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, Inc. Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. During the question and answer portion, you may ask a question from the phone by pressing star one. 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, Inc. third quarter 2025 Earnings Conference Call. Joining me on the call today are Daniel Heaf, Chief Executive Officer, and Eva C. Boratto, Chief Financial Officer. In addition to this call and this morning's press release, we have posted a slide presentation on our website that summarizes the information in these prepared remarks and provides 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, Inc. 2024 Form 10-Ks. Today's call also contains certain non-GAAP financial measures. Please refer to this morning's press release and supplemental materials for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. With that, I'll turn the call over to Daniel.

Thank you, Luke, and good morning. Let me begin by acknowledging that our third quarter results and our lower expectations for the fourth quarter don't live up to the expectations we all have for this brand. I joined Bath & Body Works, Inc. to accelerate growth, and I remain confident in our ability to do so. Today, I will set up a clear diagnosis for what's been challenging our performance and the actions we are already taking to address it. While the consumer environment is tougher, this is no excuse. As we continue to underperform the sector, we're focused on addressing the issues within our control to return to growth. Our transformation started the week I joined with our no-regret move, and the whole company is working with the utmost urgency. But this will take time. 2026 will be a year of investing behind our brand to strengthen our fundamentals and position our business for sustainable long-term growth. Before I outline what must change, let me ground you in what endures: the competitive advantages that give us the right to win. We are a market leader in attractive growing consumer categories. We are an iconic American brand recognized worldwide. We have a vault of beloved fragrance franchises with each of our top five franchises generating over $100 million in annual revenue, and our largest fragrance generating over $250 million yearly. We operate more than 2,400 stores around the world, employ a community of exceptional associates, have 40 million active loyalty members, and benefit from a fast, largely domestic supply chain. Our business model generates strong margins and high free cash flow conversion. Despite these strengths and the revenue growth in recent quarters, I concluded that swift and decisive action is needed to build the engine to drive sustainable long-term growth. From my first day, we have refocused on putting the consumer at the center of everything we do and listening closely to their feedback and insights. This has guided a disciplined end-to-end review of every aspect of our business: product, brand, digital, stores, operations, and talent. The plan we are announcing today and the actions we are taking and the strategic investments that we are making are the result of that comprehensive review, not a reaction to a single quarter. Let me first give you the diagnosis in four clear points. Firstly, we pursued adjacency to attract new consumers, but that strategy has not delivered the growth we expected, and it reduced focus in investing in our core categories. Secondly, collaborations that should have been used to drive excitement, energy, and equity into our brand have been used to carry quarters. Thirdly, as these strategies and other tactics have not delivered growth, we have relied on deeper and more frequent promotions. Great value and exciting deals have been part of our brand, and that will not change. However, over-reliance on promotion delivers diminishing returns and erodes brand equity, and that is what has happened here. While all these efforts appeal to our existing consumers, they did not grow our customer base, and we have not attracted a younger consumer. Finally, our organization has become slow and inefficient. Unnecessary complexity has reduced our speed, dampened our innovation, and we prioritized efforts that were not targeted to acquiring a new and younger consumer. Unlocking the next phase of growth requires decisive action. We are investing in new talent, focusing our teams on the highest value work, and moving at the speed of the consumer while optimizing expenses to fuel innovation and long-term performance. Our strategy is guided by what we have seen working in the marketplace. Over the years, consumers have evolved. They seek greater efficacy, ingredient-led products, modern packaging, emotive storytelling, and elevated multi-channel experiences. Our competitors have risen to meet those needs. We have not. In some cases, as with our formulations, we have invested in these attributes, but we have not communicated them consistently and effectively. Today, we are announcing a holistic growth plan to revitalize Bath & Body Works, Inc. across brands, product, and the marketplace, designed to drive value for our stakeholders. We are reclaiming our legacy as an innovative brand rooted in nature and benefits and leading the world in scent and self-care. This plan, the consumer-first formula, focuses our investment behind our four largest revenue-driving opportunities. These strategic priorities have already been communicated across the organization, and work is well underway. The first pillar of our plan is to create disruptive and innovative products that serve the needs of today's consumer. Desire will be designed. We will develop products in our core category to deliver luxury scents with benefits created to be accessible to everybody. Thoughtfully sourced and ingredient-led, refocusing on what made Bath & Body Works, Inc. distinct. In 2026, we will reinvest in our core categories. We are returning to best-in-class product leadership in body care, home fragrance, and soaps and sanitizers. Two, consumer muses. Designed with deep consumer insights guide our every decision. Jen, who demands bold fragrance, fun, seasonality, and value. And

