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 Second Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]. I'll now turn the call over to Luke Long, Vice President of Investor Relations. Luke, you may begin.

Good morning, and welcome to Bath & Body Works Second 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 in 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. 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 here on my 105th day as CEO of Bath & Body Works. Q2 was a packed quarter where I focused on 3 things: firstly, deeply immersing myself in the business; secondly, driving forward; three, no regret moves and finally, shaping our long-term vision. At the same time, our team navigated the quarter with focus, and we delivered solid results. We ended the quarter with revenue and adjusted earnings at the high end of our guidance range, and given our strong first half results and confidence in our outlook, we are raising the low end of our full year adjusted earnings per share guidance. This quarter, our customers remain cautious and value seeking, and we continue to see more intentional purchasing behavior. Consumers are prioritizing purchases that support personal well-being and convenience while spending selectively. Regardless of the macro environment, we are well positioned to serve consumers with affordable, high-quality products that bring joy to their life, and I believe there is even more opportunity ahead. Over the past 105 days, I focused on understanding where our biggest opportunities lie to accelerate growth. I've had the privilege of connecting with associates at Beauty Park, our distribution centers and our stores across the United States. I've spoken with many of our shareholders. I've traveled internationally where I've engaged with our partners in key markets such as Dubai, Malaysia and the U.K. And of course, I've spoken with our customers. It was important for me to collect direct insights from our most critical stakeholders, and I will continue doing this going forward. What stands out most from my time on the ground is the tremendous upside potential across the entire value chain. From product innovation and merchandising to alternative distribution and storytelling across both our physical stores and digital platforms. 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. That commitment remains unchanged. But we must continue to evolve with our consumers, positioning ourselves as a global leader in home fragrance and personal care. To be clear, Bath & Body Works has a very strong foundation, an iconic brand, over 1,900 North American stores, more than 530 international stores, 39 million active loyalty members, knowledgeable and passionate store associates and a predominantly U.S.-based vertically integrated supply chain. In recent years, we've invested heavily to strengthen this foundation from building a loyalty program and enhancing our technology to expanding into new categories. These moves have made us stronger, but we have not yet delivered the consistent, durable and profitable growth we expect of ourselves. The reality is clear to me. We have grown spend and increased retention with existing customers. We have not achieved the new customer growth we aspire to, and we are not connecting deeply enough with the younger consumers who are driving growth in our industry. There is also an opportunity to drive market share growth in our core categories and reduce our reliance on promotions. We are confident in the steps we must take to unlock growth potential. To meet the opportunity, we are taking swift action in the short term while actively shaping our long-term strategy. This is about performing and transforming simultaneously. It's about making strategic moves that resonate both with current and future customers. I'm confident we can achieve this while not only maintaining but expanding our operating margin. Looking at Q2, we made progress with improvements to our semiannual sale, and we launched successful collections like Summerween, where we highlighted Halloween theme products during the late summer period. And as we build a durable, consistent long-term growth model, we were pleased to announce that we have entered into a multiyear partnership with Disney. This builds on the successful momentum of Disney Princesses and our recently announced Disney Villains collaboration, which Eva will share more about. From a process perspective, I'm putting our marketing, digital and merchandising team to work in a more integrated and omnichannel way to deepen brand connection by telling powerful and emotional stories, delivering innovative products and engaging consumers across all touch points. And this is just the beginning. Early in my tenure, I laid out 3 no regret move to act on now while we shape our vision and strategy for the future. Firstly, elevating our own digital platform, the consumer experience and revenue growth of our digital business are not where they need to be, and we're making rapid progress to address these now. Our focus is on elevating our digital platform to meet the expectations of today's consumers, delivering more experiential frictionless and convenient way to shop. Improving our digital platform is expected to drive stronger results both online and in stores. Starting this September, you will see meaningful improvement across our digital platforms, including enhanced functionality, better product imagery and copy and richer and more emotional storytelling. You can see examples of these improvements on our slide presentation. Over time, we believe these digital improvement will boost brand equity and direct channel sales. Next, we are amplifying our efficacy message by more clearly communicating claims and modernizing packaging to better reflect the key product attributes such as efficacy, safety and emotional benefits. These will help us connect more meaningfully with consumers and reinforce the value of our products. Our formulas are of exceptional quality, but our packaging doesn't emphasize it. We will evolve our packaging to more consistently educate the consumer and build awareness of the numerous benefits of our products, especially to younger and ingredient conscious consumers. For example, starting this fall, we are enhancing in-store and online messages of our aromatherapy line to focus on stress relief and sleep. Also, our body lotion and body cream packaging will highlight 48-hour hydration. And over time, we'll be updating our labeling to more prominently signal that our products are dermatologists tested. We're also introducing consistent, elevated metrics across all of our stores to reinforce trust in every product we offer. Thirdly, we are focused on putting our product in the path of the consumer. Because to attract new consumers, we must meet them where they are. That means strategically and thoughtfully exploring new forms of distribution beyond the own channels we currently sell through. Our recent entry into college bookstores is a fantastic example and one we are excited about. As back-to-school season kicks off, we're in more than 600 campus stores with access to 7 million young consumers. This push into alternative distribution is the first time we have distributed products at this scale outside of our stores, and we believe it provides an exciting avenue to reach and engage new younger consumers and is the perfect environment to drive brand discovery. These no-regret initiatives will place us in the path of even more consumers, and they will accelerate our growth over time. However, the opportunity ahead extends well beyond these 3 moves with potential upside to how we innovate and execute and how we reach and connect with consumers. For example, we see opportunity in how we manage and merchandise our assortment, how we leverage our store footprint to further enhance brand storytelling, how we maximize the potential of our supply chain and beauty park and how we drive growth across international markets. Looking at our store experience and our assortment, many consumers tell us that when they walk into our stores, the assortment feels overwhelming. We also tend to lead with discount and promotion instead of highlighting product benefits. We believe we have an opportunity to focus our assortment and spotlight product attributes alongside price and value as compelling purchase drivers. Our stores also provide us with an opportunity to amplify bigger, bolder marketing messages. For example, we've moved our store base to predominantly off-mall locations, and we've gained tens of thousands of feet of window space, historically underutilized these windows are now being used to activate and tell rich brand storytelling that draw in new consumers. Turning to our supply chain. Our strategic partners at Beauty Park and our relationships with leading global fragrance houses provides us with unmatched speed and quality. We are focused on better leveraging these strengths to accelerate our innovation cycle and reinforce our position as a category leader. And finally, we have tremendous untapped opportunity to reach and connect with more consumers internationally. We are thoughtfully evaluating these and other opportunities and integrating them into our long-term strategy. Before I hand off to Eva, I want to take a moment to thank our team for the hard work, dedication and focus on delivering for our customers and our company. Change is already underway at Bath & Body Works. We understand the challenges and our opportunities, which is exactly why we've moved quickly on our no-regret move and we are building a strategy to perform and transform in parallel with razor sharp priorities, disciplined execution and a strong team, we are determined to return Bath and Body Works to durable revenue and profitable growth. We look forward to sharing more on our long-term vision in the coming quarters. And now I'll hand it over to Eva.

