Bath & Body Works Inc (BBWI) 2025 Q3 法說會逐字稿

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Bath & Body third-quarter 2025 earnings conference call. Please be advised that today's conference is being recorded. (Operator Instructions).

I'll now turn the call over to Luke Long, Vice President of Investor Relations. Luke, you may begin.

Good morning, and welcome to Bath & Body Works third-quarter 2025 earnings conference call. Joining me on the call today are Daniel Heaf, Chief Executive Officer; and Eva Boratto, Chief Financial Officer.

In addition to this call and this morning's press release, we have posted a slide presentation on our website that summarizes the information in these prepared remarks and provide some related facts and figures regarding our operating performance and guidance.

As a reminder, some of the comments today may include forward-looking statements related to future events and expectations. For factors that could cause the actual results to differ materially from these forward-looking statements, please refer to the risk factors in Bath & Body Works 2024 Form 10-K.

Today's call also contains certain non-GAAP financial measures. Please refer to this morning's press release and supplemental materials for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure.

With that, I'll turn the call over to Daniel.

Thank you, Luke, and good morning. Let me begin by acknowledging that our third-quarter results and our lower expectations for the fourth quarter don't live up to the expectations we all have for this brand. I joined Bath & Body Works to accelerate growth, and I remain confident in our ability to do so.

Today, I will set out a clear diagnosis for what's been challenging our performance and the actions we are already taking to address it. While the consumer environment is tougher, this is no excuse as we continue to underperform the sector. We're focused on addressing the issues within our control to return to growth.

Our transformation started the week I joined with our no-regret moves, and the whole company is working with the utmost urgency. But this will take time. 2026 will be a year of investing behind our brand to strengthen our fundamentals and position our business for sustainable long-term growth. Before I outline what must change, let me ground you in what endures, the competitive advantages that give us the right to win.

We are a market leader in attractive, growing consumer categories. We are an iconic American brand recognized worldwide. We have a vault of beloved fragrance franchises, with each of our top five franchises generating over $100 million in annual revenue and our largest fragrance generating over $250 million yearly.

We operate more than 2,400 stores around the world, employ a community of exceptional associates, have 40 million active loyalty members, and benefit from a fast, largely domestic supply chain. Our business model generates strong margins and high free cash flow conversion. Despite these strengths and the revenue growth in recent quarters, I concluded that swift and decisive action is needed to build the engine to drive sustainable long-term growth.

From my first day, we have refocused on putting the consumer at the center of everything we do and listening closely to their feedback and insight. This has guided a disciplined end-to-end review of every aspect of our business: product, brand, digital, stores, operations, and talent. The plan we are announcing today and the actions we are taking and the strategic investments that we are making are the result of that comprehensive review, not a reaction to a single quarter.

Let me first give you the diagnosis in four clear points. Firstly, we pursued adjacency to attract new consumers. But that strategy has not delivered the growth we expected, and it reduced focus in investing in our core category.

Secondly, collaborations that should have been used to drive excitement, energy, and equity into our brand have been used to carry quarters. Thirdly, as these strategies and other tactics have not delivered growth, we have relied on deeper and more frequent promotions.

Great value and exciting deals have been part of our brand, and that will not change. However, over-reliance on promotion delivers diminishing returns and erodes brand equity. And that is what has happened here. While all these efforts appeal to our existing consumers, they did not grow our customer base and we have not attracted a younger consumer.

Finally, our organization has become slow and inefficient. Unnecessary complexity has reduced our speed, dampened our innovation, and we prioritized efforts that were not targeted to acquiring a new and younger consumer. Unlocking the next phase of growth requires decisive action.

We are investing in new talent, focusing our teams on the highest-value work, and moving at the speed of the consumer, while optimizing expenses to fuel innovation and long-term performance. Our strategy is guided by what we have been working in the marketplace.

Over the years, consumers have evolved. They seek greater efficacy, ingredient-led products, modern packaging, emotive storytelling, and elevated multichannel experiences. Our competitors have risen to meet those needs; we have not. In some cases, as with our formulations, we have invested in these attributes. But we have not communicated them consistently and effectively.

Today, we are announcing a holistic growth plan to revitalize Bath & Body Works across brands, products, and the marketplace designed to drive value for our stakeholders. We are reclaiming our legacy as an innovative brand rooted in nature and benefits and leading the world in scent and self-care.

This plan, the consumer-first formula, focuses our investment behind our four largest revenue-driving opportunities. These strategic priorities have already been communicated across the organization, and work is well underway.

The first pillar of our plan is to create disruptive and innovative products that serve the needs of today's consumer. Desire will be designed. We will develop products in our core category to deliver luxury scent with benefits, created to be accessible to everybody.

Thoughtfully sourced and ingredient-led, refocusing on what made Bath & Body Works distinct. In 2026, we will reinvest in our core categories. We are returning to best-in-class product leadership in body care, home fragrance, and soaps and sanitizers.

Two consumer muses, designed with deep consumer insights, guide our every decision: Jen who demands bold fragrance, fun, seasonality, and value; and Zoe who craves clean products with elevated scent and design at an accessible price point.

