of superior growth and filing differentiated business model.

This is a company truly positioned at the intersection of consumer goods and retail.

Companies, a market leader and innovator with leading Sharon it's major categories of home fragrance body care and soaps and Sanitizers and we have a top position in the U S. And 10 forms. This includes body lotion shower gel freeway candles, and soaps and hand, Sanitizers and we have also gained significant share in the men's category.

These are all grown categories with a long runway ahead and large addressable markets.

That's one of the Premier fragrance companies in the World, we deliver customers their favorite fragrances in multiple forms and categories with industry, leading speed and innovation.

We bring affordable luxuries and personal care and home fragrance to life like no other.

Are strong relationships with our domestic vendor partners and fragrance houses enables us to continually deliver newness and meet the demands of an omnichannel customer.

We manage every touch point throughout the customer journey to deliver a highly differentiated shopping experience.

Cause I was visiting stores I was also struck by the fact that Boston Bath and body works office products for the whole family and we're part of so many people's lives, we estimate that our products are in 40% of American households.

And my first three months I've immersed myself in the business and he visited our stores and distribution centers and meeting with our supplier network at Uni card.

I've also have an opportunity engage with customers in store associates across the country as well as talk with investors to hear their perspective.

Ah conducted details business reviews with each of our functional leader and I've been impressed with the talent in our company and how engaged knowledgeable and dedicated our associates or.

This holiday season, I saw firsthand how are passionate salesforce springs are seasonal storytelling to life in our stores.

I've seen the strong connection customers have with our brand, which is underscored by our best in class brand new engagement and loyalty.

And I'm excited to see customers celebrate our events I was delighted to learn that many customers consider or a candle day a national holiday.

Overall, I'm pleased with the reach of Bath and body works with top random weirdness in our industry and customers, indicating a strong propensity to recommend our brands.

During the pandemic are integrated and predominantly domestic supply chain physician the company to meet elevated customer demand, which enabled us to drive significant growth in 2000 2002 thousand 21.

In 2022, the company continue to grow unit chair across our three major categories of boarding care home fragrance and soaps and satisfactory.

15, Mister demonstrated remarkable innovation capabilities, delivering a pipeline of newness and fragrance and product forums that powers are deep customer connection.

Our product offering for multiple customer vacation, including gifting replenishment and self purchase.

We also connect with customers across Touchpoints by telling stories through our fragrance and packaging.

And finally, I've witnessed the company's key competitive advantage in bringing products to market with industry, leading the speed.

Vertically integrated supply chain allows us to respond quickly to changing customer and macro trends.

So my early days, the Bath and body works have reinforced why I joined the company and reaffirm the opportunity that we have to strengthen our position as a leading global omnichannel home and personal care brands.

At the same time, there are areas, where we can improve to drive top line growth and increase profitability.

Looking forward key areas of focus for us, we'll be driving grove by expanding our customer base delivering effective personal life marketing optimizing our product offerings expanding our international reach.

Advancing our digital capabilities and unlocking the potential of our Omnichannel model, all what focusing on improving profitability.

So just starting with a customer we have a large loyal customer base and we have diversity across income levels age groups and ethnicities I see a significant opportunity to acquire new customers increase then and further diversify the space.

As you know our loyalty program launched nationwide in August and we've seen right early results.

Enrollment speed is one of the fastest in the industry and just last week Newsweek named as one of America's Best loyalty program.

We've enrolled a total of 33 million members to date and more than 80% of these are active this is a testament to our customers passion for our brands.

Our loyalty sales represent approximately two thirds of our U S sales since launch.

And our loyalty customers also have higher spend rate of retention rates and make more interest.

And while these results are certainly impressive we are still only in the early innings of the programs were confident that more opportunity lies ahead. For example, we can drive more value and attract more customers for the program by increasing engagement through personalization by fully integrating our loyalty program across social physical M digital inner.

Her actions and making future program enhancements like tears accelerators and flexible rewards.

We also have an opportunity to leverage data and analytics to build deeper customer connections and deliver more personalized marketing and a more targeted promotion strategies.

As when he will explain relative to 2019 product cost inflation has exerted over 500 basis points of pressure on our operating margin and though we've taken price increases in all set a portion of that pressure in 2022 customers became increasingly price sensitive.

I believe we can grow our customer base increasingly age men and driving for mental trips always decreasing all reliant on broad based promotion. We can capture this opportunity by implementing a more targeted marketing approach that is rooted in advanced analytics in customer segmentation.

Our product offering an assortment strategies are key to elevating our brand as well as increasing our pricing power and extending our reach.

We're focused on leveraging our core strengths and fragrance and innovation to extend our product leadership into categories, such as men and wellness both of which currently represent a small portion of our total business today and julie's gonna speak in a bit about our product and marketing strategy.

We also have an opportunity to drive significant growth in our international business, which on a reported basis is approximately four per cent of our sales. This business Leverages a partnership based asset like model.

In 2023, we expect our international business to continue to accelerate with double digit top line growth and operating margins that are repeated overall business.

We're committed to expanding our reach and strengthening our position as a leading global brand through market expansion do stores and digital growth.

Judy and personal care category customers value, a true omnichannel experience to.

To that end, we have a strong fleet of profitable stores, both all small and and mall and these physician as close to the customer. We also have a strong digital business, we see a significant opportunity to better connect our stores and e-commerce platform to deliver a seamless experience and increase our customer lifetime value as.

An example, dual channel customers spend three times more than single channel customers.

But dual channel customers represent less than 15 per cent of our customer base. So increasing penetration by just one percentage point could drive up to $50 million in sales.

Technology is a key enabler of our growth and as the team has shared we are in the process of separating our I T systems from Victoria Secrets, and we expect to complete that transitions in summer.

But we're also assessing and investing in the foundational tools and systems that will need to support the company's future growth.

We're focused on building out incremental capabilities to enhance the customer experience evolve our loyalty program support advanced analytics deliver more personalized marketing and strengthening our omnichannel capabilities.

We also remain committed to driving margin expansion in cost savings through the effective management of pricing and promotions along with finding conditional waves to operate more efficiently.

Following my functional business reviews, I see meaningful opportunities to reduce expenses and improve operating efficiency.

I'm mindful that we've increased revenue 40 per cent since 2019, and while our team has done an excellent job accommodating back roads, while separating from Victoria Secrets, we now have an opportunity to position the business for margin expansion and deficiencies.

To that end, we are targeting $200 million of annual cost savings across the company, we expect to realize over half of those savings in 2023, and a substantial portion of the remaining savings in 2024.

Been gauged external advisers to assist in a top to bottom review of the business.

As we pursue opportunities for both broke and margin expansion. We are prioritizing actions, which we believe will create durable value for our shareholders.

While we're focused in the near term on optimizing the core business will continue to explore longer term opportunities such as adding new adjacent categories.

With respect to 2023, we expect that ongoing macroeconomic challenges will continue to impact customer spending.

At the same time, we expect that we will continue to see inflationary pressure on our input costs in the first quarter before beginning to see some relief as we move through the year.

And we are pleased to enter this year in a clean inventory position.

Regarding SG&A the technology investments, we're making to separate our systems and develop critical capabilities will help reinvigorate growth and support the long term success of the business. This will however, great cause pressure in 2023.

We're focusing on what we can control and we're taking aggressive action to drive profitable growth in the future and despite near term macro economic pressures I'm very optimistic about our future and our ability to reach our 10 billion dollar sales target and deliver industry, leading operating margins 20 per cent. We look forward to updating you on our progress as we worked to realize that.

Potential of her Omnichannel model and profitably grow on business and delivered long term shareholder value.

So with that I will turn the call over to Julie who will review our brand and category performance.

Thank you Gina.

The fourth quarter customers responded well to our holiday Assortments, which included both Christmas favorites and Cozy New fragrance edition.

We are an affordable luxury brands with comfortable gift offering and the key tenets of our holidays strategy was offering gifts that's all price point.

We drove a strong gives doing business in the fourth quarter exceeding our expectations and last year as a result with record high Gibson cells in particular strengths and overall good things about last week before Christmas.

The season was led by our iconic holiday traditions and top fragrances, such as winter Candy, Apple and Vanilla Bean Noah.

We brought back these customer favorites in new packaging that span multiple categories informed.

Offers our customers favorites in multiple forums is really a competitive differentiator for us and we find that it drives customer loyalty and purchases.

Across category Assortments is the key reason for our customers to come back and visit us each year.

He saw success with our ability to tell cohesive and compelling fragrant stories across the shop, which continue to resonate with customers who want to enjoy our fragrances for both body on home.

The fragrant stories about performed well during the quarter include core fragrances, such a champagne toast.

Returning holiday favorites, such as fresh balsam.

New fragrances, such a strawberry snowflakes.

Our men at business continues to be our fastest growing category and body care, how can we test new forms and merchandising ideas.

In the fourth quarter for the first time, we launched the newest single friend with lunch for the men's business after dark.

The response to this launch exceeded our expectations and.

And we will leverage the significant insights gained from it to guide future innovation.

<unk> continues to perform well outpacing the total shock or new packages and holidays <unk>.

<unk> the customers mindset during this time of year and really drove demand.

We continue to expand our formulation that's made without Parabens sulfates poor dog.

Relaunch of our Joseph has performed well and we see opportunities for meaningful future growth through this form.

We've been able to maintain a strong market leadership position in the sanitizer business.

So I was expected we continue to see a shift out of this category, which we know searched during the pandemic.

Body care outperformed in the fourth quarter led by body lotion and cleansers, our customers continue to show their affinity for our body care collection as our unit sales exceeded last year's fourth quarter.

Travel also outpaced other categories.

Customers continues to increase their mobility post pandemic.

Oh fragrance was down compared to last year as expected.

However, we achieved the most successful candle day in our history as customers continued to come and celebrate one of their favorite holidays.

Innovation and noone in certain key drivers of our business and we look ahead to spring we are focused on delivering rash and compelling new sense.

Such as our new among the clouds, it's been cocoa Paradise.

We also have some exciting new products expansions to our gingham fragrance portfolio coming for mother's day as well as additional lunches later in the year.

It's part of our continued focus on delivering innovation and newness.

<unk> rolled out men empty person to your to our entire chain and we are seeing very promising results.