Thank you, Daniel, and good morning, everyone. The energy level here at BBW is high, and our teams are hard at work to accelerate growth under Daniel's leadership. I'll begin with a high-level summary of the quarter, including key business drivers. I'll then share more detail on our Q2 financial performance and provide an update on our Q3 and fiscal year 2025 guidance. Throughout the quarter, we were disciplined and decisive in our actions while navigating through continued macro volatility and our Q2 performance is evidence of that. As a reminder, we are focused on 3 priority areas: first, accelerating top line growth while maintaining or expanding margins. Second, enhancing operational excellence; and third, consistently deploying our strong cash flow to invest in growth opportunities and return value to shareholders. Overall, we delivered a solid quarter with net sales up 1.5% and adjusted earnings per diluted share of $0.37, both at the high end of our range. In terms of our top line performance, it was our fourth consecutive quarter of underlying sales growth with positive dual channel traffic and stores traffic exceeding third-party benchmarks we track. This performance was led by a strong semiannual sale, thanks to focused execution by our teams. We put our learnings from prior semiannual sales into action, strategically shifting the event back by 2 weeks to better align with the market dynamics and consumer mindset. Our stores were ready with the right mix of product and clearly signaling the sale event, effectively drawing in deal-seeking shoppers from the start. We also built excitement across social media, Billy the Duck, our newly relaunched brand mascot became a breakout star, driving strong engagement across platforms and generating over 260 million impressions. Additionally, partnerships with leading fragrance influencers helped boost awareness and traffic, both online and in stores. Additionally, there were other key contributors to our performance in the quarter. First, our sanitizer business performed above the shop with consumers responding positively to our newer products like our moisturizing PocketBacs and our 1 ounce sanitizer sprays. We drove growth in our men's business, which we highlighted during Father's Day, and we're pleased with the performance of our True Blue Spa collection relaunch. Finally, we launched our Summerween product collection earlier to capture consumer demand. Fan favorite fragrances like Ghoul Friend and Vampire Blood performed well, and our new Frankenstein bakery concept featuring ice cream float became a standout hit. Looking ahead, we will bring consumers more newness and more collaborations in Q3 and Q4. We're excited about the fragrance experiences will drive this fall including our Disney Villains collaboration, which launched with early access to loyalty members this week. Building on the success of our Princess collaboration, this launch will soon be available to all consumers globally. We have also introduced a new ceramic candle vessel, elevating our assortment with an enhanced design. At the same time, we're evolving our in- store technology and loyalty program, along with the planned enhancements to our digital capabilities will strengthen the consumer experience. This quarter, we successfully completed the deployment of a new point-of-sale system across our store base with no consumer disruption. This new point of sale is easier for our store associates to navigate and allows them to provide a better customer experience. Our loyalty program is performing well with existing customers and is driving increased spend, trip frequency, cross- channel purchases and retention. In Q2, we had approximately 39 million active loyalty customers up 5% compared to the prior year. Now I'll turn to the details of our Q2 financial performance and guidance. In Q2, we delivered net sales of $1.5 billion up 1.5% to the prior year. These results were at the high end of our guidance range, led by strong semiannual sale performance as I previously stated. In U.S. and Canadian stores, net sales totaled $1.2 billion, an increase of 5% versus the prior year. Direct net sales were $267 million, a decrease of 10% compared to last year when adjusted for buy online, pickup in store, which is reported as store sales, direct net sales were down 3%. That said, we're not satisfied with our digital business. And as Daniel noted, our teams are moving quickly to enhance the digital experience. International net sales were $86 million in the second quarter, a decline of 3% and in line with expectations. The decline in the quarter was driven by the timing of ship sales between Q1 and Q2. Year-to-date, net sales were up 2% versus prior year, representing the first positive seasonal net sales results we've seen since the start of the Middle East conflict. International system-wide retail sales grew 9% in the quarter, in line with our expectations and a continued improvement in performance. Our second quarter gross profit rate of 41.3% exceeded our expectations and increased 30 basis points compared to prior year, while including $16 million or approximately 100 basis point headwind from tariffs. Gross profit expansion resulted from B&O leverage, largely due to the exit of a third-party fulfillment