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Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Mike McGuire, Interim Head of Investor Relations. Mike, you may begin.

Good morning, and welcome to Bath & Body Works' first quarter 2024 earnings conference call. Joining me on the call today are Gina Boswell, Chief Executive Officer; Julie Rosen, President, Retail; 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 in addition to providing some related facts and figures regarding our operating performance and guidance. Today's call may contain certain 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 this morning's press release as well as the risk factors in Bath & Body Works' 2023 Form 10-K and our quarterly report on Form 10-Q, which will be filed at the end of today. Today's call 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. As you know, fiscal 2023 was a 53 week year. To provide the best sense of the health of the business, all category sales results, market share data, loyalty metrics and selling metrics discussed during the call are on a comparable calendar basis, which is 13 weeks ended May 4, 2024 versus the 13 weeks ended May 6, 2023. All other results discussed are on a reported basis, which is the 13 weeks ended May 4, 2024 versus the 13 weeks ended April 29, 2023. With that, I'll now turn the call over to Gina.

Thank you, Mike, and good morning, everyone. We appreciate you all joining us. Today, we are pleased to report better than expected Q1 sales and earnings performance. Through strong execution, we continued our progress against our strategic priorities, managing our profitability and at the same time, building toward our anticipated return to sales growth in the second half. Before I get into the details, let me first say that our Q1 outperformance would not be possible without the tireless dedication of our exceptional team who consistently delivers tremendous service to our customers while remaining nimble in a dynamic environment to deliver our goals. Jumping into results. We were pleased to deliver net sales of $1.4 billion in the first quarter, down 0.9% from the prior year, which was above the high end of our guidance. First quarter earnings per diluted share of $0.38 was up 15% from the prior year's adjusted EPS, which was above our guidance. With our better-than-expected results in the first quarter, we've narrowed our full year guidance ranges for both the top- and bottom-lines, raising the midpoint while maintaining the high end for each. Keeping in mind that it's still early in the year and we remain in a dynamic consumer spending environment, we are taking a prudent approach to our guidance. Eva will share more details later. Now shifting back to the quarter, let me provide some color on what drove our Q1 performance. Of course, it starts with the customer and their favorable response to the level of newness and innovation we brought to them with compelling product introductions and new marketing activities that build the brand. We continue to grow our newer adjacencies such as men's, hair, lip and laundry, and we are excited to see all of these contributing more to the business. We're continuing to roll out our lip fixtures to nearly all North American stores and we're accelerating laundry to all U.S. stores in late fall. As part of our efforts to drive our core growth, we introduced a new brand collaboration with Netflix, starting with their hit series, Bridgerton. We also launched a new Everyday Luxuries collection, which generated some viral buzz that Julie will touch on a bit later. Together, we were delighted with the abundance of brand love demonstrated by customers for these products. The Home Fragrance category performed in line with our expectations with the year-over-year decline in candles consistent with the prior quarter's performance, as macro level normalization continued. Overall transactions were up for the quarter driven by conversion with dual channel traffic flat. Consistent with external market data, we are continuing to see customers carefully manage their spending, which has pressured basket size. Average unit retails declined 1% versus our expectation of flat. At the beginning of the quarter, we leveraged promotion to help drive traffic in light of a floor set that wasn't resonating with our customers. As the quarter progressed and demand grew, we eased off promotions, which allowed us to achieve flat AURs in the back half of the quarter. From a market share perspective, we maintained our strong unit share overall. Our international business was pressured given the war in the Middle East and related softness. Despite this near term pressure, international markets remain an attractive pillar of our overall strategy, and we are committed to growing outside North America. During the quarter, our partners opened stores in new markets, including our first standalone store in London. And just last week, together with our franchise partner, we opened our first store in South Korea. Our plan is to add at least 35 net new stores in international markets this year. As you know, over the past year, our team's efforts have been centered on elevating the Bath & Body Works brand and product, extending our reach, engaging with our customers, enabling a seamless omnichannel experience and enhancing operational excellence and efficiency. Building upon the strong foundation that Bath & Body Works had already established, our efforts are driving positive progress along our path to $10 billion in sales and operating margins of 20%. Last quarter, I highlighted several marketing and technology initiatives in which we're making important investments to fuel our growth. This quarter, I would like to focus on a key indicator of the success of this work, which we call customership. Customership essentially refers to the demand we generate among current and potential customers to drive sustained growth in the business. Simply put, our goal is to bring more customers to the brand more often and with more love for our amazing fragrance assortment and omnichannel experience. With the introduction of our full funnel marketing approach beginning in Q4 of last year, we have seen improving trends supported by greater top-of-mind brand awareness and engagement among existing, new and reactivated customers alike. Early results from our more fulsome approach have been promising. The trend on net customer count in the first quarter improved 10 percentage points when compared to the first quarter of 2023, fueled by better retention of existing customers and a trend improvement in attracting new customers to the brand. We saw our most promising performance within our most valued customer segment, which we call fragrance fashionistas. These customers consider fragrance to be an essential part of their identity and self-expression, and they're extremely invested in innovation, evidenced by their response to our newness in the quarter. We were also encouraged to see our new efforts lead customers to shop with us more often, with approximately 40% of customers visiting us nearly 7 times on average per year. And we're seeing brand love continue to build. Brand impressions generated in the quarter were up 43% versus the prior year and we saw key brand equities, such as likelihood to recommend Bath & Body Works, on the rise. Hand in hand with our marketing efforts in driving customership is our focus on loyalty. As of the end of first quarter, we had increased our active loyalty members by more than 18% year-over-year to approximately 37 million and they drove about 80% of our U.S. sales. The program also boasted an outstanding 93% satisfaction rating within its membership. While the scale and satisfaction of our loyalty program are strong, of equal importance is the stickiness the program brings to the business. In Q1, our overall customer retention rate was the best posted since 2021, which was a high watermark for the brand. As we look to a future built on strong customership, we see additional potential to drive even more enrollment in our loyalty program, particularly among new customers, who made up 43% of enrollees in the first quarter. In order to drive a new level of engagement in the program in 2024, we will offer more loyalty exclusive and early access events along with point accelerators. We introduced these in Q4 to foster reward redemption as that is a critical factor in incenting customer purchase behavior. As customership grows, it will enhance our potential to both drive short--term performance as well as sustain customer lifetime value. Turning briefly to our technology initiatives, our tech roadmap is on track, and we've made progress toward our goals. As you know, in standing up Bath & Body Works as an independent company, there has been and continues to be significant work required to bring the company's technology systems to where we need them to be for a leading omnichannel retail business of our size. We remain focused on investing in the foundational tools and systems need to support future growth, and have been engaging with world-class partners to do so. We continue to evolve the digital experience for our customers, and we look forward to sharing big wins from these efforts later in the year. With that, I'll turn the call over to Julie to provide the merchandising overview.