These two muses keep us true to today's consumer while providing opportunity to engage new and younger consumers. We are making changes to better serve these muses, embedding consumer insights at the start of product development, accelerating new franchise development, and leveraging rapid testing to inform our innovation.

Consumers will start to see these new products in the second half of 2026. From body care to home fragrance, we are introducing new forms, vessels, and formulas in our core categories, that will drive growth and elevate the overall experience.

To sharpen our focus and make our in-store experience less overwhelming, we will cut our assortment and reduce complexity, concentrating on fewer, more on-trend product priorities. Starting in the first half of next year, you will see thoughtful edits to our assortment and selective category exits such as hair and men's grooming as we refocus on the core.

The second pillar of our strategy is to reignite our brand and reclaim cultural relevance. In 2026, we will market fewer, bolder, more targeted product moments, with stronger creator advocacy and a more aspirational positioning.

You can already see early proof point of this strategy in our Touch of Gold collection. We are recruiting a network of influencers to ignite social buzz while communicate incredible science-based claims that differentiates our products from our competitors. We will make big bigger by elevating and amplifying two iconic Bath & Body Works scents.

New consumers will discover and love these fragrances when we treat them with the reverence they deserve, elevate, and market them properly. We will deliver more impactful visual experiences in all our channels and across social platforms.

The third pillar of our strategy is winning in the marketplace. Discovery should feel effortless. We will make it simpler for a new and young consumer to find us, love us, and buy us wherever they shop. We will elevate our owned retail channels and thoughtfully expand our distribution to new channels, positioning ourselves directly in the path of our consumer.

As part of this, we will continue to enhance our app and website to increase engagement to make product discovery easier, to deliver richer brand and product story, and to reduce purchase friction. This work is already well underway.

For example, our mobile homepage is undergoing a refresh. And in early 2026, we will invest in a permanently lower and more competitive free shipping threshold. We will also expand thoughtfully into marketplaces and select wholesale channels, with Amazon expected to go live in the first half of 2026.

In anticipation of an Amazon launch, we are carving brand-dilutive gray market selling by restricting bulk purchases from resellers online and in-store. Amazon will enable us to reach new consumers and reengage lapsed ones. And we will launch with a curated assortment of evergreen [hero] products and over time, introduce product design to acquire a new consumer.

Our brand-operated channels will always carry the widest assortment and offer the most immersive brand storytelling. And to encourage new consumers to enter our operated stores, we will pilot updated merchandising, improved navigation, and refreshed retail marketing in 2026.

Our final pillar is operating with speed and efficiency. We expect to fund investments through better execution, timing inventory, shortening cycle time, and implementing a multiyear cost savings program.

Consistent with the focus of the consumer-first formula, this initiative prioritizes high-value consumer-focused activities funded through value engineering and sourcing optimization. We have planned to deliver $250 million in cost savings over the next two years, with over half identified for 2026. These savings will be reinvested into revenue-generating activities in product and brand.

A transformational plan requires transformational leadership, and we are putting the right leaders in the right roles with clear accountability. Earlier this month, we welcomed Maly Bernstein as our Chief Commercial Officer, overseeing the full marketplace across stores, digital, and wholesale channels. She brings extensive multichannel retail experience within our sector, backed by a proven track record of impressive results.

We're equally thrilled to welcome Veronique Gabai as our Product and Merchandising Advisor. Her creative vision, strategic insight, and global experience in beauty will add invaluable perspective to our transformation.

In addition, we also now have in place new leaders across digital, wholesale, and human resources. And we will continue to invest in talent to support the execution of our plan. As a result of our no-regret moves that I outlined six months ago, some of our strategic actions are already visible to the consumer. But it will take time before we see the benefits in our financial performance.

I believe that we have the foundation, the plan, and the focus to deliver sustainable growth and shareholder value. We are acting with urgency and clarity, putting the consumer at the center of every decision. I am confident in Bath & Body Works' future and the immense opportunity we have in front of us.

And now I'll hand over to Eva.

Thank you, and good morning, everyone. As Daniel emphasized, our path forward is anchored to the four pillars of our consumer-first formula: creating disruptive and innovative product, reigniting our brand, winning in the marketplace, and operating with speed and efficiency, to attract a new and younger consumer to the brand and unlock our next era of growth.

We will invest behind our strategy as we also drive diligent cost discipline to fund the actions we're taking. Our team is already hard at work unlocking the targeted $250 million of additional cost savings over the next two years. While we are moving with pace, this strategy will take time to impact our financial performance.

Now turning to the financials, I'll begin with a summary of the third quarter. I'll then provide an update on our Q4 guidance. As Daniel noted, the Q3 results didn't live up to the expectations we have for this brand. In Q3, we delivered net sales of $1.6 billion, down 1% to the prior year and adjusted earnings per diluted share of $0.35, both below our expectations.

Relative to our expectations, the Villains collection did not generate the consumer excitement, traffic, or sales that we expected. Our start to holiday in late October has been very challenging. I'll provide more color on that shortly. Versus prior year, all of our core categories declined low single digits. This underscores the need to focus investment in our core categories.