center. Adjusted SG&A as a percentage of net sales was 30.2%, representing a 110 basis point deleverage compared to the prior year. The increase was driven by selling expense, including investments in new stores and higher health care costs. Now bringing it all together, Second quarter adjusted operating income was $172 million, down 6% to last year. With respect to inventory, we ended the second quarter with total inventory up 13% to prior year. This includes the impacts of tariffs on purchases as well as planned strategic pull forward. We exited the season with healthy inventory levels. Turning to real estate. Our portfolio remains healthy with 58% of our fleet in off-mall locations. In the second quarter, we opened 20 new North American stores, all in off-mall locations and permanently closed 16 stores, primarily in malls. Internationally, our partners opened 14 new stores and closed 1 store during the quarter, and we ended the quarter with 537 stores. Our international store 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 third quarter guidance includes the estimated impact of all tariff rates communicated by the U.S. government and other countries as of this week including the recent removal of Canadian retaliatory tariffs effective September 1. For the full year, we expect tariffs, net of mitigation efforts to negatively impact growth gross profit by approximately $85 million, with $40 million of that impact in Q3. As a reminder, we import approximately 10% of goods from China and 7% from Canada and Mexico. We believe our vertically integrated predominantly U.S.-based supply chain positions us well to compete in the current environment and to fully absorb the impact of tariffs at current levels in our fiscal 2025 guidance. Looking ahead, we are confident in our ability to further mitigate these costs over time through strategic sourcing, operational efficiencies and other targeted initiatives. For the full year, we are narrowing our net sales guidance from 1% to 3% growth to 1.5% to 2.7% growth and raising the low end of our adjusted earnings per diluted share guidance from $3.25 to $3.60 to $3.35 to $3.60. Our guidance reflects strong first half performance and consistent expectations of 1% to 3% net sales growth for the second half of the year. We continue to expect gross profit rate of approximately 44%, and I am confident in our ability to absorb the $85 million impact of tariffs most of which was not included in our initial guidance range back in February. We now expect our adjusted SG&A rate to be approximately 27.7% driven by higher health care costs and strategic investments. And we are increasing our planned share repurchases to $400 million, up from $300 million. Turning now to the third quarter. We expect net sales growth of 1% to 3% growth versus the prior year. We expect Q3 system-wide international retail sales to be up high single digits with reported net sales up mid- single digits. We expect third quarter gross profit rate to be approximately 42.2% including approximately $40 million of tariff impact. Tariffs are expected to disproportionately impact third quarter results due to inventory receipts that were subject to the 145% China tariff rate between April 9 through May 13. We expect our third quarter SG&A rate to be approximately 31.5%, also reflecting higher health care and technology costs as well as strategic investments. We are diligently working to mitigate these impacts. Our third quarter outlook includes interest expense and other of approximately $65 million and a tax rate of approximately 25% and weighted average diluted shares outstanding of approximately 206 million. Considering all of these inputs, we are forecasting third quarter earnings per diluted share of $0.37 to $0.45. You can find additional details on our guidance in our slide presentation. Now for an update on capital allocation. We are a strong cash flow generating business, and our top priority remains driving durable 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 second quarter, capital expenditures totaled $56 million, bringing the year-to-date total to $93 million. Our full year free cash flow expectation remains in the range of $750 million to $850 million, reflecting working capital improvement driven by our fuel for growth initiatives. In Q2, we returned $42 million to shareholders through dividends and repurchased 4.1 million shares of common stock for $121 million at an average price of $29.14 per share. Year-to-date, we have returned $85 million to shareholders through dividends and we have repurchased 8.5 million shares of common stock for $256 million. As I mentioned, we are increasing our planned full year share repurchases from $300 million to $400 million. Our business generates strong free cash flow, and we view our shares as an attractive investment at current levels. In summary, I'm encouraged by our first half performance and energized by the opportunity to accelerate growth. We believe that our agile business model positions us well to compete effectively in today's dynamic consumer and macro environment. We are executing with discipline focusing on what we can control and introducing newness and collaborations to consumers in 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 questions.

