BATH & BODY WORKS, INC. The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") as codified in the ASC. The following information should be read in conjunction with our financial statements and the related notes included in Part I, Item 1. Financial Statements in this Quarterly Report on Form 10-Q. OnAugust 2, 2021 , we completed the tax-free spin-off of ourVictoria's Secret business, which included theVictoria's Secret and PINK brands, into an independent publicly traded company. Accordingly, the operating results of, and costs to separate, theVictoria's Secret business are reported in Income (Loss) from Discontinued Operations, Net of Tax in the Consolidated Statements of Income for all periods presented. Unless otherwise noted, all amounts, percentages and discussions reflect only the results of operations and financial condition of our continuing operations.
Executive Overview
In the third quarter of 2022, net sales decreased$77 million , or 5%, to$1.604 billion compared to the third quarter of 2021. In our stores and direct channels, net sales decreased 5% to$1.178 billion , and 6% to$345 million , respectively. These declines compared to 2021 were primarily driven by decreases in both average dollar sales and transactions. In our international business, net sales increased 10% to$81 million . In the third quarter of 2022, operating income decreased$207 million , or 51%, to$202 million , from$409 million in the third quarter of 2021, and the operating income rate (expressed as a percentage of sales) decreased to 12.6% from 24.3%. These decreases were primarily due to the decline in net sales, incremental inflationary cost pressures, increased promotional activities and strategic investments in technology, in connection with our information technology ("IT") separation and transformation, and our associates, including increased wage rates and retention for key talent.
For additional information related to our third quarter 2022 financial performance, see "Results of Operations."
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Global Supply Chain and Inflationary Impacts
There continues to be volatility and inflation in the global supply chain. We are continuing to experience increased costs in raw materials, transportation and wage rates. We estimate that our full year 2022 incremental inflation impact could range between$220 million and$230 million , with approximately$70 million of pressure expected in the fourth quarter of 2022. These pressures have had a negative impact on our Gross Profit dollars and rate for the third quarter of and year-to-date 2022, and we expect this trend to continue in the fourth quarter of 2022.
Information Technology and Other Costs
Subsequent to the completion of the Separation,Victoria's Secret & Co. has provided technology services and systems to us under a Transition Services Agreement. During the first quarter of 2022, we decided to accelerate the separation of our technology systems, which we now expect to be predominantly completed during 2023. We believe that completing technology separation on this accelerated basis will enable us to more quickly build additional technology capabilities to support our long-term growth.
Further, we have incurred additional costs related to our Chief Executive Officer transition, including retention for key talent and other associated expenses. These costs, the previously mentioned investments in IT and increases in wage rates have had a negative impact on our General, Administrative and Store Operating Expenses and rate for the third quarter of and year-to-date 2022, and we expect this trend to continue in the fourth quarter of 2022.
Profit Improvement Initiatives and Organizational Realignment
We are taking rigorous actions to improve profitability, including revisiting promotions, pricing and product costing to improve merchandise margin. We are being strategic with our pricing architecture through the balance of the year, given that our consumers are price sensitive, while continuing to look at opportunities. We are also working to improve product costing by actively working with our vendor base and streamlining our operations to combat inflationary pressures and improve our results. Additionally, we implemented several expense reduction actions during the third quarter including optimization of corporate overhead and store selling expenses. As part of these actions, we simplified and realigned our operating structure inAugust 2022 resulting in the elimination of about 130 roles, the majority of which were leadership positions. As a result of these initiatives, we realized a benefit of approximately$15 million in the third quarter of 2022, excluding severance and related charges of approximately$6 million . COVID-19 The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty and volatility. We remain focused on providing a safe store environment for our customers and associates while delivering an engaging shopping experience, and in establishing the necessary protocols to ensure the safe operations of our distribution and fulfillment centers and corporate offices. As expected, we have experienced channel and product category shifts as customer mindset and needs have shifted coming out of the pandemic.