Thank you, and good morning, everyone. As Daniel emphasized, our path forward is anchored to the four pillars of our consumer-first formula: creating disruptive and innovative products, reigniting our brand, winning in the marketplace, and operating with speed and efficiency. To attract a new and younger consumer to the brand and unlock our next era of growth, we will invest behind our strategy as we also drive diligent cost discipline to fund the actions we're taking. Our team is already hard at work unlocking the targeted $250 million of additional cost savings over the next two years. While we are moving with pace, this strategy will take time to impact our financial performance. Now turning to the financials, I'll begin with a summary of the third quarter. I'll then provide an update on our Q4 guidance. As Daniel noted, the Q3 results didn't live up to the expectations we have for this brand. In Q3, we delivered net sales of $1.6 billion, down 1% to the prior year, and adjusted earnings per diluted share of $0.35, both below our expectations. Relative to our expectations, the Villains collection did not generate the consumer excitement, traffic, or sales that we expected. Our start to holiday in late October has been very challenging. I'll provide more color on that shortly. Versus prior year, all of our core categories declined low single digits. This underscores the need to focus investment in our core categories. In U.S. and Canadian stores, net sales totaled $1.2 billion, flat versus the prior year. Direct net sales were $299 million, a decrease of 7% compared to last year. When adjusted for Buy Online Pickup in Store, which is reported as store sales, digital net sales were down 1%, a sequential improvement from Q2 performance. While we continue to make progress on our app and mobile web enhancements, there is substantial work ahead to develop a best-in-class experience. International net sales were $73 million in the third quarter, an increase of 6% and in line with our expectations. International system-wide retail sales grew 16% in the quarter, a continued acceleration as the business has stabilized since the effects of the war in the Middle East. Our third quarter gross profit rate of 41.3% was below our expectations and decreased 220 basis points compared to the prior year, driven by a 260 basis point decrease in merch margin. Our merch margin was negatively impacted by approximately $35 million or roughly 200 basis points from tariffs. We increased our promotional activity to clear seasonal product as we ended the quarter with clean inventory. The merch margin decline was partially offset by D and O, driving 40 basis points of leverage, which benefited from the exit of a third-party fulfillment center in Q1. SG&A as a percentage of net sales was 31.2%, representing 120 basis points deleverage compared to the prior year. The deleverage was driven by soft sales performance, investments in new stores, and higher healthcare costs. In response to weaker sales, we acted quickly to flex costs down, such as store payroll and incentive compensation, which partially offset the deleverage. Bringing it all together, third quarter operating income was $161 million, down 26% to last year. Turning to real estate, our portfolio remains healthy with 59% of our fleet in off-mall locations. In the third quarter, we opened 40 new North American stores, primarily in off-mall locations, and permanently closed 10 stores, primarily in mall. Internationally, our partners opened 10 new stores and closed three stores during the quarter, and we ended the quarter with 544 stores. Our international store expansion plans for 2025 remain on track with at least 30 planned net new store openings. Moving to our Q4 guidance, the trends we experienced at the end of the third quarter have continued into the first few weeks of Q4, with sales to date down high single digits. Macro consumer sentiment is weighing heavily on our consumers' purchase intent. Recent data shows consumer confidence continued to decline due to a number of factors, including concerns about job loss and affordability. This dynamic negatively affected our start to the holiday season and our largest quarter. This impact is compounded by a highly competitive retail marketplace. Our research indicates that our customers are waiting for deeper discounts before making purchases. In this volatile environment, we are providing cautious guidance that assumes these early Q4 trends persist through the season. While we are taking action to strengthen our performance, with that as context, we expect Q4 sales to be down high single digits versus last year and gross profit rate to be approximately 44.5%, which includes the impacts of tariffs and higher promotional levels, which we believe are required to compete effectively. We expect our SG&A rate to be approximately 24%, reflecting top-line declines partially offset by disciplined cost management. We are aggressively managing cost while working closely with our teams to ensure that any reductions do not compromise the consumer experience. Moving down the P&L, we expect interest expense and other of approximately $60 million and a tax rate of approximately 25% and weighted average diluted shares outstanding of approximately 204 million. Considering these inputs, we are forecasting fourth quarter earnings per diluted share of at least $1.70. At this point, we believe this guidance represents a floor for Q4 performance, and we are working with urgency to improve upon it. For the full year, we are lowering our net sales guidance from 1.5% to 2.7% growth to a decline of low single digits and are lowering our adjusted earnings per diluted share guidance range from $3.35 to $3.60 to at least $2.87. You can find additional details of our guidance in our slide presentation. Now for an update on capital allocation. We are planning for capital expenditures of approximately $240 million during the year, down from previous guidance as we prioritized highest return projects. In the third quarter, capital expenditures totaled $81 million, bringing the year-to-date total to $174 million. Our full-year free cash flow expectation is now approximately $650 million, reflecting our current performance trend partially offset by our ongoing inventory management actions and reduction to capital expenditures. In Q3, we returned $41 million to shareholders through dividends and repurchased 3 million shares of common stock for $87 million at an average price of $29.25 per share. Year-to-date, we have returned $126 million to shareholders through dividends, and we have repurchased 11.5 million shares of common stock for $343 million. In closing, we are focused and moving with urgency against the actions we must take to return our brand to growth. On our Q4 earnings call, we will update you on our 2026 outlook and the strategic KPIs to measure our continued progress. I'd like to extend my gratitude to our teams across the company for their hard work. Let's now open it up for Q&A.

