Bath & Body Works, Inc. Q2 FY2027 earnings call

• Strategic Progress: Management reported tangible evidence that the 'Consumer First Formula' is working, citing sequential improvements in body care, a return to growth in digital, and accelerated growth in expanded distribution.
• Product Innovation: Launched 'Fruit Fusion,' a new body care franchise with celebrity ambassador Hilary Duff, which exceeded sales expectations and drove strong customer engagement. This launch served as a test case for a repeatable go-to-market playbook combining product innovation, cultural relevance, and coordinated demand creation.
• Brand Renewal: Introduced a modern demand creation model leveraging creator networks and celebrity partnerships to build cultural relevance. Social sentiment and awareness among non-consumers are improving.
• Marketplace Expansion: Amazon net sales more than tripled compared to Q1, making B&BW one of the largest candle brands on the platform. A partnership with Ulta Beauty launched across ~600 stores, focusing on trial and discovery. No cannibalization of owned channels was observed.
• Store Operations: Completed a full-fleet merchandising reset to improve navigation and discovery. International retail sales increased 9% despite geopolitical conflicts, with positive early performance in Brazil.
• Operational Efficiency: 'Fuel for Growth' initiatives are expected to exceed the $175 million savings goal by ~$25 million, funding investments in marketing and transformation.

Net sales were $1.5 billion, a decline of 2.3% year-over-year. The direct channel saw net sales of $275 million, an increase of 3%, while U.S. and Canadian store sales declined 5.4% to $1.1 billion. International and Other channels grew 24.9% to $108 million. In terms of product categories, body care declined mid-single digits but showed sequential improvement; home fragrance declined low single digits due to strategic Halloween assortment reductions and lower clearance inventory; soaps and sanitizers remained flat. Excluding the benefit from approximately $80 million in tariff refunds, adjusted earnings per diluted share would have been $0.31.

• Full Year Net Sales: Raised the low end to down 4% (previously down 5%), maintaining the high end at down 2.5%. Narrowed guidance range based on Q2 outperformance.
• Full Year Adjusted EPS: Raised to $2.60–$2.80 (previously $2.30–$2.60), reflecting Q2 results and operational efficiencies.
• Q3 Net Sales: Forecasted to be down 5% to down 2.5%.
• Q3 Adjusted EPS: Forecasted to be $0.07–$0.12.
• Margin Assumptions: Full-year adjusted gross profit rate expected at ~43.3%; adjusted SG&A rate at ~29.6% due to increased marketing investments. Third-quarter gross profit rate expected at ~40% and SG&A at ~34.8% due to sales deleverage and investment spending.

• Tariff Exposure: Forward tariff pressures and input cost inflation may offset Q2 benefits. Specifically, exposure exists to potential retaliatory tariffs if Canada tariffs remain at 50%, impacting production and retail operations.
• Store Traffic Pressure: Continued macroeconomic headwinds and softer mall traffic remain significant drags on North American store sales.
• Promotional Reliance: Risk of over-reliance on promotional activity to drive top-line growth, though management intends to avoid becoming incrementally more promotional.
• Execution Risk: The transformation is multi-year; current proof points are not yet broad enough to guarantee an immediate inflection in overall business trajectory.

Q: Why does Q3 guidance show moderation despite easing comparisons and visible strategy progress? / A: CEO Daniel Heaf explained that while strategic pillars like digital and body care are improving, the scale of these gains is not yet large enough to reverse the overall business trajectory. Store traffic remains pressured, and the company is not planning to become more promotional to drive sales. CFO Tom Javitch added that the guidance reflects a prudent approach assuming the current consumer environment continues, though the agile model allows them to chase upside if conditions improve.

Q: What are the key learnings from the Fruit Fusion launch and how will they inform future strategy? / A: Heaf described Fruit Fusion as a successful application of the 'Consumer First Formula' playbook: creating desirable products, telling memorable stories via celebrity/creator partnerships, and ensuring easy discovery. It demonstrated the viability of seeding durable franchises rather than just seasonal collections. The team plans to replicate this integrated approach for other hero categories in H2, including expanding the Fruit Fusion line with new fragrances and forms.

Q: Is there cannibalization between expanded distribution (Amazon/Ulta) and owned channels? / A: Heaf stated that data monitoring shows no observed cannibalization in stores or website sales. Amazon is viewed as a convenience channel attracting new, younger consumers with higher AUR, while Ulta serves as a discovery/trial channel for specialty beauty shoppers. The companies emphasize that only ~10% of the assortment is available on Amazon, preserving the full brand experience in owned channels.

Q: How sustainable is the digital turnaround, and what lessons apply to stores? / A: Heaf expressed confidence in the sustainability of digital growth, noting improvements in new, existing, and reactivated customers. He drew parallels to physical stores, stating that just as digital required improved proposition, marketing, and experience to turn around, stores require similar efforts to 'earn the visit.' The recent merchandising reset is a start, but further lease-line disruptions and marketing are needed to combat traffic softness.

Q: What is the long-term operating margin outlook and baseline revenue growth needed? / A: Javitch noted that margin expansion is achievable with positive sales growth in line with market rates (mid-single digits) and improved brand health allowing for AUR growth. While specific multi-year margins aren't guided, the focus is on delivering H2 results. The 'Fuel for Growth' savings are currently funding transformation investments, suggesting a path where efficiency gains support strategic spending before driving pure margin expansion.