Thank you, Gina. I too want to thank our teams for their exceptional work and for continuing to deliver a special experience to our customers. We are pleased with our first quarter performance as a result of their efforts and we're well positioned for a strong summer. As Gina touched on briefly, newness drove our success in the first quarter. In March, we announced a year-long partnership with Netflix to bring storytelling to life through the power of fragrance. Through the partnership, we aim to transform the viewing experience for millions of Netflix fans by allowing the power of fragrance to help transport them into their favorite stories and scenes. And we started with Bridgerton, one of the most popular programs on Netflix. The response was terrific. The collection resonated with our core customer, and over the launch period, Bridgerton products represented 4% of the shop. This response exceeded our expectations and our agile model allowed us to chase into strong selling fragrances and forms. Turning to our category performance, Body Care sales grew low-single digits in the quarter, outperforming the shop as we maintained unit share in the category. Fine fragrance mist, men's, travel and lip were particular highlights. During the quarter, we had a limited launch of our Everyday Luxuries collection of fine fragrance mist, with success spurred on by the organic virality of the product. As the sprays went viral on social media, demand increased with fine fragrance mist outperforming the shop during that period. The demand was driven by a slightly younger and more diverse set of customers. As I said, this a limited test launch in about one-third of our US stores. Given the success, you will see us relaunch this line across the full North American fleet in the fall. The men's business continues to be one of our fastest-growing categories in Body Care, as we benefit from new forms introduced last year, including grooming and antiperspirant deodorant as well as the newness we infused into the core collection in the first quarter. Notwithstanding the growth in men's we've seen to date, customer awareness for men's remains relatively low and we continue to invest in new media channels to drive awareness and growth. We believe we have significant opportunity to drive increased visibility and expansion of this category. Travel, as I mentioned, outpaced the shop as we continue to take advantage of the trial and travel mindset. Home Fragrance sales were down mid-single digits to last year, yet we increased our unit market share slightly. Candle sales declined from last year as we not only continued to be impacted by candle normalization, but we also narrowed our assortment of single wick candles. We saw a slight decline in unit market share in candles in the quarter, while we maintained our market leadership. Our air fresheners or wallflowers grew unit share in the quarter. Our Soaps & Sanitizers category decreased low-single digits compared to last year. Despite slightly declining in unit market share, we maintained our strong market leadership. Within this, soaps increased, driven by refills. We've been pleased with the performance of our refills, which make up slightly less than 10% of the soap business. We've received positive customer feedback and have expanded the assortment since the launch. Meanwhile, sanitizers declined, driven by our decision to exit the full size form due to continued normalization in the category. Pocketbacs overall performed nicely in the quarter, growing versus the same period last year. We've been enhancing our current forms such as adding a moisturizing pocketbac. Finally, customers continue to look to us as an important gifting destination, which drove a 6% increase in giftsets in the quarter. As we look forward, continued innovation and newness that we have planned for the seasons ahead will continue to be key drivers across our products and merchandising. For our summer floorset, we delivered fresh and compelling new scents, such as our new Summer Glow collection and we expanded our SPF assortment and level of skin protection. Lip products outperformed the shop as we continued to roll out our fixture and expanded assortment to almost all North American stores. Our new lip fixture is attracting new, younger customers to our brand, which is encouraging customers to linger and play, doubling sales of lip in the stores with the new lip fixture. We're on track to complete the rollout to nearly all of our North American stores by July. As we've continued to optimize our assortment and maintain supply to meet customer demand, we are accelerating the rollout of our laundry line and now expect it to be in all US stores by late fall. With that, I'll turn it over to Eva.