Thank you. You may press 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, I ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Ike Boruchow with Wells Fargo.

Hey, good morning, Daniel, Eva, Luke. I guess, Daniel, my question would be, can you help us understand bigger picture kinda what changed between when you first joined the company? I believe you kinda talked to an expectation to accelerate growth while expanding margins. Obviously, today's expectations for Q4 revenue to be down, margins to compress goes against that. You maybe just walk us through what exactly has changed, what you've learned since you've been there? Exactly how should we be thinking about what Q4 guidance kind of means to next year would also be helpful. Thank you.

Good morning, Ike, and thank you for the question. So let me start by reemphasizing that the third quarter results and the lower expectations for the fourth quarter don't live up to the expectations that we all have for this brand. The brand is not fulfilling its potential. I joined to accelerate growth, and I remain confident that we will do so. Directly to your question, what's changed, if we unpack our Q3 performance, we declined in each of our core categories, and that really the diagnostic I gave in our opening remarks. That focus on adjacencies has resulted in underinvestment in our core and not keeping pace with our consumer. But again, you know, this strategic reset is the result of months of detailed analysis in every part of our business. It isn't a reactive reaction to the quarter. If we look across the last few years, and you guys all know this, while we've been able to drive some growth in some quarters, we've lagged the market. We lagged the beauty and fragrance sector, and the growth that we've delivered was not durable. I've talked about that, you know, since I arrived, and now is the time to address that. We've laid out the diagnosis clearly. We've laid out a very clear plan on how we're going to put the consumer back at the center, reignite the brand, begin creating innovative, coveted, disruptive products in our core categories again. And those four pillars of our strategy have already been communicated to the whole company. Work is well underway. And what gives me confidence, honestly, in this plan is that this is a pattern I've seen many times in my career and many other places, many other companies, and this is really about going back to what made this company so great but evolving to meet the needs of today's consumer. We will deliver coveted product. We will deliver elevated experience, but that change isn't gonna happen overnight. Now to the next, what this means for Q4, an excellent question, and the macro is a significant factor in our Q4 guide. Eva, can I hand to you for some more color on that?

