BBWI - NYSE

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 Works First 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 Invest Relations. Luke, you may begin.

Good morning and welcome to Bath & Body Works first 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've 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. 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.

Hello everyone and thank you for joining us. I'm excited to be with you today for my first Bath & Body Works earnings call. I want to begin by thanking the Board for their trust and confidence in me. I'd also like to thank Eva and the leadership team and the thousands of associates who have warmly welcomed me over the last few days. It is truly a privilege to lead a brand as beloved as Bath & Body Works, one that has an incredibly strong foundation and has a meaningful place in homes and in our customers' daily lives. With more than 50,000 dedicated associates working in our 1,900 vibrant North American stores, a vertically integrated, predominantly US-based supply chain, and a loyalty program with approximately 39 million members, we are well positioned for growth. But today's consumers are dynamic. We must meet them where they are, positioning ourselves as the leading global brand in home fragrance and beauty. With this backdrop, we see a clear opportunity to transform Bath & Body Works to accelerate our growth, deepen our customer connection, and continue evolving for the future. In my first 10 days, I have been incredibly energized by what I've seen. Our customers are passionate and loyal. Many of our highly engaged customers shop with us 10 or more times a year. And our strong innovation ensures that we always have something new for them. That is an extraordinary strength. We also have a significant opportunity to grow the brand by attracting new consumers, especially younger audiences and men. When I joined, I spoke to many of you about my philosophy. We will accelerate growth by putting the consumer at the center of everything we do. We'll execute that philosophy by listening to our consumers to gather insights, using those insights to create innovative and coveted products, telling bold and emotional brand and product stories and bringing it all to life in an integrated and elevated omnichannel marketplace globally. And the good news, this philosophy is already in motion here at Bath & Body Works. Our Disney collaboration and Everyday Luxuries are great examples of what happens when we listen to our customers, build coveted products, tell emotional stories and deliver it all seamlessly across all our channels. But there is an opportunity to execute that philosophy more consistently and with greater focus to connect more intentionally with consumers across multiple touch points and to be less reliant on promotions to drive growth. Over the next few months, I'll work closely with the leadership team to identify the short and medium-term lever we can pull to deliver quick wins and define a long-term strategy, which we will communicate in the coming quarters. Some of the levers we are exploring are digital. There is an opportunity with our current site to better deliver what customers expect. Enhanced functionality, improved aesthetics and a compelling storytelling is the standard that consumers expect. There is a fast path to improvement that boosts conversion, brand equity and engagement. Second, packaging and labeling. We've made real strides in formula quality, but our packaging doesn't emphasize it. We can do more to signal better-for-you ingredients, especially to health conscious and younger consumers. Thirdly, distribution to attract consumers -- to attract new consumers, we must be in their path. That means exploring new forms of distribution beyond our own channels strategically and thoughtfully. And finally, international expansion. Today, international represents about 5% of our business, but from my experience at both Nike and Burberry, I know that international growth is an incremental. It can define an era. In the coming weeks, I'll be on the ground with our partners and customers internationally to explore how we scale effectively. As I mentioned, we'll be sharing a clear strategy in the coming quarters, one that puts the consumer at the center and commit to fewer, bolder priorities. Our strategy will address opportunities to accelerate growth through consistent, repeatable and durable drivers. Now I'll turn it over to Eva.

