Yahoo Finance Bath & Body Works, Inc. (NYSE:BBWI) Q1 2024 Earnings Call Transcript
Bath & Body Works, Inc. (NYSE:BBWI) Q1 2024 Earnings Call Transcript June 4, 2024
Bath & Body Works, Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.3343.
Operator: Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Mike McGuire, Interim Head of Investor Relations. Mike, you may begin.
Mike McGuire: Good morning, and welcome to Bath & Body Works' first quarter 2024 earnings conference call. Joining me on the call today are Gina Boswell, Chief Executive Officer; Julie Rosen, President, Retail; and Eva Boratto, Chief Financial Officer. 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. Today's call may contain certain forward-looking statements related to future events and expectations. 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 Bath & Body Works' 2023 Form 10-K and our quarterly report on Form 10-Q, which will be filed at the end of today.
Today's call contains certain non-GAAP financial measures. Please refer to this morning's press release and supplemental materials for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. As you know, fiscal 2023 was a 53 week year. To provide the best sense of the health of the business, all category sales results, market share data, loyalty metrics and selling metrics discussed during the call are on a comparable calendar basis, which is 13 weeks ended May 4, 2024 versus the 13 weeks ended May 6, 2023. All other results discussed are on a reported basis, which is the 13 weeks ended May 4, 2024 versus the 13 weeks ended April 29, 2023. With that, I'll now turn the call over to Gina.
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Gina Boswell: Thank you, Mike, and good morning, everyone. We appreciate you all joining us. Today, we are pleased to report better than expected Q1 sales and earnings performance. Through strong execution, we continued our progress against our strategic priorities, managing our profitability and, at the same time, building toward our anticipated return to sales growth in the second half. Before I get into the details, let me first say that our Q1 outperformance would not be possible without the tireless dedication of our exceptional team who consistently delivers tremendous service to our customers while remaining nimble in a dynamic environment to deliver our goals. Jumping into results. We were pleased to deliver net sales of $1.4 billion in the first quarter, down 0.9% from the prior year, which was above the high end of our guidance.
First quarter earnings per diluted share of $0.38 was up 15% from the prior year's adjusted EPS, which was above our guidance. With our better-than-expected results in the first quarter, we've narrowed our full year guidance ranges for both the top- and bottom-lines, raising the midpoint while maintaining the high end for each. Keeping in mind that it's still early in the year and we remain in a dynamic consumer spending environment, we are taking a prudent approach to our guidance. Eva will share more details later. Now shifting back to the quarter, let me provide some color on what drove our Q1 performance. Of course, it starts with the customer and their favorable response to the level of newness and innovation we brought to them with compelling product introductions and new marketing activities that build the brand.
We continue to grow our newer adjacencies such as men's, hair, lip and laundry, and we are excited to see all of these contributing more to the business. We're continuing to roll out our lip fixtures to nearly all North American stores and we're accelerating laundry to all US stores in late fall. As part of our efforts to drive our core growth, we introduced a new brand collaboration with Netflix, starting with their hit series, Bridgerton. We also launched a new Everyday Luxuries collection, which generated some viral buzz that Julie will touch on a bit later. Together, we were delighted with the abundance of brand love demonstrated by customers for these products. The Home Fragrance category performed in line with our expectations with the year-over-year decline in candles consistent with the prior quarter's performance, as macro level normalization continued.
Overall transactions were up for the quarter driven by conversion with dual channel traffic flat. Consistent with external market data, we are continuing to see customers carefully manage their spending, which has pressured basket size. Average unit retails declined 1% versus our expectation of flat. At the beginning of the quarter, we leveraged promotion to help drive traffic in light of a floor set that wasn't resonating with our customers. As the quarter progressed and demand grew, we eased off promotions, which allowed us to achieve flat AURs in the back half of the quarter. From a market share perspective, we maintained our strong unit share overall. Our international business was pressured given the war in the Middle East and related softness.
Despite this near term pressure, international markets remain an attractive pillar of our overall strategy, and we are committed to growing outside North America. During the quarter, our partners opened stores in new markets, including our first standalone store in London. And just last week, together with our franchise partner, we opened our first store in South Korea. Our plan is to add at least 35 net new stores in international markets this year. As you know, over the past year, our team's efforts have been centered on elevating the Bath & Body Works brand and product, extending our reach, engaging with our customers, enabling a seamless omnichannel experience and enhancing operational excellence and efficiency. Building upon the strong foundation that Bath & Body Works had already established, our efforts are driving positive progress along our path to $10 billion in sales and operating margins of 20%.
