Bath & Body Works, Inc. (BBWI) Earnings

Management highlights

### Strategic Transformation Progress - Management is executing the multi-year "Consumer First" formula strategy, launched in November 2025, to return the brand to sustainable consistent growth. Early proof points from initial actions confirm the strategy is on the right track, with full impact expected to build through 2026 and become more visible in 2027. - CFO Eva Barado will depart the company; a comprehensive external search for a permanent replacement is underway, with Tom Javich (EVP of Brand Finance, 16-year company veteran) stepping in as Interim CFO to ensure continuity. ### Product Innovation - Restarting the innovation engine for core hero categories is a top priority, with a focus on intentional innovation, clear consumer benefits, upgraded packaging, and focused marketing. The new moisturizing and revitalizing hand soap launch delivered double-digit AUR and SKU productivity gains, confirming the new innovation model works. - After over-cutting the Everyday Luxuries body care assortment in Q1, management quickly restored 10 top-selling fragrances by the start of Q2, with early sales improvements already observed. Long-term, the franchise will be supported by assortment rebuilding, higher fragrance loads, and expansion into new product forms. - Limited, strategic collaborations are used to drive consumer excitement, cultural relevance, and seasonal performance: the limited Peeps collaboration sold out quickly and supported a 9% year-over-year increase in the spring collection, while the Disney Princess 2 and Vera Bradley collaborations performed well for Easter and Mother's Day respectively. Upcoming H2 2026 innovations include new product forms (flat-back hand sanitizer, pumped moisturizing body wash), upgraded packaging, and higher fragrance loads across hero categories. ### Brand Reignition - The brand is being modernized with clearer, benefit-forward storytelling, elevated creative expression, and a consistent influencer marketing strategy to build relevance with younger consumers. The White Barn Neutrals collection grew ~20% year-over-year in Q1 after a creator and podcast marketing campaign, and attracted a younger consumer base. - Enriched, modern brand storytelling has launched on Amazon and will roll out to all owned channels by the end of 2026, creating a consistent elevated experience across all consumer touchpoints. ### Marketplace Optimization - The 2,500-store North American fleet is a core competitive advantage; starting in July 2026, a full fleet rollout of updated in-store navigation, clear signage, and fragrance/form/franchise-based product layouts will simplify the shopping experience and improve conversion. - Digital improvements are underway: a mobile-first website relaunch with stronger storytelling and faster checkout is planned for late 2026, which has already delivered a ~10% conversion improvement for new consumers in early testing. - The new Amazon marketplace launch is performing in line with plans, delivering consistent double-digit week-over-week growth. Amazon is attracting younger, more affluent consumers new to the brand, with higher AURs than owned channels; it is positioned as a curated complement to owned channels (only 7% of the full in-store assortment is currently live on Amazon), not a replacement. - International growth remains a key strategic pillar, with Q1 retail sales up double digits, despite near-term pressure in the Middle East. ### Operational Efficiency - The multi-year "Fuel for Growth" program is simplifying the business, removing unnecessary complexity, and reallocating resources to high-impact consumer-focused investments (product innovation, brand building, digital upgrades) while maintaining a strong financial foundation. - Inventory ended Q1 down 10% year-over-year, with management confident in inventory levels heading into Q2. 13 new off-mall North American stores were opened, and 17 underperforming mall stores were closed, aligning the fleet with consumer shopping patterns.

Guidance

- Full year 2026 guidance is fully reaffirmed, with no changes to prior ranges: net sales are expected to decline 2.5% to 4.5% year-over-year, and adjusted EPS is expected to range between $2.40 and $2.65. - Q2 2026 guidance: net sales are expected to decline 3% to 5% year-over-year. International net sales are expected to decline low to mid-single digits (driven by reduced product shipments to Middle East partners due to ongoing conflict), while international retail sales are expected to grow low double digits, matching Q1 performance. Adjusted EPS is expected to range between $0.20 and $0.25. - Guidance assumptions: no share repurchases are included; energy prices are assumed to remain elevated for the full year; no benefit from potential tariff refunds is included; the full-year gross profit margin is expected to be ~42.4%, consistent with prior guidance. Tariff and inflation impacts are expected to be roughly neutral year-over-year. - Full year 2026 capital expenditures are expected to total ~$270 million, focused on high-return real estate, Consumer First formula initiatives, and logistics/fulfillment upgrades. Full year free cash flow is expected to be ~$600 million, including a $66 million after-tax benefit from interchange fee litigation settlements recognized in Q1.