Sure. Good morning, Ike. So I guess I said in my prepared remarks, right, the outlook we're providing for Q4 reflects what we believe is the floor. Right? We saw material changes in trends by the macro coming into the quarter. We've seen some modest improvement since the government reopened, and we're further taking actions to improve that. That said, our underlying core performance was weak, as Daniel said. If you looked at our Q3, we were down 1%. But if you were to normalize for the expansion of the fall sale extension, we were probably down closer to 3%. So if I look forward to 2026, our current view is that we do not expect to deliver growth for the full year. These initiatives that we've laid out today will become visible to consumers throughout the year, but realistically, we don't expect it to impact the business in any meaningful way until the second half of the year. Digital is the fastest growing space in beauty. We know those enhancements are underway. As Daniel said, evolving our core product, which is critical to attract that new customer, that will start to become visible in the second half of the year. So we are here. We are working with urgency, driving the changes we need to drive that durable growth, and we'll have more details on our Q4 earnings call.

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

Great. Thanks. So Daniel, maybe to pick up on that. So on the new strategy, so the last two years, the company's talked positively about adjacencies and collaborations. But now that strategy is wrong, and the focus is on the core to drive durable growth. So could you provide maybe some of the key KPIs that you're watching to gain confidence in this new strategy? And you cited the change won't happen overnight, I mean, what do you see as a reasonable timeline for stabilization?

Great. Thank you, Matt, for the question. So, first, I'm going to say that this strategy has been communicated to the whole company. Work is, as Eva said, underway. Teams are working feverishly against those four priorities, but let me show some progress that is already evident. Firstly, let's take a look at talent in a very short amount of time. We've added tremendous talent to our team where we saw gaps and where we saw a need to improve our executional ability, we've moved with speed. A couple of moves I'd highlight, we've brought in Varonis Gabai. She obviously brings global beauty experience, creative vision, and has worked at iconic brands across Estee Lauder and L'Oreal. Craig Smith, in digital, two decades of building digital transformation at Burberry, Apple, LVMH, Dan Kudrow, unrivaled wholesale experience for more than thirty years at brands like L'Oreal and BIC, and as you'll have seen in the press release last week, Mally Bernstein, a transformational retail leader who has a track record in driving incredible results across beauty and omnichannel businesses. So where we saw gaps, we've already addressed that. Next, when you think about the things that we talked about on the call that we expect to be delivering in the short term, winning in the marketplace, we know we need to be more convenient to consumers. We know that we need to be in their path, and you'll see us launch on Amazon early next year. And I mean, we already know that we're doing somewhere between $60 to $80 million of gray market sales in that channel that is brand dilutive and product dilutive. So launching there is an incredible sales opportunity, but also an opportunity to reignite the brand, that second pillar of our strategy. And then from day one, you know, we have recognized the digital opportunity, and we are moving with pace there. We relaunched our app. We relaunched the website. We have new product photography coming in on roughly about 500 of our current SKUs, elevated claims, and messaging. But we know we have got so much further to go. We are working with pace, but the opportunity there is enormous. If we think about just the penetration of digital sales. So, Eva and I were talking about this just last week. In soaps and sanitizers, the percentage of e-commerce sales in that category is about 40% to 45%. Our current e-commerce penetration is 20%. That just represents the incredible opportunity that we have to drive growth and acquire new customers in the digital channel. Now when it comes to metrics, of course, there's all the normal metrics that we're going to be tracking and delivering revenue, operating income, EPS. But where I'm really focused is in total active consumers and growth in our core categories. Underneath that, of course, we are measuring the retail equation. And if you think about digital in the most recent quarter since we've made some of the modest changes already, we're seeing an increase in traffic. We're seeing an increase in dwell time. So these are good leading indicators for the progress that we are making.

And, Daniel, if I could just add, Matt, to your question about stabilization, I'll just say again, we don't expect growth in the full year next year, but we certainly expect business to improve as we progress throughout the year. And in the second half of the year is where more of our consumer-first plan initiatives will come to fruition with new product with, you know, further time under our belt in terms of digital. And we'll continue to update you as we progress on this plan.

Helpful color. Best of luck.

Thank you.

