Q3 2024 Bath & Body Works Inc Earnings Call
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Speaker Change: Unknown Executive, Julie Rosen, Michael McGuire, Unknown Executive, Julie Rosen, Unknown Executive,
Speaker Change: Unknown Executive, Julie Rosen, Michael McGuire, Unknown Executive, Julie Rosen, Unknown Executive,
Melissa: Good morning, my name is Melissa, and I will be your conference call operator today. At this time, I would like to welcome everyone to Bath and Body Works third quarter 2024 earnings conference call. Please be advised that today's conference is being recorded. During the question and answer portion, you may ask a question from the phone by pressing star one.
Speaker Change: I will now turn the call over to Luke Long, Vice President of Investor Relations. Luke, you may begin.
Luke Long: Good morning and welcome to Bath and Body Works third quarter 2024 earnings conference call. Joining me on the call today are Gina Boswell, Chief Executive Officer and Eva Boratto, Chief Financial Officer.
Luke Long: In addition to this call and this morning's press release, we have posted a slide presentation on our website that summarizes the information in these prepared remarks, in addition to providing some related facts and figures regarding our operating performance and guidance.
Luke Long: As a reminder, some of the comments today may include forward-looking statements related to future events and expectations.
Luke Long: For factors that could cause the actual results to differ materially from these forward-looking statements, please refer to this morning's press release, as well as the risk factors in BAFTA and Body Works 2023 Form 10-K and our quarterly report on Form 10-Q, which will be filed this week.
Fiscal 2023 was a 53-week year.
Luke Long: To provide the best understanding of the business, all category sales results, year-to-date market share data, loyalty metrics, and selling metrics discussed during the call are on a comparable calendar basis.
Luke Long: which is the 13 weeks ended November 2nd, 2024 versus the 13 weeks ended November 4th, 2023.
Speaker Change: All other results discussed are on a reported basis, which is the 13 weeks ended November 2nd, 2024, versus the 13 weeks ended October 28th, 2023. With that, I'll turn the call over to Gina.
Speaker Change: We beat our guidance on both the top and bottom line, and we are raising our full-year guidance to fully reflect this outperformance.
Gina Boswell: I've spent a lot of time in our stores over the past few months, and I've seen firsthand how customers are responding positively to our seasonal merchandise and storytelling.
Gina Boswell: Witnessing our beautifully arranged floor sets along with our store associates unique ability to meet our customers needs is always a great reminder of the strength of our retail experience and the team that enables it.
Gina Boswell: Our continued product innovation coupled with improved demand generation, the compelling value of our products, and our team's strong execution drove positive store traffic and conversion for the quarter.
Our store traffic exceeded the third-party benchmarks we track.
Gina Boswell: Each of our categories, Body Care, Home Fragrance, and Soaps and Sanitizers grew low single digits year over year and year to date we maintained our overall leading unit market share.
Gina Boswell: And with this quarter's results, our net sales performance adjusted for calendar shifts has sequentially improved each quarter during 2024.
Gina Boswell: enabling a more seamless omni-channel experience and finally enhancing operational excellence and efficiency. All of this is underpinned by the hard work of our talented associates.
Gina Boswell: Our home fragrance performance in the quarter was fueled by growth in the candle business as we drove targeted marketing investments coupled with a successful new promotional event.
Gina Boswell: The team strategically timed this new event to align with this year's holiday calendar. We executed well and met the customer mindset.
Gina Boswell: As we noted when we reported our Q2 results, it is a competitive market with a value-conscious consumer, a trend that has continued.
Gina Boswell: And as the category leader in home fragrance, we are reasserting our differentiation as America's most loved candle brand.
Gina Boswell: through storytelling that conveys the quality and value of our products through a compelling assortment at a range of price points and By utilizing our speed and agility to meet the market where it is driving unit share gains in the quarter
Gina Boswell: And while normalization of the candle market has impacted us this year, on a unit basis, it has moderated each quarter and we do not expect it to have a material impact on our business in 2025 and beyond.
Gina Boswell: Fragrance is core to who we are, and we drove growth in body care by delivering compelling fragrances. For example, customers responded positively to the full North American rollout of everyday luxuries.
Gina Boswell: This helped drive double-digit growth in fine-fragrance myths during the quarter. Everyday Luxuries is connecting with a younger customer, and as a platform, it has the potential to drive growth for years to come.
Gina Boswell: Body Care also benefited from our on-trend single fragrance launches of Vanilla Romance and Platinum, and we're excited about the launch of our latest cross-category fragrance, Perfect in Pink, which we debuted in the final week of the third quarter.
Gina Boswell: Soaps and sanitizers growth was driven by strength in core sanitizers, moisturizing sanitizer forms, and a new one ounce spray.
