Good morning, everyone. Thank you for joining us at the Goldman Sachs 31st Annual Global Retailing Conference. It's my pleasure to kick off the conference today with Bath & Body Works. We'll be moderating this fireside chat. Today, we have with us Gina Boswell, Chief Executive Officer and Director of Bath & Body Works. Gina joined the company and the board of directors in December 2022, previously serving as a senior executive with Unilever. We also have Eva Boratto, Chief Financial Officer of Bath & Body Works, who joined in August 2023, previously serving as CFO of Opentrons Labworks and CFO of CVS Health Corporation prior to that. Thank you so much for joining us today.
Thank you for having us.
Pleasure to have you.
Thank you, Kate.
It's exciting that you're the first meeting today, so thank you for that, too. We wondered if we could maybe just start out talking about your view on the health of the consumer. Bath & Body Works, I think, addresses a broad swath of consumer, and could you maybe walk through what you've seen throughout the year, up until now, and what you expect for the second half?
Sure. So, during the second quarter, we experienced a more cautious consumer and one that was seeking value for sure. And then also in the second quarter, we experienced some pressure on traffic, which we hadn't seen in the first quarter. So this traffic pressure, though, was consistent with what we had seen with external benchmarks in an off mall. So that was one thing that we had noticed. And we also saw as much as the customer was seeking value and being more cautious, they were also quite interested in innovation and newness, and that hadn't changed. So for us, we were leaning into you know, our quality messaging, which you know, when we think about the consumer seeking value, we don't think it is simply about price.
We think it's about the best value, meaning the best quality for a price and the best experience, frankly. So, what we're looking at, certainly as we go forward against the health of the customer, is: How do we play to our strengths with that? And for sure, we've been, you know, focusing on newness and in innovation, but also asserting our credentials as the category leaders in the categories that we are in, specifically home fragrance, personal care, soaps and sanitizers, et cetera. So that's sort of where we are doubling down our focus against that backdrop.
And maybe could we just ask then, within that, you know, you said the consumer is responding to newness and innovation, yet there's this, you know, attraction to value as well?
Right.
So could you maybe talk to us a little bit about how you balance the two? Also, sounds like the consumer is coming out for key shopping events, too, back to school, anything holiday related. And so could you maybe talk through how you're managing that? And then, with regards to your guidance for the year, your net sales of down four to down two, can you talk us through the scenarios in which you can get to a down two versus a down four?
Yeah. Well, let's start with the guidance.
the back end, and we'll come back to-
Sure.
newness and innovation.
Mm-hmm. So, Kate, let me take a step back on the guidance, right? As we set the guidance last week on our call, right? There were a few factors taken into account. The year-to-date trends we were seeing and that more cautious consumer, you know, a choppier macro backdrop that you've heard a lot of talk about, as well as the pace of growth of winning new customers. Think about it, which in part is attributable to the choppier macro, right? Are people, they're focused on their pocketbook, gonna go and try something new? Those are the factors that we took into account in our guidance. What I'd also like to say is, as you look at adjusted earnings per share, it was about a 1% reduction at the midpoint.
As a result of us controlling what we can control, improving our cost reduction initiatives, $30 million, improving our gross margin outlook, and increasing our share buyback. So that's the broader picture. Now, to your question, what would it take to be at the high versus the low? At the high, I would say greater customer response to our newness, right? We talked about doubling down on core and the innovation, Everyday Luxuries. We went full lights on a week ago, which was very successful for us in Q1 on a limited basis. Where our good, better, best pricing strategies, right? How do we meet the consumer's mindset and value? So responsiveness to our newness, I would say, drives us to the high end. At the low end, I would say a worsening consumer environment or less responsiveness to our innovations.