We continue to monitor the COVID-19 pandemic and the effects on our operations and financial performance. There remains the potential for future COVID-19-related closures or operating restrictions, which could materially impact our operations and financial performance in future periods.
Adjusted Financial Information from Continuing Operations
In addition to our results provided in accordance with GAAP above and throughout
this Quarterly Report on Form 10-Q, provided below are non-GAAP measurements
which present net income from continuing operations and earnings from continuing
operations per diluted share for the third quarter of and year-to-date 2021 on
an adjusted basis, which remove certain special items recorded in 2021. We
believe that these special items are not indicative of our ongoing operations
due to their size and nature. We use adjusted financial information as key
performance measures of results of operations for the purpose of evaluating
performance internally. These non-GAAP measurements are not intended to replace
the presentation of our financial results in accordance with GAAP. Instead, we
believe that the presentation of adjusted financial information provides
additional information to investors to facilitate the comparison of past and
present operations. Further, our definitions of adjusted financial information
may differ from similarly titled measures used by other companies.
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The table below reconciles the third quarter of and year-to-date 2021 GAAP financial measures to the non-GAAP financial measures:
(in millions, except per share amounts) Third Quarter Year-to-Date Reconciliation of Reported Net Income from Continuing Operations to Adjusted Net Income from Continuing Operations Reported Net Income from Continuing Operations $ 177$ 483 Loss on Extinguishment of Debt (a) 89 195 Tax Benefit of Loss on Extinguishment of Debt (21) (47) Adjusted Net Income from Continuing Operations $ 245$ 631
Reconciliation of Reported Earnings from Continuing Operations Per Diluted Share to Adjusted Earnings from Continuing Operations Per Diluted Share Reported Earnings from Continuing Operations Per Diluted Share $
0.66 $ 1.74
Loss on Extinguishment of Debt (a) 0.25 0.53
Adjusted Earnings from Continuing Operations Per Diluted Share $
0.92 $ 2.28 ________________
(a)In the third and first quarters of 2021, we recognized pre-tax losses of$89 million and$105 million (after-tax losses of$68 million and$80 million ), respectively, due to the early extinguishments of outstanding notes. For additional information, see Note 8, "Long-term Debt and Borrowing Facilities" included in Part I, Item 1. Financial Statements.
Company-Operated Store Data
The following table compares Company-operated
Third Quarter Year-to-Date
2022 2021 % Change 2022 2021 % Change
Sales per Average Selling Square
Foot $ 240 $ 257 (7 %) $ 701 $ 751 (7 %)
Sales per Average Store (in
thousands) $ 660 $ 692 (5 %) $ 1,920 $ 2,014 (5 %)
Average Store Size (selling square
feet) 2,764 2,700 2 %
Total Selling Square Feet (in
thousands) 4,646 4,514 3 %
The following table represents Company-operated store data for year-to-date
2022:
Stores Stores
January 29, 2022 Opened Closed October 29, 2022
United States 1,651 64 (34) 1,681
Canada 104 2 - 106
Total 1,755 66 (34) 1,787
The following table represents Company-operated store data for year-to-date
2021:
Stores Stores
January 30, 2021 Opened Closed October 30, 2021
United States 1,633 50 (11) 1,672
Canada 103 - - 103
Total 1,736 50 (11) 1,775
Partner-Operated Store Data
The following table represents partner-operated store data for year-to-date
2022:
Stores Stores
January 29, 2022 Opened Closed October 29, 2022
International 317 59 (3) 373
International - Travel Retail 21 1 (1) 21
Total International 338 60 (4) 394
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The following table represents partner-operated store data for year-to-date
2021:
Stores Stores
January 30, 2021 Opened Closed October 30, 2021
International 270 30 (7) 293
International - Travel Retail 18 1 - 19
Total International 288 31 (7) 312
Results of Operations
Third Quarter of 2022 Compared to Third Quarter of 2021
The following table provides
2022 2021 % Change
(in millions)
Stores - U.S. and Canada $ 1,178 $ 1,238 (5 %)
Direct - U.S. and Canada 345 369 (6 %)
International (a) 81 74 10 %
Total Net Sales $ 1,604 $ 1,681 (5 %)