In US and Canadian stores, net sales totaled $1.2 billion, flat versus the prior year. Direct net sales were $299 million, a decrease of 7% compared to last year. When adjusted for buy online pick up in-store, which is reported as store sales, digital net sales were down 1% of sequential improvement from Q2 performance.

While we continue to make progress on our app and mobile [wealth] enhancement, there is substantial work ahead to develop a best-in-class experience. International net sales were $73 million in the third quarter, an increase of 6% and in line with our expectations. International system-wide retail sales grew 16% in the quarter, a continued acceleration as the business has stabilized since the effects of the war in the Middle East.

Our third-quarter gross profit rate of 41.3% was below our expectations and decreased 220 basis points compared to the prior year, driven by a 260-basis-point decrease in merch margin. Our merch margin was negatively impacted by approximately $35 million or roughly 200 basis points from tariffs.

We increased our promotional activity to clear seasonal product as we ended the quarter with clean inventory. The merch margin decline was partially offset by B&O driving 40 basis points of leverage, which benefited from the exit of a third-party fulfillment center in Q1.

SG&A as a percentage of net sales was 31.2%, representing 120-basis-point de-leverage compared to the prior year. The de-leverage was driven by soft sales performance, investments in new stores, and higher healthcare costs. In response to weaker sales, we acted quickly to flex costs down such as store payroll and incentive compensation, which partially offset the de-leverage. Bringing it all together, third-quarter operating income was $161 million, down 26% to last year.

Turning to real estate, our portfolio remains healthy with 59% of our fleet in off-mall locations. In the third quarter, we opened 40 new North American stores primarily in off-mall locations and permanently closed 10 stores primarily in malls.

Internationally, our partners opened 10 new stores and closed three stores during the quarter. And we ended the quarter with 544 stores. Our international store expansion plans for 2025 remain on track, with at least 30 planned net new store openings.

Moving to our Q4 guidance, the trends we experienced at the end of the third quarter have continued into the first few weeks of Q4, with sales to date down high single digits. Macro consumer sentiment is weighing heavily on our consumers' purchase intent.

Recent data shows consumer confidence continue to decline due to a number of factors, including concerns about job loss and affordability. This dynamic negatively affected our start to the holiday season and our largest quarter. This impact is compounded by a highly competitive retail marketplace.

Our research indicates that our customers are waiting for deeper discounts before making purchases. In this volatile environment, we are providing cautious guidance that assumes these early Q4 trends persist through the season, while we are taking action to strengthen our performance.

With that as context, we expect Q4 sales to be down high single digits versus last year and gross profit rate to be approximately 44.5%, which includes the impact of tariffs and higher promotional levels, which we believe are required to compete effectively.

We expect our SG&A rate to be approximately 24%, reflecting top-line declines, partially offset by disciplined cost management. We are aggressively managing costs while working closely with our teams to ensure that any reductions do not compromise the consumer experience.

Moving down the P&L, we expect interest expense and other of approximately $60 million and a tax rate of approximately 25%, and weighted average diluted shares outstanding of approximately 204 million. Considering these inputs, we are forecasting fourth-quarter earnings per diluted share of at least $1.70.

At this point, we believe this guidance represents a floor for Q4 performance, and we are working with urgency to improve upon it. For the full year, we are lowering our net sales guidance from 1.5% to 2.7% growth to a decline of low single digits, and are lowering our adjusted earnings per diluted share guidance range from $3.35 to $3.60 to at least $2.87. You can find additional details of our guidance in our slide presentation.

Now for an update on capital allocation, we are planning for capital expenditures of approximately $240 million during the year, down from previous guidance as we prioritized highest-return projects. In the third quarter, capital expenditures totaled $81 million, bringing the year-to-date total to $174 million.

Our full-year free cash flow expectation is now approximately $650 million, reflecting our current performance trends partially offset by our ongoing inventory management actions and reductions to capital expenditures.

In Q3, we returned $41 million to shareholders through dividends and repurchased 3 million shares of common stock for $87 million at an average price of $29.25 per share. Year to date, we have returned $126 million to shareholders through dividends, and we have repurchased 11.5 million shares of common stock for $343 million.

In closing, we are focused and moving with urgency against the actions we must take to return our brand to growth. On our Q4 earnings call, we will update you on our 2026 outlook and the strategic KPIs to measure our continued progress. I'd like to extend my gratitude to our teams across the company for their hard work.

Let's now open it up for Q&A.

(Operator Instructions) Ike Boruchow, Wells Fargo.

Hey, good morning, Daniel, Eva, Luke. I guess, Daniel, my question would be, can you help us understand bigger picture kind of what changed between when you first joined the company? I believe you kind of talked to an expectation to accelerate growth while expanding margins. Obviously, today's expectations for 4Q revenue to be down, margins to compress goes against that.

Can you maybe just walk us through what exactly has changed, what you've learned since you've been there? And exactly how should we be thinking about what Q4 guidance kind of means to next year would also be helpful. Thank you.

