Bath & Body Works Inc Stock

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 2026 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 2026 Earnings Conference Call. Joining me on the call today are Daniel Heaf, Chief Executive Officer; and Tom Javitch, Interim 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 and provide 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 2025 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.

Thank you, Luke, and good morning, everyone. Today, I'll review our second quarter performance provide an update on the progress we're making against our Consumer-first formula and share how we're positioning the business for the second half of the year. Our second quarter results exceeded our expectations. Net sales declined 2.3%, ahead of our guidance range of down 5% to down 3% and adjusted earnings per diluted share was $0.62, above our guidance range of $0.20 to $0.25. Adjusted earnings per diluted share included the benefit from approximately $80 million of tariff refunds received in the quarter.

Excluding this benefit, adjusted earnings per diluted share would have been $0.31 and above the high end of our guidance range. While the underlying business remains pressured and our performance is not yet where we want it to be, we are where we expected to be. and our teams are moving at pace to execute our strategy.

Last quarter, we described early evidence that the Consumer First formula was beginning to work. This quarter, that evidence is becoming more tangible and quantifiable with sequential improvement in body care, a return to growth in digital and accelerated growth in expanded distribution. These proof points strengthen our confidence that our actions are gaining traction but they are not yet broad enough to signal an inflection in the overall business.

Based on our second quarter performance, and our outlook for the balance of the year, we are narrowing our full year net sales guidance by raising the low end to down 4%, while maintaining the high end at down 2.5%. We are also raising our adjusted earnings per diluted share guidance to $2.60 to $2.80, reflecting our second quarter outperformance and latest view of the business.

We have been clear in introducing the Consumer First formula 9 months ago that returning bars and Body Work to sustainable growth is a multiyear transformation. 2026 remains an investment year, building consideration and trust with new consumers require sustained product innovation, continued investment in demand creation and consistent execution. Our priority in the back half is to continue to strengthen the underlying drivers of sustainable growth while closely tracking leading indicators to validate our actions are working ahead of our goal of revenue growth in 2027.

With that context, let me turn to the progress we are making against our 4 strategic priorities. First, creating disruptive and innovative products. As we set out last quarter, we are bringing greater focus and discipline to how we develop and bring product innovation to market. We are concentrating resources behind our hero categories and franchises where our leading market position and attractive category growth give us the greatest right to win.

During the quarter, we launched Fusion a new body care franchise designed as a hydration routine. It pairs distinctive fragrances with new dermatologist-approved formula designed to layer hydration throughout the routine. We also introduced more functional packaging. For example, our moisturizing body wash now includes a pump and more product at the same price delivering better functionality and greater value at a time when consumers are often being asked to pay more for less.

The launch exceeded our sales expectations and achieved a higher AUR than our core fragrant body care assortment and drove strong customer engagement with several forms selling out. Importantly, FuFusion is designed as an enduring franchise rather than a seasonal collection and we plan to build on its success through additional fragrances in September and for extensions in 2027.

The commercial response to Fusion gives us greater confidence in an integrated model that brings differentiated products, cultural relevance and coordinative demand creation together behind a focused launch. In the second half, consumers will see stronger innovation pipeline across our hero categories, combining proven franchises, modernized icons and new platforms for future growth. Every day, luxury will demonstrate how we can scale a proven franchise. After restoring 10 of its top fragrances during the second half, the franchise performed ahead of our expectations and contributed to the sequential improvement in body care.

In the second half, we will build on that momentum with higher frequence float, a new Otopartform and 5 new fragrances. And files and wishes will demonstrate how we are modernizing and extending our most iconic fragrances. In the second half, we will enhance fragrance performance, elevate packaging and expand the franchise with a new fragrance flanker, 1,000 wishes granted designed to recruit new consumers while staying true to what customers love about the original.

In Q3, we will also introduce new franchise platforms across bodycare and home fragrance. For example, the reserve collection, which launched on Monday, brings a more elevated design-led proposition to home fragrance, including a new 4-week candle and liquidlous re disputes. These new platforms will begin at a seed scale and they are not expected to materially affect our near-term financial results. They are designed to build brand equity, test new consumer propositions and established a platform that will scale over time.

Consumer response will help determine where we invest and which we scale in 2027. Finally, greater focus also means being clear about where we choose not to compete. We continually evaluate our portfolio and assortments against our strategy and each category financial contribution. As part of that ongoing discipline, we have decided to exit home care, which includes our laundry and kitchen products. The category represents less than 1% of our annual sales and create disproportionate product and operating complexity without generating the productivity or incremental demand required to justify the cost.

Second, reigniting the brand. Bath & Body Works has always been grounded in a simple belief. Everybody deserves to feel good. Inspired by the optimism, want and creativity of the American Spirit, we create sensorial products and experiences for everybody, giving the brand a distinctive and broadly relevant place in consumers' lives. The ensuring emotional connection is guiding how we shape our products, tell our story and show up in culture as we work to deepen consumer engagement and build stronger demand.

To bring this brand promise to life more consistently, we are building a modern demand creation model that connects our most important product story with relevant talent, creator content and culture. We are encouraged by the early signs that the efforts are beginning to resonate. Strong Net Promoter Scores, improving social sentiment and growing awareness amongst nonconsumers suggest that the brand is gaining cultural relevance and strengthening its opportunity to attract new consumers.

The Fusion provided our first example of this model in the second quarter. It was the first time Bath & Body Works teamed up with a celebrity at this scale with Hillary at serving as an ambassador and creative partner. As a longtime fan of Bath & Body books with relevant across generation, heat broad and genuine affinity for the brand to the partnership. We amplified the launch through coordinated creator led campaign, another first for the brand.

The campaign generated approximately 615 million impressions and contributed to over 50,000 new social followers bringing Bath & Body Works into the cultural conversation with new audiences. Together with the strong commercial response, these results provide early evidence that greater cultural relevance and awareness can strengthen demand. The launch is also a repeatable playbook. We intend to continue to apply this demand creation model, behind our most important product launches in the second half.

One component of that playbook we are now scaling is creator activation. Creator interest in working with Bath & Body Works is strong giving us an efficient way to tell our stories authentically. We have significantly expanded our creator network and expect to mobilize thousands of creators across a range of audience sizes to support our holiday campaign. Looking ahead, consumers will see fewer, bigger and more coordinated brand moments that bring together product innovation, talent, creator content and seasonal storytelling.

Third, winning in the marketplace. Across digital and expanded distribution, we continue to see some of the clearest signs of progress. Our owned digital business returned to growth in the quarter improving 4 percentage points sequentially from Q1. We expect digital to be among the first areas where the Consumer-first formula would translate into measurable results.

The return to growth, coupled with increases in new, existing and reactivated digital customers provides early evidence that stronger product storytelling, improved discovery, personalization and demand creation are beginning to work and helping us reach consumers beyond our existing customer base. This progress is particularly meaningful because we have not grown our e-commerce business since 2021, leaving a significant opportunity to capture a greater share of the category growth over time.

Expanded distribution was another area of a measurable progress in the quarter. Amazon continues to scale quickly with net sales more than tripling compared with the first quarter. We are now 1 of the largest candle brands on the platform. As more category spending shifts to Amazon over time, our presence allows us to meet consumers where they are already shopping and participate in that growth.

The channel is attracting a higher mix of new-to-brand consumers, who skew younger and more affluent while delivering a higher AUR than our own channels, reinforcing our confidence that Amazon can expand our reach and drive incremental growth.

During the second quarter, we launched with Ulta Beauty across approximately 600 stores, creating new points of discovery for the brand within Specialty Beauty. While still early, the initial response has been encouraging and supports our belief that thoughtfully selected partnerships can help introduce Bath & Body Works to new consumers. Together, Amazon and Ulta expand discovery, broadening our reach and reinforcing a consistent brand experience across channels while maintaining the strength and distinctiveness of our owned channels.

During the second quarter, we completed a merchandising reset across our full store fleet. The first in a series of improvements to the existing store experience. Clearer signage and more intuitive layout organized by fragrance, format franchise are designed to make our assortment easier to understand and products easier to discover. Initial feedback from consumers and associates has been positive and we will continue to evolve the door of Spirit to improve new consumer acquisition, conversion and store productivity.

International, remains an attractive asset-light opportunity to expand the reach of Bath & Body Works globally. Despite continued conflict in the Middle East, international retail sales increased 9% versus last year, and we are pleased with the early performance in Brazil, which opened in July.

Finally, operating with speed and efficiency. Supporting all of this work is our continued focus on simplification, speed and disciplined execution. Through fuel for growth and broader operational improvement, we are creating capacity to reinvest behind innovation, marketing, digital capabilities and marketplace expansion while strengthening the long-term foundation of the business.

Before I close, I want to thank our associates for their continued dedication to serving customers and advancing our strategy. The progress we are making is a reflection of their commitment and hard work. The second quarter provided evidence that Consumer-first formula is beginning to work with progress in digital, encouraging early reads from product innovation, growth and expanded distribution and continued improvement in several of our strategic indicators.

As we move to the second half, we are focused on improving those outcomes while continuing to build the product, brand and marketplace capabilities that will support durable growth. We are confident in our strategic direction and focus on disciplined execution advancing these initiatives together and at sufficient scale to change the trajectory of the business and build momentum throughout 2027.

With that, I'll turn the call over to Tom, to review our financial results and outlook.

Thank you, Daniel, and good morning, everyone. Today, I will review our second quarter results and provide an update on our outlook for the third quarter and fiscal 2026.

Beginning with the second quarter, net sales were $1.5 billion, a decline of 2.3% versus last year and above our guidance range of down 5% to down 3%. As Daniel discussed, underlying business performance remains pressured what results exceeded our guidance and improved sequentially compared to Q1. We entered into our June semiannual sale with lower levels of clearance inventory than last year. While this was healthy for the overall brand in business, it represented approximately 1 point of headwind to second quarter sales with impacts across all categories.

Finance declined mid-single digits. While performance improved sequentially from Q1, supported by strength in our everyday luxury franchise and the Fruit Fusion launch results remain below our expectations. We will continue to invest in product innovation while increasing focus on merchandising and marketing in this critical category. Home Fragrance declined low single digits Performance was driven by a strategic reduction in Halloween assortment as well as less clearance product as referenced previously, partially offset by strength in single wit candles and wallflower heaters.

Soaps and sanitizers were flat in the quarter. Innovation remains a source of strength within the category. Our newer moisturizing and revitalizing soap formulas continue to perform well, and we continued to drive strong AUR performance in those forms. In U.S. and Canadian stores, net sales were $1.1 billion, a decrease of 5.4% versus last year. Store sales were pressured by a few factors during the quarter. The introduction of free ship 50 in the fourth quarter of 2025 drove some expected channel shift to direct, while lower clearance inventory levels primarily impact stores.

As a reminder, our semiannual sale is the largest portion of the quarter's revenue. Direct channel net sales were $275 million, an increase of 3% versus last year. benefiting from a reduction to our free ship threshold of $50 and improved digital conversion supported by our ongoing investments in digital capabilities and customer engagement. International and other inclusive of our expanded distribution wholesale revenues, net sales were $108 million, an increase of 24.9% to last year.

International retail sales were up high single digits, in line with expectations and international net sales were up low double digits above expectations as product shipments increased across our regions. Our second quarter gross profit rate was 45.7%. Results included approximately $80 million of tariff refunds, which contributed approximately 530 basis points to merchandise margin. Excluding this benefit, gross profit rate would have been 40.4%, slightly better than expected and a decline of 90 basis points compared to the prior year driven primarily from deleverage in buying and occupancy expenses on the decline in net sales.

Mix adjusted AUR was flat in the quarter. Adjusted SG&A dollars were $467 million and adjusted SG&A rate was 30.8%, better than expected due to incremental expense savings and discrete items. Bringing it all together, adjusted operating income was $225 million or 14.8% of net sales and adjusted earnings per diluted share was $0.62. Inventory ended the quarter down 10% versus last year. We ended the quarter with clean forward inventories and our inventory is well positioned to deliver in the back half.

Moving to real estate. During the quarter, we opened 24 stores, primarily off-mall and closed 10 stores, primarily in malls. International partners opened 17 stores. We ended the quarter with 1,937 North American company-owned stores with approximately 60% of our fleet in off-mall locations and 596 international locations. We continuously review our real estate fleet performance and have a highly profitable store portfolio with virtually all stores generating 4-wall profit.

Moving to full year guidance. Based on our second quarter performance and outlook for the balance of the year, we are narrowing our full year net sales guidance and raising our adjusted earnings per diluted share guidance. As we think about the balance of the year, the benefit of Q2 tariff refunds is being partially offset by forward tariff pressure and input cost inflation as of the end of the second quarter representing an additional approximately $30 million or 40 basis points. As well as incremental investments representing approximately $35 million into the consumer first formula primarily into marketing efforts.

Our approach allows us to continue investing in the long-term transformation of the business while also improving near-term profitability.

Turning to the assumptions in our guidance. We now expect net sales to be down 4% to down 2.5%. This is an increase to the low end of our guidance while maintaining the high end of our prior guidance range. We now expect full year adjusted gross profit rate to be approximately 43.3%. This includes the tariff refund benefit recognized in the second quarter and assumes the approved tariffs and input cost environment as of the end of the second quarter remain in place through the balance of the year.

Adjusted SG&A rate is now expected to be approximately 29.6%, driven by increased investments in the consumer first formula. We are tracking to exceed our 2026 full year Fuel for Growth goal of $175 million by approximately $25 million, totaling approximately $200 million. This progress has been critical to funding our investments into the consumer first formula and delivering bottom line results.

Adjusted net nonoperating expense is now expected to be approximately $217 million reflecting the interest benefit of the early partial redemption of $250 million of our 2029 bonds. Adjusted tax rate is now expected to be approximately 26.8% and weighted average diluted shares outstanding are expected to be approximately $203 million. Considering these inputs, we now expect full year adjusted earnings per diluted share of $2.60 to $2.80.

Turning now to the third quarter. We expect third quarter net sales to be down 5% to down 2.5%. Gross profit rate is expected to be approximately 40%, driven primarily by deleverage in buying and occupancy expenses on lower sales. SG&A rate is expected to be approximately 34.8%, reflecting net sales deleverage and increased investments in the consumer first formula, primarily marketing.

We believe these investments will strengthen consumer engagement heading into the holiday season and support performance across both Q3 and Q4. Adjusted net nonoperating expense is expected to be approximately $54 million. Adjusted tax rate is expected to be approximately 26% and weighted average diluted shares outstanding are expected to be approximately $203 million. Considering these inputs, we are forecasting third quarter adjusted earnings per diluted share of $0.07 to $0.12.

Now for a quick update on capital allocation. We remain a strong cash flow generating business. Year-to-date, capital expenditures totaled $98 million, and now we expect capital expenditures of approximately $240 million for fiscal 2026, down from prior guidance, reflecting savings in real estate and other projects. We returned $40 million to shareholders through dividends during the quarter. We now expect free cash flow of approximately $650 million, up from our prior guide of $600 million, reflecting higher earnings expectations and lower capital expenditures.

On August 19, we redeemed $250 million of our 2029 notes, of which the interest savings are reflected in our updated net nonoperating expense outlook. In closing, our second quarter performance exceeded expectations and reflected disciplined execution across the business. While we have significant work ahead to return Bath & Body Works to durable growth, we remain focused on strengthening the foundation of the business, supporting the actions outlined through the consumer first formula and returning the business to durable growth.

We are encouraged by the progress we are seeing and remain committed to balancing disciplined investment with strong financial management. With that, I'll turn it over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Paul Lashway with Citi.

Sales are down 2.3% in 2Q and comparisons eased in the third quarter. So I guess I'm curious, with the investments that you're making and the benefits of the consumer-first formula building, why you wouldn't expect 3Q to be a bit better than what you guided just also considering the comparisons. Is there anything working the other way that is acting as an offset to some of the benefits that you're seeing as you think about that third quarter sales guide?

Paul, thanks for the question. So look, I'm really pleased with the team's execution and focus on our strategic priorities in the second Q. As I said in the prepared remarks, we're seeing more tangible evidence this quarter that the strategy that we laid out 9 months ago is working. Sequential improvement in body care, stronger AUR on our innovative products. Tom mentioned moisturizing and revitalizing handset, but that is true on Fusion also. a return to growth in digital after many years of declining performance, improved brand discovery and sales acceleration across our expanded distribution marketplace partnerships.

So the progress that we're seeing is real and it's quantifiable. But that progress at this point is not yet large enough to change the whole trajectory of the business. That is what we are focused on, and that is what we must change in the back half. At the same time, working against us, as you asked, the store traffic remains precious. And body care, while a significant improvement helped by Fusion and everyday luxury is still performing below its potential.

Now also remember in November when we set out the strategy, we said that the core had become too reliant on promotional activity. Promotion, as I'll emphasize, will remain an important way for us to create excitement and deliver compelling value to consumers, but we're not planning on becoming incrementally more promotional to drive the top line in the back half. So net-net, I'd say, transforming a business the size of Bath & Body Works takes time.

We laid out the strategy in November of last year. We're delivering against that strategy, and we are exactly where we expected to be at this stage. Q2 gave us greater confidence and more tangible evidence that we're on the right track, but we want to see these proof points become broader, more consistent and more durable before we really build them into our outlook.

I would add in terms of the guidance itself, -- the high end of the range is very consistent with our year-to-date trends. We're assuming current consumer and macro environment continues. And we believe a prudent approach is appropriate. We want to stay disciplined on managing the business as we continue to execute the consumer-first formula. Importantly, our agile model allows us to shape upside -- so we believe we are positioned to capture opportunities as they appear.