Thank you, Daniel, and good morning, everyone. Last week we welcomed Daniel at our Townhall with associates from across the company. Daniel shared his consumer-centered philosophy, his personal journey and engage directly with associates across the company. The energy level here at BBW is high and associates are eager to accelerate growth under his leadership. I look forward to partnering with Daniel and the rest of the leadership team as we plan for Bath & Body Works' future and work to unlock value. With that, let's turn to the quarter. I'll begin with a high level summary of our first quarter results and key business drivers. I'll then share more detail on our Q1 financial performance and provide an update on our Q2 and fiscal year 2025 guidance, building on the preliminary results we shared last Monday. As shared last week, we delivered another strong quarter, with net sales up 3%, coming in at the high-end of our guidance range, and earnings per diluted share of $0.49, exceeding the high end of our range. Amid a challenging macro backdrop, we've remained disciplined and decisive in our actions and our Q1 performance is evidence of that. As a reminder, we have been focused on three priority areas: First, accelerating top line growth across our core, while also extending our reach through adjacencies and international expansion. Second, enhancing operational excellence and efficiency through cost discipline and a continuous improvement mindset, which is particularly critical in this current environment. And third, consistently deploying our strong cash flow to invest in growth opportunities and return value to shareholders through dividends and share repurchases. Let's take a closer look at our top-line performance and key growth drivers in the quarter. In the first quarter, we delivered our strongest underlying sales growth since 2021, and we drove positive dual channel traffic exceeding third-party benchmarks we track. We brought innovation again this quarter, giving customers a reason to visit our stores and reinforcing our industry leadership. Customers have always trusted us for our high-quality products and accessible price points. And even in this environment, they continue to have a strong appetite for compelling newness. In Q1, consumer excitement around fragrance innovation drove growth across all three core categories. Our Disney collaboration was an undeniable success and exceeded our expectations. Customers lined up outside our stores to be the first to purchase one of our six Disney Princess fragrances. This was our largest collab to date featuring 85 SKUs across categories. Consumers also actively engaged with us online, driving a record 1.8 billion impressions. Consumers also responded positively to our thoughtful gift assortments in the quarter, as they celebrated meaningful moments during Valentine's Day, Easter and the Start to Mother's Day, proving that gifting isn't just a Q4 driver. Moving to our performance across our key categories in the quarter. Body Care grew low-single digits, driven by success in our Disney Princess line, strength in everyday luxuries and our single fragrance launch Sweetest Song. We expanded our everyday luxuries line to body cream and body wash in the quarter, creating new fragrance layering opportunities for our customers. Home Fragrance grew low single digits, driven by our Single Wick candles, wall flowers and home sprays as consumers sought to diverse and elevate ways to infuse their spaces with fragrance. Soaps & Sanitizers grew mid-single digits, driven by our convenient on-the-go assortment, including our 1oz sanitizer spray and Pocketbacs. Our innovation and collaboration pipeline is strong, and we are excited about the fragrance experiences we're bringing to customers this summer, including our cross category coast-to-coast collection inspired by iconic coastal destinations. We've launched on-trend fragrances like Off the Vine, and we brought back our True Blue Spa collection due to strong demand from our customers. This is one of the most customer-based collections. We're also relaunching some of our original fragrances with updated efficacious formulas that are made without sulfate, parabens, phthalates and artificial dyes. Beyond product innovation, we continue to improve our customer experience, both in-store and online. We are building on the success of our brick-and-mortar strategy with the introduction of new in-store innovations. Our newer stores feature elevated design, a more open layout, interactive fragrance bars and integrated technology, creating a more immersive, elevated and seamless shopping experience, which meets the expectations of today's consumer. Our talented store design team has cost engineer the new stores to match the build cost of our traditional model, achieving similar payback periods and driving higher sales. Our loyalty program is performing well and driving increased spend, trip frequency, cross-channel purchases and retention. In Q1, we had approximately 39 million active loyalty customers, up 4% compared to the prior year. We are now in the third year following the full U.S. rollout of the loyalty program, and we continue to make enhancements to elevate the customers' experience. Most recently, we increased our loyalty reward redemption options giving members greater access to our most loved body care business, which we expect will drive higher engagement and redemption. With our large loyalty base in place, the greatest opportunity now lies in deepening engagement and increasing value from existing members. Increasing reward redemption drives higher trip frequency, stronger sales and deeper brand engagement. We see an opportunity to grow sales with our most loyal customers while also increasing loyalty among more casual shoppers. Finally, we extended our reach this quarter through adjacent category growth. Our adjacent categories, men's, lip, hair and laundry continue to represent approximately 10% of total sales. Our men's category, which is included in Body Care, remains a compelling avenue to expand our customer base, and we are also hyper-focused on increasing awareness. To increase visibility and engagement for our men's assortment, we're elevating Father's Day this year with an enhanced marketing strategy, store positioning and an expanded product lineup, including a new men's single fragrance launch and an exclusive purchase with purchase set. This builds on insights from the 2024 holiday season, where we saw strong results from our first men's purchase with purchase offer. International expansion remains an important pillar of our long-term strategy, as Daniel mentioned earlier, with significant opportunity for long-term growth. International retail sales grew