_______________(a)Results include royalties associated with franchised stores and wholesale sales.
The following table provides a reconciliation of
(in millions)
2021 Net Sales $ 1,681
Comparable Store Sales (59)Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
4
Direct Channels (24)
International Wholesale, Royalty and Other 7
Foreign Currency Translation (5)
2022 Net Sales $ 1,604
For the third quarter of 2022, net sales decreased $77 million , to $1.604
billion , compared to the third quarter of 2021. Net sales decreased in the
stores channel by $60 million , or 5%, primarily due to a decrease in both
average dollar sales and transactions. Direct net sales decreased $24 million ,
or 6%, partially due to last year's strong results as well as our customers
continuing to select our buy online-pick up in store option (which is recognized
as store net sales). International net sales increased $7 million , or 10%,
primarily due to new stores opened by our partners partially offset by timing
shifts related to product shipments.
Gross Profit
For the third quarter of 2022, our gross profit decreased $161 million to $678
million , and our gross profit rate (expressed as a percentage of net sales)
decreased to 42.2% from 49.9%. Gross profit decreased due to the decline in net
sales and a decline in merchandise margin dollars as a result of a significant
decrease in our merchandise margin rate due to continued inflationary cost
pressures and increased promotional activity. Additionally, occupancy expenses
increased primarily due to higher distribution costs.
The gross profit rate decline was driven by a significant decrease in the merchandise margin rate and buying and occupancy expense deleverage due to lower net sales.
General, Administrative and Store Operating Expenses For the third quarter of 2022, our general, administrative and store operating expenses increased$46 million to$476 million , and the rate (expressed as a percentage of net sales) increased to 29.7% from 25.6%. The general, administrative and store operating expenses and rate increased primarily due to our strategic investments in technology in connection with our IT separation and transformation and our associates. 22
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Table of Contents Other Income and Expense Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the third quarters of 2022 and 2021:
2022 2021
Average daily borrowings (in millions)
7.1 % 7.2 %
For the third quarter of 2022, our interest expense decreased
Other Income (Loss)
For the third quarter of 2021, our other loss was
Provision for Income Taxes For the third quarter of 2022, our effective tax rate was 23.3% compared to 22.0% in the third quarter of 2021. The third quarter of 2022 and 2021 rates were lower than our combined estimated federal and state statutory rates primarily due to the resolution of certain tax matters during the periods.
Results of Operations
Year-to-Date 2022 Compared to Year-to-Date 2021
For year-to-date 2022, operating income decreased$406 million to$724 million , from$1.130 billion year-to-date 2021, and the operating income rate (expressed as a percentage of sales) decreased to 15.5% from 23.3%. The drivers of the year-to-date operating income results are discussed in the following sections.
The following table providesNet Sales for year-to-date 2022 in comparison to year-to-date 2021: 2022 2021 % Change (in millions) Stores - U.S. and Canada$ 3,398 $ 3,518 (3 %) Direct - U.S. and Canada 1,030 1,126 (9 %) International (a) 244 210 16 % Total Net Sales$ 4,672 $ 4,854 (4 %) _______________
(a)Results include royalties associated with franchised stores and wholesale sales.
