Bath & Body Works, Inc. — Form 10-Q Summary
Period: Thirteen weeks ended October 29, 2022; year-to-date covers the 39 weeks ended that date. The request metadata says 2021 Q3, but the supplied filing is for 2022 Q3. Comparisons below are against the comparable 2021 periods. Amounts are in U.S. dollars.
Business context and reporting period
The company is a specialty retailer of home fragrance, body care, soap and sanitizer, selling through stores, direct channels and international partners. It reports one continuing operating segment. Victoria’s Secret was spun off in August 2021; its 2021 results are presented as discontinued operations.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Net sales | $1.604B | $1.681B | $4.672B | $4.854B |
| Gross profit / margin | $678M / 42.2% | $839M / 49.9% | $2.006B / 42.9% | $2.409B / 49.6% |
| Operating income / margin | $202M / 12.6% | $409M / 24.3% | $724M / 15.5% | $1.130B / 23.3% |
| Continuing-operations net income | $91M | $177M | $366M | $483M |
| Diluted EPS from continuing operations | $0.40 | $0.66 | $1.56 | $1.74 |
- Q3 net income was $91M versus $88M reported in 2021, but the prior quarter included an $89M after-tax loss from discontinued operations. YTD 2021 total net income included $256M from discontinued operations.
- YTD operating cash flow was $67M versus $447M; capital expenditures were $252M, implying cash flow after capital expenditures of approximately negative $185M. Inventory increased to $1.269B from $709M at fiscal year-end as the company stocked for the holiday season.
- At October 29, cash was $295M, working capital was $496M, long-term debt was $4.860B, and shareholders’ deficit was $2.609B. Cash was $1.979B at January 29, 2022.
- The $750M asset-backed revolver had no borrowings and $734M available. The company said cash, operating cash flow and facility capacity should cover liquidity needs for at least 12 months.
Material changes versus prior period
- Q3 sales fell 5%; U.S. and Canada store sales fell 5% and direct sales fell 6%, while international sales rose 10%. Management attributed domestic declines mainly to lower average dollar sales and transactions.
- Gross margin contracted 7.7 percentage points in Q3. Management cited inflation, increased promotions, higher distribution and occupancy costs, and lower sales-related expense leverage.
- Q3 general, administrative and store operating expenses increased $46M to $476M; the expense rate rose to 29.7% from 25.6%, mainly reflecting technology and associate investments.
- Interest expense declined to $86M from $91M in Q3 and to $262M from $301M YTD, reflecting lower average borrowings and borrowing rates. Prior-year other expense included debt-extinguishment losses of $89M in Q3 and $195M YTD.
- YTD share repurchases totaled $1.312B, including a $1B accelerated repurchase; 27M shares were retired. YTD dividends were $140M. The February 2022 repurchase authorization had $188M remaining at quarter-end.
Outlook, management commentary and risks
- Management estimated full-year 2022 incremental inflation costs of $220M–$230M, with approximately $70M expected in Q4, and expected inflation to continue pressuring gross profit.
- The company expects its accelerated IT separation from Victoria’s Secret to be predominantly complete during 2023. Technology transition costs, wage increases, retention costs and CEO-transition expenses were expected to continue affecting expenses in Q4.
- Management described actions to improve profitability through promotion, pricing and product-cost reviews, vendor work and expense reductions. A structure realignment eliminated about 130 roles; Q3 actions provided an estimated $15M benefit, excluding approximately $6M of severance and related charges.
- Full-year 2022 capital expenditures were estimated at approximately $400M. The company planned about 100 new off-mall North American stores and remodels, targeting approximately 6% net square-footage growth.
- In November, the Board declared a $0.20-per-share Q4 dividend. Gina R. Boswell was appointed CEO effective December 1, 2022; Executive Chair Sarah Nash was to remain in that role through fiscal year-end.
- Key disclosed risks include inflation and consumer price sensitivity, supply-chain and transportation disruption, labor costs, seasonality, store traffic, COVID-19 effects, currency movements, reliance on suppliers, technology and data security, debt servicing and refinancing, and dependence on Victoria’s Secret for certain transition services.
- The company reported $287M of contingent lease-guarantee obligations related primarily to former businesses, with reserves described as not significant. A shareholder-action settlement requires at least $45M of investment over at least five years in specified management and governance measures. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether sales trends, transactions and merchandise margins stabilize, particularly through the holiday quarter.
- Actual inflation and promotional impacts compared with management’s Q4 and full-year estimates.
- Cash generation, inventory levels, available revolver capacity and the balance between capital investment, dividends and buybacks.
- Progress, cost and operational risks of the accelerated IT separation, alongside the new CEO transition.
- Potential cash exposure from the lease guarantees and settlement commitments, and any material changes in litigation or other contingencies.