Bath & Body Works, Inc. — Form 10-Q Summary
Period clarification: The request metadata says “2022 Q3,” but the supplied filing is for the third quarter of 2023, the 13 weeks ended October 28, 2023, with comparisons to the 13 weeks ended October 29, 2022. Year-to-date figures cover 39 weeks. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Bath & Body Works is a global omnichannel retailer focused on personal care and home fragrance, operating as one reportable segment. It sells through company-operated stores and direct channels in the U.S. and Canada, and international franchise, license, and wholesale partners. Sales are seasonal, with the holiday quarter typically the largest. Fiscal 2023 includes 53 weeks.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Year-to-date 2023 | Year-to-date 2022 |
|---|---|---|---|---|
| Net sales | $1,562 | $1,604 | $4,517 | $4,672 |
| Gross profit | $682 | $678 | $1,899 | $2,006 |
| Gross margin | 43.6% | 42.2% | 42.0% | 42.9% |
| Operating income | $221 | $202 | $589 | $724 |
| Operating margin | 14.1% | 12.6% | 13.0% | 15.5% |
| Net income | $119 | $91 | $299 | $366 |
| Diluted EPS | $0.52 | $0.40 | $1.31 | $1.56 |
- Adjusted results: Excluding after-tax gains on debt extinguishment, adjusted net income was $110 million and adjusted diluted EPS was $0.48 for Q3; year-to-date adjusted net income was $278 million and adjusted diluted EPS was $1.21. These are non-GAAP measures.
- Cash flow: Year-to-date operating cash flow was $28 million, compared with $67 million. Capital expenditures were $250 million, implying operating cash flow less capital expenditures of negative $222 million. Investing cash outflow was $239 million; financing cash outflow was $609 million. Cash fell by $820 million from fiscal year-end to $412 million.
- Liquidity and debt: Current assets were $1,959 million and current liabilities $1,409 million; working capital was $550 million. Long-term debt was $4,497 million, versus $4,862 million at fiscal year-end. The company had no ABL borrowings and $740 million of availability under its $750 million facility. Shareholders’ deficit was $2,125 million.
- Interest and returns: Q3 interest expense was $84 million; the average borrowing rate was 7.4%. The company paid $137 million in dividends year-to-date and repurchased $100 million of shares.
Material changes versus the comparable period
- Q3 sales declined 3%, primarily from lower average dollar sale and transactions. Store sales fell 1%, direct sales fell 8%, and international sales fell 5%. The direct-channel comparison was also affected by buy-online-pick-up-in-store sales being recorded in stores after the U.S. rollout.
- Q3 operating income and margin improved despite lower sales, primarily from a 200-basis-point increase in merchandise margin, including approximately $40 million of cost deflation, lower product costs, and lower transportation costs, plus cost-optimization savings.
- Year-to-date operating income declined $135 million and operating margin fell to 13.0%. Lower sales and increased occupancy costs, along with higher home-office and technology expenses, outweighed merchandise-margin improvement.
- Q3 net income benefited from $12 million of pre-tax gains on debt extinguishment. Year-to-date gains were $28 million. The company repurchased and extinguished $373 million principal amount of notes for $343 million year-to-date.
- Inventory was $1,205 million at October 28, 2023, up from $709 million at fiscal year-end, as the company built seasonal inventory for the holiday period.
Outlook, commentary, risks, and unusual items
- Management expected macroeconomic uncertainty, soft customer spending, and normalization in candles and sanitizers to pressure Q4 2023 sales and potentially continue into fiscal 2024. No specific sales or EPS forecast is provided in the supplied filing text.
- The company targeted $200 million of planned annual cost savings. It reported approximately $45 million of Q3 benefits, expected approximately $50 million in Q4, and projected $150 million of savings for fiscal 2023, with remaining benefits expected in fiscal 2024.
- Management expected Q4 merchandise margin to improve year over year, supported by cost deflation and optimization savings, partly offset by product formulation and packaging investment. It expected Q4 operating expenses to deleverage due to higher marketing and technology spending. Technology investment was expected to remain elevated following substantial completion of the IT separation from Victoria’s Secret.
- Fiscal 2023 capital expenditures were expected to be $300 million to $350 million. Management said cash, operating cash flow, and ABL availability should meet liquidity needs, including capital expenditures, for at least the next 12 months.
- Risks cited include consumer spending and macroeconomic conditions, seasonality, competition, store traffic, product acceptance, sourcing and supply-chain disruptions, labor costs, foreign exchange, IT and data security, and the ability to service or refinance debt and maintain credit ratings.
- Contingencies include $267 million of contingent lease obligations related primarily to leases of businesses previously disposed of; recorded reserves were not significant. Management did not expect ordinary-course litigation to materially affect results. Three Fair and Accurate Credit Transactions Act matters had agreements in principle to resolve, subject to court approval where applicable; management did not expect material effects.
Important facts for investors to verify
- Confirm the reporting period: this filing covers Q3 2023, not Q3 2022.
- Track holiday-quarter sales, inventory conversion, and operating cash flow, given the seasonal inventory build and weak year-to-date cash generation.
- Assess whether management achieves the stated cost-savings targets and whether margin gains offset sales pressure and planned marketing and technology spending.
- Monitor debt reduction, interest costs, ABL availability, and the company’s ability to sustain dividends and repurchases.
- Review subsequent debt and share repurchases, the resolution of the cited legal matters, and the contingent lease obligations.