We look forward to further expanding our men's portfolio later in the year.

We recently also launched a new signature tumbler and candles, which rounds out our candle portfolio and offers a burn time of 30 to 50 hours.

We continue to increase our assortment of sent control water ballflower heaters that offer customers choice and how much sent to enjoy each room of the house.

We're also expanding our wellness production that is geared toward elevating our customers daily wellness routine with curators collections for body and home.

And we will continue our sustainability initiative later this year, we're excited to be offering cartons about enable our customers to refill their soap containers and minimize waves.

The customer is always at the center of our innovation process and we will continue to add new compelling products and packaging as we work to expand our brands global potential.

We're also building capabilities.

Better connect with our customers and drive margin expansion through more personalized marketing initiatives some more targeted promotion.

And with that I'll turn it over to Wendy Thank you Julie.

Starting with our fourth quarter results. We were pleased to have exceeded are beginning of quarter guidance. We generated earnings from continuing operations per diluted share of $1.86. These results exceeded our guidance dollar 45 to $1.65 per share.

This was primarily driven by a better than expected margin right <unk>.

Principally to transportation cost improvement in a favorable inventory position, leading to less clearance activity as well as lower SG&A expense compared to our expectation net sales for the quarter were $2.9 billion, a decline of 5% compared to last year driven by a decrease in both.

Transactions and average dollar sale, our customer continued to be price sensitive given the macro economic pressures.

Fourth quarter net sales were up 29% compared to 2019.

And are you asking Canadian stores fourth quarter sales were $2.08 billion, a decrease of 5% versus the prior year.

Sales increased 19% compared to 2019.

Fourth quarter direct sales of $716 million decreased 6% compared to last year, but increased 66% compared to 2019 or.

Our customers continue to take advantage of our army focused option or by online pick up in store or bogus and frequently add to their purchase in the store as a reminder, both a sales are recognized outdoor sales we.

We have rules opus capabilities to over 800 additional stores in 2022, and we currently have focus availability and more than 1300 stores overall.

For the fourth quarter International sales were $95 million and grew 30% versus last year as a reminder, or international operations are primarily conducted through franchise license and wholesale partners and are recognized sales include royalties and wholesale product sales total not total.

International system wide retail sale, where approximately $250 million in the fourth quarter and $700 million and the full year of 2022.

The gross margin rate for the fourth quarter decreased by 480 basis points to 43%. This was driven by a significant decline in the merchandise margin rate and buying an occupancy expense deleverage due primarily to lower sales and increased labor costs, and our distribution and fulfillment network.

The merchandise margin rate decline was primarily driven by increased product costs due to continued inflationary pressure and raw materials transportation and labor as well as incremental promotions to drive sales.

Inflationary pressures total approximately $60 million in the fourth quarter.

Our average unit retail or AUR was down-low single digits in the quarter and slightly better than expectations and what we experienced in the third quarter.

We continue to focus on disciplined expense management, given sales trends and macroeconomic uncertainty. This resulted in better than expected SG&A expense for the quarter.

Total SG&A deleverage to 590 basis points with technology expense accounting for approximately 100 basis points of pressure.

As we have previously mentioned, we are making important strategic investments to enable future growth and this includes investing in technology is part of our I T separation.

Wage rates also drove an additional 70 basis points of deleverage as we increase customer facing associates wages to stay competitive while ensuring that we manage labor hours in line with sales expectations take.

Taking all of this into consideration Fourthquarter total company operating income was $653 million or 22.6% of net sales.

Turning to the balance sheets.

Total inventories ended the quarter flat compared to last year better than our expectations do too disciplined inventory management finished.

Finished goods retail units were down 5% compared to last year also better than our expectation.

Difference between flat dollars and the unit decrease of five per cent is due primarily to inflationary pressures and product costs, which was partially offset by lower component inventory compared to last year. Our inventory is clean and we are well positioned heading into the new year with agility and our supply chain.

Importantly, or overall real estate portfolio continues to be very healthy approximately 99% of our store fleet is profitable and our stores continue to significantly outperformed pre pandemic level led by strength and are non mall location.

And 20 twenty-two permanently closed 48 stores for the full year principally in malls, we opened 95, new off mall North American stores in 2022, resulting in nuts square footage growth of about 5% for the full year.

For International we had record store grow through our partnership model in 2022, ending the year with 427 stores.

Next before I outline or physical twenty-three guidance I'll describe our core performance from 2019 to 2022, which we believe will help to better evaluate our progress going forward I encourage you to review the supplemental slides posted on our Investor Relations website for additional details.

Starting with 2019 baseline Bath and body works revenue was $5.4 billion gross margin was 44% operating margin was 19.2%.

<unk> 2022 were up 40% as compared to 2019 with a balanced contribution from unit and AUR growth and while we were guiding to lower sales in 2000 twenty-three we remain confident in achieving our 10 billion dollar sales target.

Well operating margin has declined 100 basis points compared to 2019, we drove 32 per cent growth in operating income of dollars. The decrease in rate is predominantly driven by over 500 basis points of cost inflation 140 basis points of technology in transition expenses associated with our son.

Operations from Victoria's secret and 70 basis points of pressure from store wages, which was partially upset by leverage on sales growth and you are increases.

We were able to offset a portion of the inflation pressure with pricing, but as many other retailers saw the customer became more price sensitive in 2022. This limited our ability to increase aur's.

Ah Junior described we're focused on developing a more targeted personalised marketing approach to grow our customer base and drive visit at the same time, we are working to decrease over lions on broad promotion, which should increase our merchandise margin.

We expect that cost inflation will began to subside after the first quarter of this year.

As for technology expenses, our I T efforts and investment through the end of the summer are focused on completing our separation activities beyond separation, we're focused on building new capabilities to drive profitable sales growth. These include advancing or loyalty program supporting advanced analytics evolving or <unk>.

Or getting strategy and bolstering our omnichannel capabilities.

Our model assumes that technology costs will continue at current levels as we roll off separation related costs establish are standalone capabilities N team and invest strategically to drive future growth.

As Gina indicated earlier, we are partnering with external advisers to closely evaluate our cost structure and take action to offset what we see is ongoing cost pressures in both gross margin and SG&A as well as to fund our strategic investment. We are early in this process, but we are targeting $200 million of annual <unk>.

Cost savings of which over half is included in our 2000 twenty-three outlook, primarily impacting the second half of the year.

We expect to realize a substantial portion of the remaining benefits and 2024.

Our efforts are broad base with opportunities and transportation product margin store operations home office expense and indirect spend we have recently initiated this work and look forward to sharing more with you an upcoming coworkers.

As we move past recent and near term challenges and realize the benefits of our profit optimization initiatives. We are targeting industry, leading operating margins of 20 per cent with gross margin of approximately 45% and and SG&A rate of approximately 25 per cent.

Turning now to our fiscal twenty-three financial outlook.

Today, we are providing our 20th twenty-three outlook with comparisons to 2022. Please note. The physical twenty-three will include a 53rd week to the fourth quarter of fiscal 2023 will consist of 14 weeks are outlook includes the impacts of the 53rd week, which we estimate at seven cents per diluted share.

Sure.

Our forecast takes into consideration ongoing macroeconomic uncertainty unexpected customer sentiment for the full year, we are forecasting flat sales to a mid single digits sales decline.

Range assumes a continuation of fourth quarter sales trends for the first half of 2023 and a moderate improvement in the back half of the year as we anniversary softening sales front.

Quickly reading and reacting changing business trend is part of our DNA, we will leverage our vertically integrated supply chain in our industry, leading agility to chase demand and maximize sales.

We will also work to drive growth through our loyalty program cause he's customers make more visits have higher spend than other customers. A current customer segmentation work is also designed to lead to more efficient and effective marketing.

Or international business continues to provide healthy and margin accretive growth to our business. We are forecasting double digit international net sales growth in 2023.

We expect a full year gross margin right to be approximately 42%. We explore expect inflationary costs will continue in the first quarter and began to moderate as we move through the year. We are forecasting aur's roughly flat, but we'll continue to test for opportunities to increase aur's and expand.

Margin through more data driven targeted marketing efforts.

We also expect buying an occupancy expense to beat leverage driven by lower sales and our investments indirect fulfillment capabilities to drive future omnichannel growth, partially offset by the benefits of our profit organization work.

Our plan assumes a full year SG&A rate of approximately 26% with deleverage primary primarily driven by increased store wage rates technology and transfer technology personally offset by the benefits of our cost optimization work.

We expect full year net non-operating expense of approximately $320 million and effective tax rate of approximately 26% and weighted average diluted shares outstanding of approximately $231 million.

Considering all of these inputs, we are forecasting full year earnings from continuing operations per diluted share to be between $2.50 and $3.

Turning to capital expenditures, we're planning for approximately 300 to 350 million in 2023. The majority of our capital is focused on investments to support future growth you're planning for continued investments and select remodeled and new off mall store opening.

We are also investing in our technology distribution and logistics capabilities to support growth approximately 35 million a planned capital expenditures relate to payments, which shifted out of 2022 into 2023.

This year, we are planning approximately 115 total real estate projects, consisting of approximately 90, new all small stores and twenty-five remodels to the white barns store design offset by about 50 mall closures at all this year old square footage growth of approximate.

At least 4%.

We expect to generate free cash flow of $600 million to $700 million in fiscal twenty-three well.

Well now turn to our first quarter twenty-three outlook for the first quarter, we are forecasting low to mid digit sales decline.

We expect the first quarter gross margin right to be approximately 41%.

Climbed versus last year is principally driven by unexpected lower merchandise margin rate and deleverage and buying an occupancy we are forecasting flight AUR declines just super mix as we anticipate continued customer price sensitivity are forecast includes approximately 20 million.

<unk> of incremental inflationary cost increases in the first quarter related to raw materials wages and transportation.

Flying in occupancy expenses are also forecasted to deleverage driven by the sales decline and our new direct to consumer fulfillment center as it ramps up operations in the first and second quarter.

We expect our first quarter SG&A right to be approximately 30% of sales with the rate increase driven largely by investments in technology and increased store associate wages.

We expect first quarter net non-operating expensive approximately $80 million <unk>.

Tax rate of approximately 27 per cent and.

And weighted average diluted shares outstanding of approximately 230 million.

