Hi, everyone. Thanks for joining us. Our next fireside chat is with Bath & Body Works. We're with Wendy Arlin today Chief Financial Officer of the company. Wendy was appointed to this role in 2021 when the legacy L Brands separated into Bath & Body Works and Victoria's Secret. Previously, she served as Senior Vice President Finance and Corporate Controller for L Brands, and joined the organization in 2005. Thank you so much for joining us today. Thank you for having us. Bath & Body Works, I think is the most asked about stock that we cover, and we cover 43 names. There's quite a bit of interest in your company, and there's quite a lot of changes and things that you guys are working on that everyone's very interested in so we're excited to get into that. We wanted to talk first and foremost about the health of the consumer. Y ou have a very wide very deep wide consumer base, covers a wide range of demographics and income levels. Can you maybe talk to us a little bit about the health of your core consumer and what you're seeing in terms of spending from them? Sure. Yeah. As you said Bath & Body Works does look a lot like the U.S., so our customer file is about 60 million people in the U.S., and when you look at it demographically it looks remarkably like the United States in terms of income level and other aspects of the customer. T he only area that our customer distorts significantly from the U.S. Census is in gender. We do, and this probably isn't a surprise, but we do over-distort to women as compared to men, which we actually see that as a plus and an opportunity, which you can ask me about later. We see the men's market as a potential significant growth opportunity for us. We do look like the U.S. In our most recent quarter that we just reported in August in the Q2, we did see our lower income customer was disproportionately impacted in terms of willingness to spend than our other customers. We saw that was our biggest driver of pressure in the Q2. We also saw that that customer was clearly sensitive to basket size, so we did feel the pressure on total basket size. We felt that starting in mid-June. When we flipped the calendar to July and started introducing newness, including Halloween in July which is always a surprise to me, people love Halloween in July. We did see that the newness did reinvigorate the customer and at all income levels, but we have felt the pressure with our customer at the lower income level. Yeah. It's an interesting dynamic that we've heard throughout the conference up until this point. We had NPD here this morning talking about that promotions motivating the consumer, but also when you have newness and innovation it seems like money's no object. Or not no object, but they will pay full price, if there's newness. Could you maybe talk a little bit about that? Because I think when it came to your Semi-Annual Sale, there may have been some underperformance there but as you pointed out with some of the new, the Poppy collection and then some of the Halloween introduction you've done, there's been a great response. Could you maybe talk through that a little bit more in terms of what you're seeing from that? Yeah. What you mentioned in terms of both being important I think is true and is consistent with our experience. W e do run our Semi-Annual Sale in the month of June every year, and as we kicked it off this past june it resonated with the customer. The customer was looking for a deal. W hat we discovered is, for us, it got a little long, and the customer was looking for newness and are constantly looking for newness. We've talked a little bit about we accelerated Halloween because we were hearing that in July the customer wanted Halloween. We've got certain aspects of our assortment that are very high priced that did well. Like, as an example, we've talked a little bit about this house this candleholder house that we sold. It retails for about $200, which is significantly higher than the Bath & Body Works typical price point, but we had customers grab it and love it. It was new and it was unique. It's not a huge part of our assortment. W e do limit those buys in terms of inventory investment at $200 price points. But the newness generated buzz and excitement. I think the customer wants newness. We've been very thoughtful as we think about Q3 and Q4 to make sure we're pulsing things in almost every week because we know that that will generate the buzz and the excitement with our customer. Yeah. You did mention on your Q2 call that you're gonna try and put more newness in every week. How do you manage that, and how does that differ from what you typically do when you're introducing new product? What we've decided to do this year, just because it is so important, and newness is what makes us unique, is we've taken a little bit more of a thoughtful phased floor set approach than we had in years past. In years past, you may see us do one big floor set change at a certain time in the season. Now we're trying to phase in a pulse pulse in some of the new additions to the assortment almost every week. Okay. We talked a little bit about promotions but we're also in an inflationary environment, and I think on the last call, you had mentioned that AUR has increased about 20% since 2019. How are you managing some of those needed price increases to offset inflation while still running the promotions that the consumer would like to see? It's a balance for us, right? we, our customer loves a deal, and so we have to be very careful to price in a way that it still resonates with the customer. O ne of the things that we've done is we've, in our business, frequently run multiple type pricing. Maybe to take soaps as an example. Pre-pandemic, you