approximately 10% this quarter. Turning to margins. We remain steadfast in our disciplined approach to cost management, leveraging a continuous improvement mindset and operational efficiencies to drive sustained financial strength. Our predominantly U.S. based supply chain is a source of competitive advantage, allowing us to respond quickly and remain agile, as the landscape evolves, while our exposure in China is limited to approximately 10% of global spend, we are taking proactive measures to mitigate global trade policy shifts and offset our tariff exposure over time. Now I will transition to details on our financial performance and guidance. We delivered net sales of $1.4 billion, up 2.9% to the prior year, at the high end of our guidance range. Again, our strongest underlying sales performance since 2021, fueled by our Disney collaboration. In U.S. and Canadian stores, net sales totaled $1.1 billion, an increase of 4.3% versus the prior year. Direct net sales were $250 million, a decrease of 4.3% compared to last year. However, when adjusted for buy online, pickup in store, which is reported as store sales, direct outperformed stores. Focused demand increased by 29% in the quarter versus last year and represented approximately 30% of total digital demand. International, which represents approximately 5% of total net sales generated $64 million of net sales in the first quarter, an increase of 10.1%, versus the prior year due to timing of ship sales and was in line with expectations. Our first quarter gross profit rate of 45.4% exceeded expectations and increased 160 basis points compared to the prior year. Gross profit rate expansion versus the prior year was driven by a 100 basis point improvement in merchandise margin primarily driven by low single-digit mix-adjusted AUR increases. We also drove favorable buying and occupancy leverage due to net sales growth this quarter, as B&O expenses were flat. SG&A as a percentage of net sales was 30.7%, slightly higher than our expectations, primarily driven by incremental investments in marketing and store associate training. First quarter operating income was $209 million, 14.7% of net sales, an improvement of 120 basis points versus prior year. With respect to inventory, we ended the first quarter with total inventory up 7% to prior year. This was slightly above our initial plan due to tariffs on purchases, as well as strategic pull forwards to help mitigate tariff impacts. However, our underlying inventory levels remain healthy. Turning to real estate. Our portfolio remains healthy with 57% of our fleet in off-mall locations. In the first quarter, we opened 13 new North American stores, all in off-mall locations and permanently closed eight stores all in malls. Internationally, our partners opened 14 new stores and closed 19 stores during the quarter, and we ended the quarter with 524 stores. The net closures in the first quarter were planned and were predominantly in low-performing stores in the Middle East. Our international expansion plans for 2025 remain on track with at least 30 planned net new store openings. Turning now to our 2025 financial guidance. Our full year and second quarter guidance includes the anticipated impact of all tariff rates currently in effect and levied by the U.S. government and other countries and excludes the anticipated financial impact of the CEO transition. For the full year 2025, we are maintaining both our net sales guidance of 1% to 3% growth and our earnings per share guidance range of $3.25 to [$3.60] (ph). Building on our Q1 outperformance, our current projections of the business, proactive tariff mitigation strategies and our strong predominantly U.S. supply chain, we believe, we are well-positioned to absorb the tariffs at current levels. If there are material changes in future tariffs, we will revisit our guidance. For the full year, you can find additional commentary on the details of our guidance in our slide presentation. Turning now to the second quarter. We expect Q2 net sales of flat to 2% growth to prior year, reflecting the current trends in our business, and we are lapping some accounting items in the prior year, largely loyalty. We expect Q2 system-wide international retail sales to be up high single digits with reported net sales decline of mid-single digits due to ship sales timing in Q1 this year. We expect second quarter gross profit rate to be approximately 41%, flat to prior year, including the impact of tariffs. We expect our second quarter SG&A rate to be approximately 30%, reflecting wage rate inflation and investments in technology. Our second quarter outlook includes net nonoperating expense of approximately $65 million and a tax rate of approximately 29% and weighted average diluted shares outstanding of approximately $212 million. Considering these inputs, we are forecasting second quarter earnings per diluted share of $0.33 to $0.38. We expect inventory to remain elevated in the first half, up about 10%. This above -- this is above our initial expectations due to tariff-related costs impacting inventory. As a reminder, first-half inventory levels reflect additional holiday related inventory builds to support our growth goals. Now for a quick update on capital allocation. We are a strong cash flow generating business. Our top priority remains driving sustainable long-term profitable growth through strategic investments in the business. To support this, we continue to plan capital expenditures of $250 million to $270 million during the year with a focus on real estate and technology. In the first quarter, our total capital expenditures were $37 million. Our full year free cash flow expectations remain in the range of $750 million to $850 million and reflects working capital improvements driven by our Fuel for Growth initiatives. In Q1, we returned $43 million to shareholders through dividends and repurchased 4.3 million shares of common stock for $135 million at an average price of $31.24 per share. We continue to assume $300 million in share repurchases for the year, though as we've demonstrated, we will be opportunistic. Our business generates strong free cash flow, and we view our shares at an attractive investment at current levels. In summary, I'm proud of our Q1 performance and energized by the opportunity to accelerate our growth in the future. Our agile business model positions us well to compete effectively in today's dynamic environment. The team continues to execute with discipline, focusing on what we can control, and we're excited about the strength of our innovative pipeline for the second half of the year. I'd like to extend my gratitude to our teams across the company for their hard work and strong execution. Now let's open it up for Q&A.