And then to pick up on how does it all balance out, you know, I would say that we focus on our strengths, right? So for us, good, better, best assortment, which, you know, Eva alluded to, that's an important part because good, better, best has both innovation and value in it, right? We also focus on our agile model, the vertically integrated model that allows us to sort of react to whether people are particularly seeking value or innovation, or both. And then our nimble promotional capability, which, you know, is about as dynamic as any I've ever seen, literally looking at the elasticities, you know, sort of by the week. And I think, you know, beyond that, marketing and highlighting the product attributes-
... which, you know, brings all the quality credentials to bear. But we also use other levers. Innovation and newness to us is as much about the product itself, which is, you know, from a candle perspective, it's about the fragrance throw, it's about the consistent and even burn, it's about the quality of the glass, and so forth. So you're gonna be seeing a bit more as we lean into asserting those leadership credentials. But in addition to that, as you probably know, we've been doing a lot of collaborations, which collaborations for us really focuses on the core, but it's an innovation in itself because it drives traffic, it drives deeper engagement, and this supports both the core and more.
So I think that, you know, as we lean into the second half, you'll see a bit more of that. Some of it was alluded to by Eva with respect to, you know, like, we just turned on the lights for Everyday Luxuries. We've got Stranger Things Part Two, which drove a lot of engagement and so forth. So a lot going on.
Yes
to balance those two.
Yes. The collaborations... I'm going a little off script, but, the collaborations have been, again, you've seen it more frequently. What is the history of the brand with collaborations? Is this something that's newer for the company, and what makes it work?
Yeah. So it's. I believe there was likely to be a. I wouldn't call it a collaboration, but maybe a co-branding way back. But as far as we can tell, collaborations in the newest sense of the word, when you think about any brand, has been pretty new for the company. What makes it work is that Bath & Body Works is, you know, the general awareness of Bath & Body Works as a brand is pretty significant. But the, when you go further into the funnel of, you know, awareness to familiarity to conversion, we wanted to get sort of a, an expanded customer appeal, right? We wanted to make sure that we're looking at properties that allow people to reassess the brand and really bring in new customers as well.
What we found is, yes, collaborations, actually, our existing customers lean into them as well. For example, the very first collaboration that we did was in the first quarter. It was part of our Netflix partnership. It was Bridgerton, and we literally had people showing up in Bridgerton garb in the store. That's, you know, an existing customer, but very engaged with Bridgerton. What collaborations brings is, in addition to traffic, engagement, new customers, but really, shining a light on the core, and this collaboration was focused on, for example, the core, candles, specifically. What we're trying to do is, you know, with the collab partner, what is the intersection between, say, a Bridgerton fan base and a Bath & Body Works customer, and how do we sort of, you know, really engage with both?
And I would say, following the first quarter, which Bridgerton was, you know, exceeded our expectations, the second quarter, we had a relatively small collab with Crocs, and this was something we called a CrocketBac. So you may be familiar with our sort of award-winning PocketBac Sanitizer. Well, we use this little Croc that houses the PocketBac, we call CrocketBac. That sold out in a week. So there's almost a scarcity in, you know, get off your couch, kind of go to the store because I really am into both Crocs and Bath & Body Works. Follow that up with Stranger Things Part One, Stranger Things Part Two, where we had, I think, 20 million videos on TikTok, so incredible excitement and engagement. And then we have one more in store for the back half of the year.
Great. Thank you. If we could maybe pivot away from some of the newness and, ask about the Semi-Annual Sale, because I know in the second quarter, you mentioned it came in below your expectations, with the store presentation not maybe necessarily screaming its value as much as you thought the customer needed to see. Can you walk us through what changes you made throughout the process, this particular Semi-Annual Sale, and what learnings do you expect to carry forward into the next Semi-Annual Sale?
Yeah. So Semi-Annual Sale, for those not familiar, we do it semi-annually, so twice a year. We do one in January and one in June. And these are real tentpole events. It's like, you should really be, you know, screaming sale. And this particular time, we did Semi-Annual Sale positioned in the front of the store, but we didn't—the customer did not feel that we were pulling it through all the way through the store. And so we, with our agile model, quickly reacted, because we needed this to be the two times a year that the, you know, the store is effectively on sale. And so we reacted. We put red bins in the front of the shop, and we tried our best to pull it through.
