Business context and reporting period
Bath & Body Works, Inc. is an omnichannel retailer of personal care, home fragrance, soap and sanitizer products, operating primarily under the Bath & Body Works and White Barn brands. This Form 10-K covers fiscal 2023, the 53-week year ended February 3, 2024, compared with fiscal 2022, the 52-week year ended January 28, 2023. The filing is not a standalone 2022 fourth-quarter report; it includes full-year results. Victoria’s Secret is presented as discontinued operations following its 2021 spin-off.
Financial performance and condition
| Metric | Fiscal 2023 | Fiscal 2022 |
|---|---|---|
| Net sales | $7.429 billion | $7.560 billion |
| Gross profit / margin | $3.236 billion / 43.6% | $3.255 billion / 43.1% |
| Operating income / margin | $1.285 billion / 17.3% | $1.376 billion / 18.2% |
| Net income from continuing operations | $878 million | $794 million |
| Diluted EPS from continuing operations | $3.84 | $3.40 |
| Operating cash flow | $954 million | $1.144 billion |
Net sales fell 2% despite the extra week, which contributed $81 million in sales and about $0.05 in continuing-operations diluted EPS. Store sales in the U.S. and Canada rose 1% to $5.507 billion; direct sales declined 9% to $1.582 billion, partly reflecting customers using buy-online-pick-up-in-store, with those sales recorded in stores. International sales were approximately flat at $340 million.
Gross margin improved by about 50 basis points, supported by lower product and transportation costs and higher average unit retail, partly offset by store occupancy costs and investment in product reformulations and packaging. General, administrative and store operating expenses rose 4% to $1.951 billion, increasing from 24.9% to 26.3% of sales, mainly due to technology and marketing investments. Operating income decreased 7%.
Reported continuing-operations net income included a $112 million tax benefit from a partial release of a foreign deferred-tax valuation allowance and a $34 million pretax gain on debt extinguishment, partly offset by an $8 million investment impairment. Management’s non-GAAP adjusted continuing-operations net income was $747 million, or $3.27 per diluted share, versus reported $878 million and $3.84 per share.
Cash and equivalents were $1.084 billion at year-end, down from $1.232 billion. The company generated $954 million of operating cash flow, used $286 million in investing activities and $815 million in financing activities. Capital expenditures were $298 million. Long-term debt was $4.388 billion, down from $4.862 billion; the company repurchased $485 million principal amount of notes for $447 million. Debt leverage, as defined by the company, was 2.8x versus 3.1x. The $750 million asset-backed revolver had no borrowings and $529 million of availability. Shareholders’ equity remained in deficit at $1.627 billion. The company paid $0.80 per share in dividends and repurchased $149 million of stock.
Changes, outlook and risks
- Management cited pressure on basket size, lower consumer savings and post-pandemic normalization in candles and sanitizers. Candle, sanitizer and related soap/accessory sales declined; total body-care sales were approximately flat.
- The company reported approximately $150 million of cost reductions in 2023, exceeding its initial $100 million goal. Its cumulative cost-optimization target increased to approximately $250 million, with about $100 million of incremental savings expected in 2024.
- For 2024, management anticipates continued macroeconomic pressure and candle/sanitizer normalization, expected to moderate during the year. It plans to pursue core-category growth, expand adjacent categories and enhance loyalty and personalized digital experiences. No specific 2024 net-sales or EPS guidance is stated in the provided filing text.
- Management expects merchandise margin-rate improvement in 2024 from modest average-unit-retail expansion and lower product costs, partly offset by product investment. Buying and occupancy expenses and general, administrative and store operating expenses are expected to deleverage, including from store investment, marketing and wage inflation.
- Expected 2024 capital expenditures are $300 million to $325 million. Management believes cash, operating cash flow and revolver capacity will meet liquidity needs for at least 12 months.
- Key risks include consumer weakness and inflation, promotional pressure and seasonal inventory exposure; competition and changing customer preferences; supply-chain concentration and vendor dependence; store traffic and lease commitments; international and geopolitical exposure; cybersecurity and the multi-year IT transformation; and the ability to service debt and comply with borrowing covenants. The filing also identifies $263 million of contingent lease obligations related primarily to disposed businesses, and a potential tax exposure if the Victoria’s Secret spin-off’s tax-free treatment were challenged.
- Management said ordinary-course legal matters are not expected to have a material adverse effect. Three Fair and Accurate Credit Transactions Act receipt cases were settled or agreed to be resolved subject to court approval; their resolutions were not expected to be material.
Most important facts for investors to verify
- Whether sales trends, particularly direct-channel performance and normalized candle and sanitizer demand, stabilize or improve in 2024.
- Whether margin gains and the planned $100 million of incremental cost savings offset wage, marketing, technology and occupancy expense pressure.
- Execution and cost of the IT transformation, remaining separation from Victoria’s Secret, and associated cybersecurity and service-continuity risks.
- Debt reduction, interest burden, refinancing needs and continued access to the $529 million of reported revolver availability.
- The assumptions behind the $112 million tax benefit and adjusted earnings, plus developments in tax audits and the contingent lease obligations.