And then just 1 follow-up on the tariff refund, you're spending some of that Ben, can you just talk a little bit more about how you're spending that money and what the consumer might see.

Yes, sure. So we did receive approximately $80 million in Q2, which is the substantial majority of what was outstanding. In our guidance for the second half. We are covering forward tariff and input cost pressures of approximately $30 million based on what we knew as of the end of Q2. So that specifically assumed Canada tariffs remain at 50% for the balance of the year. As a reminder, we do have production in Canada, primarily in candles, that represents approximately 3% of our total cost of goods. We also have a large Canada retail business. So there is exposure to retaliatory tariffs if applied to our categories.

And we're still evaluating this as new information is being released really in real time. I will say we're continuing to work hard to mitigate those risks through sourcing, assortment and pricing opportunities. In addition to the forward tariffs, we've increased investment into the consumer first formula of about $35 million, that's primarily marketing to accelerate our transformation. The majority of that investment, about 70% is pointed to Q3 ahead of our holiday peak season, which should support both Q3 and Q4.

We do view the highest upside to the business as investing in product and brand, areas that need more consistent, elevated support, and we believe over time will create the most durable and consistent growth.

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

Daniel, I wanted to ask you Basically, you had a lot of innovation that hit in July. Just what are the key learnings from specifically the Ford Fusions launch, the campaign with Hillary Do. It's very different than what you guys have done in the past. So just kind of curious, early learnings and how do you kind of use that to inform your decisions going forward?

Yes, thanks for the question. As I said, -- good Fusion is off to a strong start. I had exceeded our sales expectations in the quarter. As you might have seen, several forms sold out, and our supply chains are working hard to make sure that we replenish that inventory. The way I think about it is put Fusion stands for more than just a single product launch, and I think that's what you're poking at, Ike. Fusion is really the consumer-first formula in action. It demonstrates a repeatable go-to-market playbook that we're going to use time and time again as we go through the back half. It starts with product.

We did what we said we were going to do in November. We took trend right fragrances and real skin care benefits, and we gave more value to the consumer. We then built a bigger story around it in this instance of fusion with Hilary da but improved social creators and then coordinated execution across our own channels, stores and digital and on Amazon. This is the playbook. Create products that people want, tell stories that people remember and make it easier to discover and buy. So the sort of playbook that we're going to be running from here on in.

The other important point about Fusion, which is a big learning and I think a pine to what Bath & Body Works to do so well is franchise management. We are seeing these new franchises because they believe that they can be durable drivers of growth over time. Fusion isn't in this floor set and out the next we are really getting back to that disciplined franchise management and the business was known for. We're adding 2 new fragrances to Fusion in Q3. We have new additional forms in 2027.

We will continue to support through marketing investment because we believe that the franchises give consumers reasons to return and it allows us to extend idea across multiple forms and then it creates value beyond the initial launch. So net-net, we're pleased with that first outing of the consumer first formula sales beat our expectations. It's a go-to-market playbook and franchises will be a source of durable growth over time, and we're launching and seeding more in the back half of the year.

Got it. And that's super helpful. And then if I can add 1 more, Daniel. I don't expect you to guide next year, but I do want to ask, I think you said in the prepared remarks, you expect revenue growth in '27 based on the improvements you're seeing -- any chance you could elaborate on that timing? Is there more specificity there? Is there something that you're kind of waiting to see? Just kind of curious if you can elaborate a little bit more on that comment that you gave earlier.

Yes. I'm not -- obviously not surprised you're going to ask that question, Ike. Look, I'm going to go back to what I always say, everybody at Bath & Body Works is working with incredible focus and urgency to return us back to growth as soon as possible. We believe that the consumer first formula is the strategy to do that, and we are seeing better growth more tangible results from that strategy, and we demonstrated that in the quarter. But as I said, we're not -- we're not seeing that at the moment at a broad enough level and at a consistent enough level to be able to put it into our guidance. So our North Star is growth in 2027.

Now as a strategic North Star, but we're not giving financial guidance for '27 on this quarter. we'll do that in future quarters, but know that we are working to that mandate. And no 1 is more anxious to return to growth as soon as possible. We've been encouraged by the moves that we've made. And yes, we're on it.

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

Can you talk about key learnings from Amazon and Alta? And how do you ensure that it's not cannibalizing your own stores, these new sales?

Lorraine, yes, so oldest alternative distribution is a key pillar of the consumer-first formula. We're really pleased with the progress, both on Amazon and Ulta. But more importantly, what we learned in the quarter. We're exceptionally good at understanding the business in real time and reading and reacting. So -- we launched on Amazon in Q1 in February, as you'll recall, in the business, as I said in my prepared remarks, tripled in the quarter.

we have a really experienced team in place managing this channel, and we have been methodical about learning it, including the customer behavior, pricing, AUR dynamics, and we have seen really strong sales growth as we increased our marketing investment while it continued to deliver attractive margins.

We also, as I mentioned in the question from Ike, we simultaneously launched -- Fusion on Amazon as well as in our own channels, and that demonstrated how Al distro and Amazon can support a major product introduction. But remember, it's only roughly about 10% of our assortment is available on Amazon. It is not the full expression of our brand. If you want the full Bath & Body Works work experience, you want all of our seasonal products, you want our colabs, our own channels are still the places to go and get that.

With regards to Ulta, it's early. Ulta is an absolutely best-in-class specialty beauty retailer and exactly the kind of strategic partner we need as we expand our presence and the early response has been really encouraging. We've seen strong consumer reaction to trial size and to gifting. That's what we expected. It is a channel where we are introducing the consumer to Bath & Body Works. So more to say there, but we have exciting plans with Ulta as we move into the holiday period.

What I'd say at the end of the day is that we're not expanding our distribution to just add more doors. We're really going after new consumers, and each partnership has a distinctive strategic need Amazon is about convenience and Ulta is about trial and discovery within a specialty beauty environment.

Now the question that you asked, really in the question we get a lot is about cannibalization. We have a lot of data under the hood on this subject. We monitor the impact of expanded distribution on our own channels on a daily, weekly, monthly basis. And on everything that we are seeing to date, we have not observed any cannibalization in our own stores or website. But rest assured, this is not something that we assume it's something that we must continue to prove quarter in and quarter out.

I would add in terms of our guidance, we're more or less tracking in line with expectations and expect the businesses to continue to build into the second half.

And switching gears, now that we're a few quarters into free ship 50. Can you talk about the impact you've seen from both the sales and the margin perspective from this change?

Yes, sure. I would say in terms of revenue, as expected, there is more consumers choosing free ship versus options like focus. So we are seeing some expected shift out of stores into digital and that's very much in line with our expectations. In terms of the economics, it was planned for the loss of the shipping revenue, and that is also very much in line with what we think. And it's a modest headwind to merch margin, and we should have that fully lapped as we go into Q4.

Maybe I'll just jump in here and maybe we can talk a little bit about digital because -- we've said since the very first earnings call, I was on that digital is a huge opportunity for Bath & Body Works. We've seen material growth from competitors and in the categories across e-commerce, and we have not fully participated in that. And this quarter, it is a return to growth for the first time in a long time for Bart Body Works. And there's no doubt, Lorraine, that the free ship 50 is a driver, but it's absolutely not the only driver.

We saw improvement in conversion, search visibility, product storytelling, merchandising and personalization, I think it's important to remember that as well that digital is not just a place to transact. It's a place to tell the story of our brand. And I think a better digital experience will over time drive traffic and conversion across all of our channels. So we're really pleased with the progress that we're making in digital.

One quarter doesn't make a digital turnaround. We remain dissatisfied as always, but it's definitely evident that the improvements that we've made over the last year are beginning to work, we have a really, really strong digital team in place. We have a road map of improvements to the back half and well into 2027, and we're going to continue to deliver on them.

Our next question comes from the line of Simeon Siegel with Guggenheim Securities.

Great. Hope you have a nice summer. Daniel, maybe just a follow-up on that a little bit. So you did call out digital as being 1 of the first areas of focus. You said it would be the first turn it did. One, how -- talk to us about how sustainable you think that is it sounds like you think it is? Any other changes digital we should see from here. But I'm also curious, based on the learnings, how similar do you think as you diagnose the store dynamic, how similar is that going to track versus the changes you made to digital. Obviously, the nuance will be different, but maybe the confidence you have in the stores from that.

And then if we can -- if you can elaborate a little bit more separately, if you can elaborate a little bit more on the underlying profitability drivers built into the new full year guide, excluding tariffs. Just trying to think through how you're thinking about long-term gross margin and EBIT margin opportunity.

Yes. Thanks, Simeon. I hope you had a good summer also. So look, I'm really bullish on the digital opportunity for this business. I think we've taken important steps over the first year to improve the overall experience. And 1 quarter of a return to growth and mid-single-digit growth. We're not taking victory laps over here, just so you know. But I think that underneath that, the improvement in new consumers, the improvement in existing consumers and the improvement in reactivated consumers gives us more confidence than the mid-single digit for a single quarter sort of portray.

And we have a strong road map of continued improvement and continued improvements ahead. So we feel really good about where we're going. And it's certainly my expectation that we continue to see growth in digital in the back half and through 2027. Maybe now turning Tom to the point on margin.

Yes. In terms of full year guidance, I'll start there. Gross profit is projected down slightly and that's driven primarily by deleverage in B&O on lower sales. Within merchandise margin, I think there's a few important themes that I could hit on. One, AUR was flat in the first half of the year, and we're assuming about flat promotional environment in the second half of the year. Second, there is investment into product and transformation that will be a modest headwind to merchandise margin.

Third, our wholesale businesses, international and expanded distribution are growing faster than the total -- they do carry a lower merchandise margin rate, but they are accretive in OI rate in dollars. And then finally is the tariff and inflation environment, of which I spoke about a little bit earlier in the call.

In terms of SG&A, there is deleverage on the sales decline. All of the dollar growth in SG&A right now is pointed into marketing. -- our Fuel for Growth efforts have offset all other investments, merit inflation, et cetera.

I thought I'd come back to your question on stores because I think this is an important strategic point here. what does digital teach us here, it teaches us that when we change the complete proposition, we add new product, we add new marketing and we improve the total proposition, which is, I think, what you see today, if you go on our website, we drive growth. We are improving stores at the same time. We've completed the largest merchandising project remerchandising projects in a decade in Bath & Body Works and the response has been good.

We have more to do in our store experience in the back half to make sure that consumers can really feel that change tend to be out from the lease line and on the lease line. We're very aware that stores remain under pressure, and we don't expect it to just improve by putting new products in there, like we have got to do more to earn a visit, and we have a strong plan in the back half to get after that.

Our next question comes from the line of Matthew Boss with JPMorgan.

So Daniel, if you break down the box by category, how best to bridge in your forecast for moderating revenues that you're anticipating for the third quarter. Have you seen any change in behavior near term? Or what's driving the embedded sequential softening?

And then Tom, what do you see as the right operating margin multiyear given the changes that you're making? -- and implementing to the model? And what's the baseline revenue growth needed to achieve annual operating margin expansion on an annual basis?

Matt, look, I think I'll point back to our 6 strategic indicators. Those are the proof points that we are using to guide our strategic progress. We're looking for new-to-brand consumers, AUR on product innovation, sequential improvement in body care, digital growth, growth from expanded distribution and savings in fuel for growth. Those are all things that we're tracking to make sure that the strategy is on track. And I don't expect any change in behavior.

What we are working hard to achieve as a team is to make the things that we're doing broader and more consistent as we go through the back half. So we would like to see our digital growth continue. We would like to see body care continue to grow. We absolutely have to do more to attract a new consumer and we have to do more to reduce the pressure that we are seeing in store traffic.

We've proven that we can do that in digital. It is now a question of making sure that we are attacking that in the back half of the year, and we've got plans to do it.

Yes. I'll speak to the long-term model. I would say right now, we are most focused on delivering the second half. So we're not guiding beyond this year. But in general, we should be able to get margin expansion with positive sales growth in line with market growth, let's say, up mid-single digits and with improved brand health that would allow us to realize AUR growth over time.

Our next question comes from the line of Adrian with Barclays.

Great. And I'll just say that the DTC e-commerce, the website is so much cleaner, so much easier to shop. So I can totally see why the messaging there comes through. So I guess my first question is how much of the kind of the product offering as you envision it is online and in stores including kind of SKU reduction and new launches. So where are we sort of in that journey of what you would be satisfied with as the full and correct presentation?

And then secondly, we often see this kind of inflection in whether it's red price selling or DTC, where you learn what's working there and then you kind of translate it into the stores. but it becomes -- it's much more difficult, right, to show that offering very clearly. So as you go through the stores, how many stores are in this cleaner format? And how many can you touch before the end of the year.

Yes, a lot in that. Let me start on the assortment. So the most important point is that we have an incredible innovation pipeline that goes all the way through the back half. We said that we have a stronger pipeline of innovation. In Q2, we just saw Fusion, but we have more coming in body care, home fragrance and across our categories. So I feel good about the product pipeline.

As it pertains to SKU reduction, I'll sort of go back to what I've always said, which is 2 things. Firstly, we are focused on our hero categories. And the hero categories are where we are seeing growth in the marketplace, and we believe that we have an authority to win. SKU reduction to a certain extent and the exit from laundry was both because it didn't reach a commercial threshold for us, but also because we want to focus our resources behind the places that we have the right to win.

We're not chasing a SKU reduction number. What we're trying to get to is growth in our core categories, growth in the business overall and a cleaner environment in our stores. So it's not like we're not targeting a number. And I'd say we broadly are where we expect to be in terms of our overall SKU rationalization program.

When it comes to store presentation, I'm very pleased with what the team did with the remerchandising project in the second half. As you noted in your question, rolling out that change across 1,900 stores is no mean fee, and the team executed it well and consumer response has been good and conversion is up in our stores. That said, we do have more to do, as I said previously, to earn, I would say, to earn the visit is the way I think about it.

And I think you're right that we need to do more to alert existing new lab consumers of the change that's taking place in Bath & Body Works that is both through marketing and we're seeing good early reads on the increased investment that we put into the business in July, but also we need to do more at the lease line, more to engage consumers more within more marketing and that is something that we're focused on in the back half.

It will start, as it always does, by testing and learning. We'll be testing, eventing and lease line disruption in hundreds of doors and when we get a positive role, when we get a positive result, we will roll it out to thousands of doors. That's how this business has always operated, and we have a strong operating muscle in that regard.

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

Just drilling down on the North America store business a little bit more, it seems like there were some possibly onetime headwinds in the quarter. So I'm just wondering how much of those dynamics remain a drag into the back half. And maybe, Daniel, what's the clearest KPI you're focused on today to understand if that part of the business is actually inflecting?

And just as a follow-up, maybe as you're thinking about investing in the store experience, do you have any updated views on just the North America store fleet in general, like how big it should be from here?

Yes. Great. So -- so as we noted, to pressure store traffic was pressured in the second Q. And that's both a Bath & Body Works problem and a macro problem. So we don't expect the macro environment to improve, and that's obviously not built into our outlook. We do see our categories continue to grow. So we're not using the macro as an excuse. We believe we have to compete to win in our categories, and we believe we have to earn a right to a visit. So we're not looking at softer mall traffic as a reason why we shouldn't return to growth.

And we believe that there are a lot of levers that we can pull to address the traffic softness that we saw in Q2, and I answered some of that in the back half. I would say we continue to be focused on the 6 strategic indicators of progress that I outlined in the previous question. And I would also say, obviously, we're focused on the retail equation. Like the #1 thing that we're talking about right now as a management team and really working on is making sure that we reverse that traffic softness that we saw in the second quarter. We understand the problem. We have a list of initiatives against that, and we're looking forward to activating those in the coming weeks.

I might add, in terms of our overall fleet. We have a very profitable fleet, virtually all stores are profitable, and we view our store base as a competitive advantage and an important component of our overall marketplace strategy. We actively manage our real estate portfolio, opening new stores and new convenient venues, closing stores and declining or vulnerable malls and remodeling stores in critical centers, we will continue to study performance and optimize capital deployment and footage to meet the needs of the business over time.

Our final question this morning comes from the line of Kate McShane with Goldman Sachs.

You said the June semiannual sale was impacted by having lower levels of clearance. Can you just talk about how you see the role of the semiannual sale going forward?

Yes. Thanks, Kate. So it absolutely was. Tom mentioned in his prepared remarks that we deliberately went into SaaS with a little bit less distressed inventory. That's because we're buying our seasonal business correctly. We aren't looking to buy large amounts of inventory that we can flush through in semiannual sale. There are certain things, certain franchises, certain long-term drivers of growth that we want to protect. So that was a point of headwind in the second quarter.

That said, SaaS January sales promotions markdowns are a very important driver of our business. We are not looking to pull them away from the business and from the consumer but we don't intend to be increasingly promotional in the back half of the year versus the LY. My macro is you can't promote a business back to health. So we're using that lever less, and we're using brand marketing and product as the things that we are leaning on to drive growth in the back half.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Long for final comments.

Thank you for joining today's call. A replay will be available for 90 days on our website. Thank you for your interest in Bath & Body Works.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Bath & Body Works First Quarter 2026 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 First Quarter 2026 Earnings Conference Call. Joining me on the call today are Daniel Heaf, Chief Executive Officer; and Eva Boratto, Chief Financial Officer.

In addition to this call and this morning's press release, we have posted a slide presentation on our website that summarizes the information in these prepared remarks and provide 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' 2025 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.

Thank you, Luke, and good morning, everyone. Today, I'll walk through our first quarter performance and share an update on the progress we're making on our consumer-first formula. Our strategy to return Bath & Body Works to sustainable, consistent growth.