[Operator Instructions] Our first question comes from the line of Matthew Boss with JPMorgan.

So Daniel, with a full quarter now under your belt, how would you assess opportunities ahead versus your perspective, maybe when you first walked into the building? And Eva, could you speak to traffic trends during the quarter and trends that you've seen in August supporting the 1% to 3% sales outlook for the third quarter?

Good morning, everyone, and good morning, Matt. Yes, I've been at Bath & Body Works now for just over 100 days and deeply immersed in the business, as you heard, meeting with consumers, teams, partners, shareholders. And the real headline is beyond my sort of diligence from outside the company, I see even more opportunity to accelerate growth than I did 3 days ago. I mentioned on my first earnings call on day 10 of 3 no regret move, elevating our digital platform, amplifying the efficacy of our products and expanding our distribution, and we are making good progress against those important initiatives. But beyond those, I do see opportunities right across the value chain to accelerate growth. Let me give you a few examples of the things I've seen. Firstly, in terms of our assortment and merchandising. Our stores are beautiful and experiential, exceptionally strong, but many new consumers have told me they find the assortment overwhelming. It's not that we don't have the product for them, we really do. It's just that they find it hard to find, and we also lead with price sometimes over benefits. So we're addressing that. We're editing our assortment to amplify what we truly stand for the consumer selling bigger and bolder stories to drive greater demand through a smaller selection of products at lower discounts. That's where we're focused there. Another opportunity has been in Beauty Park. It's incredible the foundation this company has built with its agile domestically vertically integrated supply chain. It gives us speed, agility and quality, but we can truly use this asset to drive innovation in our core categories and reinforce our position as a category leader. I am focused on making sure that we have the right innovation in the pipeline for our core categories, and we are looking forward to bringing those to market in the next fiscal. And then finally on brand, so important. We have this iconic brand, and so many consumers have shared with me that the deep love for the Bath & Body Works brand. And we have this incredible social following, as you might have seen, about 7.4 million Instagram followers. But we're posting not programming social, the way that top brands do creator-led at the speed of culture and commerce integrated. We need to reframe social, Instagram, TikTok as a growth system. I think about the 4 Cs, content, community, creators and commerce. We know this is the modern brand heat and demand generation playbook, and we are getting after that in short order. Eva?