Gina Boswell: I also want to spend a moment on collaborations. As a reminder, collaborations are a key element of our strategy to drive growth in our core products.
Gina Boswell: They deliver highly differentiated storytelling that generates top-of-mind brand awareness with existing customers and attracts new customers.
Gina Boswell: Our selective approach to collaborations not only drives traffic, it also enhances our brand's cultural relevancy.
Gina Boswell: In the third quarter, we launched part two of our Stranger Things collaboration. This was primarily focused on the home fragrance category and generated buzz around our Halloween floor set, which exceeded last year.
Gina Boswell: We also announced our Emily in Paris cross-category collaboration. This kicked off with a successful early access event at the start of Q4, and the full launch is just around the corner.
Gina Boswell: Adjacencies are an opportunity to expand and diversify our product portfolio, applying our fragrance expertise to large addressable markets.
Gina Boswell: We evaluate adjacent category performance based on their incrementality to the basket, repeat purchase rates, and ability to attract new customers.
Gina Boswell: Our adjacent categories of men's hair, lip and laundry continue to perform well and year-to-date represent approximately 10% of our business with potential to become a larger percentage of our mix in 2025 and beyond.
Gina Boswell: I'll share a few of the highlights from the quarter. Today, men's, which is included in our body care business, is our largest adjacency. And we see significant opportunity as we continue to increase awareness.
Gina Boswell: Momentum in the men's business remains strong this quarter as we continue to evolve our marketing and launch new fragrances. For example, customers responded well to our new Vanilla Noir fragrance.
Gina Boswell: In Lip, which is also included in our body care business, you can expect to see additional launches of exciting products like Gloss and Lipstick, which we're confident will continue to excite younger customers.
Gina Boswell: In Laundry, which is included in Home Fragrance, we completed the full U.S. rollout in September. We believe it is an exciting platform for long-term growth that capitalizes on our differentiated fragrance expertise.
Gina Boswell: Moving to real estate, we continue to reshape the portfolio and move stores off-mall. Approximately 55% of our North American stores are in off-mall locations and the portfolio remains very healthy.
Gina Boswell: International markets are an attractive pillar of our strategy. Today, international represents approximately 5% of our net sales, and there's significant long-term opportunity as we enter new markets and expand in existing markets.
Gina Boswell: System-wide retail sales grew double digits in Q3 in the areas not affected by the war in the Middle East.
Gina Boswell: While our business continues to be pressured in the regions affected by the war, where we saw system-wide retail sales decline double-digit, the year-over-year impact began to moderate in October.
Gina Boswell: At the end of the third quarter, we celebrated the opening of our 500th international store in London. Our partner store openings this year remain on track, with approximately 50 net new stores this year.
Gina Boswell: Next is our focus on engaging with customers and enabling a seamless omni-channel experience.
Gina Boswell: Our teams have made strides in marketing, loyalty, and technology. We are employing multi-year strategies in these areas that are key enablers of sustainable long-term growth. And these efforts are already having a positive impact on the business.
Gina Boswell: For example, during Q3, we achieved record high customer retention rates and an improvement in attracting new to brand customers. We're especially encouraged by the strong growth within our highest value customer segment called the fragrance fashionistas.
Gina Boswell: This group, which purchases up to 30 fragrances a year, has grown every quarter this year.
Gina Boswell: We also continue to advance our loyalty program, which has industry-leading satisfaction ratings and represents over 80% of our sales. In Q3, we had approximately 38 million active loyalty members up 4% compared to the prior year.
Gina Boswell: Loyalty customers visit us more frequently, spend more, have higher cross-channel and cross-category purchase behavior, and higher retention rates than those outside the program.
Gina Boswell: Our technology roadmap is on track. We are building the foundational tools and systems to support long-term growth and enabling new capabilities to increase customer engagement and provide a more seamless cross-panel shopping experience.
Gina Boswell: In Q3, we successfully launched our Everyday Luxuries line on TikTok Shop, allowing us to reach younger customers where they are. According to Fiverr, nearly 54% of Gen Z customers will discover holiday gifts on TikTok this season.
Gina Boswell: We intend to continue to leverage this important platform to connect with this audience using highly engaging content to boost brand awareness throughout the holiday period.
Gina Boswell: Finally, enhancing operational excellence and efficiency. While we execute initiatives to engage our customers and drive top line growth, we continue to be focused on cost discipline.
Gina Boswell: To summarize the quarter, I'm pleased with our strong performance and the momentum we're building. As we enter Q4, our key holiday selling season, we're poised to drive strong demand and are excited to offer compelling products with gifts available at a wide range of price points.
Gina Boswell: Our fulfillment centers and stores are fully staffed and ready to deliver an exceptional retail experience, while our omni-channel approach ensures customers can shop seamlessly wherever and whenever they choose.