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

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

Lorraine, yeah, you know, the reason we did such a comprehensive diagnostic across the business, it was about discovering and laying out exactly what is holding this incredible brand back, and, you know, it's clear to me that the core is weaker, and some of that was masked by promotions and collabs and anniversarying some of those adjacent product launches. So 2026 will be absolutely about investing behind our brand and our product, investing in the things that the consumer sees, strengthen our fundamentals, and position this brand for long-term sustainable growth. Now, as Eva mentioned in her opening remarks, the teams are already hard at work in unlocking $250 million of additional savings to help fund these investments, and we have, and before I arrived, this team has a strong track record in looking for efficiencies to fund investments. They've done that successfully over the last few years, and yeah, of course, you know, until we see that top-line growth, which, you know, we are pursuing with vigor, we will be pressurized by deleverage.

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

Great. Thanks so much. Maybe just on the cost savings program, that $250 million in the next couple of years. Can you just go through where exactly you're trimming and how they're from the cost reduction that was pursued under Gina? And then does all that get reinvested so we're sort of in the same margin place? Or just help us with how we should think about SG&A and how it should grow in relation to sales over time as we're thinking about the out-year margin trajectory?

Sure. Alex, this is Eva. So we're really proud of the savings that we've over the past couple of years, delivering about $300 million in savings. We're targeting, our goal is another $250 million, as Daniel said. As I think about where that will come from, continued activities like value engineering opportunities. We have further opportunities in sourcing optimization. Also, logistics operations. Daniel spoke about SKU simplification. That simplification will bring cost reductions over time, and we'll continue to optimize our overall operations to drive cost savings. As we prioritize focusing on high-value consumer focus areas. You know, we're working hard to fuel and fund the investments that are over the next couple of years. I would think about the savings that we're driving are offsetting the investments and are not flowing to the bottom line. In the shorter term, there could be some mismatches that investments outpace savings. We'll have more details. There. Our focus is to make the right investments to drive the go durable growth and do that in a responsible way.

Thanks a lot. Good luck.

Thank you.

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

Hi, this is Kelly on for Paul. Thanks for taking our question. I just first, I got a two-parter here. One on the Amazon partnership. If you could just elaborate on the product that's gonna be in that channel versus the store, and if that makes you, you know, the expanded distribution, whether that makes you rethink your store growth and your store base. And then secondly, on free cash flows, you know, still very strong free cash flow year despite weakness in the business. Any color on how we think about free cash flow for 2026? Any kind of floor you could provide there would be great. Thanks.

Thanks so much, Kelly. Let me just go, I'll start by just touching on the Amazon partnership. Obviously, that's part of our third strategy, win in the marketplace, and that is about being in the path of the consumer. As I said, in answer to an earlier question, we know our consumer is already there. We are doing millions of dollars of sales in that channel. We're going to start with a small assortment. It's really gonna be some of our evergreen product, and we're really going to make sure that we get that absolutely right, that we test and learn, that we build the right PDP, the right ratings, and the reviews, that we're offering the right fulfillment services before we start to thoughtfully expand that assortment with new products that will be targeted at acquiring a new consumer. But we're feeling very optimistic about that component of our strategy. And maybe, Eva, if I hand over to you on the free cash flow.

Thanks, Kelly, for the question. I'll just reiterate, we are a strong cash-generating business. And overall, our capital allocation priorities remain the same. Investing in the business, and you've heard us say, that those investments will increase next year to support our transformation. Maintain a strong balance sheet, and return cash to shareholders, which we've done over the last three years returning $1.5 billion. We are headed into our biggest quarter of the year. So as I think about cash for next year and projections for next year, we'll come back to you in February on that, but we remain focused on continuing to focus on working capital and driving cash out of the business.

Thank you.

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

As you pivot back to the core categories, can you talk about the innovation pipeline over the next twelve to eighteen months and how you're thinking about the balance between legacy franchises and then some of the ingredient-led or demands for the younger consumers you're targeting?

Yes. Thanks, Mark. So let me start by saying that in our core categories, we remain the market leader. It is without question where we have the greatest right to win, and we started this work for our strategy in designing those two consumer muses. It is not about leaving our current customer behind and reaching for a new consumer. It is about serving both. If you think about Jen, she is probably more atypically the kind of customer that we have today. And we believe that we can elevate our product proposition and continue to attract more of those customers as well as reaching for a new younger consumer, the

And Daniel, if I could just add, in addition to the innovation, we are taking immediate actions on the innovation front. And we've changed, and we're involving consumer testing much earlier in the process to ensure as we shape this innovation to attract that new consumer, we are hitting the mark. As Daniel said earlier, we're making choices to exit categories that haven't been successful for us, that increase complexity, such as men's grooming and hair, and we'll continue to work to optimize our portfolio as well.