Segment performance

Overall: Q1 2026 net sales totaled $1.4 billion, a 3.2% year-over-year decline. Adjusted operating income was $151 million (11% of net sales), and adjusted diluted EPS was $0.32, beating internal expectations. By product segment: - Body care: Net sales declined mid-teens year-over-year, underperforming the broader business. The decline was driven by over-aggressive assortment cuts to the Everyday Luxuries franchise and a planned mix shift toward accessories in the Disney Princess 2 collaboration. - Home fragrance: Net sales declined low single digits year-over-year. Candles outperformed the broader segment, supported by strategic pricing and 20% growth in the White Barn Neutrals collection, partially offset by softness in Wallflowers. Home fragrance contributes approximately 40-45% of total net sales, per historical brand segment breakdowns. - Soaps and sanitizers: Net sales grew low single digits year-over-year. The new moisturizing and revitalizing hand soap launch delivered double-digit increases in average unit retail (AUR) and SKU productivity, driving solid segment performance. This segment contributes approximately 20-25% of total net sales. By geographic/channel segment: - U.S. and Canadian stores: Net sales were $1.1 billion, a 4.3% year-over-year decrease, contributing 78.6% of total net sales. - Direct (digital) channel: Net sales were $246 million, a 1.5% year-over-year decrease, contributing 17.6% of total net sales. - International and other (including domestic third-party wholesale): Net sales were $70 million, a 9% year-over-year increase, contributing 5% of total net sales. International retail sales grew double digits year-over-year, with overall international net sales up 5%.

Risks & headwinds

- Ongoing conflict in the Middle East creates near-term headwinds for international net sales, due to reduced product shipments to regional partners. - Persistent crude oil price inflation creates incremental margin pressure, partially offset by Fuel for Growth cost savings. - Body care, the company's largest core category, faces intense competitive pressure and has underperformed expectations, with underlying category trends remaining pressured. - Mall-based stores continue to underperform off-mall locations, with lower-tier malls seeing the weakest performance. Lower-tier mall traffic trends remain a persistent headwind for the store fleet. - Uncertainty around future tariff rates and potential tariff refunds, with no benefit from refunds included in current guidance, creating potential upside or downside to results depending on regulatory outcomes. - The multi-year transformation requires significant upfront investment that may not deliver the expected revenue growth or margin improvement within management's projected timeline. - Consumer demand remains pressured, with consumers increasingly value-focused, creating challenges for balancing AUR growth, brand integrity, and traffic driving promotions.

Analyst Q&A

• Q: Body care was Q1's biggest performance drag. What actions have been taken to fix the category, and is the Q1 weakness now behind us? /

  A: The Q1 underperformance stemmed from two known issues: a planned mix shift to accessories in the Disney Princess 2 collaboration (which was the right strategic move to address unmet demand from the prior launch), and over-aggressive assortment cuts to the Everyday Luxuries franchise. Management quickly replenished 10 top-selling Everyday Luxuries fragrances, and Q2 body care performance is already expected to be meaningfully better. Long-term, large-scale product innovation for body care, including higher fragrance loads and new forms, will launch in H2 2026, and management remains confident in the category's long-term potential.

• Q: One year into the transformation, is the revenue inflection still on track for 2027? Is there any need to push the timeline out? /

  A: Q1 performance was exactly in line with management's expectations for this stage of the transformation. The underlying business remains pressured, and management is not calling an inflection yet, but early proof points (strong performance from new hand soap and White Barn Neutrals) confirm the strategy is working. Management remains focused on scaling successful initiatives to return the company to growth as soon as possible, and the transformation remains on its original timeline.

• Q: What have been the key learnings from the new Amazon launch, and how do you balance third-party expansion with protecting owned channel traffic? /

  A: Amazon is performing in line with plans, delivering strong double-digit week-over-week growth, and has proven to be an effective customer acquisition channel, attracting a higher mix of younger, more affluent consumers new to the brand, with higher AURs than owned channels. Amazon is intentionally positioned as a small curated complement to owned channels (only 7% of the full in-store assortment is live on the platform), so it will not cannibalize owned channel traffic, which will always offer the full breadth of assortment. A surprising unexpected benefit is that improved product content on Amazon has improved search recommendations for the brand on generative AI platforms.

• Q: What is the current promotional strategy, and how do you balance AUR growth and brand integrity with continued consumer value-seeking? /

  A: Promotions will remain a core part of the Bath & Body Works model, but management is moving away from the prior strategy of frequent deep discounting that eroded long-term brand equity. 2026 guidance assumes broadly similar promotional depth and cadence to 2025, with no sudden planned reduction. The long-term goal is to shift consumer demand toward buying for product benefit, not just discount, with AUR growth driven by product innovation and improved brand relevance, which the new hand soap launch has already proven is achievable.

• Q: Where does the company stand on SKU rationalization, and what will be different for holiday 2026 compared to 2025? /

  A: SKU rationalization is not focused on hitting an arbitrary target reduction; instead, it is designed to reduce the "paradox of choice" that has hurt in-store conversion. Smaller deeper SKU cuts are being tested, with the ultimate goal of improving consumer response rather than just hitting productivity metrics. Holiday 2026 will be meaningfully different from 2025, with a larger, bolder marketing campaign and broader scaled product innovation that will represent the first large-scale rollout of the Consumer First formula strategy for the company's most important selling period.