Gina Boswell: Over the long term, our strategy and the actions we're taking position the company to return to sustainable, profitable growth, driving meaningful shareholder value creation.
Gina Boswell: Before I turn the call over to Eva, I'd like to thank our teams for their outstanding execution, for delivering against our strategic priorities, and for consistently providing great service to our customers.
With that, I'll turn it over to Eva.
Eva Boratto: Thank you, Gina, and good morning everyone. We executed well in the third quarter and delivered earnings per diluted share of 49 cents, beating our guidance of 41 to 47 cents per diluted share. This outperformance was driven by net sales and our ongoing cost discipline.
Eva Boratto: As expected, the calendar shift benefited net sales by approximately 200 basis points in the quarter.
Eva Boratto: In U.S. and Canadian stores, net sales totaled $1.2 billion, an increase of 4.4% versus prior year.
Eva Boratto: Direct net sales were $321 million, an increase of 1.5% compared to last year.
Eva Boratto: As a reminder, BOCUS net sales are recognized as store net sales. When adjusted for BOCUS, direct outperform stores.
Eva Boratto: Focus demand increased approximately 40% in the quarter and year-to-date represents approximately 25% of total digital demand.
Eva Boratto: International net sales were $69 million, down 11.1% from the prior year. The decline was entirely driven by the markets affected by the war in the Middle East, which currently represents about half of our total international business.
Eva Boratto: Our system-wide retail sales performance continues to be strong in areas not affected by the war, growing double digits year over year.
Eva Boratto: International was an approximate 70 basis point headwind to Q3 net sales growth.
Eva Boratto: Growth Profit Benefited from Continued Cost Savings Offset by Strategically Planned Promotion Activities in the Quarter.
AURs increased 1% in the quarter driven by MIPS.
Eva Boratto: We will continue to utilize our agile business model, and we will take the appropriate pricing actions to maximize sales and margin for the company. Our nimble supply chain allows us to quickly respond to the competitive marketplace and consumer preferences and demand.
Eva Boratto: SG&A as a percentage of net sales of 30% was better than our expectations, a result of our discipline management of our home office cost. There were also some shifts in the timing of spend from Q3 into Q4.
Eva Boratto: Finally, I would note that third quarter SG&A reflects an incremental year-over-year 100 basis point of marketing investment, consistent with prior quarters.
The
Eva Boratto: The benefits of our fuel-for-growth cost optimization work spans across both gross profit and SG&A.
Speaker Change: In the third quarter, we deliver benefits of approximately $35 million. As Gina mentioned, the expected 2020 fuel, 2024 fuel for growth contribution now totals $150 million up from our prior estimate of $130 million. The increase is largely a margin. I am pleased with our team's outstanding work on this initiative.
Speaker Change: Third quarter total operating income of $218 million decreased 1.3% and was 13.5% of net sale.
Speaker Change: With respect to inventory, we ended the third quarter with total inventory down 2% to last year. Heading into the holiday season, our inventory levels are well positioned.
Speaker Change: Internationally, our partners opened 13 net new stores in the third quarter, resulting in a total international store count of 510.
Turning now to our financial guidance.
Speaker Change: Our Q4 sales expectations include some unique elements given the calendar shifts, the 53rd week last year, and the five fewer shopping days between Thanksgiving and Christmas.
Speaker Change: The midpoint of our Q4 Net Sales Guidance assumes growth that is consistent with our Q3 results when adjusting for these calendar impacts.
Speaker Change: Our reported sales are expected to be down 6.5% to down 4.5% versus the prior year.
Speaker Change: We expect fourth quarter gross profit rate to be approximately 46.3 percent, an improvement of 40 basis points versus prior year, reflecting our fuel for growth savings and distribution productivity.
Speaker Change: We expect fourth quarter SG&A rate to be approximately 22.4%, up approximately 40 basis points to last year, largely due to our marketing investments, which we begin to lack in the quarter.
Speaker Change: We expect fourth quarter net non-operating expense of approximately $70 million, a tax rate of approximately 26.4%, with weighted average diluted shares outstanding of approximately $217 million.
Speaker Change: Considering these inputs, we are forecasting fourth quarter earnings per diluted share of between $1.94 and $2.07.
Now, I will highlight our fiscal 2024 guidance.
Speaker Change: For the full year, we now expect net sales range to be down 2.5% to down 1.7%. The 53rd week in 2023 added $81 million to net sales and represents a headwind of approximately 100 basis points to our 2024 growth.
Speaker Change: We've provided the quarterly impact on net sales due to the calendar shifts in our slide presentation.
Speaker Change: We continue to expect gross margin rate of approximately 44% and SG&A rate of approximately 27%.
