Bath & Body Works, Inc. — Form 10-K Summary
Reporting period: Fiscal 2022, the 52 weeks ended January 28, 2023. The filing also reports fourth-quarter results for the quarter ended January 28, 2023. Comparatives are fiscal 2021 and its fourth quarter. Unless noted, figures are continuing operations; Victoria’s Secret results are presented as discontinued operations following the August 2021 spin-off. Dollar amounts below are in millions except per-share figures.
Business context and performance
The company operates a single omnichannel segment focused on home fragrance, body care, soaps and sanitizers through Bath & Body Works, White Barn and related brands. At year-end it had 1,802 company-operated U.S. and Canadian stores, plus 427 partner-operated stores in more than 45 countries. Fiscal 2022 was its first full year as a standalone company.
| Metric | FY2022 | FY2021 | Q4 2022 | Q4 2021 |
|---|---|---|---|---|
| Net sales | $7,560 | $7,882 | $2,889 | $3,027 |
| Gross profit | $3,255 | $3,855 | $1,250 | $1,446 |
| Gross margin | 43.1% | 48.9% | 43.3% | 47.8% |
| Operating income | $1,376 | $2,009 | $653 | $879 |
| Operating margin | 18.2% | 25.5% | 22.6% | 29.0% |
| Net income from continuing operations | $794 | $1,075 | $428 | $592 |
| Diluted EPS from continuing operations | $3.40 | $3.94 | $1.86 | $2.27 |
For fiscal 2022, interest expense was $348 (versus $388 in 2021) and the effective tax rate was 24.0% (versus 24.5%). Total net income was $800, including $6 from discontinued operations; FY2021 included $258 from discontinued operations. Fourth-quarter total net income was $434, including $6 from discontinued operations.
Cash flow, debt and liquidity
- FY2022 operating cash flow was $1,144, compared with $1,492 in FY2021; the 2021 cash-flow figure includes continuing and discontinued operations, so the comparison is not fully like-for-like. Capital expenditures were $328 and financing cash outflows were $1,562.
- Cash and cash equivalents were $1,232 at year-end, down from $1,979. Working capital fell to $887 from $1,719.
- Long-term debt was $4,862 carrying value ($4,915 principal value), versus $4,854 carrying value a year earlier. The company had no ABL Facility borrowings and $509 of availability under the facility at year-end.
- Debt leverage ratio, a company-defined non-GAAP measure, increased to 3.1 from 2.3. It includes operating lease liabilities in adjusted debt.
- The company paid $186 in dividends ($0.80 per share) and repurchased $1,312 of stock in FY2022, including a $1 billion accelerated repurchase. Shareholders’ equity was a deficit of $2,206.
Material changes versus the prior period
- Annual sales declined 4.1%. U.S. and Canadian store sales fell 4.1% and direct-channel sales fell 7.6%; international sales rose 19.6%, mainly from partner-store and e-commerce expansion.
- Fourth-quarter sales decreased 4.6%. Store sales declined 5.1% and direct sales declined 6.3%, while international sales increased 29.9%.
- Annual gross profit fell 16%, and operating income fell 32%. Management attributed margin pressure principally to inflation in raw materials, freight and labor, together with increased promotional activity. Estimated inflationary cost pressure was approximately $225 for the year, including $60 in Q4.
- General, administrative and store operating expenses rose 2% to $1,879, with technology separation and customer-facing wages among the drivers. Store productivity also weakened: U.S. sales per average selling square foot fell 8% to $1,120.
- The company opened 95 and closed 48 company-operated stores during the year, ending with 47 more stores. It also added 89 net partner-operated international stores.
Outlook, management commentary and risks
- Management expected ongoing macroeconomic uncertainty and customer price sensitivity in 2023. It anticipated Q4 2022 sales trends continuing into the first half of 2023, with moderate improvement in the second half; inflationary cost pressure was expected to moderate during the year. The filing does not provide a clear numerical sales or earnings forecast.
- The company is targeting eventual annual savings of $200 from profit-optimization measures, expecting more than half in 2023, primarily in the second half, and a substantial portion of the remainder in 2024. Savings are preliminary and execution-dependent.
- Planned 2023 capital expenditures were approximately $300–$350. Store plans included about 90 new off-mall locations and 25 remodels, partly offset by about 50 mall closures. Management also planned 50–80 net new international partner stores.
- Gina Boswell became CEO effective December 1, 2022. The company accelerated separation of its IT systems from Victoria’s Secret & Co. and expected substantial completion in summer 2023; execution, cost, disruption and cybersecurity risks remain relevant.
- Key risks include inflation and weaker consumer demand, promotional pressure on margins, seasonal sales and inventory exposure, competition, labor costs, supply-chain concentration and disruption, international partner performance, and IT transition and data-security risks. The company also disclosed contingent lease obligations of $283 related primarily to businesses disposed of in connection with the spin-off.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Three preliminary putative class actions allege violations of the Fair and Accurate Credit Transactions Act concerning payment-card digits on receipts; the company says it intends to defend them. A previously approved shareholder derivative-action settlement requires $45 of investment over at least five years in specified governance and management measures.
Important facts for investors to verify
- Whether sales stabilize and margins recover as promotions and input-cost pressures change, particularly in the first half of 2023.
- Actual timing, cost and realized savings from the $200 annual profit-optimization target.
- Cash generation, liquidity and leverage after substantial FY2022 repurchases and dividends; also review debt maturities and restrictive covenants.
- Progress, cost and operational impact of the IT separation and new fulfillment-center investments.
- Store productivity, inventory levels, category trends and the contribution and execution of international partners.
- Developments in the receipt-related lawsuits and the contingent lease obligations associated with the Victoria’s Secret separation.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective internal controls as of January 28, 2023.