Great. Thanks, Daniel. So your first question about how the months played out in the quarter and in particular, traffic. As you know, we changed and really improved our retail calendar to drive performance during SaaS. We launched Halloween earlier than prior years and created space for Father's Day. So as you look at the monthly trends, May was softer, but largely negatively affected by the timing of SaaS. June was very strong from a sales and traffic perspective. And July, I would say, was more back to normal when you normalize for the Halloween launch and the Prime Day. So traffic overall was up in the quarter. It was above external benchmarks, but it was a bit softer than Q1. Now your question in terms of Q3 and what we're seeing in August, First, what I just want to say is, as always, our performance to date is included in our outlook for the quarter. As you think about our key drivers for the quarter, it's our Disney Villains launch, our fall assortment and our single fragrance launch that will come at the end of the quarter. So we're excited about this newness and are confident in the outlook we provided today.

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

You've talked about marketing changes to focus less on pricing and promotions and more emotionally connecting with customers. What are some of the changes you've made in marketing? And how have customers been responding, and then for Eva, can you talk to the tariff impact between 3Q and 4Q?

Yes. Thank you very much, Lorraine. We are focused on elevating our market in what I would call the most practical ways. So you can start to see already the changes that we are driving to our digital experience, just the product photography for Villains and the product copy for Villains is a marked improvement on what this brand has already done. And as I've said before, that will drive both in-store and online sales as well as raising the overall profile and feeding of the brand. And then secondly, in stores, I would say, we have a real opportunity to sell bigger bolder stories. I'm really pleased with the way that Summerween came to pass. It shows that when we stick to our growth formula or the growth philosophy, creating innovative and coveted product, telling bold and emotional stories and bring it to life in the marketplace, we win. And I see many collections in fall and holiday as you move to the back half where the consumer will notice the elevated storytelling in our fleet. Just one practical example, as we've moved our stores off mall, we've ended up with thousands of feet of windows, which we have historically not utilized. We have started to roll out really eye-catching windows, and we have been testing and learning with them and expanding it more into fall and holiday. And I must say, it looks wonderful and consumers are responding.

Great. Thanks, Daniel. The only thing I'll add to that is, as we work to continue to optimize and improve our modeling, we're going to be making sure we're measuring the returns and getting the most value and driving the most growth out of those investments. Now Lorraine to your question around Q3 versus Q4 and the impacts of tariffs. We're pleased that for the year, we've raised the low end of our guidance while absorbing this impact of tariffs. And if you think about the second half of the year, versus where we were sitting here a quarter ago, we haven't changed things materially, right? We're maintaining up 1% to 3% guidance. But as you look at the overall frame of our gross profit in particular, Q3 is disproportionately impacted by tariffs. The $40 million that I quoted in my prepared remarks, affects margins by about 240 basis points, and that compares to Q4 at 100 basis points, largely driven by the China tariffs at 145%, back between April 9 and May 13. So that disproportionately impacts that as well as some of the mix of our business quarter versus quarter. So overall, we feel good about where we are in our ability to absorb the tariffs and longer term to mitigate the impacts over time.

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

This is Katie Delahunt on for Alex Straton. Just a question for Daniel. I know the prior management team thought this was a business that could return to mid-single-digit, high single-digit growth over time. Do you agree with that still? And if so, what are the building blocks as you think about core growth versus some of the newer ideas you have like wholesale or international.