Thank you, Julie. Good morning, everyone. Before I review our first quarter fiscal results and fiscal 2024 guidance, I will provide an update on capital allocation. Our top priority remains driving sustainable long-term profitable growth through investments in the business. To support this, we continue to plan for $300 million to $325 million in capital projects during the year. And our priorities remain investment in brick and mortar stores and technology. In the first quarter, our total capital investment was $46 million. After investments in the business, our expectation for full year free cash flow generation remains between $675 million and $775 million, and we'll put that towards our priorities of dividends, share repurchases and debt deleveraging. During the quarter, we paid out $45 million in dividends. Subsequently, a few weeks ago, we announced a quarterly dividend of $0.20 per share payable later this month. We expect to continue our annual dividend of $0.80 per share with the intention to increase the dividend over time with sustained earnings growth. During the quarter, we repurchased 2.2 million shares of common stock for $99 million at an average price of $45.61 per share. Our full year guidance continues to include the expectation to repurchase approximately $300 million of shares opportunistically throughout fiscal 2024. We also remain committed to our goal of reducing our leverage ratio to approximately 2.5 times growth adjusted debt-to-EBITDAR. In the first quarter, we repurchased $109 million principal amount of senior notes and our ratio held steady at 2.8 times on a four-quarter trailing basis. Now moving to the income statement. In the first quarter, we reported earnings per diluted share of $0.38, exceeding our guidance of $0.28 to $0.33 per diluted share. Our outperformance in the quarter was driven by better-than-expected net sales and to a lesser extent buying and occupancy cost. Net sales of $1.4 billion for the quarter declined a better than expected 0.9% compared to the prior year. The outperformance in net sales was driven by strong floorsets in March, reflecting the newness that Julie described. As expected, the change in year-over-year net sales benefited by approximately 200 basis points from the shifted fiscal calendar resulting from the extra week in 2023. The benefit was offset by weaker-than-expected international ship sales and a decrease in average dollar sale as we continue to see the customer carefully manage their spending. As Gina previously discussed, AURs decreased 1% in the quarter versus our expectation of flat. Transactions were up for the quarter, driven by conversion. In US and Canadian stores, net sales totaled $1.1 billion, an increase of 3% versus the prior year. This is in line with our performance in Q4 of 2023 on a comparable calendar basis. Direct net sales were $261 million, a decline of 7% compared to last year. BOPIS continued to grow as our customers appreciate the convenience it offers. Keep in mind, BOPIS net sales are recognized as store net sales and we delivered approximately 50% growth in demand year-over-year, and BOPIS now represents approximately 25% of direct demand. So, when adjusted for BOPIS, stores and direct growth are more comparable. Note, we lapped the BOPIS US national rollout during the quarter. We generated $58 million of international net sales, a decline of 29% from last year's first quarter, which negatively impacted the year-over-year change in consolidated net sales by 170 basis points. The decline was driven by the decrease in wholesale revenue generated by product shipments to our franchise partners due to the markets affected by the war in the Middle East as those partners continue to manage their inventory levels in the face of subdued forecast. Total international system-wide retail sales from which we collect royalties were roughly flat to the prior year. Compared to the prior-year period, sales were up mid-teens outside of the areas affected by the war in the Middle East, while sales improved sequentially in areas impacted by the war. We continue to believe in the international opportunity and it is an important driver of long-term growth. First quarter gross profit rate was 43.8%, an increase of 110 basis points compared to prior year. Merchandise margin rate improved 110 basis points year-over-year, driven by a lower mix of international sales and lower transportation costs, partially offset by the modest AUR decline. Buying and occupancy expense as a percent of net sales was flat to last year. The outperformance was driven by strong execution in our fulfillment operations. Total first quarter SG&A deleveraged by 60 basis points versus last year, in line with expectations, which included the lapping of one-time discrete corporate expenses recognized in the first quarter last year. The benefits of our cost optimization work spans across both gross profit and SG&A. We continue to expect approximately $100 million in additional annual cost savings for fiscal year 2024, with benefits being realized earlier than expected. In the first quarter, we delivered approximately $40 million. First quarter total operating income increased by 3.6% to $187 million or 13.5% of net sales. Moving on to inventory, we ended the first quarter with total inventory dollars up 6% compared to last year, in line with our expectations. The increase in inventory is to support new product launches and additional stores. As we head into the second quarter, our inventory levels are appropriately positioned. Turning to real estate, our portfolio remains extremely healthy with more than half our fleet in off-mall locations. In the first quarter, we continued to increase our North American off-mall penetration, opening 15 new off-mall stores and permanently closing 11 stores, primarily in malls. Internationally, our partners ended the quarter with 486 stores. Turning now to our fiscal 2024 financial guidance. As a reminder, we are providing our guidance with comparisons to 2023 that included the 53rd week, which added about $81 million to net sales and $0.05 to diluted earnings per share. With that as background, we are narrowing full year guidance ranges for both the top- and bottom-line raising the midpoint while maintaining the high end for each. For the full year, we now expect net sales result to range between down 2.5% to flat year-over-year. Adjusting for the 53rd week in 2023, we expect net sales results to range between down 1.5% to up 1% with the extra week representing a headwind of approximately 100 basis points to our 2024 growth. We continue to expect net sales growth at both the midpoint and the high end and to turn positive in the second half of the year on a comparable week basis, as our marketing initiatives and our product launches in our adjacencies are scale. We now expect gross profit rate to be approximately 43.7%, and SG&A rate to be approximately 26.7%. The benefits of our cost optimization work mentioned previously are now expected to be more weighted to gross profit than SG&A at a split of approximately 60% and 40%, respectively. Our guidance for net non-operating expenses remain unchanged from the guidance we provided on our last earnings call. Considering all of the inputs, our updated full year guidance for earnings per diluted share is between $3.05 to $3.35. As Gina explained, we are taking a prudent approach to our guidance keeping in mind it's still early in the year and we remain in a dynamic consumer spending environment. Turning now to our second quarter 2024 guidance, we are forecasting a second quarter sales range of down 2% to flat versus prior year, with the high end of the range reflecting a sequential improvement over the prior quarter. We expect second quarter gross profit rate to be approximately 40%, in line with Q2 of 2023. In the second quarter, we will begin to lap merchandise margin rate expansion in the prior year. Our forecast reflects moderate improvement in year-over-year merch margin rate, offset by deleverage in buying and occupancy expense as a percent of net sales, driven by investments in store real estate. AURs in the second quarter are expected to be roughly flat. We expect our second quarter SG&A rate to be approximately 29% of net sales with the rate increase versus the prior year, driven largely by higher marketing investment and wage inflation, partially offset by our cost reduction initiative. We expect second quarter net non-operating expense of approximately $65 million, a tax rate of approximately 27% with weighted average diluted shares outstanding of approximately 224 million. Considering all of these inputs, we are forecasting second quarter earnings per diluted share of between $0.31 and $0.36. And I'll now turn the call back to Gina for some closing remarks.