Speaker Change: We are raising and narrowing our full-year guidance for adjusted earnings per diluted share to between $1,000 and $1,000.
Speaker Change: $3.15 to $3.28 up 2% at the midpoint versus our prior guidance reflecting the Q3 outperformance and our Q4 outlook.
Now for a quick update on capital allocations.
Speaker Change: Our top priority remains driving sustainable, long-term profitable growth through investments in the business.
Speaker Change: Year-to-date, through the third quarter, our total capital expenditures were $166 million.
Speaker Change: Our full-year capital investment plan remains approximately $250 million, the vast majority of which will be reported as capital expenditures in our cash flow statement.
Speaker Change: Additionally, we recently announced a quarterly dividend of 20 cents per share payable on December 6. We expect to continue our annual dividend of 80 cents per share with the intention to increase the dividend over time with sustained earnings growth.
Speaker Change: During the quarter, we repurchased 3.2 million shares of common stock for $99 million, at an average price of $30.87 per share.
Speaker Change: Year-to-date, we repurchased 9 million shares of common stock for $348 million. Our full-year guidance reflects the expectation to repurchase $400 million.
Speaker Change: Our gross adjusted debt to EBITDA ratio is 2.7 times on a trailing 12-month basis.
Speaker Change: Year-to-date, we repurchased $200 million principal amount of senior notes, and in July of next year, we have $314 million of debt maturing, which we will pay down.
Speaker Change: After investments in the business, we continue to expect to generate full-year adjusted free cash flow between 675 and 775 million dollars. As outlined, we'll put that towards our capital return priorities of dividend and share repurchases.
Speaker Change: Lastly, we will not be providing any guidance on 2025 until we report our Q4 2024 results. I am pleased with the momentum in the business we are building as we head into the holiday season and execute against our strategy.
Speaker Change: With that, I'll turn the call back to Gina for some closing remarks.
Gina Boswell: Thank you, Eva. To close, I'd like to thank our teams for delivering Q3 net sales and earnings above the high end of our range, and I am pleased to raise our full year guidance to reflect the outperformance.
Gina Boswell: We are laser focused on executing the all-important Q4 and building on our momentum.
Gina Boswell: Our focused investments are working and we're beginning to see results. We have the right strategy in place and are taking the right actions to position the business to navigate this volatile near-term environment and to return to long-term, sustainable, profitable growth as we enter 2025.
Speaker Change: We have a best-in-class team executing and as we look to the new year we have a lot to be excited about I will now turn the call over to the operator for questions
Speaker Change: To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you.
Speaker Change: Our first question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.
Lorraine Hutchinson: Good morning. You said in the slide deck that you don't expect candle normalization to have a material impact on the business in 2025 and beyond. Is this a change and and what drives you your confidence that this pressure is behind you?
Speaker Change: Thank you, Lorraine, great to hear from you. We, as I said in the remarks, we are the candle category leader, so we're looking at the market as a whole. We've been exerting our leadership and as a result of amplifying also our quality messaging and meeting the customer where they are, we've seen the candles, you know, certainly gain share, market unit market share, and we drove growth.
Speaker Change: The comment that we made was we don't expect candle normalization impact beyond. We have seen some of the levers, for example, for us, when we shine some of our collaborations on candles.
Speaker Change: Stranger Things Part 2, fall seasonal assortment, the customers really responded to some of these seasonal bringbacks as well and that's rose growth in the candle market.
Speaker Change: So effectively, you know, we see that as behind us, it had been normalizing and impacting us in 2024, moderated, and we're all about putting the innovation, the collaborations and the marketing brand building activities behind this leading, having leading market share as well, allows us to see that picture.
Thank you for the question.
Thank you.
Speaker Change: Unknown Executive, Julie Rosen, Michael McGuire, Unknown Executive, Julie Rosen, Unknown Executive,
Speaker Change: Thank you. Our next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.
Good morning. Thank you.
Speaker Change: Wanted to ask on gross margin. I think this is the first quarter in quite some time where you didn't deliver upside to the gross margin guidance and even with some of the outperformance and the fuel for growth initiative. So hoping you can just talk us through through some of the puts and takes there. And then just bigger picture, guidance implies about 17% even margin this year.
Speaker Change: Is that the right level for this business or do you think the sustainable top line growth will require higher levels of investment moving forward? Thank you.
Eva Boratto: Thanks for that question, Mark. This is Eva. I'll take that one.
Eva Boratto: We delivered right in line with our expectations on gross margin.
Eva Boratto: We benefited from the cost savings. We are lapping significant improvements last year in gross margin. It was about 140 basis points.
Eva Boratto: Expansion, and we did have some incremental strategically planned promotions that were pleased with the returns on both the top line as as well as the bottom line. So we're pleased with our with our margin performance.