And so in the end, we reacted quickly, but the performance, you know, overall, you know, disappointed, and it did not meet our expectations. Now, to be clear, we ended clean with inventory, and so that was an important piece as well. And there's lots of learnings that we will build into the next one, whether it has to do with the marketing, the messaging, the merchandising, the flankers. You know, sometimes people do come in Semi-Annual Sale for things other than sale, so what are the full price? And so all those learnings will be brought into our January and our next June sale as well, including timing.
One question that I had for Eva after the quarterly call, which is July, seems to be getting to be a very promotional month. Obviously, Amazon Prime has been doing their sale for a couple of years now in July, but now you have all the broadline retailers that are doing that as well. This year was a little unique because it was kind of throughout the month. Do you think anything with regards to the timing could change with the Semi-Annual Sale, just given the amount of value that's being blasted at the consumer at that time?
Yeah, Gina just mentioned that, right? We're gonna evaluate all aspects.
Mm-hmm.
Is June the right timing? What's the right duration? What-- How do we make our newness also successful in the shoulder periods surrounding the sale? So they're all things that we're looking at.
To your point about being more promotional, you know, and different things going on in the market, we did introduce some new promotions surrounding Amazon Prime Day to bring our customers out to drive traffic, and we were pleased with that.
We wanted to ask a follow-up question about average unit retail. It was up 1%.
Mm-hmm.
In the quarter following the decrease in the first quarter, we wondered if you could update us with the strategy, your strategy around AUR. Is it difficult to manage AUR, again, when you are being a little bit more promotional with the Semi-Annual Sale? And how should we think about it for the rest of the year?
Yeah. I guess I take a step back a little bit, Kate, right? As you look at our AURs relative to pre-pandemic levels, right, we continue to be up double digits from those pre-pandemic levels. So we've been able to hold on to much of the AUR increases. We see... As we've said, it's a value-seeking customer out there, right? And as Gina said, value is not just about price, it's about quality as well. But we're gonna work our agile promotion model to meet the customers where they are, where their mindset is. With that as a backdrop, we didn't provide an outlook for our AUR expectations in the back half of the year. Certainly, we have our internal plans.
It's embedded within the overall revenue guidance and guidance that we provided, but we feel it's better to be able to be nimble and agile. We read and react every week in terms of how the customer is responding to our product, to our promotions, and that's how we're thinking about the back half of the year.
And thinking about that, I know technology has been a big investment for the company as you've separated from Victoria's Secret. And along with that technology, you've talked about the opportunity to optimize promotions. So I wonder if you could talk to where you are, you know, in that journey now that I think you've made quite a bit of progress, and how do you see it impacting your margins going forward?
Yeah. So one of the things... You're absolutely right, we separated from Victoria's Secret. It was actually substantially complete a year ago. Literally this month, I believe it was.
Mm-hmm.
But actually, there were some residual that ended this past June. So now, fully independent from a systems point of view. And so what we've been able to do from, you know, from a technology, not only are we building some of the foundational, you know, capabilities, but we are also, you know, building some of the marketing capabilities, and specific to your question, around promotional capabilities. So we speak about it as sort of, a more efficient way to target with personalized promotions. And we have... It's early innings, but what we have been able to do, which is to really pull back a bit from broad-based promotions, like direct mail.
There were, you know, when I arrived, quite a bit of direct mail going into literally into the post, and that would go to some customers that maybe would have otherwise bought anyway, so we have more and more test cases and pilots by using the data capture from our loyalty program, which, by the way, is just two years old, to get to that loyalty program driving 80% of our revenue in two years with 90%+ customer satisfaction means that we can actually take the technology, leverage the data, and really run a couple of different much more efficient and targeted promotions.
These are things like, we can analyze somebody who's a one-tripper, somebody who comes once a year for whatever it may be, how based on their clickstream and their purchase behavior of that one trip, are we able to get them to a second trip? We can also look at some of the redemption ladders of rewards, and this is very different for us. We always had transaction data, but we never had an ability to really target, based on a customer segmentation and based on purchase behavior. So it is early innings, but promising results.