Yeah. And Mark, I just wanna follow-up on your question. You know, you talked about the new products, and you also talked about let's call it the core or the carryover product. Which in some ways I think hints at what we have to do. As I said in my opening remarks, we have these fragrances. It's been one of the big things that was upside on what I thought when I arrived. Some of those biggest fragrances are doing over $250 million a year annually, and they sit on a shelf in the less hand side of our store, and they operate somewhat like an annuity. Customers come in and they buy them. But we haven't treated them with the reverence and with the marketing they expect. So part of that second pillar of our strategy is reigniting our brand, and part of that is about showing the reverence for those iconic franchises, those iconic fragrances, building a world around them, taking them out to new consumers in alternative distribution channels. I'm sure that future

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

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

Our next question comes from the line of Adrienne Yih with Barclays.

Daniel, thank you so much for the detail. This is really refreshing to hear this strategy and the movement of the business. But in doing so, I guess, can you help us understand the timing of the exit of the non-go-forward categories? Is that sort of like a Q1 thing? I'm sure those hangover inventory. What's the best method of exiting those categories without kinda further putting kind of brand pressure, right, as you kind of exit those? And then within the non-core categories, you know, we had talked about SKU rationalization, and, obviously, you're talking about focusing on fewer of the things that mean something. So how many of the kind of alternative scents and kind of that newness that you bring to, you know, the seasonal scents will now go away to help focus. Thank you.

Okay. Thank you so much for the question. Let me just underscore that everything that we do at this company is subject to rigorous testing. That is something that we have instigated, as Eva said, as part of our product development process, and that is true the way we think about our assortments. So we're not pursuing a SKU rationalization target for the sake of having a target. We're pursuing it because the customer tells us that our proposition in-store is too overwhelming and confusing. So this is the outcome that we want is to be able to entice new consumers into our stores and onto our digital platform. They can find what they want easily and fall in love with what they like easily. So I think about it less as a number to hit and a set of categories to exit than I do about reaching a consumer outcome. That said, we'll begin to rationalize our SKUs and begin to exit these categories in spring, so in the first quarter of next year. And we will ramp that up with testing and as we move through the balance of '26. But it's really test, learn, and make sure that we are bringing the new products to market, that we're elevating, as I said, some of those new, some of those core franchises that are already large so that there were filling the gap. It's less about, I would say, hitting the number.

And, Adrienne, your question on hangover of inventory. As you know, we have two seasonal, two semiannual sale periods that we're able to use to clear inventory. The company has a long history of successfully doing that. Despite the pressures in Q3, we were able to exit Q3 with clean inventory as we used that fall sale period. So we'll be really thoughtful on our inventory management and our decisions around timing and when to exit.

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

Okay. So I'll take the tariffs first. Overall, the tariffs I would think about on a full-year basis, it's basically comparable to 2025. In 2025, we had about a 100 basis point of impact to the year. Expect that to be pretty comparable in 2026. Now the timing of that first half will have a bit more of a headwind given when tariffs started, with the reverse impact in the second half. In terms of the dollars of the exited categories, we'll have more to say as we build toward 2026. We don't expect that to be a meaningful drag. They're not, you know, the problem is those adjacencies haven't grown in the way that we had expected, and they are not significant, the ones that we are starting to take out. So we're looking at every merchant does. SKUs that are not contributing that much and SKUs that are not productive, and that's where we're starting in that long tail.

Thank you.