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Good morning. Hi everyone. Daniel, welcome to the company and the wonderful world of analyst Q&A. Glad to have you. Maybe to start, could you share a bit more about what brought you to Bath & Body Works a bit different than your prior company. I know you literally just started, but this was a very encouraging quarter. So perhaps any early looks you have at what you think is going right versus any high-level areas of opportunity that you're excited by? And then Eva obviously, great to see the return to this level of growth. Can you just elaborate a little bit more on the go forward top-line commentary. Maybe just specifically, you mentioned current trends within the guide. So elaborate -- if you can elaborate there, sorry. And then on just the loyalty accounting comment. Thanks guys.

Good morning, everyone, and thank you Simeon. It's great to be on this call. Let me break that question down a little bit. So first, let me talk about what attractive me to Bath & Body Works. And as you can tell from the accent, I haven't grown up in -- with the brand in the way that many of our consumers have, but as I went through the selection process with the Board, I really, really researched the company, and I love what I discovered. Let me first speak from the heart. I believe that the best businesses connect product with purpose. And at Bath & Body Works, we empower our consumers to express themselves, whether that's through selfcare or home or beauty, we bring the power of fragrance into people's lives, helping them feel more confident, more joyful and more authentically themselves. That's a meaningful mission, and it's one I'm really, really proud to be a part of. And then the emotional connection is matched by the strength of our business. This is what I found when I really dug into the company, 1,900 North American stores, 39 million-or-so loyalty members, a passionate and knowledgeable team of 50,000 store associates and a vertically integrated domestic supply chain, and that is an amazing foundation to accelerate growth by reaching new consumers, elevating our products and experiences, telling compelling brand stories and doing that in new ways. And when it comes to like what's going right obviously, it is a quality quarter. It's great to see the growth. But what I find really encouraging is that my philosophy for growth, which is about putting the consumer at the center, making sure that we listen to those insights, we create coveted and innovative products that meet those needs that we tell bold, brand and emotional product story, and we bring it to life in an omnichannel integrated marketplace globally. I can see where that is working here. As I said in my opening remarks, Disney is a good example of where that worked. But I do see opportunity to do that more consistently, more frequently and more focused on bringing new consumers to this sticky platform that we've built.

Great. And good morning Simeon, thanks for the question. So in terms of the drivers of sales go forward, let me start with Q1. We were really pleased with the 3% growth that we drove while also expanding margins. And as you dissect Q1, Disney was the key driver of the quarter. And I would say the balance of the quarter really performed more consistently with the growth we were seeing in Q4. So besides Disney, other products that stood out with EDL, particularly for women and our gifting that grew double digits. So as we enter Q2, right, we're entering in those trends for the Q4 as we exited Q1. Q2 is also our lowest quarter of innovation given the prominence of SaaS, but we are confident in the outlook. In Q2, we're going to amplify Father's Day. We've created space in the quarter to really amplify, reposition it in the shop, enhanced marketing. We are focused on SaaS execution. As you know, last year, we had some challenges. And we also had the start of Halloween. So we feel good about the outlook that we provided for Q2. And overall, for the year maybe just jumping as you look at the back half, we also continue to have innovation. Halloween is important both starts in Q2, but also continues into Q3. We're launching an elevated ceramic candle, and we have more collabs coming in the back half of the year. So there is plenty of innovation that gives us confidence in really maintaining our top-line of 1% to 3% growth for the year.

Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Great. Thanks and welcome, Daniel. So maybe, Daniel, with your clear focus on accelerating growth, could you walk through the building blocks of opportunity relative to the company's recent return to low single-digit growth maybe just areas you see for market share opportunity and any investments that you see required to accomplish your plan?

Hi, Matt and thanks for the question. I'm going to start with the caveat that it's still early days. I'm 10 days in, and my focus right now is continuing to listen and learn. And frankly, I don't know what I don't know yet. I'm listening to the leadership team, listening to our employees, our store associates, of course listening to our consumers and you, our investors. As I said in my opening remarks, we will come back and share a clear strategy in the coming quarters, and that strategy will have some key components. We will be guided by a clear and compelling vision. It will put the consumer at the center of everything that we do. We will focus on fewer, bolder priorities, and we will target opportunities to accelerate the growth through consistent and repeatable growth drivers. We will provide a clear road map and consistent KPIs, so you can track our progress, and we can hold ourselves accountable for that growth. In my opening remarks, I mentioned a few things that we are getting underway now, not sitting around and waiting to pen a strategy and then start work. There are clear opportunities as far as I see them in the short and medium-term, our digital refresh, packaging and labeling, alternative distribution and international. So I think that's all I'm going to say really about our strategy at this point. And then to your second point on financials, and investments required to accomplish the plan. I'm super aware that a successful consumer goods companies need to grow the top and the bottom-line simultaneously. It's not an either or, and as I said, we're going to be doing fewer things. So edit to amplify is important. Less breadth, more depth, fewer priorities. And so I'm not asking for more investment and making sure that the investment that we have today is aimed at the greatest opportunity to drive growth.