You mentioned the loyalty program. I vividly remember the launch of that two years ago, and the fact now that you have 80% of your sales coming from the loyalty program, 90% satisfaction. What's next for the loyalty program? What has been, you know, some things that have been big wins? Where do you think this can go?
Today we have 37 million active loyalty members, and that was up 8% over you know prior year. Certainly, enrollment will continue as customership grows, but I would also say the engagement grows even more. What are the kinds of things that we're doing, both within the app as well as the program as a whole, to really get people engaged and, like I said, up this redemption ladder, which we know drives a multiple of overall spend? What we love about the loyalty program today is not only does it have high customer satisfaction, but we've got real measurable results on higher spend, higher retention, more trips.
So what's next is we're going to continue to mine that and look at what are the other types of things we can do, go forward, whether it's flexible rewards or tiering and things like that. So it's a whole other level, now that we move into the next, you know, era of it. So stay tuned on that, you know, coming up in the next couple of quarters.
Gina, if I could just add, right? We've used loyalty members get early access. If you think about Candle Day last year, right, day one was focused on our loyalty members, some of our collabs and access to those. So their engagement offering opportunities. And just we've given this stat before, but if an individual goes from redeeming one reward to more than two, excuse me, right, their spend more than doubles, and that's that engagement that Gina speaks about. So we have our members profiled, the teams are focused on them, and how to continue to bring them up that ladder.
Yeah. And you will have seen it if you're on our app. You'll see point accelerators and some of these things that were, you know, tools designed to do just that.
And we've been, you know, very focused on, you know, newness, what's driving traffic to your stores. I'd be remiss if we didn't bring up the new categories. So we have a few questions on each. But, as a reminder, the company has introduced new categories over the last few years: men's, fabric care, lips. And so I wondered, of the three, which are you the most excited about? What do you think could be a bigger part of your sales a year from now than it is today? And could you just talk about, you know, maybe what is going to drive that growth going forward for each of those categories?
Yeah. So, newness in general to us is newness in the core, which, you know, we do, and we need to make sure that the core is always protected, but what you're referring to now is more. And so these new adjacencies, they really play well with respect to attracting a newer-to-brand customer, a basket-building opportunity for an existing customer, and really just, you know, a broadening of the brand proposition, so it's hard to pick your favorite child, I suppose, but the teams have been very busy. Men's, we can focus on men's. Men's is still a single-digit percent of the business as a whole, so, you know, a big, big total addressable market, obviously, a different customer, so there's an incrementality there as well.
I always like to think of Bath & Body Works, you know, if you're coming to the front of the store, you shouldn't have to leave any family member behind, and men's allows the entire family to come in, as well, and there's something for them as well, so you'll see a men's shop, so men's, as you know, strong as the growth has been in men's, the awareness is still pretty low, and so we will continue to drive marketing in ways, and just as a reminder, beginning Q4 of last year, our marketing spend is up 100 basis points, and that's designed to both, you know, serve the core, but also to get these new adjacencies up and running, so men's, I would expect, you know, will continue to drive growth going forward.
It's our fastest growing, you know, category. But honestly, these others are very important as well, for different reasons. Lip. So lip is something that we had just launched and now in full distribution. But, when we last spoke, I think we talked about you put these lip fixtures, which has a regimen, by the way. It's basically a scrub, a mask, and a tint. Anybody that has sort of a Gen Z will know what I'm talking about with a full lip regimen. This is literally a playground inside of our stores. So now you have fixtures in pretty much every store. There's a dwell time, there's some experimentation. What we're doing there is we are bringing not only the customer experience to a whole other level, but we're bringing a younger customer in.
When we talked last time, it was in a more limited distribution of our stores, and the sales of our lip products were doubling in those stores. Well, now we're chain-wide, and the doubling still exists in those stores, so there was no sort of degradation there. So I think lip brings a different customer, a younger customer as well, and a category that is highly replenishable, you know, there's multiples there. And then, I think you... Did you mention laundry, or maybe you skipped laundry?
The fabric was in the, on the list.
Okay.
Yeah. Mm-hmm. Yes, fabric care.
Yeah.