Good morning, Ike, and thank you for the question. So let me start by reemphasizing that the third-quarter results and the lower expectations for the fourth quarter don't live up to the expectations that we all have for this brand. The brand is not fulfilling its potential.

I joined to accelerate growth, and I remain confident that we will do so. So directly to your question, what's changed, if we unpack our Q3 performance, we declined in each of our core categories. And that really underscores the diagnostic I gave in our opening remarks.

That focus on adjacencies has resulted in under-investment in our core and not keeping pace with our consumer. But again, this strategic reset is the result of months of detailed analysis in every part of our business. It isn't a reaction to the quarter.

And if we look across the last few years -- and you guys all know this -- while we've been able to drive some growth in some quarters, we've lagged the market. We've lagged the beauty and fragrance sector, and the growth that we've delivered was not durable. I've talked about that since I arrived, and now is the time to address that.

We've laid out the diagnosis clearly. We've laid out a very clear plan how we're going to put the consumer back at the center: reignite the brand; begin creating innovative, coveted, disruptive products in our core categories again. And those four pillars of our strategy have already been communicated to the whole company. Work is well underway.

And what gives me confidence, honestly, in this plan is that this is a pattern I've seen many times in my career and many other places, many other companies. And this is really about going back to what made this company so great but evolving to meet the needs of today's consumer.

We will deliver coveted product. We will deliver elevated experience, but that change isn't going to happen overnight. Now to the next -- what this means for Q4 -- an excellent question. And the macro is a significant factor in our Q4 guide.

And, Eva, can I hand to you for some more color on that?

Sure. Good morning, Ike. So I guess, I said in my prepared remarks, right, the outlook we're providing for Q4 reflects what we believe is the floor, right? We saw material changes in trends affected by the macro coming into the quarter. We've seen some modest improvement since the government reopened, and we're further taking actions to improve that.

That said, our underlying core performance was weak, as Daniel said. If you looked at our Q3, we were down 1%. But if you were to normalize for the expansion of the full-sale extension, we were probably down closer to 3%. So if I look forward to 2026, our current view is that we do not expect to deliver growth for the full year.

These initiatives that we've laid out today will become visible to consumers throughout the year. But realistically, we don't expect it to impact the business in any meaningful way until the second half of the year. Digital is the fastest-growing space in beauty. We know those enhancements are underway.

As Daniel said, evolving our core product, which is critical to attract that new customer, that will start to become visible in the second half of the year. So we are here, we are working with urgency, driving the changes we need to drive that durable growth. And we'll have more details on our Q4 earnings call.

Thanks so much.

Matthew Boss, JPMorgan.

Great, thanks. So, Daniel, maybe to pick up on that, so on the new strategy, so the last two years, the company has talked positively about adjacencies and collaborations. But now, that strategy is wrong, and the focus is on the core to drive durable growth.

So could you provide maybe some of the key KPIs that you're watching to gain confidence in this new strategy? And while you cited the change won't happen overnight, I mean, what do you see as a reasonable timeline for stabilization?

Great. Thank you, Matt, for the question. So first, I'm going to say that this strategy has been communicated to the whole company. Work is, as Eva said, underway. Teams are working feverishly against those four priorities. But let me show some progress that is already evident.

Firstly, let's take a look at talent in a very short amount of time. We've added tremendous talent to our team, where we saw gaps and where we saw a need to improve our execution ability. We've moved with speed. A couple of moves, I'll highlight. We've brought in Veronique Gabai. She obviously brings global beauty experience, creative vision, and has worked at iconic brands across Estée Lauder and L'Oreal.

Craig Smith in digital, two decades of building digital transformation at Burberry, Apple, LVMH. [Dan Kudrow], unrivaled wholesale experience for more than 30 years at brands like L'Oreal and BIC. And as you have seen in the press release last week, Maly Bernstein, a transformational retail leader who has a track record in driving incredible results across beauty and omnichannel businesses.

So where we saw gaps, we've already addressed that. Next, when you think about the things that we talked about on the call that we expect to be delivering in the short term, winning in the marketplace, we know we need to be more convenient to consumers. We know that we need to be in their path, and you'll see us launch on Amazon early next year.

And I mean, frankly, we already know that we're doing somewhere between $60 million to $80 million of gray market sales in that channel, that is brand-dilutive and profit-dilutive. And so launching there is an incredible sales opportunity, but also an opportunity to reignite the brand, that second pillar of our strategy.

And then from day one, we have recognized the digital opportunity and we are moving with pace there. We relaunched our app. We relaunched the website. We have new product photography coming in on roughly about 500 of our current SKUs, elevated claims and messaging. But we know we have got so much further to go. We are working with pace, but the opportunity there is enormous.

If we think about just the penetration of digital sales -- so Eva and I were talking about this just last week. In soaps and sanitizers, the percentage of e-commerce sales in that category is about 40% to 45%. Our current e-commerce penetration is 20%. That just represents the incredible opportunity that we have to drive growth and acquire new customers in the digital channel.

Now when it comes to metrics, of course, there's all the normal metrics that we're going to be tracking and delivering: revenue, operating income, EPS. But where I'm really focused is in total active consumers and growth in our core categories.