Thank you, Eva. In closing, I'd like to emphasize again how pleased we are with our better-than-expected start to the year, a convincing step toward our anticipated return to top-line growth in the back half of the year. We are effectively executing on our strategic initiatives and creating more efficiencies in our business, which is allowing us to further reduce our debt and continue to return cash to shareholders. We continue to be excited about the opportunities ahead. I'll now turn the call over to the operator for questions.

Thank you. [Operator Instructions] Our first question is coming from Simeon Siegel of BMO Capital Markets. Please go ahead.

Thanks. Hey, everyone. Good morning. Nice job.

Good morning.

Sorry. Thank you. So, reflecting on your marketing campaign, the new product categories, the collaborations, just how are you thinking about the benefits you're seeing from these initiatives? Is it incremental customers? Is it incremental visits? Is it better pricing? Just I mean, how are you thinking about what you're learning through these initiatives? And then, a little bit more nuanced, you held B&O on the sales decline. You're guiding for deleverage going forward. Just what's the right way to think about the leverage point now? And I guess, I understand you're making investments in real estate, but I also wonder if you're lowering leverage points as you move off-mall. So, any color there would be helpful as well. Thank you.

Thank you, Simeon. Nice to hear from you. I'll take the first part and ask that Eva speak to the B&O leverage. As far as the marketing and the new products and colabs, we have been investing in a full funnel approach and it's certainly driving top-of-brand awareness. You heard Julie mention the 800 million impressions from Bridgerton, so -- and the Everyday Luxuries that had all those viral impressions. So, whether it's colabs, whether it's the new media activities that we're engaging in, this is all inserting us into the cultural conversations that are most relevant for customers today, and we're monitoring reach as well as other key equity metrics. So, it's really exciting to see that it's working. It's working for us to gain more customers more often with more love, we like to say. So, it's still early in the journey, but we like what we see and we've got more excitement in store for our customers as we enter the fall.