Mm-hmm.
So fabric care, you know, if you think about what the power of fragrance is and what we know about our customers, our customers want fragrance head to toe. And laundry became a category that more and more people were even investing in their laundry rooms. And so from customers wanting us to get into the laundry category and having 30 years in the business, but also understanding laundry, I thought, well, this is great, especially not just the detergent, but the fragrance booster.
Yeah.
So the role of fragrance in laundry is real, it's compelling. And so the team was incubating this before I arrived, frankly, and then came here and thought that this would be another incremental way to bring fragrance and build baskets. So we're happy with what we see. I look at things like new-to-brand customers, repeat rate, and incrementality. And while it's early days, we're excited by that as well. We were in 800 stores, I think it was the end of the second quarter, and we'll be full chain-wide by the end of September.
This month.
Well, September.
... And Kate, these are men's laundry. These are large addressable markets, right?
Mm.
Both in excess of 10 billion, with men's, I believe, in excess of 12 billion, laundry, 14 billion. So these are, these are real opportunities for us.
You didn't mention hair either, but-
I didn't mention hair, no. No.
These adjacencies come in four for us: It's men's, laundry, lip, and hair. But hair is, you know, also a fragrance positioning. Our best-selling fragrances are available in shampoo and conditioner, as well as dry shampoo, and recently, in the last quarter or so, has been a travel size, which is a wonderful way to try and travel, and watching the adoption of that trial, TSA-friendly, et cetera, to the larger size. And hair has about 13% of new-to-brand customers. So we know we're also not only satisfying existing customer that wants head-to-toe fragrance, but attracting new as well.
So, there's so much going on, you guys. You have introduced so, so much just over the last two years. The one other new initiative I wanted to make sure I asked about was TikTok Shop. You announced on the second quarter call that you'll be launching a TikTok Shop this quarter. How should we think about the potential lift from that over time, and are there any specific categories that you're going to be rolling out with this shop before holiday or for holiday?
Yeah. So TikTok, for us, is, is, you know. We, we've obviously, we've been on TikTok. Certainly, Everyday Luxuries, back in, the first quarter, went viral. You know, and so we've been on TikTok from that. But this is TikTok Shop, which for those of you who aren't familiar, this is really a discovery vehicle and a convenient shopping channel. And so what we're planning to do, leveraging, you know, Everyday Luxuries would be the first up, is to use that sort of limited approach to, you know, seeking to serve a younger customer, but with TikTok Shop. And so it is. I wouldn't expect it to be a meaningful driver of our sales in the quarter, but for us, it's new and different. It opens up a different channel.
We are excited by, you know, both the influencer element that they have and that we have, and combining that. And so it's for us, you know, one of our things that we do really well as a company is we test and learn, and that's what we're doing with TikTok Shop as well.
That's great. I wanted to make sure, Eva, that we talked about the cost savings-
Sure
... that you have worked on. You had a two-year plan to deliver $250 million in annual cost savings, which recently increased to $280 million, including $130 million this year. Can you walk us through the opportunity here, where the biggest buckets of cost savings are coming from, and maybe what the longer term or how you view the longer term opportunity for cost savings?
Yeah. I think if you rewind even a little further, Kate, right, the initial program announced was $200 million over two years, and I'm really proud of what the organization has been able to do on this program, and now two years, up to $280 million, right? We think about this as durable cost savings, right? Driving efficiencies, how we do our work, where we're able to improve our underlying cost structure, to flow to the bottom line or enable investment back in the business like we've done with marketing or tech. As you think about the more recent increase in savings, it's come from areas like moves in transportation, also in our value engineering supply chain areas, as well as I'll say, you know, G&A opportunities.
We embarked on a new procurement initiative for our non-merchandising, and that's getting up and rolling and enabling us to drive savings. So as I think about this, we're focused on executing and delivering what we just announced, but this has to be a continuous improvement mindset, right? It's not, you go on a diet for a year, right, and then you allow-
Yeah
... your cost structure to expand again. We've got to continuously be thinking about areas that we can drive improvements and efficiencies, and that's what we're doing.