Considering all of these outputs we are forecasting first quarter earnings from continuing operations per diluted share a 17 to 2070 cents.

Our forecast for the first quarter as soon as a continuation of current softer demand trends and elevated inflation and wage pressures. However, this is not reflective of our expectations for the full fiscal year, because we anticipate that certain had one such as inflation that wage pressures will moderate in the second half.

Turning to inventory, we have entered 2023 as I said with a very clean inventory position, we expect to end the first quarter with a slight decrease in both inventory dollars and units compared to the first quarter of 2022.

With regard to capital allocation, we are committed to taking a balanced and disciplined approach.

First priority is investing in the business to drive a profitable growth by significantly improving the customer experience.

[noise] sporting advancements in existing and new products categories investing in new all small stores and remodel improving our fulfillment capabilities completing our I T separation and standing up critical new technology capabilities. We are also committed to returning cashed.

To our shareholders. We plan to continue paying an annual dividend of 80 cents per share with an intention to increase the dividend overtime as earnings increase.

Turning to capital structure, we're ending the year with a gross adjusted debt to EBITDA leverage ratio of 3.1 times above our target of approximately 2.5 times on a net basis or leverage ratio is 2.4 times.

Although we are above or a target we remain confident we will return to our target range overtime.

We have no debt maturities until 2025, and a total of approximately 600 million coming due over the next four years.

Comparison in 2022, we generated over 600 million a free cash flow after a regular dividend.

We estimate that we're starting the year with $700 million more cash than we need to fund our forecasted working capital needs for the year, we will evaluate the best use of our cash as we go through the year and we can better visibility into macroeconomics trends, we are considering options such as debris.

Payment and share repurchases and.

Planning for the year, we believe that it is prudent to acknowledge the macro economic pressures continuing to impact our customers and their spending habits as well as the current trends of the business. We are striving to exceed our forecast leveraging our agile vertically integrated supply chain to chase demand and building capabilities to drive.

<unk> sales growth in the future and it's Janet I mentioned earlier, we are working with external advisors on a comprehensive review of opportunities to support our profit expansion takes.

Taking a refresh view of our core business will enable us to move forward confidently and pursuing growth opportunities that concludes our prepared comments I will turn it over to Heather.

<unk> before we open it up for Q&A, we went to briefly address the recent disclosure by third point, we issued a response last night.

The board will respond in due course to third point as appropriate with that said the purpose of today's call is to discuss our fourth quarter in fiscal year resolved and we ask that you keep questions focused on those results.

For our Q&A session, we ask that participants limit their responses to one question and one follow up well now moved to the Q&A session Danielle.

Thank you as a reminder, if you would like to ask a question over the phone. Please dial star one our first question comes from today. So we can you be <unk> your last name.

Now open.

[noise] great. Thank you so much I guess, what I'm curious about some of the cost inflation and you know maybe what's been incremental that you've seen over the last 90 days. She just help us understand sort of the difference between the margin outlook for for this year compared to the margin outlook from last year.

Okay. Thanks, J when do you would you like to pick up that's great. Thank you J for the question Yeah. So in terms of inflation you know as we've talked about in previous calls. There's you know three main groups of pressure points for us and your raw materials and components transportation and I would say wages and other so first you know I'll cover a raw material.

You know, we have specifically and one of our key raw materials as candle wax and we are seeing and I think I mentioned this in the last call of some improvements and costing and candle wax.

So we are down to 2022 levels, but still up to two pre pandemic, but we are seeing some green shoots in terms of the rest of the raw materials I would describe the markets in terms of what we're seeing as generally flattish you know we we are hoping for continued declines, but we aren't seeing.

King or planning for you know significant deflation in the other components of our of our raw materials, yes. So hopefully that comes to fruition, but I would describe those markets stable.

In terms of transportation.

What we're saying is that you know volume does continue to be down in all modes, which is great because that's creating excess capacity, which provides us options in terms of carrier selections et cetera.

So if I break it down into you know our three three main pieces you know in terms of truck trucking relying hall you know we are in the process of doing our annual meeting with our partners. So we we look at those contracts in the first quarter of every year after a holiday and our initial we're in the middle of the process.

But we are seeing a decline year over year in our initial work here, which is good for us and that is providing deflation for us and line-haul starting in the second quarter and that is factored into our guidance in terms of parcel, which is another piece of transportation you know we have seen.

Surcharges declining, but the base rates actually are increasing so right now personal we aren't seeing major G place and and and it's it's generally flat from a year over year basis, and then the the final piece for us and transportation. It's final mile, which we are saying continued pressure points you know just do two primary.

[noise] took to labor. So so Ah overall from transportation, we do have some deflation as I said starting in Q2, two driven by lying hall, which is our guidance lastly in a labor over the last two years or three years I should say, we have seen wage price pressures and labor, which we've talked about.

Cause I would describe what we're forecasting now as a relatively flat model in terms of inflation you know from our either if I'm talking about vendor wages or distribution or fulfillment centers. We are thinking about solidified for the course of the entire year. So what when you add all that up.

You know we are forecasting as we said in the remarks, you know pressure in Q1, but it should start to deflate so to speak and Q2 and then we'll we'll get a better outcome in fall.

Thank you for <unk>.

You know what if I can just ask one more did you mentioned you're still charging 20 per cent margin did you put a time frame around on a truck around when you believe.

Believe the company will get back to that level.

Yeah, you know we are we are and.

As you know you know 20 per cent, we do believe it you know it was best in class and and we think it is the right. The right level for US you know, we don't Wanna, obviously limit ourselves to 20 per cent, but we think it's the right right there where we can balance you know investment in the business as well as maximize our shareholder returns timeframe.

It's difficult to say is you know, we're working hard to maximize margins and we will we will continue to try and get there as quickly as we can.

Okay.

Thank you next question please.

Alright next question comes from Alex Straighten with Morgan Stanley . Your line is now open.

Great. Thank so much congrats on a on a good quarter here I just wanted to kind of follow up on that 20 per cent EBIT margin target.

Feels like I'm, a pretty big job from here to there, though admittedly you guys have have been able to do that in the past. So can you just bridge the gap for me between I think it's about a 16 per cent margin. This year to that 20 longer term like what are the key puts and takes their that we should be thinking about.

Thank you Alex when do you want to take that one sharp.

Yeah cause we we model and think about the future you know the first thing I'll just kind of worked my way down to the piano you know the first is obviously that fails we want a grown ourselves we're committed to growing that top line and you know a lot of the pressure points were staying in 2023 are you leverage what you get when you have a you know a guy that.

It has a negative cells number in it. So you know leverage on sales grow up it's obviously important for us to get back to about 20 per cent. The other thing I would say on top line on sales, which will help our ways. As you know we are always focused on how do we grow aur's.

In a way that you know, it's it's positive for our customers. So we talk a lot about how this business has tested and learning and rdna. Yeah. We are we are literally tough staying pricing combinations every weekend to learn to see how we can.

<unk> Aur's put you in a way that still resonates with the customer. So as we continue to do that over time are aur's will increase and and help margins. You know if you look at the long history of this company and for the last 10 years, we have consistently pre pandemic been able to grow you Aur's you know in the low to in some ear.

Mid single digit range. So you know, we know that as we innovate and deliver a compelling assortment Ah nunez, we can get AUR growth overtime. So that's that's failed very very key to getting back to the 20 per cent and then you know the other thing is Martin right now our <unk>, our merchandise margin race and archive.

Side or below pre pandemic level, we've talked a lot about inflation as I said, we've got some deflation coming this year, but at some point you know hopefully that there's a little bit more but that will be paired obviously with the AUR increase to to increase our profit rates and then the last thing I would say.

[noise] expenses you notice we mentioned here, we are doing a comprehensive review of our organization at our indirect spend and where are we to spend money and you know our goal is to optimize it for the size of the business and we are internally extremely focused on getting to that 20 per cent and that is part of our goal.

We look to optimize Ah the organization and or spend profile.

Maybe you just one quick follow up it it feels like part of the the bigger SG&A guide. This year is really related to kind of tech spending. So can you just walk us through sort of what the what the shortcomings. You feel are are there or what exactly you're trying to improve just to be have a better sense and and thank.

[noise] you so much for taking the questions.

Slowly so I would say you know through.

The beginning of the year or through end of summer. We are focused on separation from Victoria's secret. So are are are the majority of our sound is too about and and you know we're also in the process hockey players won't be and do not TSA of establishing our own organization our team our partners et.

Right. So that is where we were focused on for the first part of the year. Once we complete that separation, where we're excited to complete it because it allows us to unlock our future and you know as we talked about we see lots of opportunities to invest you heard both me and Gina talk about it you know in the mall.

Marketing space, whether whether that loyalty or whether it's how we market to customers and data analytics, we see huge opportunity to use you know really smart data analytics to drive marketing drive promotions. So it's it's really in areas that are customer facing.

Ah that where we want to invest and that is what we're focused on in the back half of the year.

Thank you.

Thanks, Alex next question please.

Our next question comes from Matthew box with J P. Morgan Your line is now open.

Thanks, So maybe two part question Gina could you elaborate on the cadence of business trends, maybe it's the fourth quarter progressed any notable change in business that you've seen post holiday here in January or February and then Wendy on on a.

Where have you seen a customers the most price sensitive across categories and just how best to think about your AUR plans for the first half of the year, maybe relative to your back half expectation.

Okay. Thanks for the questions not actually when did you Wanna start with that yeah. So I think that for the question. So let's start with the <unk>.

Four Q Ah and that's the story of how it progressed so.

For US you know we are are are solved this month of the quarter was November you know you heard a lot of other retailers comment on that so we are consistent with other retailers you know the softest part of the the quarter was the first three weeks of November as we progressed into December you know we saw.

Improvements in trends, including improvements in Tropic and in particular in the month of December Yeah. We Julie mentioned candle that we were pleased with that at the beginning of December but in particular, we saw very strong sales performance and weeks four and five of December So the week before Christmas and the week. After Christmas is very strong for us.

January continuing to be strong you know we had a nice first two weeks in January , especially when we were starting our semi annual sale. So overall you know a strong December and January relatively and just in November was our most challenging month of the quarter in terms of AUR. So you know you have.

<unk> I've mentioned and are prepared remarks, right now we're planning.