In the first quarter, net sales declined 3% and adjusted EPS was $0.32, both ahead of expectations, but remain below the standard we expect of our brand. Underlying business trends remain pressured and largely consistent with the past several quarters, reinforcing the necessity of our strategy. We are executing with urgency and remain on track with our transformation road map. Based on this performance and with our expectations for the balance of the year, we are reaffirming our full year 2026 net sales and earnings per share guidance.

Since introducing the consumer-first formula in November, we have been clear that this is a multiyear plan to return Bath & Body Works to sustainable growth. Our aspiration remains clear to bring together luxury sense real benefits and unmatched access, building a brand consumers love, trust and choose every day. The actions we are taking across product, brand and the marketplace are beginning to generate evidence that the strategy is working, and we expect the impact to build through the year and become more visible to consumers and in our financials as we move into 2027.

The work has moved from strategy to execution and from execution to early evidence. While there is significant work ahead, the early proof points we are seeing reinforce our confidence that the actions we are taking are the right ones.

With that context, let me walk through some of the progress we are making across our 4 strategic priorities. First, creating disruptive and innovative products. Restarting our innovation engine remains foundational to our strategy, particularly in our Hero category. We are being more intentional about where we innovate, how we innovate and how we bring product to market. We are prioritizing our Hero category, focusing on the forms where we have clear authority and telling stories that make the quality, benefit and feeling of our product unmistakable. When we deliver a stronger product offering, clearer benefits and sharper execution, the consumer responds, better product clearly communicated win. This was evident in the quarter with the launch of our new moisturizing and revitalizing These products pair our distinctive fragrance with clear consumer benefits, upgraded packaging, focused marketing support and stronger in-store and online presentation. More importantly, this launch reflects the model we are building: stronger product offering, clearer benefit, better packaging, focused marketing and sharper execution, all working together to drive a powerful consumer response.

Strong product acceptance by consumers showed up across multiple metrics. AUR and SKU productivity for the new formulates were both up double digits. This reinforces an important point: value is not simply price. It is the quality of the product, the clarity of the benefit and the strength of the experience relative to the price the consumer paid. That is the equation we are focused on improving.

Body Care underperformed the broader business in the quarter. Some of this reflected planned assortment choices, including the increased mix of accessories in our Disney collaboration, and actions within our everyday luxury franchise, where we pulled back too substantially on the assortment. We identified this quickly and took action. As of this month, we are backing stock with 10 everyday luxury fragrances, including our top sellers, and we are seeing strong early reads.

Everyday luxury remains an important long-term franchise. As part of our broader merchandising architecture, we have clarified the role of key franchises with everyday luxury firmly positioned within that portfolio. We are rebuilding the core assortment, increasing fragrance loads and expanding into new forms and sizes to support durable growth. Importantly, the broader category remains healthy, which reinforces our conviction that stronger innovation, clearer benefits and more modern and emotive storytelling will improve our body care performance over time.

We will also continue to use collaboration strategically as a way to drive engagement, build relevance and support moment. Disney Princesses 2 built on the insights from the original launch and resonated once again with our existing customers, with particular strength in accessories where we broadened the offering this year. I have said that as we move forward, we will use collaborations to build cultural relevance and brand equity, attract new consumers and support our most important franchises and seasonal moment.

was an early example of this approach. We kept the collaboration intentionally limited in scale, and it drove consumer excitement as it quickly sold out. The energy, it created supported our Easter assortment contributing to a spring collection that was up 9% versus last year. Similarly, our Vera Bradley collaboration served as a complement to our Mother's Day offering, driving excitement and interest in our brand during this key gifting moment.

As we move into the second half of the year, I am excited about the product innovation we will bring to market. Consumers will begin to see upgrades to our Hero categories, including new forms such as a flat back hand sanitizer; upgraded vessels, including a pump on our moisturizing body wash; higher fragrance loads; and more modernized and elevated packaging. All of these innovations have been informed by consumer feedback and designed to strengthen our leadership in our Hero categories, by delivering more relevant benefits and better meeting modern consumer expectations.

Our new product launches will be supported by bolder marketing, stronger social engagement, and, in some cases, talent partnership designed to create broader cultural reach. In summary, our product innovation is in early innings. We are encouraged by the results, and we expect momentum to build in the back half of the year and continue through 2027.

Second, reigniting the brand. We are modernizing how Bath & Body Works shows up creatively, culturally and emotionally while building a modern demand creation engine. This work is increasingly coming together in a cohesive and consistent way. We are sharpening our positioning, elevating our creative expression and moving towards clearer, more benefit-forward storytelling. The goal is simple: to be clear about who we are to make the quality and distinctiveness of our products unmistakable and to create an experience and make Bath & Body Works choosing time and time again. As part of this evolution, it's how we engage consumers. We are making creative and influencers a more consistent part of our go-to-market playbook, not as a one-off tactic, but as a way to build relevant and create demand around our most important launches.

For example, during our Vera launch and Mother's Day event, we expanded our creative network by hundreds of influencers, extending our reach and reinforcing our elevated brand narrative across the social platforms our consumers use every day. We are also leveraging these capabilities to amplify our key product stories and franchises in a more modern and culturally relevant way. This quarter, we applied this playbook to our White Barn Neutrals franchise. We extended the White Barn brand into new and unexpected spaces by partnering with creators who use White Barn Neutrals to elevate their own homes and leverage live ad read across relevant podcasts to deepen connection and reinforce our authority, as the market leader in beautiful, high-quality candles at affordable prices.

Our approach resonated. The White Barn Neutral collection grew approximately 20% in Q2 versus last year and attracted a younger consumer. This builds on our evolved brand expression, we are using on Amazon, where richer and consistent visual storytelling is helping us show up in a more modern and relevant way and attracting new consumers to the brand. The enriched brand expression will roll out more broadly across our own channels later this year. This will create a more consistent and elevated presence wherever the consumers encounter the Bath & Body Works brand.

We are in the early stages of transforming Bath & Body Works from a specialty retailer to a category-leading global brand, one that leads with products, creates desire and builds deeper emotional connection with consumers.

Third, winning in the marketplace. We are focused on meeting consumers wherever they choose to shop: in stores, online and across third-party platforms. Our global fleet of approximately 2,500 doors remains a significant competitive advantage, and we are committed to fully leveraging the strength, reach and convenience of that footprint. This includes simplifying the in-store experience and improving navigation to make it easier for consumers to discover and shop the products they love.

Beginning in July, we will begin to roll out updates across our entire fleet. Consumers will see a more intuitive in-store experiencing, featuring clearer signage and product layout designed to make the store easier to navigate by fragrance, form and franchise. At the same time, we are strengthening our digital presence to extend our reach and reduce friction, particularly for new and lapsed consumers. Later this year, we will relaunch our website with a mobile-first experience, stronger storytelling and a faster, more seamless path to checkout.

The site will celebrate our fragrance icons, including beloved such as Thousand Wishes, giving consumers a richer way to discover and engage with the hero of our brand. Within our digital business, we are beginning to see early signs of progress including approximately a 10% improvement in conversion among new consumers. While the experience is not yet where we want it to be, this progress reinforces our belief that there is significant opportunity to expand reach, deepen engagement and drive sustainable e-commerce revenue over time.

Our Amazon business is in its early stages, and we are seeing consistent growth week over week, in line with our plan. The channel is helping us to reach consumers who are not shopping with us through our own channels with a meaningful SKU towards younger and more affluent consumers. We are delivering higher AURs on Amazon relative to our own channels. We view Amazon as an important complement to our own platform, and we are learning thoughtfully, refining and scaling our presence.

Beyond our owned marketplace channels, international remains a key pillar of our strategy. In the quarter, retail sales were up double digit. Despite near-term pressure in the Middle East, the business represents a compelling opportunity with a long runway for high-return asset-light franchise growth outside of North America. Across all of our channels, our objective is clear: to be in the path of the consumer, spark discovery and ensure Bath & Body Works shows up clearly, consistently, whenever and wherever consumers choose to shop.

Finally, operating with speed and efficiency. Underpinning all of our work is a commitment to operating with greater speed, focus and discipline. Through our multiyear Fuel for Growth program, we are simplifying the business, removing unnecessary complexity and reallocating resources towards the areas that most directly impact the consumer. These efforts are helping fund investment in innovation, brand relevance and digital acceleration, while maintaining a strong financial foundation.

In conclusion, early consumer response to initial consumer-first formula actions supports the logic of the strategy and reinforce our conviction in the path we are on. We are executing with urgency and discipline and early proof points are beginning to emerge across the business, reinforcing our confidence that the actions we are taking today will drive more meaningful and sustainable impact over time. This is a comprehensive transformation. We are building the foundation to reposition Bath & Body Works from a specialty retailer into a category-leading global brand with the discipline required to return the company to sustainable long-term growth.

With that, I'll turn over to Eva to review our first quarter financial results.

Thank you, Daniel, and good morning, everyone. Today, I'll provide the details of our first quarter results and provide an update on our Q2 and fiscal year 2026 guidance.

Beginning with the first quarter, net sales were $1.4 billion, down 3.2% versus last year and ahead of our guidance range. As Daniel noted, the underlying business trends remain pressured, consistent with the past several quarters, and our category performance reflects the same themes we've shared previously: the need to deliver consumer right innovation, elevate the brand and ensure availability across all channels.

Body Care declined mid-teens, below the shock and our expectations. As Daniel mentioned, the deceleration in performance was largely driven by everyday luxury assortment changes and a mix shift towards accessories in our Disney Princesses 2 collaboration. The underlying trends within the body care portfolio remain pressured. And as we have said previously, we have taken steps to refocus on our core and better align our product with evolving consumer expectations. We will bring bold innovation to our body care assortment in the back half of the year.

Home Fragrance declined low single digits. Candles performed slightly above the shop supported by strategic pricing actions and solid results in the neutrals line, partially offset by softness in wallflowers. Soaps and sanitizers grew low single digits with continued strength in sanitizers and solid performance in soaps, driven by our new moisturizing and revitalizing formulas. In U.S. and Canadian stores, net sales were $1.1 billion, a decrease of 4.3% to the prior year.

Direct channel net sales were $246 million, a decrease of 1.5%, benefiting from a reduction to our free ship threshold to $50. Normalized for our free shipping threshold change, digital and stores performed comparably. International and other net sales, which is inclusive of domestic third-party wholesale revenues, were $70 million, up 9% to the prior year. International net sales were up 5%, in line with expectations. Our first quarter adjusted gross profit rate was 42.7%, slightly above expectations and a decline of 270 basis points.

Adjusted merchandise margin rate declined 210 basis points, primarily driven by tariffs, inflation and crude oil impact totaling approximately 130 basis points and category mix. Mix-adjusted AUR was flat versus prior year. B&O dollars were flat as expanded store occupancy costs were offset by the closure of a fulfillment center in Q1 of last year. B&O deleveraged as a result of sales decline. Adjusted SG&A dollars were also flat with rate of 31.7%, better than expected due to incremental cost savings and timing. The increase in adjusted SG&A rate of 100 basis points versus last year due to sales decline as investments associated with the consumer-first formula, increases in inflation and merit were offset by our fuel for growth.

Bringing it all together, adjusted operating income was $151 million, 11% of net sales; and adjusted earnings per diluted share of $0.32 was slightly ahead of our expectations. Inventory ended the quarter down 10% to prior year. We're confident with our inventory levels going into Q2.

Turning to real estate. Approximately 60% of our fleet is in off-mall locations. And in the quarter, we opened 13 new North American stores, all off-mall; and closed 17 stores, primarily in malls. International partners opened 8 stores and closed 2 stores in the first quarter. We ended the quarter with 579 international locations.

Now moving to guidance. For the fiscal full year 2026 confirming all elements of our guidance with net sales guidance range of down 4.5% to down 2.5%, and adjusted earnings per share guidance range of $2.40 to $2.65.

A few additional points to note. Our guidance does not include any share repurchases. Our guidance assumes energy prices remain elevated for the remainder of the year. And finally, our guidance does not assume any benefit from potential tariff refunds. As a reminder, tariffs represented an approximate $80 million cost in fiscal 2025, and our current guidance assumes the impact of tariffs and inflationary pressures will be roughly neutral year-over-year. You can find additional commentary on the details of our full year guidance in our slide presentation.

Turning now to the second quarter. We expect net sales of down 5% to down 3%. International net sales are expected to be down low- to mid-single digits, primarily related to a decline in shipped product sales to our Middle East partner due to ongoing conflict. International retail sales are expected to grow low double digits, in line with Q1. We expect second quarter gross profit rate to be approximately 40%, reflecting higher store occupancy and deleverage due to sales declines as well as product transformation investments. We expect second quarter SG&A rate to be approximately 31.8%, reflecting net sales deleverage and inflation and merit impacts and investments associated with the consumer-first formula, partially offset by Fuel for Growth savings.

Our second quarter outlook includes net nonoperating expense of approximately $56 million, a tax rate of approximately 29.3% and weighted average diluted shares outstanding of approximately 203 million. Considering these inputs, we are forecasting second quarter earnings per diluted share of $0.20 to $0.25. Looking forward to Q3, we expect greater transformation investments affecting both product and marketing. This is consistent with our expectations in our original full year guidance, which we reaffirm today.

Now for a quick update on capital allocation. We are a strong cash flow generating business, and our top priority remains driving sustainable, long-term profitable growth through strategic investments in the business. For the first quarter, our capital expenditures totaled $49 million and we returned $40 million to shareholders through dividends. In 2026, we continue to expect to invest approximately $270 million in capital expenditures focused on high-return real estate, consumer-first formula investments largely related to product assortment and logistics and fulfillment upgrades. We also continue to expect to generate approximately $600 million of free cash flow in 2026, including a $66 million after-tax benefit from the interchange fee litigation settlement recognized in Q1. In the first quarter, we redeemed our January 2027 notes of $284 million. And as always, we will take a balanced approach, investing to drive long-term growth while returning excess cash to shareholders.

In closing, while 2026 is an investment year, we're executing with speed and discipline. We're confident in our strategy, encouraged by our early progress and focused on establishing Bath & Body Works as a premier global brand, one that delivers sustained durable growth.

With that, I'll turn it over to Daniel.

Before we take questions, I'd like to take a moment to thank Eva for her contribution to Bath & Body Works. Eva, on behalf of the entire Bath & Body Works team, thank you. You've been a steady in force during a pivotal chapter for this company, strengthening our financial foundation, bringing discipline to how we invest and helping to lay the groundwork for the consumer-first formula. You leave us in a stronger position than the founder and you do so with our deep gratitude and very best wishes for what comes next.

We have initiated a comprehensive search process, supported by a leading executive search firm to identify our next Chief Financial Officer. In the meantime, Tom will step in as interim Chief Financial Officer effective upon Eva's departure. Tom brings deep experience with more than 16 years at Bath & Body Works and 25 years with L Brands, including serving as EVP of Brand Finance. We are confident he will provide strong continuity and leadership during this transition.

With that, we'll open the call for questions.

[Operator Instructions] Our first question comes from the line of Irwin Boruchow with Wells Fargo.

Daniel, I think my first one is for you. Just on the body care down mid-teens in the first quarter, it seems like it was the biggest drag, clearly, on the results. Just can you elaborate just a little bit more on what you've done to address that category issue and mainly trying to get at is that a problem that they kind of surfaced in the first quarter behind you at this point? How are you expecting body care to trend from here?

Thanks for the question. Let me start by taking you back to the diagnosis that we gave in November when we said that body care is the most competitive category and that the offering -- our offering has not kept pace with the consumer. That is why, as part of the consumer-first formula, we have prioritized investment in body care, and we are expecting stronger, more relevant innovation to begin showing up in the back half. As I said in my prepared remarks, I'm excited about the body care innovation that we have coming.

Now within the quarter, the underperformance, which you noted was driven by 2 factors: Firstly, we planned Disney, Disney Princesses 2 to be bigger in accessories this year, that is where we left demand on table last year and the results we delivered so that, that was the right thing to do. Also, in everyday luxury, we have not managed the franchise as effectively as we should have, and we pull Black to substantially on that assortment. We recognize that very quickly, and we've already taken action. As of this month, we are back in stock with 10 fragrances, including the top sellers from last spring in both Fine Fragrance Smith and Body And we are already seeing improved results, and we expect Q2 to be meaningfully better in body care.

Important, though, and this brings us back to the sort of the more substantial strategic point, I think, is we now have a clear franchise architecture across the business, including defined key growth franchises and fragrance icons. Everyday luxury is -- it has a very important role in that portfolio, and we expect it to deliver durable growth over time. We are rebuilding the core assortment, increasing fragrance loads and expanding into newer forms and all of that newness in everyday luxury will be delivered in the back half of the year.

So in summary, while Body Care the performance is not -- was absolutely not where we want it to be, we understood the drivers, we took action and we remain in the very confident in the category's long-term potential for us.

Got it. Super helpful, Daniel. And then as a follow-up, I guess a bigger picture, you're now 1 or 2 quarters in post the reset in the third quarter. Is there any view of a need to push out your revenue inflection story maybe into early 2027 for any reason? Or do you kind of just view things as largely on track and things are progressing the way you had hoped?

I think you said it, brilliantly. Q1 was absolutely consistent with where we expected to be at this stage of our transformation. As we noted in the prepared remarks, the underlying business remains pressured, and we're not calling an inflection. It was a beat, but nowhere near the potential of this brand. And what gives us confidence, the actions that we're taking are starting to show up in the growth indicators that we told you to look out for last quarter. So particularly stronger pricing power behind our innovation and the expanded reach through new distribution channels is bringing new consumers to the brand.