Underneath that, of course, we are measuring the retail equation. And if you think about digital in the most recent quarter since we've made some of the modest changes already, we're seeing an increase in traffic. We're seeing an increase in dwell time. So these are good leading indicators for the progress that we are making.

And, Daniel, if I could just add, Matt, to your question about stabilization, I'll just say again, we don't expect growth in the full year next year. But we certainly expect business to improve as we progress throughout the year.

And in the second half of the year is where more of our consumer-first plan initiatives will come to fruition with new products, with further time under our belt in terms of digital. And we'll continue to update you as we progress on this plan.

Helpful color. Best of luck.

Lorraine Hutchinson, Bank of America.

Thank you. Good morning. Daniel, it's clear that the underlying business is worse than you thought when you first joined. And it will take time to return to growth. Does your plan require more investment than you had originally thought? And how should we think about margins in 2026 as we balance these investments with cost cuts?

Good morning, Lorraine. Yes, the reason we did such a comprehensive diagnostic right across the business, it was about discovering and laying out exactly what is holding this incredible brand back. And it's clear to me that a core is weaker. And some of that was marked by promotions and collabs and anniversarying some of those adjacent product launches.

So 2026 will be absolutely about investing behind our brand and our products, investing in the things that the consumer sees to strengthen our fundamentals and position this brand for long-term sustainable growth. Now as Eva mentioned in her opening remarks, the teams are already hard at work in unlocking $250 million of additional savings to help fund these investments.

And we have -- and before I arrived, this team has a strong track record in looking for efficiencies to fund investments. They've done that successfully over the last few years. And, yes, of course, until we see that top-line growth, which we are pursuing with vigor, we will be pressurized by de-leverage.

Alex Straton, Morgan Stanley.

Great. Thanks so much. Maybe just on the cost savings program, that $250 million in the next couple of years, can you just go through where exactly you're trimming and how they're different from the cost reduction that was pursued under Gina?

And then does all of that get reinvested in the same margin place? Or maybe just help us with how we should think about SG&A and how it should grow in relation sales over time as we're thinking about the out-year margin trajectory. Thanks a lot.

Sure. Good morning, Alex. This is Eva. So we're really proud of the savings that we've delivered over the past couple of years, delivering about $300 million in savings. We're targeting -- our goal is another $250 million, as Daniel said.

As I think about where that will come from, continued activities like value engineering, opportunities. We have further opportunities in sourcing optimization, also logistics operations. Daniel spoke about SKU simplification. That simplification will bring cost reductions over time. And we'll continue to optimize our overall operations to drive cost savings as we prioritize focusing on high-value consumer-focused areas.

We're working hard to fuel and fund the investments that are required over the next couple of years. I would think about the savings that we're driving are offsetting the investments and are not flowing to the bottom line.

In the shorter term, there could be some mismatches that investments outpaced savings. We'll have more details there. Our focus is to make the right investments to drive the durable growth and do that in a responsible way.

Thanks a lot. Good luck.

Thank you.

Paul Lejuez, Citigroup.

Hi, this is Kelly, on for Paul. Thanks for taking our question. I just first -- I had two-parter here, one on the Amazon partnership. If you could just elaborate on sort of the product that's going to be in that channel versus the store and if that makes you -- the expanded distribution, whether that makes you rethink your store growth and your store base?

And then secondly, on free cash flow, still very strong free cash flow this year despite weakness in the business. Any color on how we should think about free cash flow for F26? Any kind of color you could provide there would be great. Thanks.

Thanks so much, Kelly. Let me just -- I'll start by just touching on the Amazon partnership. Obviously, that's part of our third strategy, win in the marketplace. And that is about being in the path of the consumer. As I said, in answer to an earlier question, we know our consumer is already there. We are doing millions of dollars of sales in that channel.

We're going to start with a small assortment. We're going to be -- it's really going to be some of our evergreen product. And we're really going to make sure that we get that absolutely right, that we test and learn, that we build the right PDPs, the right ratings and the reviews, that we're offering the right fulfillment services, before we start to thoughtfully expand that assortment with new products that will be targeted at acquiring a new consumer.

But we're feeling very optimistic about that component of our strategy. And maybe, Eva, if I hand over to you on the free cash flow?

Sure. Thanks, Kelly, for the question. I'll just reiterate, we are a strong cash-generating business. And overall, our capital allocation priorities remain the same.

Investing in the business, and you've heard us say that those investments will increase next year to support our transformation, maintain a strong balance sheet, and return cash to shareholders, which we've done over the last three years, returning $1.5 billion.

We are headed into our biggest quarter of the year. So as I think about cash for next year and projections for next year, we'll come back to you in February on that. But we remain focused on continuing the focus on working capital and driving cash out of the business.

Mark Altschwager, Baird.

Good morning. Thank you. As you pivot back to the core categories, can you talk about the innovation pipeline over the next 12 to 18 months and how you're thinking about the balance between legacy franchises and then some of the ingredient-led or efficacy demands for the other consumers you're targeting?