may have seen a multiple deal from us on soaps was 6 for $26. The customer comes in and says, "Oh, wow, I get 6 units for $26." Now we've adjusted that promotion to 5 for $25. A customer still comes in and sees, "Oh, I get 5 for $25," and there's excitement but it actually is a price up. O ne of the things that is important in our business and is very. It's a big part of what we do. We have a very disciplined testing approach. We have with 1,750 stores, we can run testing cells almost every weekend frequently. Actually, the majority of those testing cells every weekend are running price tests. We will take a group of stores out. We will show a different price to the customer and see how it resonates. Ultimately we want our promotions to generate margin dollars. That's our goal. We will see what test works, and that enables us to see how we can push pricing in a way that still delivers margin dollars. When we think about the promotional cadence in the back half of the year, there are some interesting dynamics I feel like for you. O ne is you don't have a direct competitor where you're trying to match price, but the overall environment is probably gonna be a little bit more promotional. Then at the same time, you're very clean on inventory. How are you viewing promotions in the H2 of this year versus 2019? In the back half of this year, we are anticipating being slightly more promotional than we were last year. Mm-hmm. Still substantially less promotional than we would have been in 2019 or pre-pandemic. We do know that it is a promotional environment out there. We know in particular in Christmas time and, when customers are shopping and have a variety of options, that, it will be important to look appealing to our customers. We do have that incorporated into our guide and our plans to be slightly more promotional in the back half. When it comes to some of the cost pressures, I know on the product cost side, there's been quite a bit of inflation, and part of that is being managed by the pricing that we just walked through. What have you been able to do on the cost side to offset some of those pressures? What is your expectation as we go into 2023 in terms of some of those higher input costs? We have had a lot of cost pressure, is the first thing I would say. You acknowledged it, but it's been a significant pressure point for our business. The biggest area that we're seeing, inflation pressure is in the cost of our inputs and our raw materials in our products. It's been broad-based. It's not been one particular input for us. It's been across the board. We saw inflationary pressure. As you'd imagine, we are looking and partnering with our vendors to see what we can do in terms of value engineering. We're looking at the inputs themselves, how can we continue to position them to get best pricing?, how can we consolidate, vendors or consolidate sources to get better pricing? That is the work of the work, and we're continuing to emphasize that because the pressures have been so significant. it'll be a journey, but we're working very hard at that part of it. The second biggest inflationary pressure that we felt is in transportation. Mm-hmm. I know a lot of companies have talked about ocean. For us, ocean is not significant. 85% of our production is in North America, ocean's not a big factor for us. But line haul and the small parcel network direct to consumer is. A s those markets stabilize in price or the pricing comes down, that will help our business. Those contracts also have fuel surcharge aspects to them. As gas prices or diesel prices come down, we will see a benefit in our P&L. It's something that definitely is impacted by the market, but I'm hopeful that we see some deflation in those markets over time. This is a question we plan to ask later, but I think it's appropriate to ask now. Just in terms of managing price in a more deflationary environment on the product cost side, how sticky do you think those higher ASPs are gonna be? Do you think that's gonna be a margin opportunity for you going forward? I think our pricing will be sticky. Part of what informs my thinking on that is Bath & Body Works is a retailer over 30 years old. If you look at our history, in particular from 2010 to 2020, over that time, we were able to raise price. W hat we've seen is as we've innovated, as we develop just new, different products with better efficacy or new features, the customer does come along with us on the pricing journey. I believe that will continue to be true. Okay. One kind of last near-term question that we still get a lot of questions about is the lapping of soaps and sanitizers. Mm-hmm. I think we're through the toughest of the lap now, and we're seeing some normalization in the sanitizers at least, but the soap piece continues to remain very strong. Any insight as to why you think that is, and is that normalization something that's to come. Yeah. On soap, we really like the soap business. It's a great use-up replenishment business, and we think our product is amazing. As we get customers to be loyal soap customers they're great customers, and it's a great use-up business. We talked about newness. We've continued, even in the soaps business, to continue to deliver newness. Recently, just in the H1 of this year, we introduced a new gel formula in soaps that is a different formula. It's clean beauty, and it's really resonating with the customer. Just like the rest of our assortment, we can introduce new newness and innovate, and that makes a difference. The other thing that we are optimistic about for the fall season in the soaps business is we are in a better inventory position than we were last year. Last year, we were returning higher than