As I said, I don't think the examples that we gave on today's call, particularly moisturizing, hand soap and White Barn Neutrals are meaningful enough at yet to show up in our full financials, but that is the job that we are all focused on in the back half. It is how do we put it together to deliver the scale and bring the company back to growth as soon as possible. That is what every team in this company wants and that is where we are focused.

Our next question comes from the line of Matthew Boss with JPMorgan.

So Daniel, you launched on Amazon during the first quarter. What are your biggest learnings to date? Have there been any surprises? And how are you thinking about balancing marketplace expansion while protecting traffic and productivity within your owned channels of distribution?

Thanks, Matt. I think it's fair to say that we are very pleased with our Amazon performance since launching in new February. Totally new capability and strategy for this company. It is still early, but we're seeing strong double-digit week-over-week growth, and that is absolutely in line with the expectations that we gave. More importantly than the growth though, I think that Amazon is proving to be an effective consumer acquisition channel. That was one of the green shoot indicators we talked to on our last earnings call. And we are bringing in a higher mix of new-to-brand consumers who are skewing younger and more affluent and who value Amazon's speed, convenience and ease of discovery.

We're also seeing AUR on this channel up higher. So this reinforces the strategic point of view that Amazon can be a controlled, curated, complement to our own channel and absolutely not a substitute for them. As we said from the outset, and it's absolutely still the case, our owned channels will always be and always offer the broadest assortment. And just by a way of reference, we have about 94 unique SKUs live on Amazon today, that's about 7% of our active in-store assortment. So there's so much more breadth and depth in our own channels than in third-party marketplaces.

And then maybe I'll add just a couple more points that I think are interesting things that we have learned. Firstly, we are as -- part of it in the process of cleaning up the marketplace, and we put in place quantity limits in both our digital channel and stores channel. And absolutely, that is being effective, and we are cleaning up the marketplace. And secondly, perhaps more future focused, we are finding that the product information that we're putting up on Amazon is really helping to improve our recommendations in generative search in platforms like ChatGPT and Claude. So again, something that we are watching and perhaps an unexpected benefit of the expansion on to Amazon.

And maybe just a follow-up for Eva. Could you elaborate on the product investments that are pressuring merchandise margin this year? And just what you've contemplated, whether it relates to oil from a headwind or markdowns over the balance of the year?

Sure. Thanks for the question, Matt. Overall, as you look at gross margins for the year, we reiterated our prior gross margin guidance of 42.4%. The merch margin deleverage, it's about 40 basis points. Think about that as largely product investment, tariffs enroll, material inflation kind of together roughly flat between the 2 of those. We have contemplated inflationary pressures in crude oil, which is a new headwind that we've been able to offset with some incremental cost reductions. So largely, it's a little bit of pressure on that crude oil as well as the product investments, net of our Fuel for Growth initiatives.

B&O deleverage, obviously, about 90 basis points, which is really driven by the sales decline. And I would just remind you that there are no tariff refunds included in our guidance. And there's a lot of news out there, and we expect to know more about that in about 3 months from now.

Our next question comes from the line of Simeon Siegel with Guggenheim Securities.

Eva, it's been really nice working with you, I wish you best in your next chapter.

Thank you.

You bet. Daniel, you've been with the company for about a year now, how was your view of the opportunity evolved since you joined? I guess, just could you speak to your optimism and the opportunity now versus maybe when you begin, any big learnings about the business and the path forward? And then if you were to take a step back and just diagnose the sales declines in recent years, how would you characterize them between price versus units? And within units, how do you think about whether you're losing customers versus you're lowering their frequency of shop?

Thanks for the question. Let me start by saying, I've loved every minute of my first 12 months here with the Bath & Body Works team. I would say that my conviction in the opportunity 12 months in is stronger. But I'd also say that my understanding of what it will take is sharper. As I said, I think almost on day 1 when I did my first earnings call, Bath & Body Works has extraordinary assets, deeply loved brand, it has leadership in growing and attractive categories; a large, profitable and convenience store footprint; highly engaged customer base; and then I'd say that the learning has been the work required to reach our potential is significant.

We need to restart our innovation engine in the Hero categories. We need to make the brand more relevant and modernized demand creation. We need to improve digital, we need to expand access. And of course, we need to do that simultaneously while operating faster and more efficiently. And that is exactly what the plan we put in place as a team, the consumer-first formula is designed to do, and it is the plan we're driving.

I would say that the diagnosis that I gave, a little bit to the second point of your question before I maybe hand to Eva, it hasn't changed. If anything in the last 6 months since we gave the diagnosis, I think that the evidence reinforces it. When we deliver stronger product sharper storytelling and better marketplace execution, and we do those things simultaneously, the consumer response. The proof points that we talked about on today's call they're still early. It's still too small to show up in the financials, but they support the logic of the strategy. So net-net, 1 year in, I have a clearer view of the work the right leadership team and a growing conviction that we're absolutely on the right path.

So Daniel, I'll take the second part of the question around the sales performance over the last several years. And I'll think this year into last year, Simeon, as I make these comments, right? Overall, our existing loyal customers have been strong. We've seen more frequency, greater spend with that loyal customer base. as Daniel pointed out several quarters ago, right, we need to be more relevant with that new younger customer where our focus is with the consumer-first formula.

On the pricing unit, given where the brand is, we really have not been able to take AURs up, right? They've been flat to down low single digits each quarter. And as you look forward, as you bring product, brand, marketplace together and have the right innovation, we know this brand can grow AUR as well as units. And that's what we're looking to drive here.

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

When you were answering Irwin's question, you spoke about the building benefits throughout the year of the consumer-first formula. Do you expect a return to positive sales growth in the second half? And if not, why not?

I mean I'll sort of go back to the comments I made earlier. I think we're exactly where we expect to be. Again, the underlying trends of the business remain pressured and we're not calling it an inflection. We do see the positive proof point in the strategy, particularly around White Barn Neutrals, moisturizing hand stope. And I think we didn't talk about it on the call, but the iconization of Japanese cherry blossom in also a good proof point. What we need to do in the back half as the innovation comes to market is making sure that we're putting all the pieces together that the foundation that we've built is being executed in the marketplace correctly and we expect the impact to become more visible to the consumer in the back half and more visible in our financials. So look, every team of Bath & Body Works wants to win and is laser focused on bringing the company back to delivering sustainable and healthy growth as soon as possible.

Yes, Lorraine, and I'll just add 1 thing, Daniel, if I could, right? We're in the early stages of this transformation. And as we provided our guidance 3 months ago and reaffirm that today, we believe we've planned the business prudently in line with our current trends. And as you think about the innovation, we're also being very surgical how we approach that and the impact so we can build on the things that win in the marketplace and drive durable growth.

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

This is Brian [indiscernible] on for Paul. Can you remind us what is embedded in your guidance regarding tariff rate? I think previously, you expected 15% for the year, but you're bringing product in at 10% currently. So just wondering how that has been factored into your outlook.

Sure. Thanks for the question, right? Overall, as you think about tariffs inclusive of the supply chain information that I spoke about, think about it as roughly neutral year-over-year with then an added headwind impact related to the crude oil pressures that we've seen, and we fill into our guidance that those continue. As you think about tariffs in particular, Q2 and fall, right, they're at lower rates than Q1, but you also layer on the 232 aluminum, so that's how we plan the business, and we'll see what changes come along. And as I said on a prior question, our guidance does not include any impact of tariff refunds.

Got it. That's helpful. And then I was just curious, are you seeing any difference in performance in your stores by geography or mall, off-mall locations?

Sure. I'll take that 1 as well, Daniel. As we looked at our performance in Q1, right, consistent with prior periods, our off malls did perform better than our mall stores driven by both traffic and conversion. We did not see any meaningful difference by income tier in our performance. It was pretty consistent across our different income tiers. And I think our regional performance, there was some modest differences across regions, but nothing substantial as to a meaningful trend break that I would note and I would say our strongest malls, our high-tier malls performed best, those A malls and the lower-tier malls had the weakest performance.

[indiscernible], there's one more strategic point that I think will be worth making as it regards to stores. So we've talked in previous calls about how consumers have found our stores on occasion overwhelming. They're not as easy to shop as they should be. We have done a great deal of consumer research into this subject. And beginning this summer, we are rolling out meaningful improvement to our store navigation, which will be full fleet. So I think that there were some pictures of that in the presentation that we showed alongside our earnings call this morning, and we think that will really improve the consumer experience and conversion as we go into the back half.

Our next question comes from the line of [indiscernible] with Piper Sandler.

Okay. Great. This is [ Noah Halston ] on for Anna. Could you just give some more color on monthly trends you saw in the first quarter? And curious if you could give us an early read on how Mother's Day was for the business? And just on exiting adjacent categories, what was the impact of that in the first quarter? And how do you think about that as we go through the year?

Sure. No, I'll take that. There's a number of questions there. The exiting of adjacent categories, that was a minimal impact. Those exits were relatively small percent of the overall shop. In terms of Mother's Day, Mother's Day span Q1 as well as as well as Q2 and overall performed well for us. We were pleased with our delivery and the Vera Bradley impact in our Mother's Day performance. And in terms of the month within Q1, there's nothing really significant to call out there.

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

First, I was hoping to get a bit more color on the promotional environment. I believe that this -- the 2026 guide assumes a comparable level of promotions to the prior year. But the consumer is clearly more value-seeking today. Just talk us through how you're balancing brand integrity and AUR versus the promotional response there and then whether there's any flex on promotion of traffic were to stay soft?

Yes. Thanks for the question. Maybe I'll start at a high level on our promotional strategy, and then we can maybe ask Eva to dive into a little bit on AUR. Look, promotions have always been part of the Bath & Body Works model. Great value and exciting events brand, and that is not going to change. As I said in November, when we gave a diagnostics over the past several years, we have leaned into more frequent and deeper promotions to prop up the top line. that does drive a short-term response, but over time, it creates diminishing returns and erodes brand equity. So our plan for 2026, it seems broadly similar, year-over-year promotional cadence and depth. We're not planning a sudden reduction in promos in the year.

The priority, which is exactly where the consumer-first formula is centered, is rebuilding the strength of the consumer proposition. Over time, as we shift towards fewer and more meaningful events built around product story, clearer benefits and more compelling reasons to buy, we want to romanticize the product because of the benefit, not just the discount in our flavor of pricing power, which we will get in our innovation and it's a proof point, followed innovation and brand relevance. And so that is why the consumer first formula is focused on rebuilding the product superiority in our hero category through efficacy, luxury fragrances, modernized packaging and marketing.

Yes, Daniel, I don't have much to add. I think you covered it all, right? Our -- we know the consumer continues to be value seeking. And as Daniel said in his prepared remarks, value isn't just price. Our mix-adjusted AURs were flat in the quarter. And to your question, right, we are strategic and smart as we execute and have an amazing team here that thinks through this where there are opportunities to be more promotional to drive that traffic and then also -- and to create moments and also in the places that we'll pull back. So that's a muscle that we execute on here week in, week out. And Daniel's point about innovation being AUR up, right, it's an early proof point, it's one proof point. But on the moisture hand soaps, it was excluded from one of our key promotions, and so we're really pleased with driving that AUR up as well as the productivity metrics and getting AUR increases is d one of our key metrics that we are tracking and focusing on in the consumer-first formula.

And just a follow-up for Daniel on the CFO transition. Eva has been a key partner in standing up the consumer-first formula and the Fuel for Growth program. So I was hoping you could speak to what's institutionalized at this point versus what could be impacted during the search and the type of profile you're prioritizing externally?

Yes. Thanks for the question. We're going to miss Eva, of course, but Eva's departure doesn't change our confidence in the full year guidance that we reaffirm today. Our expectations for the full year are grounded, very detailed operating plans that have been built right across the business and the performance we saw in Q1 and the proof points so that we are on our way. We have a very experienced finance team, strong controls and a disciplined operating cadence so I couldn't be happier to have Tom [ Javich ] as a very experienced CFO and partners to help us guide the business during this transition.

And in terms of the future profile, we're looking for a CFO who can help us execute the next phase of this transformation: disciplined capital allocation, strong financial planning, operational rigor and the ability to fund the growth while improving the long-term performance of the business. We've got a leading search firm on the case, the search is underway. And we want to make sure that we bring someone in and can quickly establish credibility with all of you and bring the experience and judgment and skills we need to the transformation.

And Daniel, can I just emphasize one thing? Really appreciate the question, Mark, and I just want to emphasize the strength of the team underneath me, the experience that they have in this business and elsewhere is really strong, and I have all the confidence that they will continue to work with Daniel as well as the broader leadership team to continue to drive the consumer-first formula forward.

Our next question comes from the line of Sydney Wagner with Jefferies.

So you cited the double-digit AUR and SKU productivity on the hand soaps. So just wondering, are these results sustaining beyond the initial launch and into replenishment cycles? And then just curious what percent of the assortment now is turning at these improved productivity levels versus legacy product? And then just one more on the appointment of [ Veronique ] as Chief Brand and Product Officer. Just curious if you can talk a little bit more about that role? And if there's been any changes you've seen from product innovation pipeline since for advisory work and kind of what you hope to achieve with that role?

Okay. Thank you. Thank you, Sydney. So yes, we are seeing that the productivity in the AUR is sustaining into replenishment cycle. So that -- I think it's one proof point on the new innovation that we brought to market, and we expect to continue to run this operating playbook, if you will, as we bring new innovation to market. Right now, it's -- we're talking about 2 new forms that we brought in. So it's an overall, it's a small percentage of the assortment. When it comes to [ Veronique ] and her role, so let's start with the role. The thinking behind this role was to bring the 2 most creative functions of the business together under a single leader to improve consistency and speed of delivery.

And we are so lucky to have [ Veronique ] join us. She is a highly experienced beauty leader with a strong track record at very big beauty firms and also an entrepreneurial mindset that she brings from her own brand. It's been a pleasure to welcome her to the team in the last few weeks, and teams are responding really well, and I think she had extremely strong and joined up viewed with me on where we see the future of the brand and how we deliver product excellence quickly. So we're feeling very good about the role and very good about [ Veronique's ] appointment. Thank you for your question, Sydney.

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Dana Telsey with Telsey Advisory Group.

I think, Daniel, one of the things you mentioned in the past is about rationalizing SKU count. Where are you on that journey? How do you think of new versus rationalizing? Is it just the categories that you're exiting? And as you think about planning for holiday, how do you think of what's different this year than last year?

Dana, thank you for the question. So rationalizing SKU count, I have a different -- maybe a different philosophy to some people on this particular subject, which is we're not chasing a number here. We're not trying to get the X percent of our total assortment. What we're trying to achieve is a consumer response. We had too many SKUs in our assortment, and it was almost for consumers as a paradox of choice with a barrier to conversion. So the rationalization wasn't about chasing a productivity number, although we do get productivity when we do assortment and we do get focused. It's about chasing that consumer response. So we're reducing assortment and we are doing other things like the improvement to store experience and the improved navigation that will deliver late this summer, that's part of a bigger whole of improving the overall consumer proposition.

And when I think about -- I mean, we are testing in some stores a deeper reduction, and we'll sort of see how that goes as we move into the year. But as I say, we're not chasing an absolute number. When I think about holiday this year versus last year, it's going to be meaningfully different. We are expecting a bigger, bolder campaign. We are expecting a greater level of product innovation. And I think it's exactly as we've said in our prepared remarks, it's where we see the consumer first formula starts to come together where the pieces are being put together at scale in 1 of the most important periods and 1 of the most important commercial period of the year.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Luke Long for any final comments.

Thank you, everyone. That concludes our first quarter earnings call. We appreciate your time today and continued interest in Bath & Body Works. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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 Fourth 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 fourth 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've posted a slide presentation on our website that summarizes the information in these prepared remarks and provide some related fact 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.

Thank you, Luke, and good morning, everyone. Today, we'll discuss our fourth quarter results, our outlook for fiscal 2026 and the early progress we're driving to return the company to consistent growth. Our fourth quarter performance was better than we had anticipated, but still well below the standard we expect for ourselves. Our aspiration is clear to bring together luxury scent, real benefit and unmatched access, building a brand consumers love, trust and choose every day.

Last quarter, we introduced the Consumer First Formula, our multiyear plan to return Bath & Body Works to sustainable growth. Our fourth quarter results reinforce our diagnosis and the necessity and urgency of this plan. After a self-start to the quarter, our actions to strengthen our performance were successful. Supported by consumer rebound after the government reopened and strong execution of targeted promotions by our teams during key holiday moments. We ended the quarter with net sales down 2% and adjusted EPS of $2.05, both ahead of our expectations.

Looking ahead, we expect improvement in our financial performance as we execute the Consumer First Formula with discipline and urgency. However, the full financial impact of the actions we were taking will take time and build throughout 2026 and accelerate into 2027. Since launching the Consumer First Formula last quarter, we have been focused on execution across the organization, teams are motivated, aligned and moving with pace. With many new roles and leaders in place, we are implementing an enhanced go-to-market approach with improved process and collaboration between product, brand and marketplace teams.

Let me walk through some of the progress we are making across our four strategic priorities. First, creating disruptive and innovative products. Strengthening our hero category product offering and restarting our innovation engine, it's foundational to our plans. Since Q3, our product, merchant and supply chain teams have been working side-by-side to take insights from consumers and prestige brands and translate them into innovative products that we can deliver to consumers at extraordinary value and unmatched scale.

We are prioritizing investments behind our fragrance icons; our priority product franchises and the core forms that drive repeat purchase. A recent example is the launch of our new moisturizing hand soap, one that featured updated efficacious formula, elevated packaging and is marketed as benefit first. Since the launch, consumer reviews and sell-through have been strong. So much so that we are now actively chasing into demand. This is a sign of things to come as we refocus on the consumer and our hero category.

