Business Context and Reporting Period
Company: Bath & Body Works, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Second Quarter and Year-to-Date ended August 1, 2026.
Business Overview: Global leader in personal care and home fragrance, operating retail stores in the U.S. and Canada, e-commerce channels, and international franchise/wholesale partnerships. The company is executing the "Consumer First Formula," a multi-year transformation plan to revitalize the brand.
Key Financial Metrics
| Metric (in millions) | Q2 2026 | Q2 2025 | YTD 2026 | YTD 2025 |
|---|---|---|---|---|
| Net Sales | $1,514 | $1,549 | $2,892 | $2,974 |
| Gross Profit | $692 | $640 | $1,279 | $1,287 |
| Gross Margin % | 45.7% | 41.3% | 44.2% | 43.3% |
| Operating Income | $216 | $157 | $447 | $367 |
| Operating Margin % | 14.2% | 10.2% | 15.4% | 12.3% |
| Net Income | $118 | $64 | $301 | $169 |
| Diluted EPS | $0.58 | $0.30 | $1.49 | $0.79 |
| Cash from Operations (YTD) | $316 | $145 | $316 | $145 |
| Cash & Equivalents (End of Period) | $794 | $364 | $794 | $364 |
| Total Debt (Net of Current) | $3,366 | $3,888 | $3,366 | $3,888 |
Material Changes vs. Prior Period
- Revenue Decline: Q2 Net Sales decreased 2.3% ($35 million) and YTD decreased 2.7% ($82 million). Store sales in the U.S. and Canada declined due to lower transaction counts and average dollar sales. Direct sales grew 3.0% in Q2, and International/Other sales grew 24.9% in Q2, driven by expanded wholesale distribution (e.g., Ulta, Amazon).
- Profitability Expansion: Operating Income increased 37.0% in Q2 and 21.8% YTD. This was primarily driven by a significant increase in merchandise margin rates due to approximately $80 million in IEEPA tariff refunds recognized in Q2 2026.
- Expense Management: General, Administrative, and Store Operating Expenses decreased $7 million in Q2 and $88 million YTD. YTD savings were heavily influenced by an $88 million pre-tax gain from payment card interchange fee litigation settlements recognized in Q1 2026.
- Debt Reduction: Total debt decreased significantly due to the early extinguishment of $284 million in 2027 Notes in Q1 2026 and a subsequent partial redemption of $250 million in 2029 Notes completed after the reporting period.
- Tax Rate Volatility: The YTD 2026 effective tax rate was 8.8% compared to 29.9% in 2025, largely due to a $62 million tax benefit from the resolution of certain tax matters.
Guidance, Outlook, and Risks
- Transformation Progress: Management reports early traction with the "Consumer First Formula," citing sequential improvement in Body Care, a return to growth in Direct sales, and momentum in marketplace partnerships.
- Capital Allocation: The company did not repurchase common stock YTD 2026. Capital expenditures for 2026 are expected to be approximately $240 million, focused on high-return real estate and transformation investments. A quarterly dividend of $0.20 per share was declared for Q3 2026.
- Macroeconomic Risks: Ongoing conflict between the U.S. and Iran is causing volatility in global energy markets, commodities, and transportation costs, which may impact input costs and consumer demand.
- Contingencies: The company has $205 million in contingent lease obligations related to the spin-off of Victoria's Secret & Co. Management believes current legal proceedings will not have a material adverse effect.
Investor Verification Checklist
- Tariff Refund Sustainability: Verify the one-time nature of the $80 million IEEPA tariff refund and its impact on future margin expectations.
- Litigation Gain Impact: Confirm the non-recurring nature of the $88 million interchange fee settlement gain included in YTD operating income.
- Store Traffic Trends: Monitor the decline in store transactions and average dollar sales to assess the effectiveness of the "Consumer First Formula" in reversing this trend.
- Debt Structure: Review the remaining debt maturities and interest rates following the recent extinguishment of the 2027 Notes and partial redemption of 2029 Notes.
- Inventory Levels: Assess inventory balances ($883 million) relative to sales trends to ensure no future markdown risks exist.