The aur's in the first quarter to be down slightly I mean, our promotional overall promotion approach in Q1 will look fairly similar to what you saw last year, but you know we're forecasting AUR has to be down slightly for the full year.

We're we're forecasting it to be roughly flat you know as I as I mentioned.

<unk> as you know we we of course are chasing to improve that result will and will take price ups and reduce promotions to the extent, we can without damaging margin dollars, but that is our overall approach and I'm gonna, let Julie add some color.

Yeah. So I just wanted to mention that we have been very slowly and methodically than raising our prices. This spring.

So our everyday price us have actually been performing very well for example, we have soaps that five for 27 from five to 25 or Wallflowers in that same deal five for 27, where they'd been five for 25, and we're not see any price resistance from our customer we've.

We've also increased prices across the board, where we are implementing a good better best strategy and we believe that that will help us.

Where we are seeing some price sensitivity is in our promo. So in the short term, we're continuing to balance the need to keep the engagement on traffic strong with our desire to increase pricing and have a very agile operating model. So that will allow us to increase.

Or decrease promotional activity in a meaningful way and test for the best outcome.

Do just want to remind everyone R. A U ours are up to close to 20% by 2009 from 2019, and we do is Wendy said have a track record of being able to raise our a you are positively in the low single digits and we hope to.

She needs to do that so.

Our guidance assumes that promotional levels are roughly flat to last year, and we're gonna read and react and maximize every dollar we can out of his performance.

When do you just want to follow up on on the 20% operating margin target I know that's relative to low to mid twenties and your previous plan is the change in the long term operating margin target is driven by a lower gross margin assumptions longer term.

Well I would say a couple of things you know as you know the reality is in the in the last two years, we've seen some major Tampa inquiries.

Increases and input costs advisor talks about labor and we've also recognized as we.

Worked on separation and thought about the future that there are certain parts of our business life technology.

Require additional investment to future growth. So you know I think it's false you don't want any tuned at best and also just a recognition that we've had major.

Gary pressures in the business. So we as I mentioned earlier, we do think that this is the right balanced targets for the business to allow for the investment for the future, but also deliver returns for our shareholders.

Thanks, Matt next question please.

Our next question comes from Kate Mcshane with Goldman Sachs. Your line is now open.

Hi, good morning, Thanks for taking our questions. We were curious to hear a little bit more detail about what role the loyalty program played in the fourth quarter and what you're assuming the list could be from loyalty and Q1 and your overall 2000 twenty-three sales guidance.

Alright, Thanks, Kate when do you want to take that one I think Julie okay, but I can add color. Yeah. So we can talk to him on this one. So we are very pleased very pleased with our enrollment in the program we projected to be about 30 million members by the end of the fiscal year and we enrolled 33 members.

With more than 75% of those numbers, having shocked with us in the last 12 months and as we've discussed on other calls we all know that loyalty members outperform non loyalty and spend trips retention and cross channel shopping behavior.

So I think that we have a huge opportunity we think about 22 as the year of enrollment and we're thinking about 23 as a year of engagement. So our strategic path forward, it's really capitalize on the very high rate of data collection.

That allows us to both identify and market to enrolls customers.

So with customer segmentation and advanced analytics work that will allow us to customize our loyalty offering to maximize enrollment and engagement. We can also attract more customers by fully integrating our loyalty program across social physical and all of our digital interaction we.

We want to test and try to influenced member behavior by leveraging points based incentives to drive incremental trips trial of new product <unk>.

And you know we will be pivoting two more member only events content and engagement as we have seen our sneak peeks and are absolutely I'd be very successful.

Actually the only thing I would add Kate to your question is we you know we did as you know we had a loyalty program in test before we did the nationwide launch in August . So we did have some markets that were in tests, where we could measure the performance on a pre post faith.

So when we did that we did see a moderate left in the fall season on a pre post basis and that's good but what we're I'm really excited about from a financial upside standpoint, which truly mentioned is now that we have got the program and we've got the members and we.

Have a lot of members the opportunities for us to use the data collection to improve our marketing and drive transactions with these customers is to me where I see the key upside for the teacher.

Thank you. Thank you.

Alright next question please.

Alright next question comes from Paul Lashway, which city. Your line is now open.

Hi, This is Kelly cradle on for Paul Thanks for taking our question wanted to get a little further into your ear, you're kind of a longer term framework around on the top line I think you mentioned and we believe you can sort of grow aur's low single digits over over the longer term.

Can we take about it uhm a top line does that assume that kind of units bladder issue in and we should sort of thing you know low single digit top line growth <unk> and then maybe a couple of points for square footage of curious if you can provide a little bit more color and that stinks.

Yeah. So what do you think about a multi year model I mean, we are still focused on as you as you mentioned delivering comp growth and we believe you know over time, we can do that and you know, let's say low single digits far with chasing for men single digits or higher and and you know what we've been able to do.

The last Coupla years, as we've been able to do that in a balanced way through both units and aur's. So that if we can do both units. Today. You are obviously, we can get to a low to mid cockroach, but you know we're focused on undoing both on a multi year basis. You also mentioned square footage we do expect.

But we will get a benefit from square footage growth, let's say in the low single digits overtime. So those will be key drivers for our store revenue growth as we think about them will tell Ya model. You've also heard of talk today about international and although right now that's a small part of the.

Business to me, that's that's exciting thing because it's small today and we see lots of opportunity for meaningful double digit growth on a multi year basis as we expand internationally throughout the world. So that is a key part of our growth algorithm in the future.

Thank you for the color on that.

You mentioned that Q1that that the cost inflation, there's gonna be a 20 million dollar has been too gross Martin, but that shouldn't be as we go four does that turn from that from a headwind to appear when did two Q or is it just less of a hide waiting and I guess, how does that how should we kind of think about the grocery market progressing throughout the year.

Thanks, Yeah.

Yeah, It turns to a tailwind in queue to I would say to tell one right now is about $10 million in queue too, but we will of course chase that hopefully it's a bigger number.

Alright next question please.

Alright next question comes from Lorraine Huntington, What we think of America. Your line is now open.

Good morning, I wanted to follow up on the gross margin guidance for the year. It does sound like after the first quarter most of the inflationary pressures actually flipped the positive yet your guidance assumes a flattish gross margin for the rest of the year. After the first quarter can you just bucket the pressures that you're expecting and those corridors two through four.

To offset these benefits from inflation and transport flipping.

Thanks, Lorraine when do you want to take that one sure. So yeah on a on a full year you know we do still have some pressure on both product March March margin products margin and deleverage on piano you are.

<unk> as I mentioned are roughly flat. So we've got a little bit of forecasted AUC growth greater than a U r's, which is pressuring there. The other area. We're seeing pressure as you know in buying an occupancy. So we've got some deleverage and store occupancy because you know as we've invested in stores and that's.

That's a good investment it's delivering a return it does delever in a negative comp model, which is implied in our range and then we've also got some deleverage on buying nah as I mentioned you. We are focused on all lines with you know in terms of getting additional.

Favorability and so it's not just expenses. We're also looking at you know continued upside and product margin that will be chasing to improve their results.

Thank you.

Thank you and we have time for one more question.

Our final question comes from Simeon Seagull with BMO capital markets. Your line is now open.

Thanks, Good morning, everyone and welcome to in and Heather You know I was hoping with just higher level, maybe what you think about the right price first 2019 architecture should be just curious how you were thinking about maybe the right balance between revenues and gross margin clearly you guys got a lot of really nice that you are are you got great brand equity. You also may have had a little bit of over purchasing through the pandemic. So just any thoughts and they are and how to balance.

Spreads and gross margins.

Thanks for the questions to me and so you know maybe if you wanted to start off with you know the the focus on on how we're growing sales and 23 and then one day, if you want to follow up with some detail there.

So it just set so I'm sure clear on on the question did you say.

The the balance between revenue and gross margin.

And yeah.

Yeah, you guys are in a lot of price and a lotta brand equity. So I'm just curious how you're thinking about promotions versus you know just thinking about that the balance there.

Yeah, So we you've probably heard and not only months, maybe all three of our remarks around promotion.

And how we're trying to well first of all it's Julia just talk about testing some of the lips and so forth, but really it's not it's not it's more bells broad based promotions and which are kind of a blunt instrument and so what we're trying to do is leveraged the data and analytics to target the promotions to we.

They are needed most one of the things that I've been focusing on since arriving is really building the marketing sort of infrastructure. We're doing some really exciting customer segmentation, that's leading with our loyalty program and inside of all of that capability is really you know driving much more effective and efficient promotion.

And so that gives me the confidence in terms of how we can maybe move that up and have you know the margin and the Aur's support both top line and merch margin.

That's a huge area of focus we had not had that before we're gonna probably see that towards with that cough, because we're still building that capability.

So that was sort of on the promotion peace, but I think you've had another longer term comments as well.

Oh.

That answer your question.

Yeah that yeah. That's helpful. Yeah, Jean it's more just trying to get a feel for as you as you look at the companies you look at you have the benefit of it can kind of be objected view, how you look at that 2019, where we are now so that's that's really helpful. When he can I just follow up on on the last one do you know offhand, what the implied occupancy other fixed fluffy leverage would be embedded within the full year revenue guidance.

So how.

How about ER, yeah, Occupancies expense for full year, we've got it so cats forecasted plus 5%. So it's about you know rally.

50, 60 basis points a few hours.

Great Alright, Thanks, Alot and best of luck with your head.

I mean, it makes them in.

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.

That concludes today's conference. Thank you all for participating you may disconnect at this time.

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Good morning, My name is Danielle and I will be your conference operator today at this time I would like to welcome everyone to the Bath and body works fourth quarter 2022 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 one I will now turn.

The call over to MS. Heather Hollander, Vice President Investor Relations at Bath <unk> body works Heather you may begin.

Thank you Danielle good morning, and welcome to the Bath and body works fourth quarter and fiscal 2022 earnings Conference call. Today's call may contain forward looking statements related to future events and expectations. Please refer to this morning's press release and the risk factors and Bath and body works 2021 Form 10-K for factors that could cause the app.

Actual results to differ materially from these forward looking statements.

Today's call may contain certain non-GAAP financial measures. Please refer to this mornings press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure joining.