So thanks, Gina. Turning to the B&O, what I would say, Simeon, is, overall, we're really pleased with the progress we continue to make on driving overall gross margin improvements and you saw that in Q1. And as you look at B&O, I would continue to say to leverage B&O, it's about 2% to 3% sales growth. Rents per square foot off-mall are slightly lower. Q1, we were able to leverage flat B&O and we had some really great execution there in our operations and our fulfillment center. So, we'll continue to push ahead and drive improvements.

Thank you. We're ready for our next question.

Thank you. The next question is coming from Alex Straton of Morgan Stanley. Please go ahead.

Perfect. Thanks for taking my questions. Just a couple here. First, on the Middle East-driven pressure, can you talk to us about your assumptions on how that evolves in the second quarter as well as your ability to offset that all -- at all? And if you could provide how much that represents as a percentage of international that would also be helpful. And then maybe taking a look forward, looking at the first quarter outcome, the second quarter guidance, full year guidance, it seems like you're embedding that gross margin would fall in the back half compared to expansion in the front half. So, can you just talk to us about the assumptions there? Thanks a lot.

Great. Thank you. I will start, and then I think Eva will chime in. I just want to zoom out for a second on international. As you pointed out, this is directly affected by the war in the Middle East. If you remove the regions affected by the war, it's quite a healthy growing business with system-wide retail sales in the teens in the first quarter. So, we've got the near-term pressure in the Middle East, but all else is on track. And so, some of the offsets that we can speak to have to do with the opening of 35 net new stores in international. We mentioned not only the store -- the free first standing store in London, but also South Korea and also in existing markets our partners are expanding, for example, in Mexico as well as other markets in Q2. So, the big picture on the international is that the Middle East pressure has not changed our long-term international expansion plans. And then beyond that -- so I expect that, that will be the ability to offset. And we are expecting, I think, as Eva mentioned in her remarks, that even in the markets affected that that is moderating quarter by quarter.

Yeah. Thanks, Gina. And I'll add a few things, Alex. There's many parts to your question here. As you look at our guidance that we provided today, in Q1, international did underperform our expectations. Our guidance assumes a wide range of scenarios from the low to the high. And I would say at the mid and the high, you expect international to -- we expect international to improve beginning in Q2, and there are expectations in the guidance. In terms of gross margin for the year, we're expecting gross margin for the year comparable with 2023. I would remind you we began driving merch margin improvements of Q2 of last year and continued throughout 2024. So that -- those improvements continue, but obviously we're wrapping them as we get to the mid-year. Merch margin improved about 50 basis points for the year and that's offset by B&O deleverage, given our investments in real estate.

Thank you. We're ready for our next question.

Thank you. The next question is coming from Paul Lejuez of Citi. Please go ahead.

Hi, thank you. This is [Kelly] (ph) on for Paul. Just curious on the AURs coming in at down 1% versus guidance. Given when you reported the fourth quarter, we already sort of knew about some of the product misses early in the quarter. Just curious how AUR kind of played out relative to plan in the back half of the quarter? I know you said flat, but were you expecting kind of more of a pullback on promos as we got into March, April? That's my first question. And secondly, just curious how your pure product costs trended ex transportation savings in 1Q. So, just your raw materials, how they turn it on an absolute basis and relative to expectations and whether you saw a benefit to merch margins and just how we're thinking about product cost for the rest of the year? Thanks.

Thank you. Thank you, Kelly. So, as it relates to AUR, AUR was under pressure in the very first start of the quarter. It was something that we actually foreshadowed in our last earnings call. You recall we had a floor set in February that wasn't resonating. So that's when we quickly pivoted and we pulled on the strategic promotion lever to build traffic. As we move through the quarter, we had strong floorsets with newness and that enabled us to achieve flat AUR in the back part of the quarter. So, we exited with flat AUR. So, other than the first part of Q1, we were no more promotional than we were last year and we're back on plan to our AUR flat expectations. And then the reminder here is on the full year guide is to expand AUR modestly for the full year. And then, for product cost, I'll ask Eva to chime in.

Yeah. Thanks for the question. I'd say overall AUCs were essentially flat in the quarter as we expected.

Thank you. We're ready for our next question.

Thank you. The next question is coming from Matthew Boss with JPMorgan. Please go ahead.

Great, thanks. It's Amanda Douglas on for Matt. So, Gina, could you elaborate on the drivers of 1Q's net sales outperformance versus your initial plan maybe as we think about by category? And just any changes in traffic or consumer behavior as you've progressed into May? And then Eva, just could you elaborate on the cost savings that you've identified within cost of goods sold to support your improved gross margin outlook on the year?

Okay. That's a three-part question. We'll start with Julie on the category.