we want in soaps, and so part of our investment in inventory right now is in soaps to support the sales in the back half. I'm excited about our inventory position in soaps. That's great and helpful to understand that dynamic. Another recent event has been your launch of the loyalty program, which I know has been in the works for a very long time. We wondered if there was any update or initial response you could maybe point to from that. If you could maybe walk us through some of the mechanics of the program, what you're offering to those that sign up for their loyalty. Sure. Yes, we just launched our loyalty program in the U.S. Nationwide on August 22nd. Still pretty early. Right now we're focused on enrollment. We're excited. It definitely is resonating with the customer. T he week prior to 8/22, we launched it in stores because we wanted all our store associates to get signed up. They came very excited, including dressing up, and we did store contests to get the field engaged. We were gonna launch on the 8/22, and they started signing people up before 8/22. Very a lot of energy in the field for this program, so we're really excited. We're focused on enrollment right now. Mm-hmm. We do know that our loyalty customers in our test markets spend more money and visit us more often. It's exciting to have this program out there. In terms of the mechanics, the way it works is it's a points-based accumulation program based on how much you spend. If you spend $100, you get the equivalent value in points. What that equates to is once you hit the threshold, you can select any full-size product up to $16.50 in price, your choice, in the store. You can redeem that once you hit the threshold. That's how the mechanics work. From a guidance perspective, it doesn't sound necessarily like you're incorporating any kind of lift from the potential of this. Is it just too new for the year to really contemplate that there could be a lift? Do you need to cycle through a whole year before you see more of a lift, or is that just being conservative? Well, it's pretty new. T his year we're really focused on enrollment. I hope there's upside with the customers coming back. But, our business is so cyclical in terms of Q4 being a really important time that we're anticipating that we get a lot of enrollment in Q4, and hopefully we'll see the benefits, hopefully earlier, but definitely in 2023 when they come back after the important Q4. Right ... shopping period. Just any kind of margin implication from the loyalty program by offering this free product. Is there any impact as a result of that? The program does have a little bit of a cost, but, we think it's margin accretive because we've seen the customers spend more money with us. Okay. Just given, I think, some of the more recent dynamics on the top line, you've made some organizational changes and which has improved your cost structure, and you also announced initiatives for more cost control, actions. Can we expect to see more cost savings to be announced as time goes on? What are you looking at in the near and longer term as opportunities there? Sure. What we just announced is in the fall season, we looked at every line on our P&L, as you can imagine we would do. We did do some restructuring work in our home office. We removed some positions, primarily in leadership. Really what we did is we took the opportunity to think about the organization in terms of being a more omni-focused organization. H istorically, Bath & Body Works grew up with a stores team and a direct-to-consumer team, and we did a lot of work to think about, okay, we we're one brand, one voice of the customer. We wanna be an omni-focused organization, so we rethought our org structure to support that. Made those changes during this quarter, and we'll continue to think about how we can be an efficient organization. The other thing that we've been focused on is store selling. W e do have a significant part of our SG&A is our store selling costs. We've been continuously thinking about the model and how we have the most efficient hours in the store and to maintain our sales. Those are the things that near term have been our biggest drivers. The things that we're continually focused on that are bigger levers for our P&L is everything about merchandise margins. We talked a little bit about pricing. Mm-hmm. How do we continue to raise price in a way that fits that. Still healthy from a overall result standpoint. We're looking at that. We're continuing to think about the assortment in terms of good, better, best, and can we start to add more in the best part of the assortment. Then on the product cost side, it's we are focused, as I mentioned, on thinking about how to mitigate the inflation pressures that we've felt. So those. The outcome of all of that work has a time horizon that is a little bit longer and we'll start to see in 2023. Great. If I can maybe switch gears and ask about real estate. It's a question that we've gotten a lot in the past, just because your fleet is about half mall and half off-mall. How are you thinking about your mall locations today, and where you think that mix can get to in the next few years? Well, first headline with our real estate is it's very healthy. Mm-hmm. 99% of our stores are cash flow positive. It's great to look across the fleet and see that we don't have any financial challenges in the real estate fleet. I think that's a headline. We have strategically, as you pointed out, been focused on migrating our fleet to be more off-mall than in the mall. Essentially, the stores that we're opening each year are in off-mall locations, and the stores that we're closing each year are in-mall locations. Right now, we're at about 