Eva Boratto: As you ask your question longer term, our target gross margins are 45.
Eva Boratto: Our guidance for this year implies about 44%, so we're pleased with the progress we've continued to make to improve our margins and remain focused on moving toward those target margins of 45% and 20% at the OI level.
Thank you. Next question please.
Speaker Change: Thank you. Our next question comes from the line of Matthew Boss with J.P. Morgan. Please proceed with your question.
Speaker Change: Great, thanks. So Gina, could you elaborate on category trends versus plan that you saw in the third quarter? And maybe the cadence of traffic that you saw as the quarter progressed, what you're seeing so far in November. And then for Eva, just on gross margin, if you could maybe bridge the 40 basis points gross margin expansion in the fourth quarter, just maybe walk through the drivers.
Gina Boswell: Thanks, Matt. I will start and I'll ask Eva to chime in as well. As we said, the categories themselves, the body care, home fragrance, and soaps and sanitizers,
Gina Boswell: grew in the quarter compared to last year. So low single digits. It was great, actually, to see the positive response that customers had to our seasonal merchandise. They continue to seek our newness and innovation. And so things like Everyday Luxuries, which was lifting the fine fragrance mist very nicely, and our seasonal fragrance launches like Vanilla Romance and Platinum. These are on-trend fragrances which lifted those categories.
Gina Boswell: Overall, it was great to see the categories as a whole respond to this level of newness and innovation, and it's supported by the competitive value proposition that we provide, and also increasing the demand-driving investments in the marketing side.
Eva Boratto: So that's it from the category side. Over to you, Eva, for the remainder.
Eva Boratto: Sure. So on the gross margin, Matt, overall, the 40 basis point expansion is largely driven by B&O. Continued benefits from our direct fulfillment as we optimize our network. We also do have some home office cost reductions that benefit the B&O line as well.
So we're pleased with the Q4 gross margin expectations.
Eva Boratto: In terms of traffic trends in the quarter, overall we were really pleased with traffic throughout the quarter. Traffic was up in our stores throughout the quarter.
Eva Boratto: and it was driven by the newness that we brought, everyday luxuries launched.
drove traffic, are fall candles.
Eva Boratto: Our traffic exceeded external benchmarks. And finally, I'll go back to Halloween. It feels like a long time ago, but our Halloween performed really well, up double digits, which was amplified by our Stranger Things Part 2 collab.
Eva Boratto: So, as you have three lengths of the stool working together, our promotion, our product amplified by our marketing, we're really pleased with the response we got from customers.
Thank you. We'll take our next question, please.
Speaker Change: Thank you. Our next question comes from the line of Alex Drayton with Morgan Stanley. Please proceed with your question.
Perfect, thanks so much.
Speaker Change: Just first on revenue, it looks like when you adjust out the 53rd week dynamics, you actually are delivering that growth you hoped for in the back half.
Speaker Change: Do you see it that way? And then what's holding you back from the mid-single-digit to high-single-digit hopes you have longer term? And then one quick final one is just on anything you can provide on the margin profile of the adjacencies as they become a bigger part of the revenue base. Thanks a lot.
Eva Boratto: Hi Alex, this is Eva. I'll take the first couple parts of the question and Gina will take the third part.
Eva Boratto: As you looked at our Q3 performance and our expected Q4 performance,
When you normalize for the calendar shift
Eva Boratto: at the mid at what we delivered in Q3 as well as at the mid and the high we continue to drive growth.
Eva Boratto: that we've built. On the adjacencies, you know, overall, it's factored into our gross margin outlook. I don't want to comment specifically on any given product, but a typical rule of thumb is as products mature, as they scale, we can improve our gross margins.
and I'll turn it back to Gina looking longer term.
Gina Boswell: Thank you. Let me just comment on adjacencies and go longer term as well. As it relates to adjacencies, we mentioned that it was
Gina Boswell: In aggregate about 10% of our business and just to remind us about the goal of adjacencies. It's really to extend our reach
Gina Boswell: Increase penetration, diversify the portfolio while still growing the core. And in this quarter, adjacencies in the aggregate grew above shop.
Gina Boswell: that is consistent with the first half of the year. So the sequential improvement was driven by the core. And so to have both adjacency and core driving is really important. As I said, Eva said as well, we're not gonna comment specifically on 2025, but we should expect to see improved health in our core categories. We should see the adjacent categories continue to grow in both size and contribution. And we're really pleased where we sit right now. Thank you.
Next question, please.
Speaker Change: Thank you. Our next question comes from the line of Paul Leshway with Citi. Please proceed with your question.