The following table provides a reconciliation ofNet Sales for year-to-date 2022 to year-to-date 2021: (in millions) 2021 Net Sales$ 4,854 Comparable Store Sales (208)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
95
Direct Channels (96)
International Wholesale, Royalty and Other 34
Foreign Currency Translation (7)
2022 Net Sales $ 4,672
For year-to-date 2022, net sales decreased $182 million , to $4.672 billion ,
compared to year-to-date 2021. Net sales decreased in the stores channel by $120
million , or 3%, primarily due to a decrease in both average dollar sales and
transactions, partially offset by higher 2022 net sales in Canada due to the
COVID-19-related store closures in 2021. Direct net sales decreased $96 million ,
or 9%, due to last year's strong results as well as our customers continuing to
select our buy online-pick up in store option (which is recognized as store net
sales), partially offset by increased net sales in the Canada Direct business
that launched in the third quarter of 2021. International net sales increased by
$34 million , or 16%, primarily due to new stores opened by our partners.
Further, we estimate that year-to-date 2021 total Company net sales benefited by
approximately $50 million related to government stimulus payments, which did not
reoccur in year-to-date 2022.
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Gross Profit
For year-to-date 2022, our gross profit decreased$403 million to$2.006 billion , and our gross profit rate (expressed as a percentage of net sales) decreased to 42.9% from 49.6%. Gross profit decreased due to the decline in net sales and a decline in merchandise margin dollars as a result of a significant decrease in our merchandise margin rate due to continued inflationary cost pressures and increased promotional activity. Additionally, occupancy expenses increased as a result of direct channel fulfillment expenses, higher distribution costs and our investments in store real estate.
The gross profit rate decline was driven by a significant decrease in the merchandise margin rate and buying and occupancy expense deleverage due to lower net sales.
General, Administrative and Store Operating Expenses
For year-to-date 2022, our general, administrative and store operating expenses increased$3 million to$1.282 billion , and the rate (expressed as a percentage of net sales) increased to 27.4% from 26.3%. The general, administrative and store operating expenses and rate increased primarily due to our strategic investments in technology in connection with our IT separation and transformation and our associates. These increases were partially offset by charitable contributions made in the first quarter of 2021, certain legal fees and other discrete items totaling approximately$20 million that were incurred in the second quarter of 2021 and lower home office and stores bonus expense in year-to-date 2022 related to business performance.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for year-to-date 2022 and 2021:
2022 2021
Average daily borrowings (in millions)
7.1 % 7.2 %
For year-to-date 2022, our interest expense decreased
Other Income (Loss)
For year-to-date 2021, our other loss was
Provision for Income Taxes
For year-to-date 2022, our effective tax rate was 21.9% compared to 23.7% year-to-date 2021. The year-to-date 2022 rate was lower than our combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters during the period. The year-to-date 2021 rate was lower than our combined federal and state statutory rate primarily due to recognition of excess tax benefits recorded through the Consolidated Statements of Income on share-based awards that vested during the period.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins, income taxes and inflationary pressures. Historically, our sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period. Our cash and cash equivalents held by foreign subsidiaries were$36 million as ofOctober 29, 2022 .
We believe that our current cash position, our cash flow generated from operations and our borrowing capacity under our asset-backed revolving credit facility ("ABL Facility") will be sufficient to meet our liquidity needs, including capital expenditure requirements, for at least the next twelve months.
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Working Capital and Capitalization
The following table provides a summary of our working capital position and capitalization as ofOctober 29, 2022 ,January 29, 2022 andOctober 30, 2021 : October 29, January 29, October 30, 2022 2022 2021 (in millions) Working Capital$ 496 $ 1,719 $ 1,550 Capitalization: Long-term Debt 4,860 4,854 4,852 Shareholders' Equity (Deficit) (2,609) (1,518) (1,676) Total Capitalization$ 2,251 $ 3,336 $ 3,176 Amounts Available Under the ABL Facility (a)$ 734
_______________
(a)As of bothOctober 29, 2022 andOctober 30, 2021 , our borrowing base exceeded the aggregate commitments and the amount available under the ABL was reduced by outstanding letters of credit of$16 million . As ofJanuary 29, 2022 , our borrowing base was$495 million and we had outstanding letters of credit of$16 million .
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