Our 2026 product pipeline reflects this approach to innovation. It is grounded in consumer insights, incorporate enhanced consumer testing and is targeted in the body care, home fragrance and soap and sanitizer category where we are the market leader. In the back half of 2026, consumers will begin to see significant product evolution in these hero categories that include new forms and upgraded vessels, such as the restage of our moisturizing body wash and a new flatback spray hand sanitizer, both directly informed by consumer feedback and designed to look modern, while improving usability.

We are also strengthening how we communicate product quality by evolving the labeling on our packaging, emphasizing ingredient transparency and highlighting product efficacy and benefits, such as 48-hour moisture and dermatologists approved claims. We know stronger quality messaging is critical to attract new younger consumers, and it is already being rolled out across all touch points, including our stores, digital platforms and our product label.

We expect that our new product formula, upgraded packaging, stronger product claims and elevated franchise positioning will increase our appeal to new consumers, while also increasing loyalty amongst our core customer base. We also expect consumers to respond positively to the rollout of higher fragrance loads across our iconic scent, franchises and complemented by new sensitive skin offerings.

These examples reflect our focus on strengthening leadership in the core, delivering more consistent and relevant benefit advancements and better meeting the evolving expectations of today's consumer. In short, these early actions of a much broader innovation agenda, which accelerates in the back half of the year and continues through 2027.

Earlier this quarter, we launched our latest Disney Princesses collaboration, building on the insights from last year's collection, including offering a broader range of accessories. This latest lineup features 5 new fragrances, Life is a Fairytale, Snow White, Mulan, Rapunzel and Aurora, along with the return of 2 fan favorites from the original collection, Belle and Tiana. The launch has resonated with customers and overall is in line with our expectations.

Collaborations remain an important part of our growth strategy, and we have more collaborations planned this year than last. As we said last quarter, we will, over time, deploy them differently and more strategically to drive energy into our fragrance icons, key franchises and seasonal collections. A good example of this is the launch of the PEEPS collection, specifically designed to support the Easter shop. In summary, we are moving with pace to modernize our product, packaging and formulations, and this will become increasingly visible in the back half of the year and continue to build through 2027.

Second, reigniting the brand. We have begun laying groundwork to modernize how Bath & Body Works shows up and communicates with consumers. Our brand and marketing teams are shifting towards clearer, more elevated brand and product storytelling. We are sharpening our position and creative platform, adopting a modern, consistent visual identity across channels and increasing investment in upper funnel media with higher-caliber influencers and creators to build a more culturally relevant presence that sparks excitement and builds awareness with new consumers.

Earlier this quarter, our evolved brand identity made its debut on Amazon, showcasing Bath & Body Works in a modern and relevant way for today's consumer. I'll speak more about the Amazon launch in a moment. This updated visual identity is supported by richer, visually compelling product storytelling that highlight what makes our brand distinct, that everyone deserves to find their feel good. As expert creators, we bring together luxury fragrance, meaningful benefits and easy access delivered at exceptional value.

The new brand expression that debuted on Amazon will begin rolling out across our own channels later this year. As we modernize the brand, creators and influencers at scale will be an important part of our new go-to-market strategy. The use of influencers is a proven go-to-market playbook that will allow us to create a more visible and consistent presence across the social media platforms, we know our consumers use every day. These actions are the beginning of a transformation of Bath & Body Works from a retailer to a global brand, one that leads with creativity, celebrates product and creates culture. I know what this looks like when it's successful, and I can see the upside.

Third, winning in the marketplace. Discovery should feel effortless. We are focused on meeting consumers wherever they choose to shop online, in stores and across third-party platforms. Our global store fleet is a meaningful competitive advantage in beauty and fragrance, one that would take newer competitors significant time and resources to replicate, and we are committed to fully leveraging its strength. To welcome more consumers to the brand, we have taken steps to simplify and modernize the in-store experience. For example, we have reduced SKUs by 10%.

Looking ahead, we are focused on enhancing in-store navigation. Changes will roll out later this year, creating a more intuitive, invited and elevated shopping journey. I am confident the consumer will feel the difference. At the same time, we are making these in-store changes, we are broadening and improving how consumers can discover and shop the brand across owned, digital and third-party platforms. A major milestone in this work was our February 20 launch on Amazon. We know consumers often go to Amazon to purchase their beauty products, and this launch gives us access to Amazon's broad, high-intent customer base, enabling us to reach new and lapsed consumers in one of the world's most trafficked marketplaces.

The curated Amazon assortment is designed to attract new shoppers to the brand, while giving loyal consumers fast, convenient access to their favorite products. As we learn more from our Amazon launch, we are evaluating additional opportunities to extend our distribution further in strategic and brand-accretive ways. In parallel, we are elevating our owned digital experience with a focus on reducing friction and improving the customer experience through clearer product navigation, stronger storytelling and a more intuitive and modern shopping experience. For example, we have now lowered our free shipping threshold from $100 to $50, aligning more closely with specialty retail standards, enhancing our competitive positioning and crucially reducing friction for new-to-brand consumers.

Looking outside of North America, our international business continues to be an exciting opportunity. The international business is approaching $1 billion in retail sales. Our partners who own and operate the stores believe in our strategy and are accelerating the pace of new store openings across existing and new markets, including Germany and Brazil. This reflects the strong global demand for our brand and allows us to further expand our reach to consumers worldwide. Our goal here is simple: be in the path of the consumer, spark Discovery and ensure the Bath & Body Works brand shows up consistently and powerfully across every owned and partner touch point.

Finally, operating with speed and efficiency. We are laser-focused on removing complexity from our business, streamlining decisions, shortening cycle times and driving productivity. Our multiyear Fuel for Growth program targets $250 million in cost savings over 2 years with approximately $175 million included in our 2026 guidance. These savings allow us to accelerate and fund our strategic investments in product and brand.

As we move forward, we are closely [ monicating ] indicators that our strategy is gaining traction, and we will share green shoots along the way, such as accelerated growth in new-to-brand consumers, stronger pricing power behind our innovation, improved performance in our hero categories and expanded reach through new distribution channels.

The Consumer First formula represents a comprehensive end-to-end transformation of our company. It is designed to ensure we consistently meet and exceed the expectation of today's modern consumer. This work is well underway. We are moving with urgency. And as the year unfolds, our progress will become increasingly visible to consumers, associates and shareholders alike.

At the core, this transformation is repositioning us from a specialty retailer to a premier global brand.

With that, I'll turn over to Eva to walk you through our financial performance and outlook.

Thank you, Daniel, and good morning, everyone. Today, I'll provide the details of our fourth quarter results, a wrap-up of 2025 performance and a review of our 2026 guidance.

Beginning with the fourth quarter, net sales were $2.7 billion, down 2.3% versus last year and better than the guidance floor we set of down high single digits. This performance reflects improvement as the quarter progressed following a soft start in early November, when we navigated significant macroeconomic pressure that impacted our consumer demand. Our targeted promotional and operational adjustments such as a new Black Friday weekend event drove dual channel traffic growth on those key days.

Our Q4 category performance reflects the same challenges we shared in Q3. We must deliver consumer-right product innovation, elevate the brand and be available wherever and whenever she chooses to shop. Body care declined mid-single digits below the shop, driven by underperformance in seasonal collections, notably holiday traditions, which did not resonate for the first time in several years. Consumer research shows our body care offerings have become too predictable and that we need to be more disruptive, modern benefit-led innovation.

On a positive note, Champagne Toast had its strongest year ever, validating our strategy of elevating our core fragrance icons. Home fragrance grew low single digits, performing above shop. Candles were a relatively bright spot supported by stronger 3-Wick and Single-Wick acceptance, better inventory positioning and disciplined pricing. Soaps and sanitizers also grew low single digits with our pocketbac sanitizers leading the way.

In U.S. and Canadian stores, net sales were $2.1 billion, a decrease of 2.6% to the prior year. Direct channel net sales were $579 million, a decrease of 2.5%. When adjusted for buy online, pick up in store, digital outperformed stores. International net sales were $91 million, up 8.6% to the prior year, and system-wide retail sales grew 13%. We are pleased with the rebound of our international business with all geographies delivering growth and our partners maintain healthy inventory positions.

Our fourth quarter adjusted gross profit rate was 45.7%, better than expected and a decline of 100 basis points to last year, driven primarily by tariff impacts and partially offset by B&O leverage, which benefited from the Q1 '25 exit of a third-party fulfillment center. Mix-adjusted AUR declined low single digits, reflecting our strategies during holiday. Adjusted SG&A rate was 23.2%, increased 90 basis points to last year, reflecting softer sales and investment in technology and initiatives associated with the Consumer First formula.

Bringing it all together, adjusted operating income was $614 million, 22.5% of net sales. Adjusted earnings per diluted share of $2.05 exceeded expectations and declined 2% to last year. With respect to inventory, we ended the fourth quarter with inventory down 5% to prior year and importantly, with clean inventory levels headed into spring. Our real estate portfolio remains healthy with 60% of our fleet in off-mall locations.

In the quarter, we opened 21 new North American stores, all off-mall and closed 28 stores, primarily in malls. For the year, we opened 32 net new stores. International partners opened 36 stores and closed 7 stores in Q4 with 44 net new stores in the year. We ended the year with 573 international locations.

Now for the fiscal year 2025, net sales were $7.3 billion, flat to the prior year, and adjusted earnings per share was $3.21, down 2% to the prior year. For additional full year results, please refer to the slide presentation we have posted on our website.

Turning to our 2026 guidance. We expect 2026 to be a year of disciplined investment behind the Consumer First Formula, balancing rigorous cost control with targeted reinvestment to position the business for sustainable long-term growth. We expect net sales to be down 4.5% to down 2.5%. Key assumptions behind our net sales include a macro environment similar to 2025 with continued value-oriented consumer behavior. Our innovation pipeline, improved marketing execution and new touch points such as marketplace and wholesale will begin to contribute more meaningfully over time with a greater impact in the back half of 2026 and into 2027.

Promotions are assumed at comparable levels to 2025 and will remain an important tool to drive traffic and customer engagement. International net sales are expected to be up mid- to high single digits. We expect full year gross profit rate of approximately 42.4%, reflecting B&O deleverage, primarily due to sales declines and merchandise margin pressure from product investments, partially offset by our Fuel for Growth initiatives.

We are assuming tariff levels, inclusive of product cost inflation pressures remain roughly neutral to year-over-year earnings. We expect full year adjusted SG&A rate of approximately 29.2%, reflecting normal wage inflation, Consumer First Formula investments and sales deleverage, again, partially offset by Fuel for Growth initiatives.

Our Fuel for Growth targets $250 million in cost savings over 2 years. As Daniel mentioned, we expect approximately $175 million of cost savings in 2026 with those savings earmarked to accelerate investments in innovation, digital and marketplace capabilities and high brand impact initiatives. We expect full year adjusted net nonoperating expense of approximately $230 million, reflecting the interest benefit of the early redemption of our January 2027 bond and an adjusted effective tax rate of approximately 26.5% and weighted average diluted shares outstanding of approximately 203 million. There are no share repurchases assumed in our outlook. Considering these inputs, we are forecasting full year adjusted earnings per diluted share of $2.40 to $2.65.

Turning now to the first quarter. We expect Q1 net sales of down 6% to down 4%. We expect first quarter gross profit rate to be approximately 42.5%, reflecting approximately 150 basis point headwind from tariffs as we had no tariff impacts in Q1 of 2025, and B&O deleverage due to the sales decline. B&O dollars are expected to be relatively flat.

We expect our first quarter adjusted SG&A rate to be approximately 32.3%, reflecting net sales deleverage and net timing of investments in Fuel for Growth savings. Our first quarter outlook includes adjusted net nonoperating expense of approximately $60 million and adjusted tax rate of approximately 28.5% and weighted average diluted shares outstanding of approximately 202 million (sic) [ 203 million ]. Considering all of these inputs, we are forecasting first quarter adjusted earnings per diluted share of $0.24 to $0.30.

Now for a quick update on capital allocation. We are a strong cash flow generating business, and our top priority remains driving sustainable long-term profitable growth through strategic investments in the business. For the full year 2025, we invested $237 million in capital expenditures. We generated free cash flow of $865 million, including approximately $125 million of working capital benefits that our teams drove. We returned $167 million to shareholders through dividends and repurchased 15.1 million shares for $400 million.

In 2026, we expect to invest approximately $270 million in capital expenditures focused on high-return real estate, Consumer First Formula investments largely related to product assortment and logistics and fulfillment upgrades. We expect to reduce the number of new store openings this year, resulting in square footage growth of approximately 1%.

We expect to generate approximately $600 million of free cash flow in 2026, including a $65 million after-tax benefit from the interchange fee litigation settlement. We expect to maintain our annual dividend of $0.80 per share and we will redeem our $284 million of January 2027 notes in the first quarter, as I previously noted. We remain committed to returning to our 2.5x gross leverage target over time. And as always, we will take a balanced approach, investing to drive long-term growth, while returning excess cash to shareholders.

To summarize, 2026 is an investment year as we execute our Consumer First Formula with pace and discipline. We are confident in our strategy and our ability to establish Bath & Body Works as a premier global brand, one that delivers sustained durable growth.

With that, we'll open the call for questions.

[Operator Instructions] Our first question comes from the line of Lorraine Hutchinson with Bank of America.

Daniel, I wanted to get your insight on the competitive landscape across mass, specialty and other fragrance players. Some of these competitors are also leaning heavily into content creators and elevated packaging. How are you approaching this? And do you think you're positioned to compete effectively at this point?

Lorraine, thanks for the question. Without a doubt, the landscape we are operating in is increasingly competitive. We operate in innovative, youthful, fast-growing, high-margin categories that naturally attract strong interest and new entrants. I love -- I really love the sectors that we play in.

As I explained on the last earnings call in Q3, for a period, our product innovation, our brand expression and our market execution did not keep pace with the competition or with the consumer. We leaned too heavily on promotions to drive the business.

The Consumer First Formula is directly addressing those gaps, and we are moving with pace. It is not strategy, it is action. You will see from us bold and disruptive product innovation. We talked about a green shoot on the call in the moisturizing hand wash, new packaging, new formula, benefit-led marketing and the success that we've had that, a refreshed and reenergized brand that resonates with today's consumer and an elevated and extension and expansion of our distribution in the marketplace, as you have seen with our February 20 launch on Amazon.

Now as part of that marketing evolution, we are going to significantly expand the use of content creators. This is really what I mean by moving from being a specialty retailer to being a global brand. We expect to see a roughly tenfold increase in how we leverage content -- and how we leverage content creators so we can show up in social media in a way that is modern and relevant.

And what I love so much about this job and what I love so much about this company is where we sit. We're evolving so fast to adopt the playbooks used by these small insurgent competitive brands, but we do so from a position of strength and with what I believe are significant competitive advantages. We have the scale and resources to invest meaningfully. We have our 2,500 stores globally, which just gives us an amazing mousetrap to capture the demand we create. We have our fast, agile domestic supply chain that allows us to chase into demand, and we offer extraordinary value to our consumers.

So what I like about where we sit is that we will be an incumbent, but operating with the pace and the agility of an insertion brand. I have so much confidence in our strategy, in our competitive position and most importantly, in our team's ability to execute with pace.

Eva, can you talk a little bit about the puts and takes around your gross margin forecast for the year? What's embedded for tariffs, promotions, any other items? I would have thought you'd get some of that -- those elevated China tariffs back over the course of the year. So maybe just how you're thinking about the pace of gross margin development through the year?

Sure. Lorraine. Overall, our outlook assumes about 130 basis points of gross margin pressure. I'll start with merch margin where we expect to see pressure, really driven by those product investments that Daniel just referenced, you'll begin to see some of that new product in the back half of the year.

From a tariff perspective, our guidance assumes tariffs inclusive of product cost inflation, it's tough to separate those, roughly flat to earnings year-over-year. I would note you'll see an outsized impact in Q1 as we're wrapping the start of tariffs, which for us began in Q2 of last year. We had essentially no tariffs. That reverses a little bit with some of the rate movements in Q3 and Q4.

We are -- we expect to experience B&O pressure as well, natural deleverage given the sales declines, the investments we are making in real estate and some wage inflation. This is all net of our Fuel for Growth. The Fuel for Growth program that we highlighted, about half of the savings flow to gross margin versus the other half SG&A. So we're continuing to mine for opportunities to improve our underlying cost as we progress.

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

Congrats on the improvements. I guess 2 questions. First one, Eva, could you help us understand the 1Q revenue guide a little more? Just looking for some thoughts really relative to the trends maybe that you saw exiting the fourth quarter.

Sure. Thanks for the question. I'll start with a comment we made last November that was very consistent in Q4. When you exclude the benefit of broader promotional activity, our core business has been trending down about 3%. As I noted in our -- in my prepared remarks, our plan does assume promotional levels consistent with 2025. We are not building incremental promotional intensity into our plan. That doesn't mean we won't have different promotional events. But overall, as we think about intensity, we're assuming we're relatively flat. So think about the 3% I referenced as a baseline for 2026.

And for Q1, we are facing our most challenging year-over-year comparison from a top line perspective. We had our strongest quarter last year in Q1.

Got it. So I guess my follow-up is kind of to that point. So last year in Q1, I think you started off with a really successful collab, which created some tough compares for you this year. But just kind of curious if you can comment on how the follow-up Princess launch, which had a few weeks ago did. I think Daniel had some positive comments, but really just trying to understand how you were able to comp that event, and if that sets you up well relative to the 1Q guide that your kind of giving us today on revenue.