50/50. We think at the end state, it's probably about two-thirds off-mall, one-third on-mall. What our strategy right now is we're looking at the stores that we have in lower tier malls and identifying replacement stores for those lower tier malls. We will go ahead and open the replacement store. That establishes the presence in the market close to the vulnerable store. When that store in the mall is ready to close, we'll close it, and we've already got the replacement store up and running. It's been a very thoughtful approach. W e do think the right mix is probably about two-thirds off-mall. Is there a time horizon for that, or is there any opportunity to shift that mix at an accelerated pace versus what you've been doing historically? We think the pace we're at right now is about the right pace. Mm-hmm. , it's a lot of activity, but, it's been at the right pace for our business. Within real estate, you've been doing the White Barn remodels. Mm-hmm. Could you update us on where we are with that, in the process and what the cadence is for the rest of the rollout? Also just has the initial uplifts changed at all over time? Yeah. White Barn is our new store design that we're migrating our stores to. It's got a focus on home fragrance. We've noticed in the remodels, it really elevates the focus of the customer on home fragrance. Every remodel, it is accretive, and it continues to be accretive. W e get a payback in one-two years on those stores, and they're immediately profitable out of the gate. From a store design standpoint, we know it's the right store design. In the malls that we want to have it in. In other words, we have some malls that are at end of life or in a lower tier center. We won't remodel those stores. The ones that we want to do the remodel, we've done about 75% of them. W e'll continue to get that number up to 100% over the next couple of years, and migrate all of them to that store design. It's very accretive and, definitely a smart investment for us. , with it, there's a focus on home fragrance as a result of the remodel. Is there a significant shift, mix shift then, with the remodel in terms of how it's impacting your overall mix? Well, what we've seen, it actually raises the whole. Mm-hmm the whole boat. It's definitely a positive representation of the brand. It does raise the whole bar. Okay. One of your longer term initiatives that we've been very excited about is expansion into new categories. Mm-hmm. I think you've flagged skincare and haircare as where those opportunities could be. Just how long-term is it? I know it has to deal a little bit with finding new vendors 'cause your current vendors can't necessarily address these new product categories. How are you thinking about category launches today versus what you've done in the past? Sure. One of the things we did during the pandemic is we decided to reorganize the merchant team to have one team focused on our core assortment. Then we created a new team that we call New Business Opportunities, or we call it NBO internally. It's a small, scrappy team focused completely on innovation. We knew that innovation's key for any retailer, but it's especially key for us. We wanted this group to really think about new, exciting things that are different for Bath & Body Works. The first outcome of their innovation ideas is coming in tests this fall. We'll be launching in stores and online and select stores a brand that is focused on hair and skin. It'll be targeting a younger customer, so its brand presentation is very bright and light and clean, and it's also, benefits-focused as opposed to fragrance-focused. It'll be a change for us to see how it resonates with the customer and how it brings in a younger customer. We're excited about that. They've got that coming in in the fall season, October-November timeframe. They've got more on tap for 2023. That's exciting, but we're also innovating in our existing categories. I mentioned men's earlier. Mm-hmm. Men's continues to be an area that we see growth. As an example we have antiperspirant and deodorant in test right now. That is a huge market, and we're looking to expand that to the fleet in 2023. There's other ancillary forms in men's that we believe can be a great growth vehicle for us. We've got innovation in the core part of the assortment, but also are looking for new business opportunities to drive future growth. That's great, and I find it very interesting that it's a little bit more benefit-focused on the skincare, haircare than fragrance. That just sounds like it can be an opportunity, too. We hope so. Yeah. Yeah. Great. My last question before we get into the questions we've been asking every company is just around digital. I think it's over 20% of your sales now, or about 20% of your sales. You still think the long-term growth rate should be above the overall algorithm of the mid-to-high single digits for the overall sales. Where do you think digital penetration reaches in the next three-five years? And can you talk about the profitability of digital versus in-store? Yeah. Well, at this point, we do anticipate it to grow faster than store channel, which means that over time it would migrate to a bigger part of our overall revenues. It's exciting. I think that we can continue to invest in the site and the experience and deliver a more omni-type experience for our customers. We see just a lot of growth potential there. A nd also as we expand the assortment the digital has no limitations on square footage, so I think that will also help contribute to overall growth. It's a focus area, and yeah, we're excited about the direction it can go. Great. We are asking every company that sits with us four questions. Okay. I asked you