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

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

Right. So, yeah, we operate in a very competitive sector. I love the sector. It still continues to grow. It's a young sector with youth and innovation at its heart, and I think that obviously we operate as the market leader in these categories. We have a right to win. We're building on a solid base. For me, some of the problems that we have in our product are what I would call perception problems. We have fantastic formulations that are clean, but we have not communicated those benefits consistently and effectively. So, we know in our product testing with consumers and some of the blind that we do that we far outperform some of those competitors that are often talked about, but we don't market it correctly. We don't put it in elevated packaging. And as a result, the consumer doesn't see us as having the attributes that they need. And then in some of the areas that we're looking at, we will launch new forms and new vessels and those types of things and new formulations. And those sort of things take longer than just chasing into demand, which is what our supply chain is really good at. But together, the teams at Bath & Body Works, Inc. and our fragrance house partners and our manufacturing partners, we are all working day and night to make sure that we are bringing this new innovation to market, and we're looking forward to starting that journey in 2026.

And, Daniel, if I could just add one thing? As you look at these categories that we're in, that we're all excited about and are growing categories, growth in digital is outpacing, for sure, the market. So the strategies that we're talking about today and the investments we're making in our own digital experience as well as alternative distribution and our presence on Amazon, we think are key elements to capturing and bringing that new consumer in as well.

And part of that, we've talked about being in the path of the consumer, and that, of course, is what drives everything in this business now, putting the consumer at the center. But, you know, I'm looking forward to competing with those competitors on that playing field. Right? We have left Amazon wide open for competitors to play. That is changing. We have left other wholesale partners wide open for those competitors to play. That is going to change also. So to me, I'm looking forward to putting our product front and center, telling bold and emotive stories, and winning in the full marketplace.

Got it. Thank you.

Our next question comes from the line of Jay Sole with UBS. Please proceed with your question.

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

No. I think about it not as either or. I think you look at some of the world's luxury brands, and they're on Amazon. And I think it's as much as a sales opportunity as I think it's a brand opportunity. I can't wait to tell an elevated story about this brand in third-party channels, and in particular, the largest shop in the world on Amazon. Why would I believe to do to change product perception? Will be in all channels. Particularly on social channels, actually, and that work, that what I call brand reignition work and brand reigniting work, is well underway. And by that, I mean, have seen visuals. We have seen photography, we have seen tone of voice. And everybody who's seen it is blown away by it. Customer testing just this week and our consumers, both current and future, love the direction that we are taking this brand.

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

Well, our product is already on Amazon. We're doing $60 to $80 million roughly in sales on that product to the of our product from gray market on Amazon today. So just going there and making it a brand accretive experience, making it a profit accretive experience is the first thing that we look to do. And actually, I think that telling the story of our brands across digital channels will drive traffic in stores. And then finally, we have a very wide assortment, maybe too wide an assortment in places, and so we have an opportunity to use that assortment thoughtfully across multiple channels to drive differentiated propositions to acquire different types of customers. And so I think that this strategy is wholly accretive.

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

Great. Thanks. Good morning. Really helpful diagnosis of the areas of improvement. And I know Amazon was something you've been hinting at for some time, so I'm sure you're excited to get going on that. A couple of questions with that. Can you talk about the sales expectations and the margin profile of launching on Amazon? You obviously mentioned the $60 to $80 million in sales already. Clearly, your hope is to go above that, but just trying to think about the arc of building on that and then the margin as well, whether that you expect that to be similar margins, dilutive, accretive, that would be helpful. On the exit of the categories, the ancillary categories that you launched into a couple of years ago, could you help us understand a little bit of the decision making as to why not continuing to run the business? Of course, it's a distraction, but it is offering some sales. And a lot of the heavy lifting, more importantly, has already been done. And I would imagine that, you know, that's something that could work in other channels. And then, Eva, one for you is just around how we should think about the cash flow progression next year. You talked about earnings, but would love to hear your views in terms of the working capital in particular given logic and continuing channels, clearing out the old inventory, how you think about the arc in working capital. Thank you so much for those questions.