Speaker Change: Hey, thanks, guys. Sorry if I missed it, but what was the third quarter merch margin and what is your plan for merch margin in 4Q? And anything you can share on AUR, on like for like, and what's driving that mix? The AUR being up one, what is driving that higher?
Speaker Change: to improve cost. We're lapping a very strong improvement last year offset by some of the promotional activities.
Speaker Change: As you look at Q4, I would say Merck's margin pretty flattish as well, and really the improvement year over year we're driving from our B&O efficiencies.
Speaker Change: And I'll add on the like for like and the mix. It's great to see mix.
Speaker Change: driving AUR up 1%. And really it's a function of the combination of product price and marketing coming together. But you know, we have a good better best product mix. And that's great to see in this
Speaker Change: with a wide variety of price points. We're elevating the value that we deliver to our customers and the innovation. So overall, we're pleased with where we sit in this environment, and excited to see the results show up in the P&L. Thank you for the question. Next question, please.
Speaker Change: Thank you. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question. Thanks. Hey, good morning, everyone. Nice to see the progress.
Speaker Change: Eva, how much was marketing as a percent of sales? How are you thinking about that going forward? And then Gina, just can you maybe dig into the colab learnings a little bit? I know it's still relatively early, but you have a few in place. I know you're great with data. So I'm just curious how you would frame the learnings and the benefits maybe you're seeing so far. Would you characterize them as driving new customers, driving greater frequency of existing, boosting the current shopper's annual spend? Does it smooth out otherwise seasonal purchases? I'm just trying to think through if you could share. It seems like you're creating catalysts as opposed to relying on what advanced specific holidays or seasons do that for you. So any color there would be helpful. Thank you.
Eva Boratto: Yes, I mean, I'll start with the with the marketing overall on an annual basis. It's about three and a half percent of our sales.
Eva Boratto: In the quarter it was about a hundred basis point about a hundred basis point step up from ly
Eva Boratto: and you see in Q4, right, we're beginning to lap the marketing investment, but there's still a step up bringing us to the full annual three and a half percent.
Unknown Speaker 05.
Speaker Change: And as it relates to your question on CoLab learnings, you know, the, this is really driving the growth in the core products, and it's generating that.
Speaker Change: So examples of that, Stranger Things part two really generated buzz in the Halloween floor set which exceeded expectations as Eva discussed.
Speaker Change: Our Emily in Paris cross category collaboration kicked off with a successful early access event at the start of this quarter. And the full launch of that is right around the corner, right around the corner. And so, in total, the metrics of traffic, their brand building relevancy, particularly for the eighteen to thirty four year old customer.
Speaker Change: because the way we choose these is the you know complementarity of what the Bath & Body Works customer is and the Netflix property in this case that we would be working with.
Speaker Change: So, that's the overall CoLab learnings and we're really pleased with success so far. What's great about having Bridgerton out of the gate success is that there's a pipeline of people who would want to work with us and we can be very choosy from that perspective. Thank you for the question. We're ready for our next one.
and the
Speaker Change: Thank you. Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.
Speaker Change: Hi, good morning. Thanks for taking our question. Last quarter, you mentioned that the adjacent categories were performing well, particularly with existing customers, but it was taking some time to build the brand awareness and generate a greater number of new-to-brand customers. I don't think we've heard similar language today, and just wondered if anything has changed there.
Speaker Change: Actually, the adjacencies are delivering as we expected and there's a strong delivery there. Nothing's changed from that perspective, although what we do watch is for adjacencies, we want to make sure that we got the incrementality that is building the baskets.
Speaker Change: So no change, there it is. Repeat rates are still very strong, so we're excited by that. And depending on the category, whether it's men's, hair, lip, and laundry, varying degrees of the percentage of customers that are new to the brand.
Speaker Change: So we're pleased actually with the progress. These are still at varying degrees of penetration and percentage of our total portfolio but no change and they're contributing as well as the core so it's great to see that.
Thank you. Next question, please.
Speaker Change: Thank you. Our next question comes from the line of Jonah Kim with TD Cowan. Please proceed with your question.
For more information visit www.FEMA.gov
Speaker Change: Thanks for taking my question. Obviously, you had some nice momentum with newness this year. Could you talk about how much of the sales is driven by newness now? And as we think about next year, if you plan to ramp that up and and just also wanted to get some color on the cadence of newness as well, as far as you can provide some some color around it. Thank you so much.
Yeah, um, thank you for the question we
Speaker Change: Hey Days of Bath & Body Works, which I'm pleased to see. The customer will always come for newness and innovation. It is especially scalable, relevant newness.
Speaker Change: And so we're going to continue to work that, you know, winning recipe. There's no particular ramp on newness next year, but as a percentage of the portfolio will continue to be the lifeblood of this business. And we're excited by the pipeline that we see. Thank you. Next question, please.