Yeah. Hi, there. So, Body Care was low-single digits to the prior year and that was really driven by new and growing categories such as men's and lip, along with the performance in fine fragrance mist, including our Everyday Luxuries. Home Fragrance was down mid-single digits, while growing unit share, and this was really driven by continuing candle normalization. So, candles declined, and that was largely due to the narrowing of the assortment of the single-wick candles, which continued to decline, but we did maintain our market leadership. Our decline in candles was consistent with Q4 and we did grow unit share in wallflowers. From a Soap & Sanitizer perspective, the business was down low-single digits, in line with shop. And soaps actually were slightly above shop, and that was driven by the performance of our refills, which make up about less than 10% of our soap business. And we love our refills. It's a really great environmentally friendly way for our customer to partake in our soap business. And finally, sanitizers declined, and that was really driven by our decision to exit the full-sized form due to continued normalization in the category. Pocketbacs really performed quite nicely in the quarter, growing versus the same period last year and we really innovated here by introducing our moisturizing pocketbac.

Great. Thanks, Julie. I'll start with your cost savings question and come back to the traffic. Overall, we are really pleased with how we're executing on the cost side of the equation. We've had a two-year plan to deliver $250 million in annual cost savings, and we're tracking well with the incremental $100 million in this year. It is skewed a little more toward gross margin about 60% of the savings. That's a little more skewed to gross margin than SG&A than last quarter. And the key drivers are transportation, sourcing, exit of one of our fulfillment centers that's enabling us to be more efficient. The remaining 40% in SG&A, it's efficiencies in our store operations, home office and indirect spend. So, again, we're really pleased with the progress that we're making there. Now coming back to traffic, overall traffic was flat for the quarter. As I think we said previously, transactions were up driven by conversion. While we target an overall omni experience, I'll say our traffic was a little stronger in stores and this was largely in the second half of the quarter. So, overall, we continue to execute against the business. And as Julie said, the newness really delivered for us in the quarter.

Thank you. We're ready for our next question please.

The next question is coming from Lorraine Hutchinson of Bank of America. Please go ahead.

Thank you. Good morning. I wanted to dig into the moving pieces behind your outlook on AUR for the back half. Are you raising ticket to ensure you're paid for some of the new formulation investments? Or do you plan to give some of that value back to the customer through price or promotion?

Yeah. Hi, Lorraine. I'll take that question. It's Julie. We really continue to balance the need to keep engagement and traffic strong with our desire to increase our pricing, right? So, we use our very agile operating model. It really allows us to increase or decrease promotional levels in a meaningful way and test for the best outcomes. We did not take widespread ticket increases in Q1 of '24, but we are lapping some increases from '23. And we did take selective pricing actions in certain product launches like Bridgerton and Everyday Luxuries due to the elevated packaging and storytelling that came from these forms where we know we can get paid. Thank you.

And I'll also add that this is still materially up from the pre-pandemic, so our AUR increases relative to 2019 are quite healthy. So, thank you for the question. We're ready for our next.

The next question is coming from Kate McShane of Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking our question. We wondered if you could comment at all about occasion buying versus buying during a more shoulder period, which I think the second quarter is for you just with the events of Easter and Mother's Day and the like in Q1, there are not quite -- not a few -- as many occasions in Q2. So, could you maybe talk to us a little bit about, again, how you view Q2 playing out given that dynamic and how we should think about it?

Yeah. Hi, Kate. Q2 actually, we had a great gifting business. Our gift sets were up 6% in the quarter. And for Q2, we have three great gifting periods, right? We have Valentine's Day, we have Easter, and then we have the beginning of Mother's Day. The other big portion, as I think you all know, of Q2 for us is our Semi-Annual Sale. So, those are the things that really drive our Q2 and we were very pleased with Valentine's Day, Easter, and the beginning of Mother's Day, as I said, with gift sets being up 6%.

Next question, please.

The next question is coming from Ike Boruchow of Wells Fargo. Please go ahead.

Hey, thanks. Good morning. Eva, I have two for you. Again, I don't mean to beat a dead horse on the AUR, but my question is, which I think has been asked a couple of different ways, when you guys gave guidance on the last call, I believe you had guided AUR flat and it came in a touch worse. I know you guys are saying that it improved on the exit of the quarter, but it just seems like something wasn't to the degree that you'd hoped it was on the upside. So, just trying to understand if you could parse that out. And then a quick follow-up on the model, Eva. I know there's like 200 basis points benefit from the calendar in the first quarter. Could you kind of walk us through the next three quarters? I feel like it's a little wacky depending on the retailer in terms of like what benefits to expect I think in 2Q and 3Q, and then how big is the headwind coming in the calendar in 4Q? Thanks.