And if I could just add, Daniel, we are always looking for efficiencies to offset new investment areas. I think we've done that over the last couple of years with our Fuel for Growth program. And we're diligent about that. And just to give you an example, during Q1, we exited one of our third-party fulfillment centers. We expect this can drive two improvements, one; improved cost that's reflected in the outlook we provided today, as well as improved customer satisfaction. So we're going to consistently mine for those areas to help offset investments.

Great color. Best of luck.

Thank you. Our next question comes from Lorraine Hutchinson with Bank of America. Please proceed with your question.

Thank you. Good morning. Daniel, it sounds like one of the first things you can impact is marketing. Can you talk about plans there? And then over the longer term, I was just curious to hear about any early work you've done on the potential to accelerate growth globally and also what those new forms of distribution beyond your own channels might look like? Thank you.

Hi. And thanks for the question. When it comes to adjusting marketing, I do think that the business has made progress in marketing as we mentioned, traffic is up and exceeded benchmarks in the first quarter. But I do believe that there is much, much more we can do to connect emotionally with our consumers, and we can do that online and offline in that part of the work that I mentioned in terms of the digital refresh that's getting underway now. And I also believe our marketing has to be less about price and promotion. We need to give our consumers compelling stories and reasons to buy that are not linked to price. And then finally, I do think that there is an opportunity to focus more of our marketing dollars on the innovation that we have and that we have coming. I do believe that we have made meaningful strides in improving the ingredients of our products, and we have not taken advantage of that by telling that story in a compelling way consistently to our consumers, and we know that, that is something that's important to them. So the next part of your question really relating to international. Of course, I've said before, I do see international as a significant opportunity. I'm still learning about the international business, what's working, what's not working, what are the impediments to accelerating growth. And I'm going to spend some time this summer on the ground with our international partners, with our international consumers really getting under the hood. But I'm pretty sure that our strategy will pick priority markets, the areas where we believe that there are the most -- the largest opportunities to accelerate growth, and we must match that opportunity with the right business model. So more to come in that way, but it is something that I'm -- it's going to be spending a lot of time on in the coming months. And then finally, on third-party distribution. I'm sure you are going to hear me say this frequently, we put the consumer at the center of everything that we do and consumers see brands, not channels. I do believe one of the greatest opportunities that this company has is to plug in new consumers to our ecosystem and our new consumers are not -- we are not necessarily in their path. So we'll think about this strategically and thoughtfully. But reaching new consumers through new platforms is definitely something that we are looking at right away.

Our next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question.

Great. Thank you. Maybe for Eva first. Both Home Fragrance and Body Care grew low single digits in the first quarter and kind of helped in that range for a few quarters. What do you view as the right long-term growth rates for those categories? Should they be better than low single digits, or is this where they should kind of hover? And then secondly, just could you go through your plan for the semiannual sale, maybe just remind us the time frame last year and walk through any change in approach year-over-year that you might be using. Thanks a lot.

Sure. Good morning Alex, thanks. I'll take your second question first, around the semiannual sale. As I said previously, last year, we all know it didn't perform to our expectations. So we've taken some poor learnings to drive stronger performance this year. First, we're going to start semiannual sale a couple of weeks later than prior year. And really, this is to do two things: one, to give a space to amplify Father's Day and elevate men's that critically important adjacency, as well as our timing will be more consistent with the general market and when summer sales occur. Second, we're amplifying our marketing to ensure customers know of the change in timing and also about the exciting products that we'll have to offer. And importantly, we believe we have a great product offering that consumers are going to love. Overall, there is not really any material changes to the duration. It's going to be a couple of days shorter. But overall, the duration generally consistent. As you look at the core categories, Body Care and Home have been great categories. You see the market growing, you see fragrance growing. So we would expect, particularly Body Care, you would get more than low single-digit growth over time growing with the market. On the Home, as you know, the candle market has been pressured. We haven't seen the candle market return to growth yet. We did this quarter increase our market share modestly in our strategies. But overall, we're pleased in this market where there is pressure on candles where overall growing home fragrance. But we are going to look for ways to innovate to continue to drive growth there. And while gifting is small right? That is an area that grew really nicely. It was up double-digits this quarter and just reinforces that we can be a gifting destination no matter what time of the year it is, customers will come to us whether it's Valentine's Day, Easter, Mother's Day and hopefully, Father's Day.