Yeah. Thanks, Mark. So let me start by saying that in our core categories, we remain the market leader. It is without question where we have the greatest right to win. And we started this work for our strategy in designing those two consumer muses.

It is not about leaving our current customer behind and looking for a new consumer; it is about serving both. If you think about Jen, she is probably more typically the kind of customer that we have today. And we believe that we can elevate our product proposition and continue to attract more of those customers, as well as reaching for a new younger consumer, the Zoe, if you like. And what she requires is, as you say, more ingredient-led, cleaner, more stylishly or more sophisticated design in packaging. And that is where our investment is headed.

So without question, we have under-invested in our core. Let's take a look at our packaging. Some of our core forms I don't think have been restaged for a decade, right? That will change. We are already building a very strong pipeline of innovative new concepts. And we expect them to come to life in the back half of the year. And I'm excited about what I'm seeing from the product design and merchandising team.

And, Daniel, if I could just add, in addition to the innovation, we are taking immediate action on the innovation front. And we've changed and we're involving consumer testing much earlier in the process to ensure as we shape this innovation to attract that new consumer.

We are hitting the mark. As Daniel said earlier, we're making choices to exit categories that haven't been successful for us, that increased complexity such as men's grooming and hair. And we'll continue to work to optimize our portfolio as well.

Yeah. And, Mark, I just want to follow up on your question. You talked about the new products, and you also talked about, let's call it, the core or the carryover product, which in some way, I think, hit that what we have to do.

As I said in my opening remarks, we have the iconic fragrances. It's been one of the big things that was an upside on what I thought when I arrived. Some of those biggest fragrances are doing over $250 million a year annually. And they sit on a shelf in the left-hand side of our store, and they operate somewhat like an annuity.

Customers come in, and they buy them. But we haven't treated them with the reverence and with the marketing they expect. So part of that second pillar of our strategy is reigniting our brand. And part of that is about showing the reverence for those iconic franchises, those iconic fragrances, building a world around them, taking them out to new consumers in alternative distribution channels.

I'm sure that future Zoes and future Jens are going to love some of the products that we already have. And it's just about making the big bigger.

Thank you. Quick follow-up for Eva. Just with the earnings reset here, the leverage ratio is edging higher. How comfortable are you with the leverage ratio medium term? And just any shift we should think about and how you're balancing buybacks with potential debt reduction? Thank you.

Sure. We've made tremendous progress over the last couple of years, bringing the leverage ratio to our target 2.5 times level. This challenging period will put pressure on that. We will -- you should expect we will pay our debt down that comes due in January of 2027. And we'll work vigilantly to bring our balance sheet to the position that we want to. And as I said earlier, our capital allocation priorities are the same.

Adrienne Yih, Barclays.

Great. Thank you very much. Daniel, thank you so much for the detail. This is -- it's really refreshing to hear the strategy and the movement of the business.

But in doing so, I guess, can you help us understand the timing of the exit of the non-go-forward categories? Is that sort of like a Q1 thing? I'm sure there's some hangover inventory. What's the best method of exiting those categories without kind of further putting kind of brand pressure, right, as you kind of exit those?

And then within the core categories, we had talked about SKU rationalization. And obviously, you're talking about focusing on fewer of the things that mean something. So how many of the kind of alternative scents and kind of that newness that you bring to the seasonal scents will now go away to help focus? Thank you.

Okay. Thank you so much for the question. Let me just underscore that everything that we do at this company is subject to a rigorous testing. And that is something that we have integrated, as Eva said, as part of our product development process. And that is true about the way we think about our assortment.

So we're not pursuing a SKU rationalization target for the sake of having a target. We're pursuing it because the customer tells us that our proposition in store is too overwhelming and confusing. So this is -- the outcome that we want is to be able to entice new consumers into our stores and onto our digital platform. They can find what they want easily and fall in love with what they like easily.

So I think about it less as a number to hit and a set of categories to exit than I do about reaching a consumer outcome. That said, we'll begin to rationalize our SKUs and begin to exit these categories in spring, so in the first quarter of next year. And we will ramp that up with testing and exit as we move through the balance of '26.

But it's really test, learn, and make sure that we are bringing the new products to market that we're elevating, as I said, some of those core franchises that are already large so that we're filling the gap. It's less about, I would say, hitting the number.

Adrienne, your question on hangover of inventory. As you know, we have two seasonal -- two semiannual sale periods that we're able to use to clear inventory. The company has a long history of successfully doing that.

Despite the pressures in Q3, we were able to exit Q3 with clean inventory as we use that full sale period. So we'll be really thoughtful on our inventory management and our decisions around timing and when to exit.

Okay. Helpful. And then, Eva, just a little bit of help on the exit categories. What's the aggregate dollar amount that they contributed in 2025? And how should we think about the wraparound tariff pressure into 1Q? Thank you.

Okay. So I'll take the tariffs first. Overall, the tariffs, I would think about on a full-year basis, it's basically comparable to 2025. In 2025, we had about 100 basis points of impact to the year. Expect that to be pretty comparable in 2026.