Yeah. Thanks for the question, Ike. I'll start with your -- the second question first on the calendar shift. As we said, first quarter benefited by 200 basis points. Q2, there is a negligible calendar impact to us. Q3, we would expect another positive calendar shift comparable I'd say to the level in Q1. And in the fourth quarter those benefits obviously would reverse. In terms of the AUR at the risk of being redundant, right, as we said on our last quarter, we started out soft and we leveraged AUR, I'll say in the first half of the quarter to use our agile promotion model to drive traffic and conversion while also balancing our margin rate. And as we progress through the quarter and our March floorset was strong, we were able to pull back and that was Gina's comment around exiting the quarter at flattish. So, again, the AUR you're right, it is pressured from our guidance, but as we look at the overall quality of our quarter at the results that we drove, we believe we made the right decisions to drive the business forward.

And if I may add, we're always doing that up or down to meet the customer where they're at. So, I have been relatively still new to this model of agility where you can actually almost measure the elasticities within weeks. If we guide to flat and we feel the need to use promotion as a strategic lever to get that so long as the quality of everything else is intact, including by the way our gross margin, we can optimize the top-line. So, I just want to make sure that we're clear that when we guide to flat, we can sometimes be up as we were in the fourth quarter and we can sometimes be down, but the important point is that we're trying to get a good quality view and meeting the most customers where they're at. Thank you for the question. We're ready for our next.

Thank you. The next question is coming from Olivia Tong of Raymond James. Please go ahead.

Great. Thank you. I wanted to better understand a few things, one of them being your view on the retail competition and how that might be impacting you. We've obviously heard a lot of comments from Ulta, some more in terms of the activity in Amazon and [off-price]within these categories. I know they're not direct competitors, but just thinking through how that may be impacting your business? And then, apologies for another question on AUR, but if you could potentially give us a little bit of color on what you saw in May, and then just talking about the second half initiatives that could drive the improvement that you're expecting? Thank you.

Hi, there. It's Julie. I'll take the competition questions. So, we participate in very attractive market segments, right? The competition is always top of mind for us. We think that they're always right on our doorstep. It's why we're really focused on offering innovative products that perform well against the high standards of our customers. So, innovation is literally our lifeblood. It sets us apart from the competition. We know that they don't stand still and we work really hard as a team to stay ahead. I would say that two competitive advantages really help us do this. One is our vertically integrated model. It really enables us to act with speed. We were able to react to Bridgerton, to best scents, best fragrances, get back into them. We can do this more quickly than anybody else out there. And the second competitive advantage is our unique immersive selling environment, that is found in our best-in-class stores. We are really able to tell transportive stories, which is a competitive advantage for us that you don't see at the Targets or the Ultas of the world. And as a fragrance-first company, the quality of our fragrances and our work with the top fragrance houses in the world really help us deliver products that our customer needs across many different forms, whether it's body wash, a candle, a wallflower or a lip product. So, we have a constant eye on the competition.

Great. And I'll pick up on your question regarding what we've seen so far in May. The trends that we've seen so far are contemplated in our guidance outlook that we provided today both sales and AUR.

Thank you. We're ready for our next question.

Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Good morning. Just one more thing on AUR. As you think about the different categories of merchandise and as we go through the year, are you expecting any differences to how the categories AURs are as we go from 1Q to 2Q to 3Q to 4Q and what you're seeing? And then, on the direct business versus the retail stores business, any difference in pricing that we should be aware of? And then, Julie, just in terms of the new categories out there, what are you most excited about as we go through the balance of the year given the increased laundry? Anything we should be watching for in terms of the newness? Thank you.

So, I'll start with the AUR category differences. We look at it in total, as you know, we do different ticket increases and then we have promotions throughout the year. So, no noticeable or planned differences as we move through the year. There'll be more surprise and delights, and those would be opportunities for us to move AUR up in those instances. But in general, we're trying to build really compelling baskets as well with cross category opportunities. In terms of direct versus stores, we try very hard to be an omnichannel player, meaning no specific advantage to direct or stores because what we really want to incent is dual shopping, because those are the most valuable excited about. And in terms of excitement about newness, Julie, if you want to comment on that? There's lots to be excited about.

Hi, Dana. It's nice to hear your voice. There is a lot to be excited about, and me and my team are very pleased with our new adjacencies. So, as we look to return to growth, we have four key elements and they're all important to our strategy. You heard Gina say new adjacencies is one of them. So, we continue to be excited about men's. It's our fastest growing category in Body Care. We're really benefiting from forms we introduced last year in APDO and grooming as well as newness in the core collection, which is really driving a lot of that growth. And we are seeing a slightly younger customer in men's. From a lip perspective, so lip sales in stores that have our new lip fixture doubled and we are on track to really complete that rollout to nearly all North American stores by July. We have a great routine that we're introducing customers to through this fixture. It's a routine of scrub, mask and tint, and it is resonating with customers. And we're seeing a younger customer sort of linger out the fixture and play and then go and purchase. From a hair perspective, another exciting category, we rolled hair to the full fleet earlier this year. And we're continuing to learn. We are learning that our core best-selling fragrances that we're famous for are really resonating with our customer. We continue to test fragrances and we'll continue to optimize our assortment. We've also seen that 14% of those customers are new to brand. And we're very excited, because we just launched our travel-sized shampoo and conditioner this month, and customers were asking for that because it's a great way for them to gain trial into a new category. And of course, laundry, which I know is everybody's favorite. We ended Q1 with laundry in about 300 stores, and we are thrilled to announce that we will be rolling it to all US stores by late fall. We've been testing and tinkering with different assortments in different stores to ensure that we continue to optimize and right size. But just quickly above and beyond, we have other things that we are delivering that are innovative and new and exciting besides just the adjacencies. Just for summer this last month, we delivered fresh and compelling new scents. We have our new Summer Glow collection. We also delivered our expanded SPF assortment with a higher level of protection, which our customers were asking for and we're very excited about that. And then, we haven't spent a lot of time talking about Bridgerton, but that was very exciting for us as our first partnership with Netflix and you should expect to see more partnerships as the year progressed.