Thanks, Katie. Yes, we are absolutely anchored to getting to mid-single digit, high single digit. And we look at it both from a growth perspective, but also we're a brand that wants to take share in our core categories, and we know that we are in exciting and our categories are growing. When it comes to the core, we believe that we have all the right product and really it's about making sure that we are bringing it to market in the best possible way. I can't emphasize enough how fast we will act on our digital opportunity. We know that this is an opportunity to bring new consumers to the brand, which, as I said in my opening remarks, is the single largest opportunity that we have to drive durable and profitable growth. We know that consumers are on digital channels, researching what it is they want to buy, whether they purchase in-store and online. And as we move through September, October and into the next year, we will be unrelenting in making sure that we are delivering consumer right progress on that channel. And then in terms of new priorities, we do see being in the path of the consumer as fundamental to growing new consumers and returning to consistent durable high single-digit, mid-single-digit growth. We're very excited by the announcement of our launch in college bookstores, 7 million young consumers with more convenient access to the brand, and this is the first of many initiatives in this area.

Daniel, fun switching between calls here. It's Alex. I have 1 follow-up for you. And it's really just a similar question. But on this path, potentially 20% EBIT margin over time that the prior management team was pretty keen on. Similar question. Do you agree with that still and building blocks on that piece?

Thanks, Alex. When it comes to investing in our strategy, I think that -- I'm still anchored to the principles that management have outlined. What we're going to do is refocus our capital internally -- refocus our capital allocation internally to invest in the largest growth drivers, and we don't expect ourselves to -- certainly don't expect ourselves to dilute our margins in the coming quarters.

Our next question comes from the line of Kate McShane with Goldman Sachs.

This is Emily Ghosh on for Kate. We were wondering if you could provide more detail around the drivers of SG&A deleverage in the quarter, including the investments in new stores and higher health care costs. And then do you guys expect to see similar costs in the second half of the year?

Great. Thanks for the question, Emily. So overall, in the quarter, as I mentioned in my prepared remarks, a few things, right? The investment in stores is normal the store growth, the build-out that we're doing. We also invested in some training. We are seeing some pressure on health care costs that is factored in to our outlook. You saw for the year, we took our SG&A guidance up a bit if you think about that, and it's the health care cost, it's some technology cost and some investments we're making in building out the strategic plans that Daniel has outlined.

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

I wanted to focus on the digital side of the business, understanding the BOPIS is having a headwind there, but still negative. I guess, Daniel, I'd love to hear some of the initial learnings that you have on your end, obviously, from your background, big DTC digital platform. I would love to know what you think you can enact in kind of the near term and the medium term, what are the biggest opportunities? And what's your outlook for Bath & Body's kind of digital and e-commerce platform over the next couple of years?

Thank you, Ike. You're absolutely right. Our digital business is not up to our standard. Our stores are beautiful and experiential and our digital platform is not. We know that digital drives brand relevance, discovery and sales in all channels, and we are taking steps to address this immediately, as I said, and consumers are going to start to feel this. You see it in the product topography for Villains, and we will launch a new app in September. We will relaunch mobile web starting in October. And we have a plan that goes 3 months, 6 months, 9 months, 12 months, and we're going to be unrelenting in improving the channel because we know that it will drive brand and it will drive sales in store as well as sales online, and it is key to capturing the new consumer. We believe we have so many of the fundamentals in place, but this will be a key driver in the coming months, quarters and years, and we are on it.

Daniel, just a follow-up. Do you have an expectation on when that channel can realistically show some inflection? Is there an algo or a growth rate that you would target over the longer term? Just kind of curious more into the numbers.

So obviously, we look at the retail equation just as we do with all of our channels. I think the way I think about it is consumers are going to start seeing improvements immediately, and we do expect that to grow over time. Quite when it reaches what the growth rate should be, I actually have to learn in my time at Nike that the important thing is to be moving at the pace of the consumer. We're not looking to overly advantage our digital channel over our stores channel. What we're looking to do is ensure that we are in the path of the consumer with a channel that's right for them and bringing new consumers to the brand.

Our next question comes from the line of Paul Lejuez with Citi.

This is Kelly on for Paul. I just wanted to dig a bit more into the tariffs. The $85 million burn you're seeing this year seems very high relative to your sourcing exposure, any way to sort of quantify what sort of tariff impact that you've seen from those higher rates does not repeat next year so would sort of view it as a margin opportunity. That's my first question. And then second question is just on how AUR shook out in the quarter and your views on the back half.