Now the timing of that first half will have a bit more of a headwind, given when tariff started, with the reverse impact in the second half. In terms of the dollars of the exited categories, we'll have more to say as we build toward 2026. We don't expect that to be a meaningful drag.

The problem is those adjacencies haven't grown in the way that we had expected, and they are not significant the ones that we are starting to take out. So we're looking at every merchandise, the SKUs that are not contributing that much and SKUs are not productive, and that's where we're starting in that long tail.

Jonna Kim, TD Cowen.

Thank you for taking my question. Daniel, on the competitive dynamics within the fragrance and body mist category, I know a lot of new entrants have entered the category in the last few years. How are you assessing the competitive dynamics there? And then you also mentioned shortening lead times. Which category it will work in your view? Thank you so much.

Great. So, yeah, we operate in a very competitive sector. I love the sector. It still continues to grow. It's a young sector with sort of youth and innovation at its heart. And I think that, obviously, we operate as the market leader in these categories. We have a right to win. We're building on a solid base.

So for me, some of the problems that we have in our products are what I would call perception problems. We have fantastic formulations that are clean, but we have not communicated those benefits consistently and effectively. So we know in our product testing with consumers and some of the blind testing that we do, that we far outperform some of those competitors that are often talked about.

But we don't market it correctly. We don't put it in elevated packaging. And as a result, the consumer doesn't see us as having the attributes that they need. And then in some of the areas that we're looking at, we will launch new forms and new vessels, and those types of things -- and new formulations.

And those sort of things take longer than just chasing into demand, which is what our supply chain is really good at. But together, the teams at Bath & Body Works and our fragrance house partners and our manufacturing partners, we are all working day and night to make sure that we are bringing this new innovation to market. And we're looking forward to starting that journey in the back half of 2026.

And, Daniel, can I just add one thing? As you look at these categories that we're in, that we're all excited about in our growing category, growth in digital is outpacing the market.

So the strategies that we're talking about today and the investments we're making in our own digital experience as well as alternative distribution and our presence on Amazon, we think, are key elements to capturing and bringing that new consumer as well.

And part of that, we've talked about being in the path of the consumer. And that, of course, is what drives everything in this business now, putting the consumer at the center. But I'm looking forward to competing with those competitors on that playing field, right? We have left Amazon wide open for competitors to play.

That is changing. We have left other wholesale partners wide open for those competitors to play. That is going to change also. So to me, I'm looking forward to putting our products front and center, telling bold and emotive stories and winning in the full marketplace.

Thank you.

Jay Sole, UBS.

Great. Thank you so much. Daniel, I want to just follow up on that last question. Is there a tension at all between entering Amazon and potentially other mass market channels and sort of maintaining an iconic brand image? And if so, how do you feel about navigating that?

No. I think about it not as either or. I think you look at some of the world's luxury brands that are there on Amazon. And I think it's -- as much as a sales opportunity as I think, it's a brand opportunity. I can't wait to tell an elevated story about this brand in third-party channels and in particular, on the largest shop in the world, on Amazon.

What would I believe to do to change product perception will be in all channels and particularly on social channels, actually. And that work, that what I call brand reignition work and brand reigniting work, is well underway.

And by that, I mean, we have seen visuals. We have seen photography. We have seen tone of voice. And everybody who's seen it is blown away by it. Customer testing just this week. And our consumers, both current and future, love the direction that we are taking this brand.

I understand. And maybe if I can just follow up on that. I mean, what about just the concern that entering Amazon will cannibalize traffic into the stores and obviously create a separate issue?

Well, our product is already on Amazon. We're doing $60 million to $80 million roughly in sales on that product -- of our product from gray market on Amazon today. So just going there and making it a brand-accretive experience, making it a profit-accretive experience, is the first thing that we look to do.

And actually, I think that telling the story of our brand across digital channels will drive traffic in-stores. And then finally, we have a very wide assortment, maybe too wide of an assortment in places. And so we have an opportunity to use that assortment thoughtfully across multiple channels to drive differentiated propositions to acquire different types of customers. And so I think that this strategy is wholly accretive.

Olivia Tong, Raymond James.

Great, thanks. Good morning. Really helpful diagnosis of the areas of improvement. And I know Amazon was something you've been hinting at for some time, so I'm sure you expect to get going on that. So a couple of questions with that.

Can you talk about the sales expectations and the margin profile of launching on Amazon? You obviously mentioned $60 million to $80 million in sales already. Clearly, your hope is to go above that. But just trying to think about the arc of building on that and then the margin profile as well, whether you expect that to be at similar margins, dilutive, accretive, that would be helpful.

On the exit of the categories, the ancillary categories that you launched into a couple of years ago, can you help us understand a little bit of the decision-making as to why not continuing to run the business? Of course, it's a distraction, but it is offering some sales. And a lot of the heavy lifting, more importantly, has already been done. And I would imagine that that's something that could work in other channels.

And then, Eva, one for you is just around how we should think about the cash flow progressing next year. You talked about earnings. But would love to hear your views in terms of the working capital, in particular, given launching it in channels, clearing out the old inventory, how you think about the arc in working capital? Thank you so much for those questions.