Thank you.

Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Hi, good morning. Eva, two questions for you, if that's okay. Just curious, would you have raised guidance including tariffs when you looked at the full year view that you're issuing? And then I guess, just simply just kind of what gives you the confidence in the back half for 1% to 3% revenue growth. Obviously, the compares are a little bit tougher. So I'm just kind of curious where the confidence comes from there. Thank you.

Yes, Ike, thanks for the question. And good morning. On the back half of the year, I'll say what gives us confidence is the innovation that we have planned. I mentioned a couple of things earlier. We have – we are launching a new and elevated ceramic handle in the back part of the year. We have additional collaborations coming off of the Disney Princess, and we know how well those have performed for us, and Halloween, an important time of the year for us, and we have some new and exciting products with elevated storytelling and new fragrances to bring there. So that is what really gives us the confidence. As we've said quarter after quarter, our customers respond when we have great innovation. Now on the -- on your question on the tariff -- on the tariff front, overall -- let me give a little context before I answer your specific question, if we would have raised guided. The guidance that we provided includes all of the tariffs that have been announced prior to last night's court ruling, which has already been appealed. And if you think about the guidance and absorbing that, it was our delivery of margin expansion and our opportunities to mitigate some of those tariffs through the levers we are pulling. If tariffs were to continue at current levels for the remainder of the year, we'd probably be at the lower half of the guidance range. And if they were to moderate or be reduced, we would be at the upper half. And what I would say is to your real question, all else equal, if tariffs haven't changed from the initial 10%, yes, we would have been increasing our guidance today. And it is a dynamic time for us. I’m really pleased with our position, our agile model, and we’ll compete in any environment.

Thank you. Our next question comes from the line of Paul Lajuez with Citi. Please proceed with your question.

Leon for Paul. Thanks for taking our question. Just wondering if you could elaborate on the strength of the merch margins in AURs in the first quarter. How much do you attribute that to the Disney collab versus sort of the underlying core business and any benefits that carry forward. And then just secondly, could you just give more detail on the accounting of these collabs, where do you see the licensing revenue to your partners? Where does that show up in the P&L? Just any color there would be helpful. Thank you.

Great. Thanks for the question. We are really pleased with our gross margin performance in the first quarter. We expanded gross margin 160 basis. We exceeded our guidance of 210 basis points. So as you dissect that, first merch margin was up about 100 basis points, this was primarily driven by we had mix-adjusted AURs up low single digits, as well as our cost savings work where we were able to improve some of our product costs through our value engineering as well as our transportation costs. B&O dollars were flat. Leverage was also favorable 50 basis points, and I'd say there were a couple of things driving that. First, as I mentioned previously, we exited from a fulfillment center that's driving improvements that will, of course continue for the remainder of the year. We also had some lower store asset depreciation expenses we evaluated our useful life. So as you look at that performance, there are those opportunities that enabled us to really be able to offset the tariffs and hold our guidance for the remainder of the year. And the royalty payment hits merch margin.

Thank you. Our next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Good morning. This is [Amy Teske ] (ph) on the line for Mark. Thank you for taking our question. The strong performance on the Disney collaboration is exciting. Could you provide any commentary about the potential size of the opportunities you have in the pipeline on the collaboration side compared to Disney, and how we should think about the pace and timing of those collaborations through the rest of the year and in the second half. Thank you.

Yes. Thanks for the question. I think the timing, as I referenced still be in the back half of the year, we'll have more to say in due time. Listen, each of the collabs are different sizes, the Disney Princesses was our most expansive with fixed with six princesses over 82 SKUs. In the back half of the year, we had more than one collab plan. And what I would say there meaningful enough that they're going to be a contributor to our back half growth at our full year, up 1% to 3%. Thanks for the question.

Thank you. Our next question comes from the line of Jonna Kim with TD Cowen. Please proceed with your question.

Thank you for taking my question. Curious about your pricing strategy. I would imagine some competitors are taking pricing due to tariffs. What is your take on pricing throughout the year? And then also any early learnings from the Disney partnerships were you able to bring in new customers? And how are -- what are some strategies you are trying to retain those customers that come through the partnership? Thank you very much.