Sure, Kelly. I'll start with the tariff question. The net impact of about $85 million syncs up with our sourcing. I would remind you that until September 1, right, the Canadian retaliatory tariffs of 25% were in place, we have a business -- a strong business in Canada. Thus, we were importing our product there. So that may be the delta on your math there. Overall, on AURs, our mix-adjusted AURs were up low single digits in the quarter. We were less promotional overall for the quarter. Obviously, we had a larger sales mix into the SaaS time frame. But we continue to use our agile model to meet consumers where they are, and we'll do that.

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

A couple here. First is on wholesale. How should we be thinking about the contribution from the Campus stores this year, both from top line and gross margin? And just bigger picture, maybe update us on how you're thinking about the timing and scale of future wholesale opportunities. And then separately, just SG&A, I wanted to follow up there. I mean the deleverage has intensified a bit. Maybe just help us reconcile the Q2 trend and the guide with the plans to accelerate growth while sustaining or expanding margin. Thank you.

Let me kick off and then hand to Eva. So the contribution from Campus is -- Campus bookstore is built into our full year guidance. So that's that. The most important thing, I think is this is a statement of intent. We are a consumer-led brand and consumers don't shop channels, they shop brands and to introduce new consumers, we must be in their path. And so we're going to thoughtfully and strategically explore new channels of distribution, college bookstores is the first example. It target consumers, younger consumers in a really convenient location. We are hard at work thinking about which are the next opportunities, and we're looking forward to providing you an update when we come back with our long-term growth strategy.

Yes, Mark, and I will take your SG&A question. From an SG&A pressure and the trends we're seeing, as I said, it's really the higher health care costs, some strategic investments that we're making to drive the new strategy and a bit of technology. Now looking at it more holistically, right, B&O is leveraging as we exited a third-party fulfillment center as we're driving strength in our stores, that pressures were the SG&A versus the B&O. We'll continue. We've had a strong fuel for growth program. We've taken out $300 million of cost over the last couple of years, and we will continue to flex that muscle to offset some of these impacts we're seeing.

Our next question comes from the line of Jonna Kim with TD Cowen.

I would love to hear more about the fragrance and body mist how that performed during the quarter. And Daniel, I know Beauty is a focus area for you. What are your plans around that specific category, and any color around Disney's partnership in terms of how long the new drop will last and cadence of future launches as well.

Great, Jonna, I'll start with Body Care and how it performed in the quarter. Overall, we were disappointed with Body Care. As you saw, we were down low single digits. We had stronger results during the semiannual sale. Our men's business continued to grow nicely. We've relaunched True Blue Spa. But Mother's Day didn't perform to our expectations in this growing category. We'll hindsight that. We believe we needed more newness as you approach the event. And what I'll say is this is a really strong category that we're a leader in, and it will continue to be a priority area for us, and we're going to learn from consumers and innovate in both form and function.

Thanks, Eva. Now let me just follow up with a few comments on Disney and collabs, We have seen great success from our collaboration in the past with Disney. Disney Princesses specifically in the first quarter, and we're very excited about the launch of Villains in this quarter. We've taken learnings from what we did at Princess' and applied them to this launch, and we're excited that this is our first global launch of a collaboration. But there are 2 strategic things that I should mention. Firstly, collaborations like this are proof points to the growth philosophy, putting the consumer at the center, innovative and coveted product, amazing storytelling and then bringing it to life in the integrated and elevated marketplace. I've seen what Villains is going to look like in stores. And again, it raises the bar for storytelling in our stores, and I know our consumers will respond positively. Secondly, we are focused on consistent durable and profitable growth levers. And so the announcement of our signing a multiyear deal with Disney is exciting. We're turning a one-off into a durable and profitable growth lever for this company, it will be the first of many that we'll be talking about in the coming quarters.

Our next question comes from the line of Olivia Tong with Raymond James. Ms. Tong your line is live.

Could you talk a little bit more about price and promotion in your views, less so in Q2 given the semiannual sale, but more in Q3 and second half and whether tariff mitigation plans necessitate any pricing? And then just on tariffs overall, could you talk about any other initiatives that you have that you're planning to embark on to lower the pressure there?