Speaker Change: Thank you. Our next question comes from the line of Ike Boratto with Wells Fargo. Please proceed with your question.
Speaker Change: Hey, good morning, everyone. Eva, maybe first one for you just on the international side, maybe excluding the calendar shifts.
Speaker Change: What's the expectation for 4Q and the timing of return to growth, given the headwinds there? And then the follow-up for Gina, it doesn't sound like it, especially based on your tone and your Q4 outlook, but just because of the gross margin, the lack of robust upside you guys have been putting up, but also the revenue upside, just trying to understand, is there any kind of strategic shift in your view where you need to give up a little bit more of the gross margin to drive more productivity, more market share gains? It doesn't sound like that's what you're trying to message, but I just want to double-click into that. Thanks.
For more information visit www.FEMA.gov
Speaker Change: Thanks, Ike, for the question. Overall, as we as we look at international
Speaker Change: A couple things I just want to highlight for you. First,
In the areas not affected by the war, system-wide retail
Sales grew double digits. We actually saw an acceleration.
Speaker Change: and that's underpinning the health of the business, right? And that was store openings and comps, and we feel really good about the acceptance of
Speaker Change: of the brand there. Now, the war-affected regions, you know, represent about half of our business.
and they continue to be pressured.
Speaker Change: It's really difficult to predict the dynamics there. For the fourth quarter, from a reported sales perspective, I would expect sales to be down mid-single digits. And if you think about our commentary last quarter, you look at the back half of the year, we're largely in line with our commentary last quarter. So we'll have more to say about 2025 on our earnings call, but we see international as a great opportunity for longer-term growth and entering new markets.
Speaker Change: Thanks. And Ike, to your question about the growth margin, I think
Speaker Change: You know, the gross margin that we spoke about that Eva talked to is on top of already very healthy gains in the anniversary. There's no strategic shift of giving up on gross margin. We came in line with expectations and gross margin.
Speaker Change: What we are doing is we're leveraging our core strength, which is we have this very agile model, as you know, and supply chain, and we can leverage that and chase, you know, best sellers and winners and so forth. And so, if I go back to the real core performance levers that we have, I think of it as four legs to a chair.
Speaker Change: We've got the scalable relevant newness. We've got the competitive value proposition. We've got the increased demand driving investments. But above all, we also have this agile supply chain model that allows us to react to customer demand and meet them where they are, both in our core categories as well as our adjacent.
Speaker Change: Thank you for the question and we will take our next question.
Speaker Change: Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.
Olivia Tong: Great. Thanks. Good morning. I want to ask you about loyalty as it's continued to gain some really nice momentum and what your thoughts are from here, how much more opportunities there to leverage your program, learnings that you've made from them.
Olivia Tong: And then in terms of the manufacturing, great to hear about the 85% that is in the US. I was wondering if you could just discuss your competition, if there's any color that you can provide on how much exposure your competition has to overseas manufacturing, that would be very helpful. Thank you.
Speaker Change: Thank you. Let me start with loyalty, which we're really pleased about. Our loyalty program, as you know, has very high member satisfaction rates of 93% and accounts for over 80% of our U.S. sales.
Speaker Change: You know, as we move forward, we're going to get even more out of the approximately 38 million active members of our program. And as we said in our remarks, it
Speaker Change: They're even more valuable to us and we're pleased to say that actually that happened. We call this the loyalty flywheel actually
Speaker Change: When attached sales to the loyalty program increases, which it did, and then when newly enrolled active members, you know, loyalty members enroll with the app.
Speaker Change: They're proven to have an even higher engagement and spend so overall loyalty delivering on the metrics that you know We have and we're really pleased to see that progress
Speaker Change: I think on the manufacturing point, all I'll say is, you know, I don't have any color on the competition. We're just pleased with the advantage that we have having here in our backyard Beauty Park, but also together representing eighty five percent in North America. So.
Speaker Change: Gina, I'd just add we've worked diligently as a company over the last several years to reduce exposure and to increase our agility and it you know we believe it puts us in a very good place.
Great, thank you. Next question, please.
Thank you. Our next question comes from the line.
Speaker Change: of Christina Katai with Deutsche Bank. Please proceed with your question.
Speaker Change: Hi, good morning, and thank you for taking the question. I wanted to ask about your recent launch of TikTok Shop and then just building on that early success. Can you share maybe what the plans are to further leverage this platform to reach younger demographics, particularly during the holiday season? And then secondly, within that, just what are some of the key metrics that you are using to measure the effectiveness of these campaigns? Thank you.
Thank you, Christina.
Speaker Change: The launch of Tick Tock Shop that happened this quarter was exactly that, right, to allow us to reach the younger customers. And we're learning. It's early, but we like what we're seeing. We are making this channel and, more importantly, this marketing medium.