Great. So, I'll start on Amazon and then move to adjacencies, then I'll hand to Eva for cash flow. On Amazon, we're very excited about the opportunity, as I'm sure you can hear. We believe it's the right thing to do for our consumer, and it sits squarely in our third pillar of our strategy. The plan is to go slow to go fast. Right? We're gonna launch with a tight assortment. We're gonna make sure that we are optimizing those pages for the Amazon consumer, that we're providing the right level of product description, that we're providing the right level of PDP, that we build up a really incredible bank of ratings and reviews. And as we start to gain success in that channel, we will build out the assortment over time. But as I said in my opening remarks, our owned channels will remain the widest expression of our assortment and the purest expression of our brand. So we'll be very careful to make sure that we're using that channel to attract a new consumer or a lapsed consumer, and we're not just taking the assortment, handing it over to a different channel, and expecting, you know, and taking a margin hit as a result of doing that. So go slow in the first half to speed up as we move sequentially through the year. And then when it comes to adjacencies, you know, I wanna just clarify what I said. We are no longer going to invest in adjacencies. We are going to invest in our core. We have told you of two categories that we plan to exit in hair and men's grooming. We haven't, at this point, signaled that we are exiting whole adjacencies. But we, you know, I actually agree with your question. What is the most thoughtful way to use the money that has been used, that has been spent in these areas to potentially build this business over time, but it won't be something that we're continuing to invest in formulas, in packaging, and in other ways. We've got to get back to the core. We aren't simply just abandoning those adjacencies. We intend to maximize the sales opportunity from those.

Yeah. And on your cash flow progression for next year, as a reminder, and I'm sure you know this, Olivia, right? We generate all of our cash in the Q4 period. We typically like to start the year with about $500 million of cash to fund the business through the first nine months, in inventory throughout the year. We're building our plans for 2026 now. As I spoke about, there will be greater investments related to this transformation. That could put a little bit more pressure on that first nine months of next year. But we'll manage our cash effectively throughout the year. On the margins for our adjacencies in Amazon in particular, it's our goal to have a comparable margin structure over time. We're gonna test and learn our way into this, as Daniel said.

Thank you.

Final question this morning comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

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

Yeah. Thanks. I'll start, and maybe, Eva, you can follow-up a little bit more detail. So as I've always said, our loyalty program and that loyal consumer that we have today is a competitive advantage, and we're gonna continue to build on it. In fact, I think in the recent 14 million loyalty customers. So it is a competitive advantage. We're going to continue to leverage it to drive sales, to drive building the basket of our existing consumers. Eva, maybe if I can give you ask you for a little bit more detail.

Sure. Sure. I think that loyalty customer, we've continued to drive the strongest retention rate. With our changes in our loyalty program, we've seen an increase in reward redemption. That brings along with it an incremental spend. We're seeing good visits, good spend across all of our deciles. And the team, the marketing team, the loyalty team really continues to focus on how can we continue to engage and excite those very valuable loyalty members that drive 80% of our sales.

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

Right. I appreciate the question. So, I can clarify what our collaboration strategy is. So make no mistake, we love collaboration. Right? They are a way to drive energy, equity, and excitement and buzz into the brand. And we actually have lined up for the next fiscal, some really, really exciting collaborations. But strategically, collaborations should be used to drive energy into the brand and energy into some of those franchises and collections. Energy that builds everyday luxuries, energy that builds White Barn, energy that builds the seasonal collection like fall, not necessarily something that sort of stands alone and is there to carry the quarter. You know, we don't wanna get into positions where a collaboration like Villains was something that was the difference between where we guided our Q3 and where we ended our Q3. We want to use them more tactfully, more thoughtfully to drive long-term brand equity into our brand, into our franchises, and into some of those iconic fragrances that I've referenced in today's call.

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

Well, thank you, everybody, for joining us this morning. Thank you very much for your thoughtful questions, and just let me restate, I came to Bath & Body Works, Inc. to accelerate growth, and I remain absolutely confident in our ability to do so. Work to restoring our brand and achieving sustainable growth, as you've heard on today's call, is already well underway, but it will take time and focus. We've aligned our teams to the vision and the strategy, creating disruptive and innovative products, reigniting our brand, winning in the marketplace, and operating with speed and efficiency. To attract a new and younger consumer to the brand and unlock what I know will be the next era of growth for this brand. You've heard today that we are driving early progress across those priorities, and we look forward to sharing more updates in the quarters ahead. I want to say a special thank you to our associates and our store teams for delivering joy this holiday season. We have the platform. We have the plan. And we absolutely have the team to win.