Thanks, Olivia. This is Eva. I'll start. As you think about tariffs, we've been working to mitigate this since tariffs were announced or became a possibility. And as we look over a multiyear period, we have 3 areas that we're clearly focused on. One, supply chain optimization. We've done that before, right, with 80% of our supply chain U.S.-based. So our teams are working hard there. That takes time to shift and have the right capacity in the right location, targeted assortment changes how we can optimize our assortment to minimize tariffs while continuing to satisfy the customer. We've made some of those changes. It's reflected in our outlook in our back half of the year expectation. And finally, strategic pricing assumptions. And as Daniel has said, relying less on promotional elevating our value equation. We're an affordable luxury. So really bringing the innovation to elevate that value and drive AUR up.

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

This is Sydney on for Ashley. Have you ever quantified the difference in store productivity between on and off mall stores? And then just on newness and thinking about that as a sales driver, have you sized maybe what percent of comp is driven by newness historically and kind of where you would like to see that go going forward?

Yes. On your question on the on and off mall, both have very strong 4-wall economics in the quarter, and this is very consistent with prior periods, all small stores are performing better than mall-based stores, driven by conversion, some traffic. But overall, the economics are both -- are strong in both, and we have a very healthy portfolio. And in terms of your question on what percent of growth is driven by newness, we have an overall portfolio of products. We know our customers respond to the newness that we bring that's the way to drive traffic, excitement, bring new consumers in. So it's part of the overall equation. We have not broken it out specifically.

Our final question this morning comes from the line of Dana Telsey with Telsey Advisory Group.

As you think about 1 top line, the drivers of innovation and now, obviously, the new college campus initiative. Are there other initiatives that -- where you can see putting your product outside of your own stores that could be a top line enhancer and marrying that with the profitability and margin metrics how do you think of accelerating those margins go forward in the wake of tariffs? And just lastly, on the third and fourth quarter guide, the fourth quarter obviously shows much more improvement than the third quarter as you think about the fourth quarter, any changes in how you're thinking about the promotional cadence and innovation or marketing.

Dana. I'll start with your last question first, right? The dynamics between the third and fourth quarter and the pressures on margin is largely driven to that tariff dynamic that I spoke to earlier, about 230, 240 basis points of pressure in Q3; in Q4, 100 basis points of pressure. We know Q4 is about winning in holiday. We're excited about our holiday assortment. Our expectation is not to be meaningfully different than last year from a promotional cadence, and we'll continue to use our Agile model to meet the customer and drive demand.

Dana, let me just come in finally on the top line drivers. I mean I think that's my big takeout from my first 100 days. It was clear to me that we are going to drive top line growth by elevating our digital platforms, by amplifying the efficacy of our product, which is something that new and younger consumers are asking for, and we have already invested in the formulas that are efficacious and clean. And so it's really about messaging and bringing them to the market in the right way. And then as we said, as we expand our distribution points to be in the part of the consumer, we see that being a top line driver as well. But beyond those things, I can't emphasize enough how many opportunities I've seen in this business to drive growth. That is my big takeout from the first 100 days, whether that is in marketing and in social, whether that is in innovation through our partnerships in the Beauty Park, whether that is the opportunities that we have just with some of our iconic fragrances, I go into our stores, and I see some big drivers of growth in our classic fragrances. Think Mahogany Teakwood, Into The Stars, Champagne Toast. Once we've launched those products, we rarely go back and market them. We don't necessarily take into a new consumer. They sit on the shelves and people walk in and buy them. It's almost like an annuity. When we take those products to a new consumer and we treat them with the iconic status they deserve, I believe we will bring new consumers to the brand and drive repeat purchase from existing consumers. There is so much opportunity for this company, and we are getting after making sure that we identify the largest opportunities and focus the company behind them in the short term. And as we bring our strategy to the market in the next couple of quarters in the medium and long term, too.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Heaf for any final comments.

Thank you, and thank you so much for joining us today. In summary, while we delivered solid results this quarter, there is still much work for us to do ahead. We are energized by the path forward, and we believe the actions we are taking now are positioning us well for profitable, consistent and durable long-term growth. We are, without question, making progress on those 3 no regret moves and actively evaluating all the other untapped opportunities we have spoken to today, all while executing with strength and delivering newness for our customers and the customer is the center of everything that we do. I want to say thank you to all of our associates who are making all of this progress possible, and we couldn't be more excited about what lies ahead.