Yes. So overall, as you look at our tourist mitigation strategies, right? AUR was a lever, and we are going to stay flexible. We're going to ensure that we're meeting the customer where their mindset is. The customer continues to be value-seeking. We are pleased in the first quarter that our AURs makes adjusted were up low single digits, and it just speaks to the ability of our agile model to respond to customers.

Great. And then I'll just follow up with the second part of that question around new consumers. So I think we should be pleased with the results that we got from Disney. We should be pleased with that philosophy around growth model that when we bring the right product, when we listen to consumers bring the right products, telemarket brand stories, we definitely drive traffic to the brand. But at the same time, I'd say we do see trends in the sector with younger people, and we know that that's a big part of our opportunity to accelerate growth. And I believe that when we do bring them to the brand, they join this platform. That's remarkably sticky. We've seen the effect of our loyalty program in driving repeat purchase, repeat visits, increase spend, so it remains a big opportunity to bring new consumers to the brand, whether that's through collaborations or through other products and growth levers that we have.

Got it. Thank you very much.

Thank you. Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Hi, good morning. Thanks for taking our question. We just wanted to ask about the new store format that you mentioned on the call today. And if this is the same initiative as the Gingham Plus that you had mentioned several quarters ago?

Kate, this is Eva. Yes, the new store format is the -- it is the Gingham Plus that we mentioned. And we're really pleased with how the format is performing. It is brought some modernization to it, some better navigation, some better technology, some additional engagement. And financially, they are outperforming the stores, and we are building them at comparable costs, so the returns are favorable.

And I'll just jump in there which is I had the opportunity to spend two days this weekend in our Gingham Plus store, and I really like what I see I do think it's a material improvement in terms of brand experience and in terms of the overall store layout. That said, I believe that we can iterate on it further. I do believe that we can go further in terms of offering services, in terms of some of the engagement that we offer and in terms of using our stores as a marketing vehicle to bring more new consumers to the brand. So I think that we are going to continue to iterate on it, and we see it as a very positive step but with more to deliver.

And is there a [indiscernible] number of stores you like it in by the end of the year?

We're -- Kate, I think overall, our -- the format is going in all of the new stores we build and remodel. So that's how you should think about it. We have not accelerated our CapEx on these stores either, I would say.

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.

Thanks and good morning. I wanted to understand how -- a little bit more about how you think about the current backdrop and your view on your pricing opportunity. Clearly, your tariff exposure is a bit lower than peers. But do you view that their need to price as an opportunity to push price as well for you or perhaps an opportunity to consolidate more market share? And then, Daniel, you mentioned the desire to expand more aggressively outside of the U.S. Can you talk about how you think about doing that? Are there certain markets that are particularly attractive? Do you think about markets that so far don't have a ton of competition where maybe you have to convince the audience a little bit more, or is it more thinking about established markets where they have already been improvement? Thank you so much.

Yes. Olivia, I'll start with your pricing question. What I'll say, it's a dynamic market out there, and we are going to stay agile. We know customers are value seeking, and we are in a great position that we bring great products at a great value where we sit. So we'll be agile and read and react to the customer and the market.

Thank you. And then on international, I'll just kind of repeat what I said, which, of course, it's an opportunity to accelerate growth. I've had a strong track record of doing that at both Nike and Burberry. And I'm looking forward to getting on the ground this summer with our partners with our international consumers and really understanding what it is that needs to change. I am in agreement with you that we will be focusing on a select group of markets, and we'll be matching those markets with the business model that most makes sense. So there isn't a one-size-fits-all strategy in my mind in terms of international expansion. It is going to be which market, prioritizing those and which business models lead to the best growth outcomes and financial outcomes for the business.

Thank you. Our next question comes from the line of Korinne Wolmeyer with Piper Sandler. Please proceed with your question.

Hi, team, good morning. Thanks for taking my question. I'd like to touch a little bit on, one, how you're thinking about lapping some of the bigger launches as we progress through the year, such as men's that's been doing particularly well everyday luxuries. How should we be thinking about cycling through those? And then also, I think the adjacent categories as a percent of sales hasn't changed meaningfully in the past couple of quarters. Can you just touch a little bit on your strategy behind those categories? Is there a goal to get those as a larger piece of the mix, or are you pretty pleased with how they are doing right now? Thank you.

Yes. I'll start, Korinne, and maybe Daniel will have something to jump in. So first, on the launches such as men's everyday luxury, we see those as foundational to build upon those versus thinking about them as we have to lap. Everyday luxuries was in the full fleet and by the end of the second quarter of last year. So we -- for women's, it continue to perform well. We've brought new fragrances. We introduced body cream and customers really responded favorably. On the adjacencies, they did grow faster than the overall -- than our overall growth. So the rate of growth is greater. I would say given the predominance of Disney and the impact in first quarter, you don't see it as a percent of total with 10% being consistent. But we're pleased with where we're positioned and look forward to continuing to drive growth.

