Bath & Body Works, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 29, 2023, compared with the 13 weeks ended April 30, 2022. Although the request labels the period “2022 Q1,” the filing is for first-quarter 2023. The company is an omnichannel personal-care and home-fragrance retailer reporting one segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $1.396 billion | $1.450 billion |
| Gross profit / margin | $596 million / 42.7% | $669 million / 46.1% |
| Operating income / margin | $181 million / 12.9% | $280 million / 19.3% |
| Net income | $81 million | $155 million |
| Diluted EPS | $0.35 | $0.64 |
| Operating cash flow | $44 million | $66 million |
| Capital expenditures | $93 million | $88 million |
- Sales declined 4%; U.S. and Canada store sales fell 2%, direct sales fell 12%, and international sales increased 13%. Management attributed lower store sales to reduced transactions and average dollar sale; direct sales also reflected greater use of buy-online-pick-up-in-store, recorded as store sales.
- Gross margin contracted 3.4 percentage points amid lower sales, approximately $13 million of raw-material inflation, product formulation and packaging investment, and higher occupancy costs.
- General, administrative and store operating expenses rose to $415 million from $389 million, and increased to 29.7% of sales from 26.8%. Technology investment for the Victoria’s Secret IT separation and higher associate wages contributed.
- Interest expense was $89 million in both periods. The effective tax rate rose to 27.7% from 19.4%, primarily due to accrued interest on unrecognized tax benefits; the prior-year rate benefited from share-based award tax benefits.
Liquidity, debt and capital
- Cash and cash equivalents were $1.046 billion at April 29, 2023, down $186 million from the fiscal-year start. Operating cash flow was $44 million; investing used $94 million and financing used $135 million.
- Long-term debt was $4.781 billion, down from $4.862 billion at January 28, 2023. The company repurchased and extinguished $84 million principal amount of notes for $76 million, recognizing a $7 million pretax gain. Average borrowing rate was 7.3%, versus 7.1%.
- The company had no ABL revolver borrowings and reported $607 million of availability under its $750 million facility. It stated that cash, operating cash flow and borrowing capacity should meet liquidity needs for at least the next 12 months.
- Shareholders’ equity remained in deficit at $2.171 billion. The company paid $46 million in dividends, or $0.20 per share, and declared another $0.20-per-share dividend for Q2. No program share repurchases were made in Q1, though $188 million of authorization remained at quarter-end.
- Fiscal 2023 capital expenditures were projected at approximately $300 million to $350 million.
Outlook, commentary and risks
- Management anticipated continued macroeconomic uncertainty and Q1-like sales trends in Q2, with moderate improvement in the second half as comparisons ease. It expected modest cost deflation in Q2 and greater deflation in the second half, partly offset by product and packaging investments.
- The company targeted $200 million in annual cost savings and expected more than $100 million in 2023, with a substantial portion of remaining savings expected in 2024. Expense deleverage was expected versus 2022, reflecting lower sales, IT separation costs and wage increases.
- The IT separation from Victoria’s Secret was expected to be substantially complete in summer 2023. Management cited macroeconomic conditions, inflation, competition, consumer demand, sourcing and logistics, foreign exchange, technology and data security, labor, and debt servicing among risks that could affect results.
- Remaining contingent lease obligations related to previously disposed businesses were $278 million, with lease terms extending through 2037; reserves were not significant. Management did not expect ordinary-course litigation to have a material adverse effect. Two Fair and Accurate Credit Transactions Act cases had settlements in principle subject to court approval; another was sent to arbitration.
- Q1 adjusted net income was $76 million and adjusted diluted EPS was $0.33, excluding the after-tax $5 million debt-extinguishment gain. These are non-GAAP measures; reported GAAP net income and diluted EPS were $81 million and $0.35.
Important facts for investors to verify
- Whether sales trends and management’s expected second-half improvement materialize, particularly given continued weakness in direct sales and category normalization.
- Whether margin pressure eases as expected and the targeted cost savings are achieved without impairing product investment or customer experience.
- Progress, remaining cost and completion timing of the IT separation, alongside planned capital expenditures.
- Cash generation, debt service capacity, and the terms and use of subsequent debt and share repurchases; $50 million principal amount of notes was repurchased after quarter-end through June 2, 2023.
- Potential exposure from lease guarantees and litigation, including the status of the credit-card receipt cases.