Joining me on the call today are gene up Oswald Chief Executive Officer, Julie Rosen brand President and when do you Arlen Chief Financial Officer.

All of the 2021 results, we will discuss today are adjusted and exclude the significant items detailed in our press release. Additionally results represent results from continuing operations and exclude the discontinued operations related to Victoria's secret in 2021, I'll now turn the call over to Gina.

Thank you Heather and good morning, everyone and thank you for joining US first let me say, how thrilled I am to be here at such a dynamic time. It is an honor to lead Bath and body works and the more than 55000 associates worldwide.

I look forward to working with this team our leadership and our board to capitalize on the tremendous opportunities that I see for the business and for creating long term shareholder value.

On today's call I'm going to talk about why I joined Bath and body works discuss some of my early observations and then outline my initial areas of focus to drive growth and profitability.

But before I dive in I'd like to first thank the team their efforts enabled us to deliver fourth quarter sales at the high end of our guidance range and EPS that exceeded expectations. This was despite a challenging macro economic environment.

That's a share a bit about why I chose to join Bath <unk> body works through nearly three decades in the consumer industry I have developed a true love for beauty personal care and fragrance.

Our customers are passionate and engaged in quality and innovation are critical.

Immediately drawn to Bath <unk> body works as a company with.

With its history of superior growth and a highly differentiated business model.

This is a company truly positioned at the intersection of consumer goods and retail.

Company, the market leader and innovator with leading share in its major categories of home fragrance body care and soap and Sanitizers and we are a top position in the U S and transforms. This includes body lotion shower gel freeway candles, and soaps and hand, Sanitizers and we've also gained significant share in the men's category.

These are all growth categories with a long runway ahead enlarge the addressable market as one of the Premier fragrance companies in the world, we deliver customers their favorite fragrances in multiple forms and categories with industry, leading speed and innovation.

We bring affordable luxuries and personal care and home fragrance to life like no other.

Our strong relationships with our domestic vendor partners in fragrance houses enables us to continually deliver newness and meet the demands of an omnichannel customer.

We manage every touch point throughout the customer journey to deliver a highly differentiated shopping experience.

I was visiting stores I was also struck by the fact that Boston Bath <unk> body works office products for the whole family and we're part of so many people's lives, we estimate that our products are in 40% of American households.

And in my first three months Ive immersed myself in the business and he visited our stores and distribution centers and meeting with our supplier network at beauty car I've also had an opportunity to engage with customers and store associates across the country as well as talk with investors to hear their perspective.

As conducted detailed business reviews with each of our functional leader and I've been impressed with the talent in our company and how engaged knowledgeable and dedicated our associates are.

This holiday season, I saw firsthand, how our passionate salesforce brings our seasonal storytelling to life in our stores.

I've seen the strong connection customers have with our brands, which is underscored by our best in class brand engagement and loyalty.

And I'm excited to see customers celebrate our events I was delighted to learn that many customers consider our candle Bay a national holiday.

Overall, I'm pleased with the reach and Bath <unk> body works with top brand awareness in our industry and customers, indicating a strong propensity to recommend our brands.

During the pandemic, our integrated and predominantly domestic supply chain positioning the company to meet elevated customer demand, which enabled us to drive significant growth in 2020 in 2021.

In 2022, the company continue to grow unit share across our three major categories of body care home fragrance and soap and Sanitizers.

This team has demonstrated remarkable innovation capabilities delivering a pipeline of new units in fragrance and product form the <unk>.

Our deep customer connections.

Our product offerings serve multiple customer applications, including gifting replenishment and self purchase.

We also connect with customers across touch points by telling stories through our fragrance and packaging.

And finally I have witnessed the companys key competitive advantage in bringing products to market with industry leading speed.

Vertically integrated supply chain allows us to respond quickly to changing customer and macro trends.

So my early days at Bath <unk> body works have reinforced why I joined the company and reaffirm the opportunity that we have to strengthen our position as a leading global omnichannel home and personal care brands.

At the same time, there are areas, where we can improve to drive topline growth and increased profitability.

Looking forward key areas of focus for us will be driving growth by expanding our customer base delivering effective personalized marketing optimizing our product offerings expanding our international reach.

Advancing our digital capabilities and unlocking the potential of our Omnichannel model, all while focusing on improving profitability.

So just starting with the customer we have a large loyal customer base and we have diversity across income levels age groups and ethnicities I see a significant opportunity to acquire new customers increased spend and further diversify the space.

As you know our loyalty program launched nationwide in August and we've seen great early results.

Our enrollment speed is one of the fastest in the industry and just last week Newsweek named US one of America's best loyalty programs.

We've enrolled a total of 33 million members to date and more than 80% of these are active this is a testament to our customers' passion for our brands.

Our loyalty sales represent approximately two thirds of our U S sales since launch.

Our loyalty customers, who also have higher spend greater retention rates and make more trips.

And while these results are certainly impressive we are still only in the early innings of the program. We're confident that more opportunity lies ahead. For example, we can drive more value and attract more customers to the program by increasing engagement through personalization.

By fully integrating our loyalty program across social physical and digital interactions and making future program enhancements like tiers accelerators and flexible rewards.

We also have an opportunity to leverage data and analytics to build deeper customer connections and deliver more personalized marketing and a more targeted promotion strategy.

As when he will explain relative to 2019 product cost inflation has exerted over 500 basis points of pressure on our operating margin.

We've taken price increases to offset a portion of that pressure in 2022 customers became increasingly price sensitive.

I believe we can grow our customer base increase engagement and drive incremental trips all while decreasing our reliance on broad based promotions. We can capture this opportunity by implementing a more targeted marketing approach that is rooted in advanced analytics and customer segmentation.

Our product offering an assortment strategy are key to elevating our brand as well as increasing our pricing power and extending our reach.

We're focused on leveraging our core strengths in fragrance in innovation to extend our product leadership into categories, such as men's and wellness both of which currently represents a small portion of our total business today and julie's going to speak in a bit about our product and marketing strategy.

We also have an opportunity to drive significant growth in our international business, which on a reported basis and approximately 4% of our sales in this business Leverages a partnership based asset light model in.

In 2023, we expect our international business to continue to accelerate with double digit topline growth and operating margins that are accretive to our overall business for.

We're committed to expanding our reach and strengthening our position as a leading global brand through market expansion, new stores and digital growth.

Julian personal care category customers value a true omnichannel experience to that end, we have a strong fleet of profitable stores, both off mall and <unk> mall and these position of close to the customer. We also have a strong digital business, we see a significant opportunity to better connect our stores and E comm.

<unk> platform to deliver a seamless experience and increase our customer lifetime value.

As an example, dual channel customers spend three times more than single channel customers.

But dual channel customers represent less than 15% of our customer base. So increasing penetration by just one percentage point could drive up to $50 million in sales.

Technology is a key enabler of our growth and as the team has shared we are in the process of separating our it systems from Victoria's secret and we expect to complete that transition this summer.

Also assessing and investing in the foundational tools and systems that will need to support the companys future growth.

Focused on building out incremental capabilities to enhance the customer experience evolve our loyalty program support advanced analytics deliver more personalized marketing and strengthening our omnichannel capabilities.

We also remain committed to driving margin expansion and cost savings through effective management of pricing and promotions along with finding additional ways to operate more efficiently.

Following my functional business reviews, I see meaningful opportunities to reduce expenses and improve operating efficiency.

I'm mindful that we've increased revenue, 40% since 2019, and while our team has done an excellent job of accommodating that growth while separating from Victoria Secrets, we now have an opportunity to position the business for margin expansion and efficiency.

To that end, we are targeting $200 million of annual cost savings across the company, we expect to realize over half of those savings in 2023, and a substantial portion of the remaining savings in 2024.

We have engaged external advisors to assist in a top to bottom review of the business.

As we pursue opportunities for both growth and margin expansion, we are prioritizing actions, which we believe will create durable value for our shareholders.

While we're focused in the near term on optimizing the core business will continue to explore longer term opportunities such as adding new adjacent categories.

With respect to 2023, we expect the ongoing macroeconomic challenges will continue to impact customer spending.

At the same time, we expect that we will continue to see inflationary pressure on our input cost in the first quarter before beginning to see some relief as we move through the year and.

And we're pleased to enter this year in a clean inventory position.

Regarding SG&A the technology investments, we're making to separate our systems and develop critical capabilities will help to reinvigorate growth and support the long term success of the business. This will however create cost pressure in 2023.

We're focusing on what we can control and we're taking aggressive action to drive profitable growth in the future and despite near term macroeconomic pressures I'm very optimistic about our future and our ability to reach our $10 billion sales target and deliver industry, leading operating margins of 20%. We look forward to updating you on our progress as we work to realize the full.

The potential of our Omnichannel model and profitably grow our business and deliver long term shareholder value.

So with that I will turn the call over to Julie who will review our brand and category performance.

Thank you gena in the fourth quarter customers responded well to our holiday assortment, which included both Christmas favorites and cozy new fragrance additions.

We are an affordable luxury brands with comfortable gift offerings and a key tenant of our holiday strategy was offering guests at all price points.

We drove a strong gifting business in the fourth quarter exceeding our expectations and last year's results with record high gift set sales and particular strength in overall gifting that last week before Christmas.

This season was led by our iconic holiday traditions and top fragrances, such as winter can be Apple and vanilla Bean Noah.

We brought back these customer favorites and new packaging that spans multiple categories informed.

Operating our customers' favorites in multiple forums is really a competitive differentiator for us and we find that it drives customer loyalty and purchases.

Our cross category assortment is a key reason for our customers to come back and visit us each year.

We saw success with our ability to tell cohesive and compelling fragrance stories across the shops, which continue to resonate with customers who want to enjoy our fragrances for both body on home.

The fragrance stories that performed well during the quarter.

<unk> core fragrances, such as Champagne toast, returning holiday favorites, such as fresh Balsam and.

New fragrances, such as Strawberry snowflakes.

Our men's business continues to be our fastest growing category and body care as we test new forms and merchandising ideas.

In the fourth quarter for the first time, we launched a new single fragrance launch for the men's business after dark.

The response to this launch exceeded our expectations.

And we will leverage the significant insights we gained from it to guide future innovation.

<unk> continued to perform well outpacing the total shop, our new packaging and holidays.