Yeah. And if I could just add, and I know that was described, but you can hear the passion in Julie's voice, I think what we try to think about in the newness category is its core and more. And we speak about growing the core, which these partnerships and collaborations do just that and then the more on the adjacencies is also critical. Both of these, these are two of the four levers, which we will rely on to inflect in the back half of the growth. And so -- that's why we're so excited about it, because it is truly driving the inflection point at the mid and high point of our guidance. Thank you. Next question?

Our next question is coming from Jonna Kim of TD Cowen. Please go ahead.

Thanks for taking my question. Just wanted to get more color on your expectations for the Home Fragrance category and your business in the back half, if anything has changed since last quarter there? And also your increasing marketing spend and talked about full-funnel marketing, but how are you measuring ROI and how are you allocating your spend across different channels in the back half? Thank you so much.

Yeah, thanks for the question. I'll start in terms of our overall expectations for the back half of the year. As you look at the guidance that we provided today, our assumptions behind the inflection point and returning to growth in the back half of the year remain consistent, the four elements that we outlined. And they're: moderating normalization of candles and sanitizers, they don't need to return to growth; growth from our core categories supported by newness and seasonal storytelling, which I think Julie just hit on quite a bit; reaching more of our consumers with our adjacencies men's, hair, lip and laundry; and finally, driving more loyal and engaged customers through the marketing investment that we're making and the capabilities both what we're doing on loyalty as well as personalization and digital experience.

Yes. And then, on the question about marketing spend, which we commented earlier and how that is driving the customership increases as well as the exciting engagement and the deepening of engagement, we are measuring ROI through a number of tools that people often use, which is the marketing model where we can actually attribute a dollar spend and what that drives to the top-line. But we're also using the technology as well to do some targeting and tools. Like for example, we have a targeting model now that uses machine learning algorithms and it can predict when a one trip customer can make their second purchase based on purchase behavior and the social engagement and the segmentation. And then, these customers are then targeted with personalized offers. So, there's early innings here and really promising results. So, I think of marketing hand in glove with technology so that we can actually optimize and get the highest bang for our buck with respect to those investments. So, you should expect more of that in the back half. I think we have time for one more question, please.

Thank you. Our final question today is coming from Korinne Wolfmeyer of Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking the question. First, could you just clarify the commentary on returning to growth in the back half? I assume that's assuming the high end of your guidance range. And how are you thinking about returning to growth from like Q3 and Q4 and kind of like the cadence there? And then separately, on some of the new product launches, could you talk a little bit about now that you have some of the more like loyalty membership data, how much of that new product uptake in sales is coming from customers maybe newer to those products versus customers who are now starting to replenish those products? Thanks.

Thanks. This is Eva. Korinne, I'll take the first part -- your first question first. Our return to growth is at the mid and the high point and the high end of our guidance on a 52 comparable week basis. And as you look at the cadence Q3, Q4, we would expect to return to growth in Q3.

Yeah. And as far as customers are concerned with the new categories, from a lip perspective, we're seeing a younger more diverse customer. And as I mentioned from a hair perspective, 14% of those customers are new to brand, as well as men's, we're seeing some new customers and slightly younger coming to us for men's. That being said, as I said in my script, we still think we have huge opportunity to attract more men to the brand and you see us investing in more marketing and in more media to attract them.

And I'll also add that in this first quarter, the 43% of loyalty enrollees were new customers. And so getting them in the program, getting them the kind of offers to really take the entire portfolio, there's so much data capture where we can use clickstream data to really recommend products and things like that. So, we expect new customers, existing customers and reactivated customers alike to really benefit from the loyalty program. Thank you.

Thank you. At this time, I would like to turn the floor back over to Mr. McGuire for closing comments.

Thank you, Donna. A replay of this call will be available for 90 days on our website. Thank you for joining today, and of course, thank you for your interest in Bath & Body Works. Have a good day.

Thank you.