Sure. Let me take that question in a couple of ways. So first, on the Disney Princess 2.0 launch, right, we built on our learnings from last year and our insights. We offered a broader range of accessories last year, those accessories sold out very quickly within a day or a couple of days. And overall, the launch has resonated with existing customers and overall is in line with our expectations.

I would say you can't just look at Disney in isolation how it's affecting the overall shop. Q1 to date is tracking in line with the expectations that we just set. And while Q1 to date top line is running above our guidance range, that's consistent with our internal cadence of assumption and as there is some movement in timing of key events that can affect the quarter. So I'd say, overall, we're running in line with our expectations.

Our next question comes from the line of Matthew Boss with JPMorgan.

So Daniel, maybe taking a step back, what signposts should we look for to know that your Consumer First Formula is working here? And what gives you confidence in the plan or any green shoots that you're seeing at this point?

Matt, yes, great question. Let me give you a little bit of color on that.

Let me start by saying I'm really pleased with how fast the whole company has moved from strategy to action. We're all collectively motivated, aligned behind the 4 pillars. We're focused on the Consumer First Formula. And I believe we're moving with real pace and discipline.

The most important signposts are very clear and measurable, and we expect to see an acceleration in new-to-brand customer growth. We expect stronger pricing power and sell-through behind our core innovation. We are definitely looking for improved performance in our hero categories, specifically body care in 2026 and expanded reach and incremental sales from the new distribution channels that we will open this year, like Amazon, which we opened on February 20. These are just some of the tangible proof points that the Consumer First Formula is working.

And as I've said a number of times, we expect the change to be visible to the consumer before we see the full benefits of our new strategy in the financials. And I believe there are things that the consumer is already starting to feel. We talked about the moisturizing hand soap. It is new formula, efficacious, benefit-led marketing, and we're seeing great customer reaction from that. And it is just a signal of the things that we have to come. As I said in Q3, we are really ramping into product innovation in the back half of this year.

And then as Eva mentioned, we talked about the iconization of our fragrances. If we put the right level of marketing, if we build multiyear plans behind some of our iconic fragrances, we believe we can make big, bigger. We started that with Champagne Toast last year, almost as a test, and it had its best year ever. We've got a way to go to deliver that, but we will show that in 2026.

When we talk about winning in the marketplace, international continues to be a great opportunity and grow nicely. We saw system-wide retail sales up double digit, which gives us confidence in the global opportunity for the brand. And then I would say, Amazon, it's an important structural proof point, one that we've already launched early into the fiscal year, and we know it's an opportunity to acquire new-to-brand customers as well as service customers, existing customers at a speed and convenience that this brand hasn't offered in the past. So that's a little bit of a color behind some of the proof points.

And Daniel, can I just add a couple of additional points from a point you made. As you look at international, our partners are showing confidence in the strategy with acceleration of new store openings next year. We're expanding in new markets. And our store openings will be at least 60 net new store openings.

And on the point that Daniel made about the moisturizing hand soap, as we look at the productivity of that, the productivity of that is double the soap hand gel soap that it's intended to replace. So just an early proof point of real tangible benefits when you bring the product to the market that resonates with the consumer.

Daniel, to follow-up on that, how best to think about the cadence of your top line initiatives that you walked through over the course of this year? And maybe to put numbers behind it, just the time line that you see to reverse the underlying negative 3% run rate that Eva cited versus industry growth in your segment today?

Yes. As we said on our Q3 earnings call, we don't expect to grow in 2026, but yet we expect sequential improvement as we move through the year as the impact of the investments that we are making and the impact of the Consumer First Formula ramp.

And really, I want everybody to think about the Consumer First Formula, not as a set of discrete initiatives, but as a system, a holistic transformation. It really as these things come together, which we will start to see in the back half, it is new product. It is a refresh and reignited brand brought to life in an integrated and elevated marketplace that delivers both the consumer impact and the financial impact that we are looking for.

So make no mistake, we expect it to build through the year, and there is -- the whole company is working as fast as possible to return this company to durable and profitable growth without leaning on the brand erosive and promotional strategy that we have had in the past.

Our next question comes from the line of Simeon Siegel with Guggenheim Partners.

Daniel, and sorry if I missed it if you said this, obviously early, but is there any way to quantify the initial reads from Amazon, maybe how you're thinking about both Amazon and the other incremental wholesale partnerships within the full year guide for next year?

And then just when thinking about wholesale, I'm curious maybe higher level, can you share your thoughts on this is -- is this something you want to drive customers to wholesale? Or is it more so a function of you want to be able to meet your customers where they are?

And then just, Eva, just quickly, it was nice to see the B&O leverage. And I heard the comment for go forward, but I'm just curious if you could tell us what the leverage point is now for occupancy and then maybe for SG&A as well?

So I'll sort of take the strategic question and maybe Eva, you can follow-up.

So yes, the third pillar of the strategy is really winning in the marketplace. And the ambition here is to make discovery effortless. We are focused on meeting consumers where they are and where they choose to shop online, in our own stores and across third-party platforms. And Amazon is an important part of the strategy. We've only been live for a couple of weeks. So it's a bit early to be able to assess performance. But there's no question that the channel meaningfully extends our reach by giving us access to Amazon's broad consumer base and helps us connect, as I said, with both new and lapsed shoppers to drive brand discovery.

I'm particularly pleased with the response that we've had from the way that the brand looks. If you think about when I started here, our own website offered one photograph per product. And I think it was seen very much as a way for store shoppers to replenish. If you look at how our assortment, and it is a limited assortment to start with on Amazon Look's, there's 50 SKUs. The product photography is incredible. You can see the scent stacks. You can see the benefits with lifestyle photography. We're starting to sell the brand through an elevated positioning and product storytelling in a way that we haven't done so before. And once we've done that at Amazon, of course, it's relatively quick and cheap to start to roll that out across our existing touch points.

So Amazon is both a place to drive brand and consumer discovery, no question. And we are competing in the marketplace for traffic on Amazon. For too long, we've allowed our competitors to use our keywords and the fact that we didn't have an official brand presence to take the demand that was rightfully ours and funnel it towards their product. That is now no longer happening. So we have high expectations for this. It will make a meaningful financial impact in the year, and we are ramping into it.

Great. And Simeon, to your question about the full year guide, inherent in our guide is about $50 million or 0.5 point of growth from our expanded distribution efforts. I would note our Amazon partnership is a wholesale model. So we're not realizing full year sales. We're excited about the start to the launch, and the teams are highly engaged to continue to drive this strategy forward.

On leverage points, I would say we don't really have any changes to our leverage point. B&O at about 2% to 3% sales growth and SG&A at about 2.5% to 3.5% sales growth.

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

Daniel, you mentioned a few times the words luxury and pricing power. And I wondered if you could drill down a little bit more about what specific initiatives center around these strategies?

Kate, yes, I think that's a -- it's a great question. So I think for too long, the brand has not listen to the consumer. And so that's what we mean when we talk about putting the consumer at the center of everything that we do. We are taking consumer insights and directly translating that into our new and disruptive innovative product. This is a new process that we are operating.

And for too long, I think that we've looked at mass as the competition, which, of course, it is. But really, the USP of our brand and what we're getting back to is bringing queues and scents from luxuries and making it available at accessible price points. That is really the opportunity that we have in front of us.

So it's not that we are looking to reposition the brand as prestige or move into luxury price points. That's absolutely not what we're doing. But it is luxury scent with benefits at unbelievable value for consumers.

And just as a second question, Eva, we wanted to ask about the international outlook. Is there any risk to the numbers you gave today just given the current circumstances in the Middle East? I know there was a little bit of a drag the last time we saw a conflict in that region on your international sales.

Yes. Thanks for the question, Kate. It's quite early. Let me take a step back, right? We're pleased with the rebound of our international business. In Q4, all geographies delivered growth, and our partners are starting the year in a healthy inventory position.

As we look at the Middle East, today, international represents, as you know, about 5% of our total net sales with the Middle East currently representing about 40% of the portfolio. That's down quite a bit from where we were a couple of years ago. We have a strong diversified international portfolio. We're expanding our markets, and we have strong compelling consumer demographics.

So I think it's too early to comment on the current dynamic in the Middle East, we'll continue to monitor it and pivot. Our stores are open and continuing to function, and we're focused on our partners and our associates, of course.

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

Daniel, as you think about the collaboration and Amazon, how is your retention strategy is different, if not at all? And how do you think that will evolve over time? And in terms of the core offering as you continue to evaluate what's the right mix of body care, candles and soap and sanitizer going forward?

Jungwon, so let me expand a little bit on collab. So -- as I said in Q3, we're sort of thinking about collabs differently. We love collabs. We want to use them differently and more strategically. We want to use them to drive energy into the things that are permanent about this brand. So driving energy into our priority franchises, driving energy into our iconic fragrances or driving energy into a seasonal collection that we are known for.

And the good news is we have more collabs this year than we did last year, and we are starting to use them strategically already. A really good example of this is live right now. So we launched our PEEPS collab, which has had really excellent response for consumers. And what it's doing is not standing alone as a collab as a separate thing that's used to drive a quarter, but it is actually set up to drive energy into our Easter collection, and we are starting to see good results from that already.

And when it comes to Amazon, I do think, as I've said in the past, this is predominantly about meeting new and lapped consumers. We have a very powerful and very successful rewards program with over 40 million members and over 80% of our transactions in our own network flow through that. That is an excellent tool for continuing retention, but Amazon doesn't offer our rewards program. And so we are getting a benefit of having improved AUR on that, and that is what the consumer is getting as a balance for speed and convenience. So it really is about new and lapped consumers on Amazon.

And then on the second part of your question with regards to the core offering, I would say, we're focused together on making sure that we are taking share. And to take share, we should be growing in line or better than the marketplace. That is the standard we expect of ourselves, and that is what the Consumer force -- First Formula will deliver. So I don't really think about what's the right balance for the business. I think where is the consumer demand, where is the growth in the marketplace and how are we going to claim our rightful share of that.

And just to repeat what you said earlier, Daniel, right, particularly as you look at body care and soaps and sanitizers, these are nice growing markets out there that we can win in.

Absolutely. We do so from a position of strength.

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

Starting with margin, guidance implies low teens EBIT margin this year. Do you view this as a durable base for the business? And then what is your philosophy on driving faster top line versus EBIT margin expansion in fiscal '26 and into fiscal '27?

Sure, Mark. I'll start with that. We -- this business has been a very healthy margin business for a long time. We need to invest for growth responsibly, while we're funding the journey through our Fuel for Growth, but we must invest in this business to get the business back to growth. And when you do that, this business leverages nicely. And so as we think about margin expansion beyond '26, we'll come back to you as we continue to execute on the Fuel for Growth strategy. But I would think about it, there's leverage to be had as we drive growth in the business.

It is growth and margin, but growth must come first.

And then a follow-up on capital allocation. You're pausing buybacks, redeeming the nearly $300 million in debt in Q1. But if free cash flow tracks toward the $600 million guide, would you intend to remain out of the market for the full year? Or is there a path to resuming some opportunistic repurchases through 2026? Or how are you thinking about the longer-dated maturities on the debt side as you update your buyback plans?

Sure. Thanks, Mark. Our priorities remain the same, investing in the business, returning cash to shareholders and maintaining a strong balance sheet. We are committed to our 2.5x gross leverage. We repurchased those bonds earlier in the process of doing so. It was earnings accretive. We were preserving the cash for those bonds. And of course, as we progress through the year, we'll maintain the flexibility to return cash to shareholders after funding our Consumer First Formula priorities.

Our next question comes from the line of Sydney Wagner with Jefferies.

Just one more kind of on the pricing architecture. How are you thinking about the price taking with newness and kind of what your right to pricing is there? Is there any learnings you've had as you've rolled out some of the brand refreshed product?

And then just as you work to shift brand perception toward being benefit-led, adding dermatologist-approved claims in store, do you feel the consumer is following you there? What's been the early feedback on those specific claims?

Sydney, yes. So with pricing, I think our strategy is very clear. We have relied too often in the past on deeper and more frequent discounts. As we go into 2027, we are expecting AUR improvements on our innovative products. So we're expecting to get paid for our innovation. And that product isn't just great innovative, disruptive product in and of itself. It will be wrapped in new energy and new brand identity. So I do believe that when you get it right, great product, great brand brought together in the marketplace, we can start to regain pricing power. So that is absolutely the strategy.

And as Eva and I have both said, across the whole business, it's not our intention in this financial year to use deeper and more frequent discounts as a lever to growth. We know that is not in the best interest of the business long-term. So that's how we're thinking about pricing. It's not that the pricing or the tickets will be materially different on innovation. It's the fact that it will not be included in some of the more aggressive discounting that we may do.

When it comes to benefit-led, it is very clear in our consumer insights for many years that this is a critical thing that we must crack for new and younger consumers to consider the brand. And it is really a multipart 365 strategy. We have rolled out new claims and new levels of ingredient transparency on our product. So you can see it today on our labeling and the presentation that we showed as part of this call gave a couple of highlights of that. It is now prominent and permanent in stores and our website just launched what we call the feel good formula, which is going a much more detailed look into our ingredients and our commitment to a more clean product.

So it's early days. We're getting good consumer feedback, and we expect this to be a core part of our brand identity as we move through the year, are critical for us.

Our final question this morning comes from the line of Krisztina Katai with Deutsche Bank.

So Daniel, with the emphasis on attracting new younger consumers, and I believe I heard you say a roughly tenfold increase in leveraging content creators. Can you maybe just talk about your expectations around new customer acquisition, just how you see changes in your consumer demographics by age, by income?

And then just how are you tracking engagement rates on social media platforms that you expect to see as a direct result of these efforts in 2026?

Great question. So our expectations on new consumers is that we are expecting to see a trend break in the levels of new consumers that we are attracting to the brand that -- we're really, really focused on that. And it is -- we welcome all consumers to the brand, and that's what I love. We are a broad church when it comes to consumers. We have propositions like Disney Princesses, which clearly skews younger. And we have a very, very loyal consumer that we love that skews slightly older. And where we want to play, of course, is where the market is growing, which is in that 25- to 30-year-old female demographic. And that is where our innovation in the back half is truly targeted.

And when it comes to brands, of course, we're tracking new-to-brand consumers. Of course, we have really good new metrics on brand health, and we're expecting improvements in that also. And when it comes to social media, there are many metrics that we track, but I would say the most important one is going to be number of posts from the influencers. We're really looking for those thousands of influencers that we recruit to be posting their content about our products and our brand in their voice because we know from having seen this playbook run with other competitors and those insurgent brands I talked about, that is the secret to success in that area. So thank you for your question.

Okay. So thank you, everybody, for your question. When I look -- and when we work in retail, the holidays don't mean a break. With that in mind, I just want to take this last moment to extend a heartfelt thanks to our associates across stores, across distribution centers and our home office for their continued commitment, passion and determination.

We are acting with urgency and clarity against the Consumer First formula, creating disruptive and innovative product, reigniting our brand, winning in the marketplace and operating with speed and efficiency, all to attract new and younger consumers. Our expectations for our business and our brand are high, and this work will take time, but we are confident that we have the platform, the plan and the team to win.

Thank you very much, everybody.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Okay. Good morning, everyone. We can get this started. So for those of you who don't know me, I'm Katy Delahunt, an associate on Alex Straton, Softline Retail and Brands team here at Morgan Stanley. And thank you all for joining us to kick off the second day of Morgan Stanley's Global Consumer and Retail Conference.

So I'm really pleased to welcome Bath & Body Works. And here on the stage with us, they're the leader in home fragrance, body care and soaps and sanitizers with over $7 billion in annual sales and more than 2,400 stores globally. So today, I'm joined by Daniel Heaf, Chief Executive Officer; and Eva Boratto, Chief Financial Officer. So welcome, and thank you both for joining us today.

So on format, this will be a fireside chat where we'll explore some of the investor questions that we've frequently been getting as well as take some time to answer audience questions if we have some time. So then to cover disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley/researchdisclosures.com. And if you have any questions, please reach out to your sales representative.

So great. Maybe to kick things off, Daniel, I can start with the big picture question for you. Since joining in May, you've now completed a comprehensive review of the company in that process, what have been your biggest learnings compared to what you initially suspected and what KPIs matter most to you?

Yes. Great. Thank you. Good morning, everybody. I'm going to reiterate what I thought coming into this business and what I think the enduring strength of the company are, which gives me so much optimism for our future. So first of all, as you know, we operate in fast-growing innovative, youthful consumer categories growing mid-single to high single digit. That's a great sector for us to be in. And we have what I saw from the outside, a competitive moat. We have a reason that distinguishes us from all of our competitors out there. We have our own distribution, 2,500 stores. We have 40 million active growing loyalty members. We have our domestic agile supply chain, 50,000 store associates, and we are the category leader in the core categories that you just mentioned.

And so I thought all of that before I came in. And it's sort of even more true today. When I dug under the hood of this business, it has some incredible advantages that are not immediately obvious. So if you think about some of our core franchises that have been around for 20 years, 15 years, we have a vault of fragrances. And some of those fragrances -- many of those fragrances are doing north of 100 million, some of them over 200 million. So if you think about the buzziest beauty brands out there, the brands that are in the front of Sephora and Ulta, the revenue from our single fragrance franchises is considerably larger than some of those franchises. So it doesn't look like it from the outside nor in the way that we treat it, but this business has a vault of iconic fragrances that's not immediately obvious from the outside.

So all those strengths are true and perhaps even more true than I thought when I first started. Now digging into the business on day 1 and really understanding what was going under the hood, we came to a number of conclusions about the business that we outlined on our last earnings call.

Firstly, the strategy to move into adjacencies. So laundry, lip, hair, men's as good examples of those adjacencies. That was done with the intention of driving both top line growth and acquiring new customers, and that strategy was not successful. It didn't achieve the growth that we expected and perhaps most importantly, didn't bring new consumers to the brand.