And that's the customer's mindset during this time of year and really drove demand.

We continue to expand our formulation that's made without parabens sulfate or dies.

A relaunch of our gel soak has performed well and we see opportunities for meaningful future growth through this forum.

We've been able to maintain our strong market leadership position in the sanitizer business. So as expected we continued to see a shift out of this category, which we know surged during the pandemic.

Body care outperformed in the fourth quarter led by body lotion and cleansers our customers contend.

New to show their affinity for our body care collection.

Our unit sales exceeded last year's fourth quarter.

Travel also outpaced other categories as customers continued to increase their mobility post pandemic.

Oh fragrance was down compared to last year as expected. However, we achieved the most successful candle day in our history as customers continued to come in and celebrate one of their favorite holiday.

Innovation and newness are key drivers of our business and we look ahead to spring we are focused on delivering fresh and compelling new.

Such as our new among the clouds and cocoa Paradise we.

We also have some exciting new product expansions to our gain on fragrance portfolio coming for mother's day as well as additional launches later in the year.

As part of our continued focus on delivering innovation and newness.

We've rolled out men's antiperspirants deodorants to our entire chain and we are seeing very promising results.

We look forward to further expanding our men's portfolio later in the year.

We recently also launched a new signature Tumblr, and candles, which rounds out our candle portfolio and offers a burn time of 30% to 50 hours.

We continue to increase our assortment of scent control water ballflower heaters that offer customers choice and how much sent to enjoy each room of the hub.

We're also expanding our wellness production that is geared toward elevating our customers daily wellness routines with curated collections for body and home.

And we will continue our sustainability initiatives.

Later this year, we're excited to be offering cartons that enable our customers to refill their so containers and minimize waste.

The customer is always at the center of our innovation process and we will continue to add new compelling products and packaging as we work to extend our brands global potential.

We're also building capability.

Better connect with our customers and drive margin expansion through more personalized marketing initiatives and more targeted promotions.

And with that I'll turn it over to Wendy Thank you Julie.

Starting with our fourth quarter results. We were pleased to have exceeded our beginning of quarter guidance. We generated earnings from continuing operations per diluted share of $1 86. These results exceeded our guidance of $1.45 to $1 65 per share. This was primarily driven by a better than <unk>.

<unk> margin rate due principally to transportation cost improvements and a favorable inventory position, leading to less clearance activity as well as lower SG&A expense compared to our expectations.

Net sales for the quarter were $2 9 billion, a decline of 5% compared to last year driven by a decrease in both transaction and average dollar sale our customer continue to be price sensitive given the macroeconomic pressures fourth quarter net sales were up 29% compared to 2019.

And our U S and Canadian stores fourth quarter sales were 2.08 billion.

A decrease of 5% versus the prior year store sales increased 19% compared to 2019.

Fourth quarter direct sales of $716 million decreased 6% compared to last year, but increased 66% compared to 2019.

Our customers continue to take advantage of our army focused option of buy online pick up in store or bogus and frequently add to their purchase in store. As a reminder, focused sales are recognized at store sales.

We have rolled phobos capabilities to over 800 additional stores in 2022, and we currently have focus availability and more than 1300 stores overall.

For the fourth quarter International sales were $95 million and grew 30% versus last year. As a reminder, our international operations are primarily conducted through franchise license and wholesale partners and our recognized sales include royalties and wholesale product sales total net total <unk>.

International system wide retail sales were approximately $250 million in the fourth quarter and $700 million in the full year of 2022.

The gross margin rate for the fourth quarter decreased by 480 basis points to 43%. This was driven by a significant decline in the merchandise margin rate and buying and occupancy expense deleverage due primarily to lower sales and increased labor costs in our distribution and fulfillment network.

The merchandise margin rate decline was primarily driven by increased product costs due to continued inflationary pressure in raw materials transportation and labor as well as incremental promotions to drive sales and inflationary pressures total approximately $60 million in the fourth quarter.

Our average unit retail or AUR was down low single digits in the quarter and slightly better than expectations and what we experienced in the third quarter.

We continue to focus on disciplined expense management, given sales trends and macroeconomic uncertainty. This resulted in better than expected SG&A expense for the quarter.

Total SG&A deleveraged by 190 basis points with technology expense accounting for approximately 100 basis points of pressure.

As we have previously mentioned, we are making important strategic investments to enable future growth and this includes investing in technology as part of our it separation.

Store wage rates also drove an additional 70 basis points of deleverage as we increased customer facing associates wages to stay competitive while ensuring that we manage labor hours in line with sales expectations.

Taking all of this into consideration fourth quarter total company operating income was $653 million or 22, 6% of net sales.

Turning to the balance sheet total inventories ended the quarter flat compared to last year better than our expectations due to disciplined inventory management.

Finished goods retail units were down 5% compared to last year also better than our expectation the difference between flat dollars and a unit decrease of 5% is due primarily to inflationary pressures in product cost, which was partially offset by lower component inventory compared to last year our.

<unk> is clean and we are well positioned heading into the new year with agility in our supply chain.

Importantly, our overall real estate portfolio continues to be very healthy approximately 99% of our store fleet is profitable and our stores continue to significantly outperform pre pandemic levels led by strength in our non mall locations.

In 2022, we permanently closed 48 stores for the full year principally in malls, we opened 95, new off mall North American stores in 2022, resulting in net square footage growth of about 5% for the full year.

For International we had record store growth through our partnership model in 2022, ending the year with 427 stores.

Next before I outline our fiscal 'twenty three guidance I will describe our core performance from 2019 to 2022, which we believe will help to better evaluate our progress going forward I encourage you to review the supplemental slides posted on our Investor Relations website for additional details.

Starting with 2019 baseline Bath and body works revenue was $5 4 billion gross margin was 44% and operating margin was 19, 2%.

Sales in 2022 were up 40% as compared to 2019 with a balanced contribution from unit and AUR growth and while we are guiding to lower sales in 2023, we remain confident in achieving our $10 billion sales target.

While operating margin has declined 100 basis points compared to 2019, we drove 32% growth in operating income dollars. The decrease in rate was predominantly driven by over 500 basis points of cost inflation of 140 basis points of technology and transition expenses associated with our separate.

Patients from Victoria's secret and 70 basis points of pressure from store wages, which was partially offset by leverage on sales growth and AUR increases.

We were able to offset a portion of the inflation pressure with pricing, but as many other retailers saw the customer became more price sensitive in 2022. This limited our ability to increase AUR.

As Jamie has described we are focused on developing a more targeted personalized marketing approach to grow our customer base and drive visits at the same time, we're working to decrease our reliance on broad promotion, which should increase our merchandize margin.

We expect that cost inflation will began to subside after the first quarter of this year.

As for technology expenses, our efforts and investments through the end of the summer are focused on completing our separation activities beyond separation. We are focused on building new capabilities to drive profitable sales growth. These include advancing our loyalty program supporting advanced analytics evolving our <unk>.

<unk> strategy and bolstering our omnichannel capabilities.

Our model assumes that technology costs will continue at current levels as we roll off separation related costs establish our standalone capabilities and team and invest strategically to drive future growth.

As Jay indicated earlier, we are partnering with external advisors to closely evaluate our cost structure and take actions to offset what we see as ongoing cost pressures in both gross margin and SG&A as well as to fund our strategic investments. We are early in this process, but we are targeting $200 million of annual.

Cost savings of which over half is included in our 2023 outlook, primarily impacting the second half of the year, we expect to realize a substantial portion of the remaining benefit in 2024.

Our efforts are broad base with opportunities in transportation product margin store operations home office expense and indirect spend we have recently initiated this work and look forward to sharing more with you in upcoming quarters.

As we move past recent and near term challenges and realize the benefits of our profit optimization initiatives, we are targeting industry, leading operating margins of 20% with gross margin of approximately 45% and an SG&A rate of approximately 25%.

Turning now to our fiscal 'twenty three financial outlook.

Today, we are providing our 2023 outlook with comparisons to 2022. Please note the fiscal 'twenty. Three will include a 50 <unk> week. So the fourth quarter of fiscal 2023 will consist of 14 weeks. Our outlook includes the impact of the 50, <unk> week, which we estimate at <unk> <unk> per diluted share.

<unk>.

Our forecast takes into consideration ongoing macroeconomic uncertainty unexpected customer sentiment for the full year, we are forecasting flat sales to a mid single digit sales decline.

Our range assumes a continuation of fourth quarter sales trends for the first half of 2023 and a moderate improvement in the back half of the year as we anniversary softening sales trends.

Quickly reading and reacting to changing business trends as part of our DNA, we will leverage our vertically integrated supply chain and our industry, leading agility to chase demand and maximize sales.

We will also work to drive growth through our loyalty program as these customers make more visits and have higher spend than other customers are current customer segmentation work is also designed to lead to more efficient and effective marketing.

Our international business continues to provide healthy and margin accretive growth to our business. We are forecasting double digit international net sales growth in 2023.

We expect full year gross margin rate to be approximately 42%. We expect expect inflationary cost will continue in the first quarter and began to moderate as we move through the year. We are forecasting AUR is roughly flat, but we'll continue to test for opportunities to increase <unk> and <unk>.

<unk> margin through more data driven targeted marketing efforts, we also expect to buying and occupancy expense to deleverage driven by lower sales and our investments in direct fulfillment capabilities to drive future omnichannel growth, partially offset by the benefits of our profit optimization work.

Our plan assumes a full year SG&A rate of approximately 26% with deleverage permanent primarily driven by increased store wage rates technology and transfer technology, partially offset by the benefits of our cost optimization work.

We expect full year net nonoperating expense of approximately $320 million and effective tax rate of approximately 26% and weighted average diluted shares outstanding of approximately $231 million.

Considering all of these inputs, we are forecasting full year earnings from continuing operations per diluted share to be between $2 50 and $3.

Turning to capital expenditures, we are planning for approximately $300 million to $350 million in 2023. The majority of our capital is focused on investments to support future growth. We are planning for continued investments in select Remodels and new off mall store openings.

We are also investing in our technology distribution and logistics capabilities to support growth approximately $35 million of planned capital expenditures related to payments, which shifted out of 2022 into 2023.

This year, we are planning approximately 115 total real estate projects, consisting of approximately 90, new off mall stores and 25 Remodels to the White barn store design offset by about 50 mall closures at all this yield square footage growth of <unk>.