Last quarter, I highlighted several marketing and technology initiatives in which we're making important investments to fuel our growth. This quarter, I would like to focus on a key indicator of the success of this work, which we call customership. Customership essentially refers to the demand we generate among current and potential customers to drive sustained growth in the business. Simply put, our goal is to bring more customers to the brand more often and with more love for our amazing fragrance assortment and omnichannel experience. With the introduction of our full funnel marketing approach beginning in Q4 of last year, we have seen improving trends supported by greater top-of-mind brand awareness and engagement among existing, new and reactivated customers alike.
Early results from our more fulsome approach have been promising. The trend on net customer count in the first quarter improved 10 percentage points when compared to the first quarter of 2023, fueled by better retention of existing customers and a trend improvement in attracting new customers to the brand. We saw our most promising performance within our most valued customer segment, which we call fragrance fashionistas. These customers consider fragrance to be an essential part of their identity and self-expression, and they're extremely invested in innovation, evidenced by their response to our newness in the quarter. We were also encouraged to see our new efforts lead customers to shop with us more often, with approximately 40% of customers visiting us nearly 7 times on average per year.
And we're seeing brand love continue to build. Brand impressions generated in the quarter were up 43% versus the prior year and we saw key brand equities, such as likelihood to recommend Bath & Body Works, on the rise. Hand in hand with our marketing efforts in driving customership is our focus on loyalty. As of the end of first quarter, we had increased our active loyalty members by more than 18% year-over-year to approximately 37 million and they drove about 80% of our US sales. The program also boasted an outstanding 93% satisfaction rating within its membership. While the scale and satisfaction of our loyalty program are strong, of equal importance is the stickiness the program brings to the business. In Q1, our overall customer retention rate was the best posted since 2021, which was a high watermark for the brand.
As we look to a future built on strong customership, we see additional potential to drive even more enrollment in our loyalty program, particularly among new customers, who made up 43% of enrollees in the first quarter. In order to drive a new level of engagement in the program in 2024, we will offer more loyalty exclusive and early access events along with point accelerators. We introduced these in Q4 to foster reward redemption as that is a critical factor in incenting customer purchase behavior. As customership grows, it will enhance our potential to both drive short--term performance as well as sustain customer lifetime value. Turning briefly to our technology initiatives, our tech roadmap is on track, and we've made progress toward our goals.
As you know, in standing up Bath & Body Works as an independent company, there has been and continues to be significant work required to bring the company's technology systems to where we need them to be for a leading omnichannel retail business of our size. We remain focused on investing in the foundational tools and systems need to support future growth, and have been engaging with world-class partners to do so. We continue to evolve the digital experience for our customers, and we look forward to sharing big wins from these efforts later in the year. With that, I'll turn the call over to Julie to provide the merchandising overview.
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Julie Rosen: Thank you, Gina. I too want to thank our teams for their exceptional work and for continuing to deliver a special experience to our customers. We are pleased with our first quarter performance as a result of their efforts and we're well positioned for a strong summer. As Gina touched on briefly, newness drove our success in the first quarter. In March, we announced a year-long partnership with Netflix to bring storytelling to life through the power of fragrance. Through the partnership, we aim to transform the viewing experience for millions of Netflix fans by allowing the power of fragrance to help transport them into their favorite stories and scenes. And we started with Bridgerton, one of the most popular programs on Netflix.
The response was terrific. The collection resonated with our core customer, and over the launch period, Bridgerton products represented 4% of the shop. This response exceeded our expectations and our agile model allowed us to chase into strong selling fragrances and forms. Turning to our category performance, Body Care sales grew low-single digits in the quarter, outperforming the shop as we maintained unit share in the category. Fine fragrance mist, men's, travel and lip were particular highlights. During the quarter, we had a limited launch of our Everyday Luxuries collection of fine fragrance mist, with success spurred on by the organic virality of the product. As the sprays went viral on social media, demand increased with fine fragrance mist outperforming the shop during that period.
The demand was driven by a slightly younger and more diverse set of customers. As I said, this a limited test launch in about one-third of our US stores. Given the success, you will see us relaunch this line across the full North American fleet in the fall. The men's business continues to be one of our fastest-growing categories in Body Care, as we benefit from new forms introduced last year, including grooming and antiperspirant deodorant as well as the newness we infused into the core collection in the first quarter. Notwithstanding the growth in men's we've seen to date, customer awareness for men's remains relatively low and we continue to invest in new media channels to drive awareness and growth. We believe we have significant opportunity to drive increased visibility and expansion of this category.