And the byproduct of that strategy, as we all know, business is about choices. And we made choices in the prior years to invest our marketing money, invest our research and development money, invest in our packaging stages -- restaging in those adjacencies. And as a result, we pulled time, money and attention away from our core, that core that you just mentioned, Soaps & Sanitizers, body care, fragrance, home fragrance, those categories drive 90% of the value. There is plenty of growth in those sectors, and we have a right to win in there. So that is what I uncovered in the first part of the strategy.

The second part of the diagnosis really came down to collabs. I love collabs. We're not walking away from collabs, but we don't want to use them to prop up the quarter. They're there to drive energy in the brand. They're there to create buzz and excitement, sell-through. They shouldn't be used to carry the quarter in the way that Villains was set up to do.

And then thirdly, and perhaps most obviously, to I'm sure all of you, when the top line isn't going as expected, companies reach for the promotion lever. And as we all know, becoming increasingly promotional erodes reference price points. It doesn't actually drive loyalty and it dilutes brand equity. So with all of that information, we came up with a consumer-first formula, which is our strategy to getting back to long-term durable, consistent profitable growth.

That's great. And Daniel, can I just add, part of your question, Katy, was also about metrics. And underneath that formula as we think about the important metrics, right, growing total customers, right, focused on that younger customer, filling that portfolio. We've done very well with our existing customer of retention as well as increased trips and spend, but we've got to grow our customer base. We've got to, as we elevate and invest in our customer-first formula, have more brand equity in the market, thus more pricing power, right, and winning share. We're in really healthy categories.

That's great. And then, Daniel, I know with the third quarter print, you unveiled your consumer-first formula. And before we dig into the details there, maybe could you just summarize the core pillars of that strategy? And then in your opinion, is there a rank order to you in terms of which matters more or less?

Sure. So there are 4 pillars to the strategy. The first pillar is about creating disruptive and innovative products in our core categories. It's about getting back to category leadership in the core categories that we are famous for, in the categories that we are the market leader for. And the consumer has told us what it is that they want. They want cleaner, more efficacious formulas. They want elevated, more modernized packaging. And this is something we know how to do. We've just got to put it together in the way that we historically have done to meet that consumer need, and we're laser-focused on that.

The second component is reigniting our brand. We are an iconic American brand. It is unbelievable the recognition and love that this brand has, but we haven't really invested in making the brand relevant to today's consumer. You can look across the retail space, and you can see how other brands have made themselves relevant with influencers, with creators, with consistent, elevated threaded marketing messages that are fewer and bigger, and that is exactly what we intend to do as well.

And the third part of our strategy is about winning in the marketplace. I fundamentally believe that you have to go to where the consumer is. You have to meet the consumer where they are, so they can find, fall in love and purchase your product, this idea of just being a single stores-based retailer operating in own 4 walls. I think that came to the end some time ago. So if our aspiration is to grow share, we must grow share by winning in the marketplace.

And then fourthly, just over time, our company has become too siloed to slow and there is an opportunity internally both for cost savings to fund the investments that we'll be making in product, brand and marketplace, but really to make the whole company more consumer-focused, faster and more efficient. Those are the 4 pillars of the strategy we laid out.

No, that's a great overview. And then maybe diving a little bit deeper. In recent years, the beauty industry has arguably become increasingly competitive. Would you agree with that characterization? And then how does your new strategy strengthen BBW's ability to win there? And then kind of related to that point, should BBW grow in line with the industry? And at what rate would that be?

Yes. So I think it's unquestionable that the sector is competitive. But if you have a high-growth sector with great margins, you attract great competitors, and that's great. What I go back to is we're the market leader in those categories. And as I said in the answer to your first question, we have these enduring qualities. We have a competitive moat. Sure, you can be X, Y, Z influencer brand and you can get your product into 300 doors of Sephora or 600 doors of Ulta, but we have 2,400 doors around the world. We have our own supply chain. We have 40 million active loyalty members. We have a moat that is going to be very hard for competitors to beat because in some ways, this brand, this business over the last 35 years has done the hard, hard things.

You can be an influencer brand, but you're not going to be opening 2,500 doors anytime soon because that is not an easy thing to do. You're not going to create your own supply chain next to your office in Ohio and be able to operate with the speed and agility that we do. So I love the competitive nature, and I'm looking forward to using our competitive advantages combined with the consumer-first formula to win in the marketplace. And I'm confident that we will.

Great. And then I think in kind of your strategy overview, you had mentioned making it easier for consumers to find and shop brand, particularly through a stronger digital presence. Can you walk us through what are the key steps you're taking to elevate the digital experience? And how is it different than maybe the prior CEO strategy? And in your view, what's the right digital penetration for the business over time?

Sure. Let me start with culture. I know that's not quite the question you asked, but it explains a lot because everybody in this room knows that digital is, without question, an enormous financial opportunity as well as the way that all modern brands really acquire customers.

Bath & Body Works hasn't operated like that in the past because we were born of L Brands and L Brands was a store-based retailer and our digital channels were seen culturally as a place where store-based customers could replenish the things that they love. And as a result, we had a very subpar digital experience. When I arrived, we had no more than one product photograph per SKU. No -- there was no attempt to seduce and invite a new customer in. Our web page was essentially a catalog of the products that we offer. So the opportunity for us financially to get just in line with where the rest of the market is. Soaps & Sanitizers is a good example. Online penetration of Soaps & Sanitizers is around 40%. We're at 20%, and we're the category leader. We don't have to reinvent the wheel here to capture that growth. We just have to be as good as everybody else.

So the financial opportunity is huge. And we're going to do that through 3 main levers, which are already underway. So firstly, we're going to improve the overall experience, product photography, product copy, the way that we express our brand online so that when you come to the brand, if you don't know the brand, you can find things that you all love and purchase them. And you'll start to see those changes already coming through. So new mobile homepage went live a few weeks ago, new native app went live a few weeks ago, 500 of our products now have multiple product photography and product descriptions and claims elevation in terms of cleanliness and in terms of efficacy.

And we've seen improved traffic, improved digital engagement, improved digital performance, which are all leading indicators of going in the right direction. That said, we've got a long way to go. I always said or I think Eva always said, this isn't a light switch that we flick, but we're going to get better week after week, quarter after quarter until we have the world's best digital proposition. So it's both brand building and commerce building on our own platforms.

And then, of course, digital marketplaces, without question, if you want to be the category leader and you want to grow share, you have to be on Amazon. And it is both an opportunity to build the brand as well as drive commerce. And we know today, there's already about $70 million of gray market products being sold on Amazon, and that is both brand dilutive and margin dilutive, hundreds of listings with no inventory against them, very poor consumer experience, very poor product photography, very poor descriptions. We're going to capture back that market, and we're going to capture new consumers through Amazon as well as lapsed consumers who want the convenience of next-day shipping.

Great. You answered one of my questions there with the Amazon. So I'll skip ahead to -- I know you've noted that consumers are increasingly seeking efficacy and ingredient-led products and the Bath & Body Works maybe hasn't always gotten the full credit that it deserves for its offerings there. What changes are you making to help customers better appreciate these benefits? And how does this translate to either better growth or profitability for the total business?

This is really about retooling the way that the organization works. And what's happened, and it comes down to the fourth pillar of our strategy, which is faster and more efficient. There are silos have built up within the company. So the supply chain team were fantastic, fantastic experienced team in product development, toxicology. We invested heavily in making clean ingredients, but it wasn't necessarily talking in the way they're working the way they should do with the merchandising team. So that product just went into the same -- those formulas went into the same packaging with the same labels. And we didn't think about a marketing campaign that was attached to our brand, these long consistent elevated messaging around cleanliness. We did a few callouts in store for a season.

So as we think about where we're going to go, it's product, brand, marketplace in retail, consistent integrated operations so that we can take what we already have, which is market-winning formulas. I've used this example before, but our moisturizing body wash without question in consumer testing is the best moisturizing body wash at both our price point and elevated price points. You can go and pick anything you like off the shelf from Sephora at $100 and consumers will always choose ours, which will be sub-$20.

But if we don't put it in modern packaging, if you don't write the claims effectively so that consumers can understand them, we aren't going to win the new consumer. So it's all about putting the pieces together. We will do some investment in formulas. We have some very exciting innovation coming in the back half of 2026, new formulas, mood-enhancing formulas, those types of things that the consumer is looking for. But we don't need to -- what's in the tubes very often isn't broken, but it is about taking it all to the consumer in the right package.

And Katy, if I could just add, if you look at the past of BBW and the value equation that Daniel is talking about, right, we've relied or emphasized the value, the price point, the promo, right? And what we're trying to do with today's consumer is bring all of the other important dimensions to win that new customer.

That's great. I appreciate the color there. And speaking of the consumer, I think on your last earnings call, you had spoken to the need to reengage that younger consumer. So maybe could you provide any sort of quantitative metrics on how your consumer base either has or hasn't changed over the last few years? And then in the context of some companies talking about a weaker younger consumer heading into the holiday season, why is that the right consumer to focus on?

Sure. I think it's worth just pointing out at the beginning, we have a very large, loyal, stable customer base, okay? So we have 40 million active loyalty members. Those members have continued to grow over time. And what we definitely know to be true, and this is proven year after year long before I got here by the team is that once a consumer finds and falls in love with Bath & Body Works, they come back more frequently, they purchase more often and they purchase more. So we have a sticky proposition.

Now when you dig under the membership data, when you look at the consumer data, it is true that I would say our audience is bifurcated. We have a consumer who's 35 years plus and is extremely loyal. This is sort of our core customer, they grew up with the brand. They love the brand. And then we have a very young customer who comes to us often buying their first body care for the first time, the first fragrance for the first time, but in that middle section, we're losing too many in that 20- to 30-year-old female demographic. We're not winning as many consumers as we should do. And we know that's where a lot of the growth from the industry is taking place. We know actually that we have many of the formulas and propositions to be successful with her, that younger demographic, but it is about putting it together in the right way across product, brand and marketplace.

And I don't think about these things in terms of what is the young consumer doing this quarter or next quarter. We are building long-term sustainable growth. We know that young consumers are the future of beauty brands, full stop, whether it is up or down this quarter, it's not really where we're focused. We know that this is something that we will continue to work on quarter after quarter, year after year because it will provide long-term sustainable and durable growth.

Great. So -- and I know you alluded to the adjacencies in the first question, but I know you've kind of shifted the strategy away from those and back towards a tighter focus on the core. Can you just outline how big are the adjacencies versus the core business from a sales perspective now? And how are you thinking about that split over time?

Sure. So our adjacencies are about 10% of the business. And just to be clear, because maybe this wasn't -- everyone didn't quite catch it on a very loaded and full earnings call that we did, we're not walking away from our adjacencies. It's not that we're going to be exiting all of those categories. We've got some great products in there that we love. We love our men's business. It's done well for us, and we're going to continue to -- it will continue to do well for us. What we won't do, though, is continue to invest in those categories to the extent that we have done because it has pulled away the focus from the core categories where we have the right to win.

And let me give you an example of where that's a very real example and something that we're addressing quickly. So in order to build the beautiful packaging that we have for our laundry detergent and scent boosters, we use the investment that we normally make in our body care restaging. We need to restage the packaging for our body care and moisturizing body wash, but instead, we decided to build beautiful packaging for laundry. So we will be taking investment away from the adjacencies to invest in the categories that we are famous for, that we have a right to win at, and that is both in product and brand and marketplace. So it's not about walking away. It's about focus for the teams. It's about focus for our investment. It's about focus for our consumers, and it's about making choices. And I think that makes it easier to win.

Great. And then Daniel and Eva, you spoke to this as well. You talked about Bath & Body Works leaning maybe too heavily into promotions recently. And obviously, deals are still an important part of your DNA. So how do you think about the right balance going forward? And then how do you plan to reset consumer expectations? And how do you -- how does this all feed into the company's longer-term gross margin profile?

I'll just start and then you can jump in. So one of the things I had to learn most about when I started at Bath & Body Works is the promotional cadence and the way that promotions work at Bath & Body Works. It's not something I have experienced in my retail life beforehand. But what is very clear to me now having done the deep dive and spent time listening to the consumer and the teams who have a great deal of experience here is that what makes us successful is great product, great brand and a great deal and great price points. And that will forever be true for Bath & Body Works, but it can't just be price.

We have to have great brand, great product and great prices, and that is what the Consumer First formula is set up to do. So we have no intention of walking away from deals and promotions. What we do, though, is make sure that we won't be using it to go deeper and more frequently. We will be still offering deals. But until we have new product that's resonating with the consumer, until we're showing up in the places where the consumer is, we have no intention of pulling back significantly because we have a very large loyal customer base that is habitualized to those price points, and we have no desire to fire our customer before we have built a very stable and loyal customer base around the new consumer propositions that we're bringing to market.

And Katy, just to add a little bit, Daniel, on -- if you look at the history of this brand, right, this brand has a strong, long history of being able to get AUR increases with the innovation and the value the customer drives. It's our goal to get back to that place. You've seen over the last couple of years, we've had moments where we have been able to realize that where we've had the right innovation to meet the customer. So as we invest in the innovative products and the brand, we believe it it's doable.

Great. That's great. And then I know you've outlined a number of initiatives kind of integration today, some of which may require some level of incremental investment. Are the additional cost savings that you outlined on the third quarter call enough to fund this? Or are margins potentially structurally lower over time as a result?

Yes. As we look at the Consumer First strategy that Daniel laid out, right, returning this brand to sustainable, consistent growth is our top priority. Innovative products, brand and winning in the marketplace. So we're laser-focused on that. We -- as you said, we also announced another Fuel for Growth program that I think we have a great track record of delivering on $250 million in savings over 2 years with about half identified for the first year. Certainly, it's our goal to offset the investments with the savings. But until we return to that durable growth, we will have margin pressures in the business.

Great. That's super helpful color. And then kind of taking everything we've talked about so far into account, how do you think about Bath & Body Works long-term financial profile? What do you think BBW can deliver in terms of sustainable long-term growth and profitability?

Yes, I'll start Daniel and please jump in. Look, as Daniel said earlier, we're in categories that are growing mid-single digits, right? So maintaining and winning share is a focus of ours to drive and win in those marketplaces. We know that growth is disproportionate on the digital side. Our strategies are very heavily focused around our own digital experience as well as other marketplaces to win in the market.

As we think about long-term operating income targets, we'll come back as we continue to flesh out the strategy on that. In the short term, we're focused on making the right investments behind the brand to drive the growth. We're starting from a position of strength. We have very strong operating margins in the industry. And as we get back to that growth, you can expect margin expansion, but we'll have more to say on our long-term aspirations.

Awesome. That's super helpful. And then Eva, kind of double-clicking a bit into the financials. I know 3Q results fell -- had fallen short of expectations, and then you had also reduced your full year guidance. Maybe just for the audience, could you just give us a sense of what specifically drove the softer performance in your view as well as the rationale behind your updated outlook?

Yes. So certainly, we're not satisfied with the outlook where the business is performing today. But as a result of the deep dive since Daniel has come in, we felt it was important to set expectations for investors. So as you look at Q3 performance and the missed expectations, certainly, the expectations for Villains was a key driver of our shortfall there.

But peeling back the onion more, as you look at the underlying performance of the business, we performed closer to a down 3-ish in the quarter when you normalize for the incremental promotions to clear the inventory. And that's where the strategy is so important to grow that core, focus on the core and more, but focus on the core to bring the business back to growth. We provided what we believe was prudent guidance for Q4. As I said, the guidance provided, we viewed as a floor. It's our aspiration, our goal to improve from there. What I can say is the decline of high single digits in the fourth quarter was where the business had been performing at to date as of our earnings call.

Post the government shutdown, also we did see post the -- not being shut down, post the reopening of the government, right, business did start to improve. And we're pleased with how we're executing during the holiday season. So a lot of the season is ahead of us. We're heads down focused on delivering, meeting or beating our expectations.

Great. That's super helpful. And looking ahead even further, I know on the last earnings call, you had indicated 2026 would be an investment year with most strategic initiatives becoming more visible to consumers in the back half. So thinking about the shape of the year, does that mean that growth should remain negative and profitability maybe decline in the front half and then improve in the back half? Or how should we just think about the progression of fundamentals from here?

Yes. I'll be high level with my comments, Katy, we're focused on getting through the all-important holiday season here. But as we look at 2026 for the full year, at this point in time, we don't expect 2026 to return to growth. We expect that the strategies that we're laying out will become visible to consumers in the first half of the year, but we will have more impact on the financials in the back half of the year. I like to call it a crescendo versus a light switch. So that's how we're thinking about the cadence today. We're working rapidly to drive and improve that, but that's what we see sitting here today.

Great. No, that's super helpful color. And then moving on quickly to the questions that we're asking everyone at the conference kind of in a rapid fire format. So relative to recent trends, do you expect consumer demand over the next 12 months to accelerate, remain stable or decelerate?

Stable.

Stable.

Great. And then similar question on margins. Over the next 12 months, do you expect margins to face more tailwinds, a balance of tailwinds and headwinds or more headwinds?

I think a bit skewed toward more headwinds.

And then finally, on capital allocation, how do you expect CapEx intensity around technology investment change over the next 12 months, increased, remain stable or decrease?

So I'd say stable, but underneath that, there's a shift from what I'll call investments in tech debt to investments in more consumer-driving consumer engaging types of technology investments.

If you think what's going on inside the company, we're taking out investments that we were making in what I call the back end of the company, and we're putting it into the things that the consumer can see. When it comes to making choices in investment, do we want a new HR system or do we want to be able to invest in an influencer to elevate our brand. I think we're pretty clear about where we sit for the next 18 to 24 months.