Great. So I'll start on Amazon and then move to adjacencies, and then I'll hand to Eva for cash flow. On Amazon, we're very excited about the opportunity, as I'm sure you can hear. We believe it's the right thing to do for our consumer, and it sits squarely in our third pillar of our strategy.

The plan is to go slow to go fast, right? We're going to launch with a tight assortment. We're going to make sure that we are optimizing those pages for the Amazon consumer, that we're providing the right level of product description, that we're providing the right level of PDP, that we build up a really incredible bank of ratings and reviews.

And as we start to gain success in that channel, we will build out the assortment over time. But as I said in my opening remarks, our owned channels will remain the widest expression of our assortment and the purest expression of our brand.

So we'll be very careful to make sure that we're using that channel to attract a new consumer or a lapsed consumer. And we're not just taking the assortment, handing it over to a different channel and expecting -- and taking a margin here as a result of doing that. So it goes slow in the first half to speed up as we move sequentially through the year.

And then when it comes to adjacencies, I want to just clarify what I said. We are no longer going to invest in adjacencies. We are going to invest in our core. We have told you of two categories that we plan to exit in hair and men's grooming. We haven't, at this point, signaled that we are exiting whole adjacencies.

We -- I actually agree with your question. What is the most thoughtful way to use the money that has been used -- has been spent in these areas to potentially build this business over time, but it won't be something that we're continuing to invest in formulas, in packaging, and in other ways. We've got to get back to the core, but we aren't simply just abandoning those adjacencies. We intend to maximize the sales opportunity from those.

Yeah. And on your cash flow progression for next year, as a reminder -- and I'm sure you know this, Olivia -- we generate all of our cash in the Q4 period. We typically like to start the year with about $500 million of cash to fund the business through the first nine months, investing in inventory throughout the year. We're building our plans for 2026 now.

As I spoke about, there will be greater investments related to this transformation. So that could put a little bit more pressure on that first nine months of next year. But we'll manage our cash effectively throughout the year. On the margins for our adjacencies and Amazon, in particular, it's our goal to have a comp margin structure over time. We're going to test and learn our way into this, as Daniel said.

Dana Telsey, Telsey Advisory Group.

Hi. Good morning, everyone, and good to hear of the plan. As you think of the loyalty customers, which I think numbered 39 million the last time we heard, how do you break them down through this transformation strategy that you put in place and the diligence you've done? What are you seeing about that consumer? What are you learning? Who's coming? Who's going? Any updates there?

Yeah. Thanks. I'll start, and maybe, Eva, you can follow up with a little bit more detail. So as I've always said, our loyalty program and that loyal consumer that we have today is a competitive advantage. And we're going to continue to build on it.

And in fact, I think in the recent Q, we're now up to 40 million loyalty customers. So it is a competitive advantage. We're going to continue to leverage it to drive sales, to drive building the basket of our existing consumers.

Eva, maybe if I can give you -- ask you to give a little bit more detail?

Yeah. Sure. I think that loyalty customer, we continue to drive the strongest retention rate. With our changes in our loyalty program, we've seen an increase in rewards redemption that brings along with it an incremental spend.

We're seeing good business, good spend, across all of our deciles. And the team, the marketing team, the loyalty team, really continues to focus how can we continue to engage and excite those very valuable loyalty members that drive 80% of our sales.

Got it. And then with the reset going on, collaborations has been a big focus over the past few years. With the refocus on the core, how do you see the opportunity for collaboration? How do you maximize the strength of the product with the opportunity to enhance with sales or margins with collaborations?

Right. I appreciate the question, so I can clarify what our collaboration strategy is. So make no mistake; we love collaboration, right? They are a way to drive energy, equity, and excitement and buzz into the brand. And we actually have lined up for the next fiscal, some really, really exciting collaborations.

But strategically, collaboration should be used to drive energy into the brand and energy into some of those franchises and collection, energy that builds Everyday Luxuries, energy that builds White Barn Color Run, energy that builds the seasonal collection like fall, not necessarily something that sort of stands alone and is there to carry the quarter.

We don't want to get into positions where a collaboration like Villains was something that was difference between where we guided our Q3 and where we ended our Q3. We want to use them more tactfully, more thoughtfully, to drive long-term brand equity into our brand, into our franchises, and into some of those iconic fragrances that I referenced in today's call.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Heaf for any final comments.

Well, thank you, everybody, for joining us this morning. Thank you very much for your thoughtful questions. And just let me restate. I came to Bath & Body Works to accelerate growth, and I remain absolutely confident in our ability to do so. Work to restoring our brand and achieving sustainable growth, as you've heard on today's call, is already well underway. But it will take time and focus.

We've aligned our teams to the vision and the strategy, creating disruptive and innovative products, reigniting our brand, winning in the marketplace, and operating with speed and efficiency, to attract a new and younger consumer to the brand and unlock what I know will be the next era of growth for this brand.

You've heard today that we are driving early progress across those priorities, and we look forward to sharing more updates in the quarters ahead. I want to say a special thank you to our associates and our store teams for delivering joy this holiday season. We have the platform, we have the plan, and we absolutely have the team to win.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.