Travel, as I mentioned, outpaced the shop as we continue to take advantage of the trial and travel mindset. Home Fragrance sales were down mid-single digits to last year, yet we increased our unit market share slightly. Candle sales declined from last year as we not only continued to be impacted by candle normalization, but we also narrowed our assortment of single wick candles. We saw a slight decline in unit market share in candles in the quarter, while we maintained our market leadership. Our air fresheners or wallflowers grew unit share in the quarter. Our Soaps & Sanitizers category decreased low-single digits compared to last year. Despite slightly declining in unit market share, we maintained our strong market leadership. Within this, soaps increased, driven by refills.
We've been pleased with the performance of our refills, which make up slightly less than 10% of the soap business. We've received positive customer feedback and have expanded the assortment since the launch. Meanwhile, sanitizers declined, driven by our decision to exit the full size form due to continued normalization in the category. Pocketbacs overall performed nicely in the quarter, growing versus the same period last year. We've been enhancing our current forms such as adding a moisturizing pocketbac. Finally, customers continue to look to us as an important gifting destination, which drove a 6% increase in giftsets in the quarter. As we look forward, continued innovation and newness that we have planned for the seasons ahead will continue to be key drivers across our products and merchandising.
For our summer floorset, we delivered fresh and compelling new scents, such as our new Summer Glow collection and we expanded our SPF assortment and level of skin protection. Lip products outperformed the shop as we continued to roll out our fixture and expanded assortment to almost all North American stores. Our new lip fixture is attracting new, younger customers to our brand, which is encouraging customers to linger and play, doubling sales of lip in the stores with the new lip fixture. We're on track to complete the rollout to nearly all of our North American stores by July. As we've continued to optimize our assortment and maintain supply to meet customer demand, we are accelerating the rollout of our laundry line and now expect it to be in all US stores by late fall.
With that, I'll turn it over to Eva.
Eva Boratto: Thank you, Julie. Good morning, everyone. Before I review our first quarter fiscal results and fiscal 2024 guidance, I will provide an update on capital allocation. Our top priority remains driving sustainable long-term profitable growth through investments in the business. To support this, we continue to plan for $300 million to $325 million in capital projects during the year. And our priorities remain investment in brick and mortar stores and technology. In the first quarter, our total capital investment was $46 million. After investments in the business, our expectation for full year free cash flow generation remains between $675 million and $775 million, and we'll put that towards our priorities of dividends, share repurchases and debt deleveraging.
During the quarter, we paid out $45 million in dividends. Subsequently, a few weeks ago, we announced a quarterly dividend of $0.20 per share payable later this month. We expect to continue our annual dividend of $0.80 per share with the intention to increase the dividend over time with sustained earnings growth. During the quarter, we repurchased 2.2 million shares of common stock for $99 million at an average price of $45.61 per share. Our full year guidance continues to include the expectation to repurchase approximately $300 million of shares opportunistically throughout fiscal 2024. We also remain committed to our goal of reducing our leverage ratio to approximately 2.5 times growth adjusted debt-to-EBITDAR. In the first quarter, we repurchased $109 million principal amount of senior notes and our ratio held steady at 2.8 times on a four-quarter trailing basis.
Now moving to the income statement. In the first quarter, we reported earnings per diluted share of $0.38, exceeding our guidance of $0.28 to $0.33 per diluted share. Our outperformance in the quarter was driven by better-than-expected net sales and to a lesser extent buying and occupancy cost. Net sales of $1.4 billion for the quarter declined a better than expected 0.9% compared to the prior year. The outperformance in net sales was driven by strong floorsets in March, reflecting the newness that Julie described. As expected, the change in year-over-year net sales benefited by approximately 200 basis points from the shifted fiscal calendar resulting from the extra week in 2023. The benefit was offset by weaker-than-expected international ship sales and a decrease in average dollar sale as we continue to see the customer carefully manage their spending.
As Gina previously discussed, AURs decreased 1% in the quarter versus our expectation of flat. Transactions were up for the quarter, driven by conversion. In US and Canadian stores, net sales totaled $1.1 billion, an increase of 3% versus the prior year. This is in line with our performance in Q4 of 2023 on a comparable calendar basis. Direct net sales were $261 million, a decline of 7% compared to last year. BOPIS continued to grow as our customers appreciate the convenience it offers. Keep in mind, BOPIS net sales are recognized as store net sales and we delivered approximately 50% growth in demand year-over-year, and BOPIS now represents approximately 25% of direct demand. So, when adjusted for BOPIS, stores and direct growth are more comparable.