Great. And then maybe taking a big step back, if we were to sit here a few years from now, what are the 2 to 3 milestones that you'd want investors to look to when evaluating your progress?

I'll go back to the KPIs that Eva gave. We are laser-focused on total active customers. So bringing new customers to the brand. And my expectation is that we'll be taking share in our core categories, and those core categories will be growing healthily.

Great. And then similarly, what are the top 3 things that make you the most excited about Bath & Body Works' future?

I'm unbelievably excited. It is -- I don't think everybody realizes, even people in the beauty industry do not realize what a sleeping giant this company is. In many ways, having been here for 6 months, the platform for growth that we have, the stores, the supply chain, the stable loyal customer base, it gives us this incredible platform for growth that other let's call them sort of insurgent beauty brands just don't have. And all we have to do is not create new markets. It's just do what other people have shown us is the right thing to do because the consumer is telling us getting our digital experience to be from a 0 to 10, it's going to take some time, but it's a lot easier than building 2,500 stores.

Taking our formulas and putting them in a beautiful elevated packaging at great price points in our stores is a lot easier than inventing new formulas, testing them and bringing them to market. So I'm looking forward and optimistic about using the platform that this company has built over the last 30-plus years and putting it to work in the way that the consumer expects us to deliver the growth that everyone should expect from this company.

Excellent. And then maybe we can wrap it up with one more open-ended question. And then I know we have about 5 minutes left. So maybe we can open up to investor questions if there are any. But is there anything you did not cover today or a key message that you'd want to make sure we hear?

I think we covered it all from my perspective.

Great. Great. Are there any questions.

I know you guided for -- not expecting growth in '26. But if you look at the [indiscernible] third quarter Villains didn't work, [indiscernible] didn't work, fragrance [indiscernible] post government shutdown. Let's say Villains was in line, you didn't have government shutdown, would you still not expect growth in '26? It seems like it could happen. Again, the only one running around longer than I have in this quarter is, brand is fine. And it seems like one bad quarter on product is not a structural issue.

Yes. I think -- so listen, we have an amazing brand, right? We're not today winning share in the marketplace as you look from a dollar. We're under-indexing on digital. So as I step back to your question and where I said Q3 sales when you normalize for the incremental promotions were down about 3%, right? And that was affected by Villains, but also affected by the underlying core performance.

As we look to 2026, right, it's our intent to not be incrementally promotional. As you know, and as we've discussed in many quarters, we have been incrementally promotional. So our goal is to bring the value equation in line, not be incrementally promotion. Additionally, think about it as we work to clean up the gray market and have made some changes to online order purchasing, the $70 million that Daniel referenced, that's about 1 point of headwind to us as well.

So as we look at underneath the brand, the levers we're pulling to bring the right product to market, that's my expectation as we sit here today that we won't return to growth, but we'll have more to say as we head into 2026.

Talking about promotional cadence, we don't [indiscernible] to be more promotional. Is it reasonable to think that you will lap what you're doing this year and next year?

Yes. We don't expect to pull back in any meaningful way, as Daniel said, we would expect promotions to be, I'll call it, comparable as we're thinking about the year.

As you elevate the packaging, the messaging to try to sell higher margin on that product and attract new customers. And I know you don't want to fire the old customer. Would you expect the entire store will be elevated? Or will you still have more juvenile or whimsical packaging [indiscernible].

Yes. We clearly -- I'm going to start by being a bit blunter, right? This business is not broken. But what it doesn't have is durable growth levers. So Villains was a miss. We have lots of collabs coming next year. One of those could be a big hit, but you can't bank on that to carry the quarter, okay? So we're going to have to do things to build these durable growth levers, new product franchises, making the big bigger. So taking some of those big fragrance franchises that I made referenced to earlier, elevating them, telling bigger marketing stories, putting them in multiple distribution channels. I believe that there is a way to acquire new customers that way, too. So it's not just new, new, new.

And we will, of course, start to make our stores more approachable to new consumers. They've told us very clearly they find the stores overwhelming. If you go into our stores today, as I'm sure many of you have done, if you're not a fan of the brand, there's so much -- there's so many good ideas, you don't really know where to start. So what you'll start to see in the stores is a simpler assortment, a cleaner navigation, clear zoning for where different consumers could find different offerings. And I think that will drive the elevation of the brand.

And can I just add to that? And I think as you think about 2026, those changes take time, right? You're going to want to check, you're going to want to test alternative formats, rollout, stores, locations, geographies, product. We're bringing the consumer in earlier to our product testing to make sure we're getting it right. So as we look at 2026, there's a lot going on, and we want to make sure we execute well and appropriately test with consumers. And that just takes time.

Awesome. I think we'll wrap it up there. So thank you both so much. This has been great. So thank you.

Thank you very much.

Thank you.

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 Third 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 Third 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 and provide 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.

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 to accelerate growth, and I remain confident in our ability to do so.

Today, I will set out 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 moves, 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 5 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've 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 4 clear points. Firstly, we pursued adjacencies 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 multichannel 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 across brands, products 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 4 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 categories to deliver luxury scents with benefits created to be accessible to everybody, thoughtfully sourced and ingredient-led, refocusing on what made Bath & Body Works 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 Zoe, who craves clean products with elevated scent and design at an accessible price point. These 2 muses keep us true to today's consumer while providing opportunities to engage new and younger consumers.

We are making changes to better serve these muses, embedding consumer insights at the start of product development, accelerating new franchise development and leveraging rapid testing to inform our innovation. Consumers will start to see these new products in the second half of 2026. From body care to home fragrance, we are introducing new forms, vessels and formulas in our core categories that will drive growth and elevate the overall experience.

To sharpen our focus and make our in-store experience less overwhelming, we will cut our assortment and reduce complexity, concentrating on fewer, more on-trend product priorities. Starting in the first half of next year, you will see thoughtful edit to our assortment and selective category exits such as hair and men's grooming as we refocus on the core.

The second pillar of our strategy is to reignite our brand and reclaim cultural relevance. In 2026, we will market fewer, bolder, more targeted product moments with stronger creator advocacy and a more aspirational positioning. You can already see early proof points of this strategy in our Touch of Gold collection. We are recruiting a network of influencers to ignite social buzz while communicating credible science-based claims that differentiates our products from our competitors.

We will make big, bigger by elevating and amplifying 2 iconic Bath & Body Works scents. New consumers will discover and love these fragrances when we treat them with the reference they deserve, elevate and market them properly. We will deliver more impactful visual experiences in all our channels and across social platforms.

The third pillar of our strategy is winning in the marketplace. Discovery should feel effortless. We will make it simpler for a new and young consumer to find us, love us and buy us wherever they shop. We will elevate our owned retail channels and thoughtfully expand our distribution to new channels, positioning ourselves directly in the path of our consumer.

As part of this, we will continue to enhance our app and websites to increase engagement, to make product discovery easier, to deliver richer brand and product stories and to reduce purchase friction. This work is already well underway. For example, our mobile homepage has undergone a refresh. And in early 2026, we will invest in a permanently lower and more competitive free shipping threshold.

We will also expand thoughtfully into marketplaces and select wholesale channels with Amazon expected to go live in the first half of 2026. In anticipation of an Amazon launch, we are carving brand-dilutive gray market selling by restricting bulk purchases from resellers online and in-store. Amazon will enable us to reach new consumers and reengage lap ones, and we will launch with a curated assortment of evergreen, hero products and over time, introduce products designed to acquire a new consumer.

Our brand-operated channels will always carry the widest assortment and offer the most immersive brand storytelling. And to encourage new consumers to enter our operated stores, we will pilot updated merchandising, improved navigation and refreshed retail marketing in 2026. Our final pillar is operating with speed and efficiency. We expect to fund investments through better execution, timing inventory, shortening cycle times and implementing a multiyear cost savings program. Consistent with the focus of the Consumer First Formula, this initiative prioritizes high-value consumer-focused activities funded through value engineering and sourcing optimization.

We have planned to deliver $215 million in cost savings over the next 2 years with over half identified for 2026. These savings will be reinvested into revenue-generating activities in product and brand. A transformational plan requires transformational leadership, and we are putting the right leaders in the right roles with clear accountability. Earlier this month, we welcomed Maly Bernstein as our Chief Commercial Officer, overseeing the full marketplace across stores, digital and wholesale channels. She brings extensive multichannel retail experience within our sector, backed by a proven track record of impressive results.

We're equally thrilled to welcome Veronique Gabai as our product and merchandising adviser. Her creative vision, strategic insight and global experience in beauty will add invaluable perspective to our transformation. In addition, we also now have in place new leaders across digital, wholesale and human resources, and we will continue to invest in talent to support the execution of our plan.

As a result of our no-regret moves that I outlined 6 months ago, some of our strategic actions are already visible to the consumer, but it will take time before we see the benefits in our financial performance. I believe that we have the foundation, the plan and the focus to deliver sustainable growth and shareholder value. We are acting with urgency and clarity, putting the consumer at the center of every decision. I am confident in Bath & Body Works' future and the immense opportunity we have in front of us.

And now I will hand over to Eva.

Thank you, and good morning, everyone. As Daniel emphasized, our path forward is anchored to the 4 pillars of our Consumer First Formula, creating disruptive and innovative product, 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 2 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, pick up 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&O driving 40 basis points of leverage, with -- 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 a 120-basis point deleverage compared to the prior year. The deleverage was driven by soft sales performance, investments in new stores and higher health care 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 malls. Internationally, our partners opened 10 new stores and closed 3 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 costs 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 prioritize 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 trends, partially offset by our ongoing inventory management actions and reductions 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.

[Operator Instructions] Our first question comes from the line of Ike Boruchow with Wells Fargo.

I guess, Daniel, my question would be, can you help us understand bigger picture kind of what changed between when you first joined the company? I believe you kind of talked to an expectation to accelerate growth while expanding margins obviously, today's expectations for 4Q revenue to be down, margins that compressed goes against that. Can you maybe just walk us through what exactly has changed, what you've learned since you've been there? And exactly how should we be thinking about what Q4 guidance kind of means to next year would also be helpful.

I can 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.

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 underscores 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, this strategic reset is the result of months of detailed analysis in every part of our business. It isn't a reaction to the quarter. And 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've lagged the beauty and fragrance sector and the growth that we've delivered was not durable. I've talked about that 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 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 4 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 in 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 going to 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. And Eva, can I hand to you for some more color on that?

Sure, sure. 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 affected 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.

Our next question comes from the line of Matthew Boss with JPMorgan.

So Daniel, maybe to pick up on that. So on the new strategy, so the last 2 years, the company has 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 while you cited the change won't happen overnight, I mean what do you see as a reasonable time line 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 4 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 would highlight. We've brought in Veronique Gabai. She obviously brings global beauty experience, creative vision and has worked at iconic brands across Estee Lauder and L'Oréal. Craig Smith in digital, 2 decades of building digital transformation at Burberry, Apple, LVMH [indiscernible] unrivaled wholesale experience for more than 30 years at brands like L'Oréal and [indiscernible]. And as you'll have seen in the press release last week, Maly 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, frankly, we already know that we're doing somewhere between $60 million to $80 million of gray market sales in that channel that is brand dilutive and profit dilutive. And 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 1, 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 products with further time under our belt in terms of digital, and we'll continue to update you as we progress on this plan.

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

Daniel, it's clear 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, yes, the reason we did such a comprehensive diagnostic right across the business, it was about discovering and laying out exactly what is holding this incredible brand back. And 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 to strengthen our fundamentals and position this brand for long-term sustainable growth. Now as Eva mentioned in her opening remarks, that 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 yes, of course, until we see that top line growth, which we are pursuing with vigor, we will be pressurized by deleverage.

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

Great. 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 different from the cost reduction that was pursued under Gina? And then does all of that get reinvested so we're sort of in the same margin place? Or maybe 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 delivered 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-focused areas. We're working hard to fuel and fund the investments that are required 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 outpaced savings. We'll have more details there. Our focus is to make the right investments to drive the durable growth and do that in a responsible way.

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

This is Kelly on for Paul. I just -- first, I had 2-parter here. One on the Amazon partnership. If you could just elaborate on sort of the product that's going to be in that channel versus the store and if that makes you the expanded distribution, whether that makes you rethink your store growth and your store base?

And then secondly, on free cash flow, still very strong free cash flow this year despite weakness in the business. Any color on how we should think about free cash flow for F '26? Any kind of color you could provide there would be great.

Thanks so much, Kelly. Let me just -- 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 part 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. We're going to be -- it's really going to be some of our evergreen products, and we're really going to make sure that we get that absolutely right that we test and learn that we build the right PDPs, 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.

Sure, sure. 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 3 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.

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

As you pivot back to the core categories, can you talk about the innovation pipeline over the next 12 to 18 months and how you're thinking about the balance between legacy franchises and then some of the ingredient-led or efficacy 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 2-consumer music. 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 Zoe, if you like.

And what she requires is, as you say, more ingredient-led, cleaner, more stylishly or more sophisticated design in packaging, and that is where our investment is headed. So without question, we have underinvested in our core. Let's take a look at our packaging. Some of our core forms, I don't think have been restaged for a decade, right? That will change. We are already building a very strong pipeline of innovative new concepts, and we expect them to come to life in the back half of the year. And I'm excited about what I'm seeing from the product design and merchandising team.

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.

Yes. And Mark, I just want to follow up on your question. You talked about the new products, and you also talked about, let's call it, the core or the carryover product, which in some way, I think, hit that what we have to do. As I said in my opening remarks, we have the iconic fragrances -- it's been one of the big things that was an upside on what I thought when I arrived. Some of those biggest frequencies are doing over $250 million a year annually and they sit on a shelf in the left-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 reference 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 Zoes and future Jens are going to love some of the products that we already have, and it's just about making the big, bigger.

A quick follow-up for Eva. Just with the earnings reset here, the 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.

Sure. We've made tremendous progress over the last couple of years, bringing the leverage ratio to our target 2.5x 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 of 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 -- it's really refreshing to hear on the 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 there's some hangover inventory. What's the best method of exiting those categories without kind of further putting kind of brand pressure, right, as you kind of exit those?

And then within the core categories, 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 the seasonal scents will now go away to help focus?

Okay. Thank you so much for the question. Look, let me just underscore that everything that we do at this company is subject to a rig to rigorous testing. And that is something that we have integrated, as Eva said, as part of our product development process, and that is true about the way we think about our assortment.

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 exits 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 we're filling the gap. It's less about, I would say, hitting the number.

Adrienne, your question on hangover of inventory. As you know, we have 2 seasonal -- 2 semiannual sale periods that we're able to use to clear inventory. The company has a long history of successfully doing that. We -- despite the pressures in Q3, we were able to exit Q3 with clean inventory as we use 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?

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 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.

No, not. 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.

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

Daniel, just on the competitive dynamics within the fragrance and body 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?

Great. So yes, we operate in a very competitive sector. I love the sector. It still continues to grow. It's a young sector with sort of 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.

So 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 testing 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 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 the back half of 2026.

And Daniel, can I just add one thing. As you look at these categories that we're in that we're all excited about and our growing categories, growth in digital is outpacing 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 the -- we've talked about being in the part of the consumer. And that, of course, is what drives everything in this business now, putting the consumer at the center. But 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 products front and center, telling bolder motive stories and winning in the full marketplace.

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

Daniel, I want 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 there 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, on the largest shop in the world on Amazon. What would I believe to do to change product perception will be in all channels and 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, we 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 follow up on that. I mean what about just the concern that entering Amazon will cannibalize traffic into the stores and obviously create a separate issue.

Well, our product is already on Amazon. We're doing $60 million to $80 million roughly in sales on that product -- 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.

Our next question comes from the line of Olivia Tong with Raymond James.

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. So 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 million 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 profile as well, whether that you expect that to be at 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, 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 launching new channels, clearing out the old inventory, how you think about the arc in working capital?

Great. So I'll start on Amazon and then move to adjacencies, and 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 going to launch with a tight assortment. We're going to 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 and taking a margin here as a result of doing that. So it's a -- go slow in the first half to speed up as we move sequentially through the year.

And then when it comes to adjacencies, I want to just clarify what I've said. We are no longer going to invest in adjacencies. We are going to invest in our core. We have told you of 2 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. We -- I actually agree with your question, what is the most thoughtful way to use the money 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, but we aren't simply just abandoning those adjacencies. We intend to maximize the sales opportunity from those.

Yes. 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 9 months, investing 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. So that could put a little bit more pressure on that first 9 months of next year, but we'll manage our cash effectively throughout the year. On the margins for our adjacencies and Amazon, in particular, it's our goal to have a comp margin structure over time. We're going to test and learn our way into this as Daniel said.

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

And good to hear of the plan. As you think of the loyalty customers, which I think numbered 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?

Yes. Thanks. I'll start, and maybe, Eva, you can follow up with 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 going to continue to build on it. And in fact, I think in the recent Q, we're now up to [ 40 ] 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 ask you for a little bit more detail.

Yes. 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 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 has been a big focus over the past few years. With the refocus on the core, how do you see the opportunity for collaboration? How do you maximize the strength of the product with the opportunity to enhance with sales or margins with collaborations?

Great. I appreciate the question, so I can clarify what our collaboration strategy is. So make no mistake, we love collaborations, 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 [indiscernible] 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 luxury, energy that builds White Barn Colorama, energy that builds the seasonal collection like fall, not necessarily something that sort of stands alone and is there to carry the quarter.

We don't want to 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 brands, into our franchises and into some of those iconic fragrances that I've referenced in today's call.

Thank you. Ladies and gentlemen, that 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 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.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.