Approximately 4% we.

We expect to generate free cash flow of $600 million to $700 million in fiscal 'twenty three.

Now turn to our first quarter 'twenty three outlook for the first quarter, we are forecasting low to mid digit sales declines we expect the first quarter gross margin rate to be approximately 41% the decline versus last year is principally driven by an expected lower merchandize margin rate and deleverage.

Buying and occupancy we are forecasting slight AUR declines adjusted for mix as we anticipate continued customer price sensitivity. Our forecast includes approximately $20 million of incremental inflationary cost increases in the first quarter related to raw materials.

Wages and transportation.

Buying and occupancy expenses are also forecasted to deleverage driven by the sales decline and our new direct to consumer fulfillment center as it ramps up operations in the first and second quarter.

We expect our first quarter SG&A rate to be approximately 30% of sales with the rate increase driven largely by investments in technology and increased store associate wages.

We expect first quarter net non operating expense of approximately $80 million a tax rate of approximately 27%.

Weighted average diluted shares outstanding of approximately $230 million.

Considering all of these outlets we are forecasting first quarter earnings from continuing operations per diluted share of <unk> 17 to 27.

Our forecast for the first quarter assumes a continuation of current softer demand trends and elevated inflation and wage pressures. However, this is not reflective of our expectations for the full fiscal year, because we anticipate that certain headwinds such as inflation and wage pressures will moderate in the second half.

Turning to inventory, we have entered 2023 as I said with a very clean inventory position, we expect to end the first quarter with a slight decrease in both inventory dollars and units compared to the first quarter of 2022.

With regard to capital allocation, we are committed to taking a balanced and disciplined approach. Our first priority is investing in the business to drive profitable growth by significantly improving the customer experience supporting advancement in existing and new product categories investing.

A new off mall stores and remodel improving our fulfillment capabilities completing our it separation and standing of critical new technology capabilities.

We are also committed to returning cash to our shareholders. We plan to continue paying an annual dividend of <unk> 80 per share with an intention to increase the dividend over time as earnings increase.

Turning to capital structure, we are ending the year with a gross adjusted debt to EBITDA leverage ratio of three one times above our target of approximately two five times on a net basis. Our leverage ratio is two four times, although we are above our target we remain confident we will.

Return to our target range over time.

We have no debt maturities until 2025, and a total of approximately $600 million coming due over the next four years by comparison in 2022, we generated over $600 million of free cash flow after our regular dividend.

We estimate that we are starting the year with $700 million more cash than we need to fund our forecasted working capital needs for the year, we will evaluate the best use of our cash as we go through the year and we gain better visibility into macroeconomics trends, we are considering options such as that.

Repayment and share repurchases.

In planning for the year, we believe that it is prudent to acknowledge the macroeconomic pressures continuing to impact our customers and their spending habits as well as the current trends of the business. We are striving to exceed our forecast leveraging our agile vertically integrated supply chain to chase demand and building capabilities to drive.

Profitability sales growth in the future and as Gino and I mentioned earlier, we are working with external advisors on a comprehensive review of opportunities to support our profit expansion.

A refreshed view of our core business will enable us to move forward confidently and pursuing growth opportunities that concludes our prepared comments I will turn it over to Heather.

Thanks, <unk> before we open it up for Q&A, we want to briefly address the recent disclosure by third point, we issued a response last night. The board will respond in due course to third point as appropriate with that said the purpose of today's call is to discuss our fourth quarter and fiscal year results and we ask that you keep questions focused on those result.

<unk>.

For our Q&A session, we ask that participants limit their responses to one question and one follow up we'll now move to the Q&A session Danielle.

Yes.

Thank you as a reminder, if you would like to ask a question over the phone. Please dial star one our first question comes from Jay sole with UBS. Your line is now open.

Great. Thank you so much I guess, what I'm curious about is some of the cost inflation.

Maybe what's the incremental that you've seen over the last 90 days just help us understand sort of the difference between.

The margin outlook for for this year compared to the margin outlook from last year.

Okay. Thanks, Jay when would you like to pick up that's great. Thank you Jay for the question Yeah. So in terms of inflation as we've talked about in previous calls there's three main groups a pressure point for us in your raw materials and components transportation and I would say wages and other so first you know I'll cover our raw.

<unk>.

We havent specifically in one of our key raw materials as candle wax and we are seeing and I think I mentioned this in the last call some improvements in costing and candle wax.

So we are down to 2022 levels, but still up two two prepayment on it but we are seeing some green shoots.

In terms of the rest of the raw materials I would describe the markets in terms of what we're seeing is generally flattish.

Our hoping for continued declines.

But we arent seeing or planning for significant deflation in the other components of our of our raw materials, yes. So hopefully that comes to fruition, but I would describe those markets are stable.

The transportation, what we're saying is that you know volume does continue to be down in all nodes, which is great because that's creating excess capacity, which provides us options in terms of carrier selections et cetera. So if I break it down into our three three main pieces you know in terms of truck.

Trucking or line haul we are in the process of doing our annual bidding with our partners. So we look at those contracts in the first quarter of every year after a holiday and our initial Ah we're in the middle of the process, but we are seeing a decline year over year in our initial work here, which.

This is good for us and that is providing deflation for us and line haul starting in the second quarter and that is factored into our guidance in terms of parcel, which is another piece of transportation, we have seen surcharges declining but the base rates actually are increasing so right now.

First of all we arent seeing major deflation in and it's generally flat.

From a year over year basis, and then the final piece for us and transportation as final mile, which we are seeing continued pressure points just due to primarily to labor. So so overall.

Overall from transportation, we do have some deflation as I said, starting in Q2, two driven by line haul which is in our guidance lastly in a labor over the last two years or three years I should say, we have seen wage pressure pressures in labor, which we've talked about good news is I would describe what we're forecasting now.

As a relatively flat model in terms of inflation from our either if I'm talking about vendor wages or our distribution and fulfillment centers. We are seeing that that solidified for the course of the entire year. So when you add all that up we are forecasting as we said in the remarks.

<unk> in Q1.

But it should start to deflate so to speak in Q2, and then we'll get a better outcome in fall.

Thank you.

And if I can just ask one more.

You mentioned, you still target, 20% EBIT margin could you put a timeframe around that around when you bill.

I believe the company will get back to that level.

Yeah, you know, we are and as you know.

20%.

We do believe it is best in class and we think it is the right the right level for us.

We don't want to obviously limit ourselves to 20%, but we think it's the right rate that where we can balance investment in the business as well as maximize our shareholder returns a timeframe it's difficult to say as you know we're working hard to maximize margins and we will we will continue to try and get there as quickly as we can.

Alright, thank you so much.

Thank you next question please.

Our next question comes from Alex Straighten with Morgan Stanley . Your line is now open.

Great. Thanks, so much congrats on a good quarter here.

I just wanted to kind of follow up on that 20% EBIT margin target it feels like a pretty big jump from here to there, though admittedly you guys have had been able to do that in the past. So can you just bridge the gap for me between I think it's about a 16 ish percent margin this year to that 'twenty longer term like what are the key puts it in.

Makes their that we should be thinking about.

Thank you Alex when do you want to take that one sure yeah.

We model and think about the future the first and I'll just kind of work my way down. The P&L you know the first is obviously net sales we want to grow net sales we're committed to growing that top line and you know a lot of the pressure points. We're seeing in 2023, our deleverage what you get when you have a you know a guy that has a negative.

Sales number in it so you know leverage on sales growth, it's obviously important for us to get back to that 20%.

Other thing I would say on top line on sales, which will help our rate.

As you know we are always focused on how do we grow AUR is in a way that is positive for our customer. So we've talked a lot about how this business has test and learning in our DNA.

We're literally testing pricing combinations every weekend to learn to see how we can grow.

Row, AUR is doing away, but it still resonates with the customer so as we continue to do that over time, our AUR as well increase in and help margins. If you look at the long history of this company and for the last 10 years, we have consistently <unk> been able to grow your AUR as you know in the law.

Low to in some years mid single digit range. So we know that as we innovate and deliver a compelling assortment.

<unk>, we can get AUR growth overtime. So that's that's sales very very key to getting back to the 20% and then the other thing is margin right now our March our merchandise margin rates and archive are below pre pandemic level, we've talked a lot about inflation as.

As I said, we've got some deflation coming this year, but at some point hopefully that theres a little bit more.

But that will be paired obviously with the AUR increase too to increase profit rates and then the last thing I would say is on expenses you know as we mentioned here. We are doing a comprehensive review of our organization at our indirect spend and where we spend money and you know our goal is to optimize it for the size of the biz.

That said, we are internally extremely focused on getting to that 20% and that is part of our goal as we work to optimize.

The organization and our spend profile.

Great maybe just one quick follow up it feels like part of the bigger SG&A Guide. This year is really related to kind of tack spending. So can you just walk us through sort of what the what the shortcomings you feel or are there or what exactly you're trying to improve just to have a better sense and thank you. So much.

For taking the questions.

Totally so I would say through.

At the beginning of the year through end of summer. We are focused on separation from Victoria's secret. So are the majority of our spend is to that and and we're also in the process. Obviously this will be ending that TSA of establishing our own organization our team our partners Etsy.

Right. So that is where we're focused on for the first part of the year once we complete that separation.

We're excited to complete it because it allows us to unlock our future and you know as we talked about we see lots of opportunities to invest you've heard both me and Gina talk about it in the marketing space, whether you, whether that's loyalty or whether it's how we market to customers and data analytics, we see.

Huge opportunity to use you know really smart data analytics to drive marketing drive promotions.

It's really in areas that are customer facing.

That where we want to invest and that is what we're focused on in the back half of the year.

Thank you.

Thanks, Alex next question please.

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

Great. Thanks.

So maybe dual part question Gena could you elaborate on the cadence of business trends, maybe as the fourth quarter progressed any notable change in business that <unk> seen post holiday here in January or February and then Wendy on AUR, where have you seen customers the most price sensitive across.

And just how best to think about your AUR plan for the first half of the year, maybe relative to your back half expectation.

Okay. Thanks for the questions, Matt actually when do you want to start with that yeah. So.

Thanks, Matt for the questions. So let's start with the Q.