Note, we lapped the BOPIS US national rollout during the quarter. We generated $58 million of international net sales, a decline of 29% from last year's first quarter, which negatively impacted the year-over-year change in consolidated net sales by 170 basis points. The decline was driven by the decrease in wholesale revenue generated by product shipments to our franchise partners due to the markets affected by the war in the Middle East as those partners continue to manage their inventory levels in the face of subdued forecast. Total international system-wide retail sales from which we collect royalties were roughly flat to the prior year. Compared to the prior-year period, sales were up mid-teens outside of the areas affected by the war in the Middle East, while sales improved sequentially in areas impacted by the war.
We continue to believe in the international opportunity and it is an important driver of long-term growth. First quarter gross profit rate was 43.8%, an increase of 110 basis points compared to prior year. Merchandise margin rate improved 110 basis points year-over-year, driven by a lower mix of international sales and lower transportation costs, partially offset by the modest AUR decline. Buying and occupancy expense as a percent of net sales was flat to last year. The outperformance was driven by strong execution in our fulfillment operations. Total first quarter SG&A deleveraged by 60 basis points versus last year, in line with expectations, which included the lapping of one-time discrete corporate expenses recognized in the first quarter last year.
The benefits of our cost optimization work spans across both gross profit and SG&A. We continue to expect approximately $100 million in additional annual cost savings for fiscal year 2024, with benefits being realized earlier than expected. In the first quarter, we delivered approximately $40 million. First quarter total operating income increased by 3.6% to $187 million or 13.5% of net sales. Moving on to inventory, we ended the first quarter with total inventory dollars up 6% compared to last year, in line with our expectations. The increase in inventory is to support new product launches and additional stores. As we head into the second quarter, our inventory levels are appropriately positioned. Turning to real estate, our portfolio remains extremely healthy with more than half our fleet in off-mall locations.
In the first quarter, we continued to increase our North American off-mall penetration, opening 15 new off-mall stores and permanently closing 11 stores, primarily in malls. Internationally, our partners ended the quarter with 486 stores. Turning now to our fiscal 2024 financial guidance. As a reminder, we are providing our guidance with comparisons to 2023 that included the 53rd week, which added about $81 million to net sales and $0.05 to diluted earnings per share. With that as background, we are narrowing full year guidance ranges for both the top- and bottom-line raising the midpoint while maintaining the high end for each. For the full year, we now expect net sales result to range between down 2.5% to flat year-over-year. Adjusting for the 53rd week in 2023, we expect net sales results to range between down 1.5% to up 1% with the extra week representing a headwind of approximately 100 basis points to our 2024 growth.
We continue to expect net sales growth at both the midpoint and the high end and to turn positive in the second half of the year on a comparable week basis, as our marketing initiatives and our product launches in our adjacencies are scale. We now expect gross profit rate to be approximately 43.7%, and SG&A rate to be approximately 26.7%. The benefits of our cost optimization work mentioned previously are now expected to be more weighted to gross profit than SG&A at a split of approximately 60% and 40%, respectively. Our guidance for net non-operating expenses remain unchanged from the guidance we provided on our last earnings call. Considering all of the inputs, our updated full year guidance for earnings per diluted share is between $3.05 to $3.35.
As Gina explained, we are taking a prudent approach to our guidance keeping in mind it's still early in the year and we remain in a dynamic consumer spending environment. Turning now to our second quarter 2024 guidance, we are forecasting a second quarter sales range of down 2% to flat versus prior year, with the high end of the range reflecting a sequential improvement over the prior quarter. We expect second quarter gross profit rate to be approximately 40%, in line with Q2 of 2023. In the second quarter, we will begin to lap merchandise margin rate expansion in the prior year. Our forecast reflects moderate improvement in year-over-year merch margin rate, offset by deleverage in buying and occupancy expense as a percent of net sales, driven by investments in store real estate.
AURs in the second quarter are expected to be roughly flat. We expect our second quarter SG&A rate to be approximately 29% of net sales with the rate increase versus the prior year, driven largely by higher marketing investment and wage inflation, partially offset by our cost reduction initiative. We expect second quarter net non-operating expense of approximately $65 million, a tax rate of approximately 27% with weighted average diluted shares outstanding of approximately 224 million. Considering all of these inputs, we are forecasting second quarter earnings per diluted share of between $0.31 and $0.36. And I'll now turn the call back to Gina for some closing remarks.
Gina Boswell: Thank you, Eva. In closing, I'd like to emphasize again how pleased we are with our better-than-expected start to the year, a convincing step toward our anticipated return to top-line growth in the back half of the year. We are effectively executing on our strategic initiatives and creating more efficiencies in our business, which is allowing us to further reduce our debt and continue to return cash to shareholders. We continue to be excited about the opportunities ahead. I'll now turn the call over to the operator for questions.
Operator: Thank you. [Operator Instructions] Our first question is coming from Simeon Siegel of BMO Capital Markets. Please go ahead.
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