Thanks, Eva. Let me just jump in and say what my observations around adjacencies are. I do think that a business should feel proud about the business that they've built in the adjacencies. They are segments we've entered with large addressable markets. And as Eva said, it is growing above shop. But I'll come back to something I mentioned earlier, which is I do believe we are going to need to focus, edit to amplify, fewer bigger things and less breadth, more depth. And I think that when we do that, we're going to put more marketing heft behind fewer priorities. And it also tells our consumer what's most important. So of course, we want to make sure that we continue to build the basket of existing consumers through the adjacencies that we have. But really, the focus is on the adjacencies, building new consumers and bringing new consumers to the brand.

Next question please.

Our next question comes from the line of Ashley Helgans with Jefferies. Please proceed with your question.

Hi, this is Sydney on for Ashley. Thanks for taking our question. Wondering if you can share any underlying assumptions you have for the Fragrance category? And then just curious how you think about the long-term mix of online versus in-store with kind of the extra digital initiatives? Thanks.

Yes. Are you going to start with the online store?

Sure. I'll kind of go back to my growth philosophy here. The most important thing that we do is listen to the consumer. And the most important thing that we do is meet the consumer where they are. So we're not setting a target that is for our digital business, but we do expect our digital business to be in-line or slightly above market penetration, and we have got an opportunity to grow that. We know that, that is where the overall segment is growing. So we do expect to see accelerated growth in that area. But we won't do something that forces the consumer into a channel mix that's not right for them.

Yes. And on your Fragrance category, as we all know, fragrance is on trend and growing nicely. And as we look at our business as the category leader in each of our businesses, right, we're going to always look to grow with the market and grow share. And we are excited about the newness that we're bringing and we'll look to continue to drive momentum with that newness.

Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Good morning. This is Angus on for Adrienne. So maybe for Eva first. You noted positive dual channel traffic and maintained market share. Can you elaborate on what drove the traffic outperformance and whether you see this trend sustaining into Q2? And what is incorporated into full year guidance regarding market share? And then a quick one for Daniel. Obviously, this company generates strong free cash flow and the $300 million in buybacks for reaffirmed. How are you approaching capital allocation under your leadership, particularly the trade-offs between returning capital and funding new growth initiatives? Thank you.

Yes. Thanks for the question. Overall in Q1, as we said earlier, we drove positive traffic dual channel in both of our in-stores and online, and we outperformed the benchmarks that we track. As we look at the trends, they are embedded they're embedded in the Q2 guidance that we provided today. We don't guide to market share, but what I will tell you is we strive to look to gain market share, grow with the market gain share.

Thanks, Eva. So on capital allocation, I would say, 10 days in, it is probably too early to be signaling what we are doing in terms of capital allocation or changes to capital allocation. I'm going to work obviously with the Board and with Eva on that. But again, my focus is making sure that the investment that we are using today is focused in the right priority growth areas, and so that will be the first place I'm looking.

Thank you. Our final question this morning comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Good morning everyone. As you think about the comment that you had traffic in both channels that exceeded third-party benchmarks, what are you seeing in your open air stores versus the enclosed mall stores. And Daniel, any way that you're thinking about malls versus open air, given the significant shift that's going to open air, and how they are doing. And what are you -- how are you thinking about the online channel? And if any website enhancements should be coming. Thank you.

Thanks, Dana, for the question. I'll start with the mall versus off-mall performance consistent with prior quarters, off-mall stores performed better than all stores, largely driven by stronger conversion. So that's pretty consistent. No change in trends there.

Dana. I mean anecdotally, I've just been in both malls and off more locations. And on the off-mall locations, I like the adjacencies. I like the fact that we are next to big anchors in traffic like Walmart, like Target, and they're driving strong traffic to our doors. When it comes to website enhancements, again, something that we're going to be prioritizing I'm pleased with the underlying tech foundation that the company has invested in does allow for some rapid change in this area. We'll be bringing some, I would call, feature enhancements in August to the app, but really looking to try to bring a much bigger pic change to our digital platforms in the coming couple of quarters. That is something the team is prioritizing and something that we are going to be getting after straightaway. And I do think that as well as allowing our consumers to connect more emotionally to the brand, to telling better product stories. It will drive conversion and growth. It is both -- it is head and heart. It is content and commerce.

We want to thank everyone for joining today’s call. A replay will be available for 90 days on our website. Thank you for your interest in Bath & Body Works.