And if I could just add to that, we think about cost savings sort of as a muscle, but we also, at the same time, as I mentioned, are spending in marketing. And so there, we're doing marketing mix modeling because we are able now to discern the difference between, I would call it, waste or efficiency.
Mm
... and investing in the top line. We're sort of tag-team on this as CEO, CFO, that we're quite clear what should not be cut, whether it's store labor levels or something that would affect the, you know, customer experience, or product innovation, or full funnel marketing. And so I have confidence that, you know, because we're able to model, you know, the impact on the top line, that we can discern the difference between those.
Mm-hmm. We're just down to five minutes left. Actually, this has gone very quickly, and we are asking five questions of every company, during our conference. So it's kind of lightning round type questions.
Oh, okay.
So, the first question we had is just your expectations for the environment in 2024 relative to recent results. Would you say same, better, or worse?
Well, I-
The consumer environment.
I would say at the midpoint of our fiscal 2024 guidance, the environment we would expect the first half trends to continue, and you know what we're doing against that, with respect to good, better, best, and leaning in, and nimble, and all of that.
The second question is on the topic of margins, which is more of a 2025 question, but how are you thinking about cost pressures, materials, labor, tariffs, same, better, or worse in 2025 ?
... Yeah, I'm not gonna be able to hit on the same better or worse, Kate. But as we think about it, we're looking at a stable cost environment right now. Our raw materials cost are flat to declining. And on your tariffs point, right, 85% of our product is North American sourced or produced, so we see ourselves at an advantage on that front, should the environment change.
Our third question is, and this might be a slightly longer answer than like a short answer, but this consumer behavior of looking for value that we've talked about, that we've heard from many other companies the last couple of quarters, do you think this is a cyclical or a secular trend? In other words, do you believe it's a function of the macro, or do you think there's been some permanent shift in what the consumer wants?
Yeah, I would say, you know, great products, high quality, great products at good prices has never, will never go out of style. It's never been out of style. I do think, though, that we have seen a customer focused on value, in part due to the choppier macro environment, so it's hard to sort of tease these two apart. And it's because consumers are smart. You know, they are spending where they believe the product can deliver. And... but they are also doing that with newness and innovation. So to me, it's a two-headed, right? It's newness and innovation and value and the collection together.
So that's why we think our products, you know, are in a unique position to deliver, 'cause we're at this intersection of mass and prestige, and we offer incredible value for the price. And that's why you'll see more of those, you know, assertions going forward. And it gets back to the power of fragrance, but also who, you know, we work with and all of that. So long answer, I suppose, but it's not something that I think the customer has ever not done, but they are definitely being choosy with where they're, you know, spending their money.
Okay. Our fourth question is around distribution. We've seen, you know, especially in beauty, I think more distribution points pop up over the last couple of years. How do you envision that? Do you see more people looking to sell beauty over the next couple of years, more points of distribution?
Yeah. Listen, you've seen it over the last several years. It's competitively intense, right? We see our stores and our real estate as a huge competitive advantage, the experience that we create. You know, we're growing square footage 3% to 4%-ish, and as we look out into the nearer term, I would expect that to continue. And obviously, it's probably more a North American question that you asked, right?
Mm-hmm.
But if you look internationally, we haven't had a chance to speak about international. That's a huge opportunity for us, right? We're only in six of the top 10 markets. Our partners, we select great partners. We're expanding in those regions, driving growth, and we're excited about that opportunity as well.
Great. Thank you. And then the last question, which we, we've kind of touched on already, but just promotionality. Do you expect to be more or less promotional this holiday season versus last year?
As I said, our ability to promote is one of our strengths, and we'll continue to do that to meet the customer where they're at. In addition to promotion, regardless of the environment, price, promotion, experience, and quality is the way we lean into a highly promotional environment. You should expect all of the above.
Great. Well, thank you for joining us today.
Thank you.
It's been a pleasure.
Appreciate it, Kate.
Thank you.
Have a good, good rest of the conference.
Great.
Thank you, everyone.
Thank you, everyone.