one earlier. I kind of preempted this with regards to the stickiness of prices, so I'll skip that. We also talked about the health of the consumer and the fact that you address a lot of demographics. The question we're asking everyone is just how you think about the consumer for 2023. How are you planning for 2023? Do you think the consumer will be weak or stronger, about the same versus what you're seeing right now? Well, the short answer is I don't know. I know. I don't know what other companies have said. The majority have said that as well. Yeah. We don't know but one of the great advantages of Bath & Body Works is we are fairly fast in our ability to read, react, produce products. A s I mentioned earlier, 85% of our production is domestic, which means that we can place orders very close in, and we don't have to place the entire buy and wait to see if it works. We can place 60 or 70% of the buy, and then if something doesn't resonate with the customer, we don't have to buy more. But if something does resonate, we can chase in and get it in back in stock in just a matter of weeks. I think that it gives us a lot of agility, so when you're in a time period of uncertainty, we don't have to make these big bets too early. We can wait and see how how the consumer is reacting. Do you feel the supply chain is at a place now where you have a little bit more flexibility than maybe you've had in the last year with regards to that read and react? We definitely are in a better place than we were during pandemic, and the business grew so dramatically during 2020 and 2021. O ur supply chain was great, and our vendor partners were great, but, I mean, the growth was phenomenal. We didn't have a lot of slack in availability because we were just producing the units that we needed to maintain. We didn't have as much chase capability in the last two years as we do this year. We are in a better place this year. The other thing that we did intentionally and planfully is we accelerated some production out of Q3 into Q2 to free up more capacity in Q3 and going into Q4 than we had in the last two years. Okay. We are in a very healthy place in our supply chain. Okay. That's great. We talked a little bit about promotions already, but our question's really based on the fact that the whole industry, everyone in retail seems to be getting more promotional. There are some pockets where you're seeing inventory build, like in apparel, and it just is setting up, we think, to be a slightly more promotional holiday in general. Would you agree with that? Do you see yourselves in competition with other retailers when you do think about promotions? How do you think promotions will look in a more normalized environment versus what we saw pre-pandemic, ultimately? Yeah. Well, right now, I think clearly it's it's a little bit more promotional, and we planned the back half that way. W e are in a position in our business to be slightly more promotional than we were year- over- year. Q4 for us is very important, and I believe you have to be careful where you're positioned in Q4 vis-à-vis other retailers, right? Because if you have got a customer going in to buy a gift for someone, and they see that this retailer has a deal and this retailer doesn't, then it's gonna depend on the customer, but you wanna be careful that you don't look different or not that you still have a good value proposition for the customer. We're planning that way going into Q3 and Q4. Okay. Our last question is on units versus price. We've seen a little bit more ticket lift this year because there has been a little bit more price being taken where traffic has been under maybe a little bit more pressure. How do you view that in 2023? Well, we'll see when we get to 2023. I would say over the long term in this business our goal is to grow both units and price. Historically, has it been fairly balanced between unit or price, or more unit lead for- It's been both. It's been both. It's been both over a longer period of time for us. Okay. We do have two minutes if there are any questions in the audience. If there are no questions, we can. I can't see everybody. There's one. It's very bright up here. Okay. I see someone's in the back. Great. Yeah. I was just curious if you've seen any change in the private label credit card penetration recently? We do not have a private label credit card. When we were part of LB, Victoria's Secret had a private label credit card, but Bath & Body Works does not. Thanks. Hi. I'm wondering, do you look at other like retail as a service aspects to your strategy? Like, do you think about marketing platforms, advertising, maybe even live streaming? In terms of marketing or stuff? Yeah. Like, do you think about bringing on other brands and using your platform because you have 60 million customers coming to you. Do you think about using it for other brands? At this point, no. I would say we're always looking at growth strategies and from time to time we'll test other products or other ideas just to see what's there. More to come on levers of growth for us in the future. Thanks. I have time for one more. Again, it's hard to see. I'm sorry. Oh, hi. Being that you have so many consumable products as you talked about, and I'm a regular buyer of your candles, they're literally burning in my house every day. Are you guys exploring any kind of subscription service that you'll offer? We actually are testing a subscription online right now in Wallflowers refills. We'll see how that resonates. Thank you for being a loyal customer, and keep buying our candles. I think with that, we can end our session. All right. Thank you so much for joining us. Thanks, everyone. everyone. Thank you for everyone for coming.