For Q.

The story of how it progressed so.

For us we.

Our softest month of the quarter was November Ah you heard a lot of other retailers comment on that so we are as consistent with other retailers you know the softest part of the quarter was the first three weeks of November .

As we progressed into December we saw improvements in trends, including improvements in traffic.

And in particular in the month of December .

Julie mentioned candidate we were pleased with that at the beginning of December but in particular, we saw very strong sales performance and weeks four and five of December So the week before Christmas and the week after Christmas as very strong for us.

January continuing to be strong we had a nice first two weeks in January , especially when we were starting our semiannual sale. So overall you know.

A strong December and January relatively and just and November was our most challenging month of the quarter.

In terms of AUR. So you heard us mentioned in our prepared remarks right now we're planning on.

The AUR in the first quarter to be down slightly I mean, our promotional overall promotion approach in Q1 will look fairly similar to what you saw last year, but you know we're forecasting <unk> to be down slightly for the full year.

We're forecasting it to be roughly flat.

I as I mentioned.

As mentioned we are of course are chasing to improve that result, and we will take price ups and reduce promotions to the extent, we can without damaging margin dollars.

But that is our overall approach and I'm going to let Julie add some color.

So I just want to mention that we have been very slowly and methodically than raising our prices. This spring.

So our everyday price stocks have actually been performing very well for example, we have soaps that five for 2007 from $5 25, our wildflower then that same deal.

For 2007, where they'd been 5% to 25, and we're not seeing any price resistance from our customer.

We've also increased prices across the board, where we are implementing a good better best strategy and we believe that that will help us.

Where we are seeing some price sensitivity is in our promos. So in the short term, we're continuing to balance the need to keep the engagement on traffic strong with our desire to increase pricing and have a very agile operating model. So that will allow us to increase.

<unk> or decreased promotional activity in a meaningful way and test for the best outcome.

Just want to remind everyone. Our AUR are up to close to 20% by 2009 from 2019, and we do as Wendy said have a track record of being able to raise our AUR is positively in the low single digits.

And we hope to continue to do that so our guidance assumes that promotional levels are roughly flat to last year, and we're going to read and react and maximize every dollar we can out of this performance.

Wendy just just one follow up on the 20% operating margin target I know thats relative to low to mid twenties and your previous plan is the change in the long term operating margin target is it driven by a lower gross margin assumption longer term.

Well I would say a couple of things you know as you know the reality is I know in the last two years, we've seen a major.

Increases and input cost that I, just talked about labor and we've also recognized as we've worked on the separation and thought about the future that there are certain parts of our business life technology.

It require additional investment to future growth. So I think it's false you know wanting to invest and also just a recognition that we've had major inflationary.

Inflationary pressures in the business. So we as I mentioned earlier, we do think that.

This is the right balanced targets for the business to allow for the investment for the future, but also deliver a return for our shareholders.

Thanks, Matt next question please.

Our next question comes from Kate Mcshane with Goldman Sachs. Your line is now open.

Hi, good morning, Thanks for taking our question.

We were curious to hear a little bit more detail about what role the loyalty program played out in the fourth quarter and what you're assuming.

It could be from loyalty in Q1, and your overall 2023 sales guidance.

Alright, Thanks, Kate when do you want to take that one I think Julie okay, but I I can add color. Yes. So we can tag team on this one so we are very pleased very pleased with our enrollment in the program we projected to be about 30 million members by the end of the fiscal year and we enrolled 33 members.

With more than 75% of those members, having shopped with us in the last 12 months and as we've discussed on other calls we all know that loyalty members outperformed non loyalty and spend trips retention and cross channel shopping behavior.

So I think that we have a huge opportunity.

Think about 'twenty two as the year of enrollment and we're thinking about 'twenty three as our year of engagement.

So our strategic path forward is to really capitalize on the very high rate of data collection that allows us to both identify and market to enroll customers.

So with customer segmentation and advanced analytics work that will allow us to customize our loyalty offering to maximize enrollment and engagement. We can also attract more customers by fully integrating our loyalty program across social physical and all of our digital interactions.

We want to test and try to <unk>.

Influence member behavior by leveraging points based incentives to drive incremental trips trial of new products.

And we will be pivoting to more member only events content and engagement as we have seen our sneak peaks in our absolute said be very successful.

Thanks, Julien the only thing I would add to your question is we did Ah.

You know we had a loyalty program in test before we did the nationwide launch in August . So we did have some markets that we're in tests, where we could measure.

The performance on a pre post basis. So when we did that we did see a moderate left in the fall season on a pre post basis and.

That's good, but what where I'm really excited about from a financial upside standpoint, which Julie mentioned is now that we have got the program and we've got the members and we have a lot of members the opportunities for us to use the data collection to improve our marketing and drive.

Transactions with these customers is to me, where I see the key upside for the future.

Thank you. Thank you.

Alright next question please.

Our next question comes from Paul Lajoie with Citi. Your line is now open.

Hi, This is Kelly crago on for Paul Thanks for taking our question I wanted to dig a little further into your your kind of longer term framework around the topline I think he mentioned and we believe we can sort of grow.

Low single digits over over the longer term I guess, when we think about it on the top line does that assume that kind of units flattish them in and we should sort of think you know low single digit top line growth comp growth and then maybe a couple of points for a square footage just curious if you can provide a little bit more color on that thanks.

Yeah. So as you think about a multiyear model I mean, we are still focused on it as you as you mentioned delivering comp growth.

And we believe over time, we can do that in the let's say low single to just far with chasing for mid single digits or higher.

And and what we've been able to do the last couple of years as we've been able to do that in a balanced way through both units and AUR. So.

That if we can do both units in AUR is obviously, we can get to a low to mid comp growth, but we're focused on on doing both on a multiyear basis. You also mentioned square footage. We do expect that we will get a benefit from square footage.

Growth, let's say in the low single digits over time, so those will be key drivers for our store revenue growth as we think about our multiyear model. You've also heard us talk today about international and although right now that's a small part of the business to me. That's it that's the exciting thing because it's small today and we.

See lots of opportunity for meaningful double digit growth on a multiyear basis as we expand.

Internationally throughout the world. So that is a key part of our growth algorithm in the future.

Thank you for the color on that and then you mentioned that and <unk> that that the cost inflation that is going to be a 20 million dollar headwind to gross margin.

But that should be as we go forward does that turn from a from a headwind to a tailwind in <unk> or is it just less of a headwind and I guess Pat.

Does that how should we kind of think about the gross margin progressing throughout.

Throughout the year.

Yeah, It turns to a tailwind in Q2.

I would say the tailwind right now its about $10 million in Q2, but we will of course chase that hopefully it's a bigger number.

Alright next question please.

Our next question comes from Lorraine Hutchinson with Bank of America. Your line is now open.

Thank you good morning, I wanted to follow up on the gross margin guidance for the year. It does sound like after the first quarter most of the inflationary pressures actually flipped to positive yet your guidance assumes a flattish gross margin for the rest of the year. After the first quarter can you just bucket the pressures that you're expecting in those quarters two through.

Four to offset these benefits from inflation and transport slipping.

Thanks, Lorraine when do you want to take that one sure. So yeah on a full year we do.

We will have.

Some pressure on both product margin merch margin product margin and deleverage on P&L.

Our AUR is as I mentioned are roughly flat. So we've got a little bit of forecasted AUC growth greater than ours, which is pressuring there either.

Other area, we're seeing pressure is in buying and occupancy so we've got some deleverage.

And store occupancy because you know as we've invested in stores and that's a good investment it's delivering a return it does delever in a negative comp.

Model.

Which is implied in our range and then we've also got some deleverage on buying not as I mentioned, we are focused on all lines of the P&L in terms of getting additional favorability and so it's not just expenses. We're also looking at you know continued upside in product margin that will be chasing to improve their results.

Thank you.

Thank you and we have time for one more question.

Our final question comes from Simeon Siegel with BMO capital markets. Your line is now open.

Thanks, Good morning, everyone and welcome to your mother.

I was hoping just higher level, maybe what you think about the right price versus 2019 architecture should be just curious how youre thinking about maybe the right balance between revenues and gross margin clearly you guys got a lot of really nice to say you are you've got great brand equity. You also may have had a little bit of over purchasing through the pandemic. So just any thoughts there on how to balance spreads and gross margins. Thank you.

Thanks for the questions to me and I'm sure you know, maybe if you want to start off with.

The focus on how we are growing sales in 'twenty three and then when do you. If you want to follow up with us a little detail there.

So just so I'm sure clear on the question did you say.

The balance between revenue and gross margin.

Yes.

Yeah, you guys earned a lot of price in a lot of brand equity. So I'm just curious how you're thinking about promotions versus units just thinking about the balance there.

So we are you probably heard not only months, maybe all three of our remarks around promotions and how.

We're trying to well first of all Julia as you talked about testing some of the lifts and so forth, but really it's not it's not it's more about broad based promotions and.

Which are kind of a blunt instrument and so what we're trying to do is leverage the data and analytics to target.

The promotions to where they're needed most one of the things that I've been focusing on since arriving is really building the marketing sort of infrastructure. We're doing some really exciting customer segmentation, that's linking with our loyalty program and inside of all of that capability is really <unk>.

Driving much more effective and efficient promotions.

And so that gives me the confidence in terms of how we can maybe move that up and have the margin and the <unk> support both topline and merch margin.

So that's a huge area of focus we have not had that before we're going to probably see that towards the back half because were still building that capability.

So that was sort of on the promotion piece, but I think you had another longer term comments as well.

Well do that with you.

That answer your question.

Yeah, Yeah. That's helpful. Yeah, Gena, it's more just trying to get a feel for as you as you look at the companies you look at you have the benefit of it can be objective view, how you look at that 2019 versus where we are now. So that's that's really helpful. When you can I just follow up on the last one.

Do you know offhand, what the implied occupancy and other fixed cost deleverage would be embedded within the full year revenue guidance.

So yeah, our occupancy expense for full year, we've got it forecasted at plus 5%. So it's about rally.

50, 60 basis points of deleverage.

Great Alright, Thanks, a lot and best of luck for the year ahead.

I mean, it makes them it.

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 <unk> body works.

Yeah.

That concludes today's conference. Thank you all for participating you may disconnect at this time.