Speaker Change: Part of our holiday season activations. We're going to compliment it by other social media strategies as well, right, to sort of [inaudible]
Amplify our brand awareness. And as you know,
Those are things like Instagram, YouTube, and so forth.
So it's.
Speaker Change: It's a combination of all the social media strategies directed towards a broader reach, particularly with the younger customer. The metrics we're using to measure the success of all of these is a return on ad spend. We're also seeing customer metrics by demographic category, whether they're listing as a result of how we're targeting the social media to them. And so there's a number of metrics that, and we're very, very disciplined with those. They have to hit a certain threshold before we continue to spend it. But we're excited by both the spend levels and the ROI on that. Thank you for the question.
Next question.
Speaker Change: Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Speaker Change: Hi, good morning. Nice to see the progress. As you think about the increase in store traffic that you mentioned, off-mall versus on-mall, were there regional trends to that? And following on the digital performance, what did you see in BOPUS?
For more information visit www.FEMA.gov
Speaker Change: Hi, Dana and Siva. Thanks for the question. Overall, all mall stores performed better than mall-based stores. It was traffic and conversion.
Speaker Change: or tears. Focus continues to be strong. Focus grew 40% in the quarter year over year. It's now represents 25% of our of our digital demand. So we're pleased with offering our customers this
Speaker Change: this choice. And and we've said this many times, but about a third of the customers make an incremental purchase when they when they come into the store. So we're very pleased with focus. Thank you.
Take the next question, please.
Speaker Change: Thank you. Our next question comes from the line of Marnie Shapiro with the Retail Tracker. Please proceed with your question.
Speaker Change: Hi guys, congratulations on a nice quarter. Could you talk a little bit about something I've noticed, I can't remember the exact name of it, I think it's called
Speaker Change: I'm curious when you rolled that out if there's been good up uptake and is it across all the products? It was on a bunch of the ones I clicked through once I found it. I was curious about that.
Yeah, thank you for the question. So,
Speaker Change: mainly wallflowers in the subscription, right? The idea that if your wallflower bulb is running low, you'd want to have something readily available to sort of screw into a wallflower heater and that you could get that on an automatic delivery, right? It was actually called auto-replenish. We rebadged it, sent inscription, and now we're offering a broader assortment. So you're correct.
There's you know
Thank you for the question.
Next question, please.
Thank you
Speaker Change: Our next question will be from the line of Corinne Wolfmeyer with Piper Sandler. Please proceed with your question.
Speaker Change: Hey, good morning. Thanks for taking the question. So AUR is trending nicely. It seems like primarily due to mix. Can you just speak to a little bit or speak a little bit on how you're viewing the AUR opportunity both in the near and longer term? How much more room do you have to drive up those price points from a mix standpoint? And then from just general pricing actions, how much more flexibility do you think you have there? Thanks.
Speaker Change: Yeah, thank you. So overall, as I mentioned, AUR is something that is a function of our Agile model as well. We want to meet the customer where they're at. We want to continue to be nimble because we're trying to optimize our top and bottom line. And I want to note also that our AUR is actually still up double digit relative to pre-pandemic level.
Speaker Change: We have a number of other things going on, right? We have a good, better, best strategy. We have, you know, a wide variety of price points.
Speaker Change: But this Agile model is about, you know, reflecting the current environment. We do rigorous testing on these promotions, which impact AUR, and we're ensuring that they're accretive to both sales and margin dollars. So we're going to continue to leverage that model, that speed and scale and the promo capabilities that we have to position the company for top and bottom line growth.
Speaker Change: And the second question that you had, I think that was it. Thank you. Next question, please.
Speaker Change: Thank you. Our final question this morning comes from the line of Ashley Helgens with Jeffries. Please proceed with your question.
and the other one.
Speaker Change: Unknown Executive, Julie Rosen, Michael McGuire, Unknown Executive, Julie Rosen, Unknown Executive,
Ashley.
Speaker Change: Oh, can you hear me now? Now we can, yes. Okay, great. This is Sydney on for Ashley. I had my line on mute. Just looking at the everyday luxuries line, a lot of the content around that has been kind of about scent dupes.
Speaker Change: Can you talk a little bit about your philosophy for towards dupes versus proprietary sense and just kind of how you how you think about that? Thank you
Thanks for the question.
at Approachable Prices.
Speaker Change: So it's thank you for the question. I think that's our last question So with that I will wish everyone a very happy Thanksgiving and over to you Luke We want to thank you for joining today's call a replay will be available for 90 days on our website Thank you for your interest in Bath and Body Works
Thank you. Bye.
Speaker Change: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Unknown Executive, Julie Rosen, Michael McGuire, Unknown Executive, Julie Rosen, Unknown Executive,