Executive Summary / Key Takeaways

• Bath & Body Works, a leader in personal care and home fragrance, is focused on accelerating growth through product innovation, expanding adjacent categories, and international expansion, underpinned by a strong brand, loyal customer base, and agile, predominantly U.S.-based supply chain.
• The company delivered a solid start to fiscal 2025, with Q1 net sales up 2.9% and operating income increasing 11.7%, driven by compelling innovation like the Disney (DIS) collaboration and disciplined cost management leading to gross margin expansion.
• New CEO Daniel Heaf is poised to build on recent momentum, exploring strategic levers including digital enhancements, new distribution channels, and accelerated international growth, aiming for less reliance on promotions and deeper consumer connection.
• BBWI maintains its full-year 2025 guidance of 1% to 3% net sales growth and $3.25 to $3.60 diluted EPS, reflecting confidence in its strategy, cost savings initiatives, and ability to absorb current tariff impacts.
• Key risks include a challenging macroeconomic backdrop, competitive intensity from both broad beauty retailers and niche players, and successful execution of strategic initiatives and the CEO transition.

Setting the Scene: Fragrance Leadership and Strategic Evolution

Bath & Body Works, Inc. (BBWI) stands as a prominent force in the personal care and home fragrance markets, a position cultivated over a history that traces back decades within the retail landscape. Following its spin-off from L Brands in 2021, the company sharpened its focus on its core strengths: beloved fragrances, a loyal customer base, and a robust retail footprint. This strategic clarity has been central to its efforts to navigate a dynamic consumer environment and return to sustainable growth.

The company operates within a competitive retail sector that includes broad beauty retailers like Ulta Beauty (ULTA), intimate apparel players with beauty segments such as Victoria's Secret & Co. (VSCO), and global luxury conglomerates like Estée Lauder Companies (EL). While ULTA offers a vast multi-category beauty assortment and excels in omnichannel experience, and EL dominates the premium and luxury space with significant R&D investment, BBWI carves out its niche at the intersection of mass and prestige. Its strength lies in offering high-quality, on-trend fragrances and products at accessible price points, fostering deep customer connection and leading market share in key categories like home fragrance.

BBWI's strategic approach, recently articulated through its "five E" framework and now evolving under new leadership, centers on elevating its core brand and products through continuous innovation, extending its reach into adjacent categories and international markets, enhancing customer engagement through loyalty and technology, enabling a seamless omnichannel experience, and driving operational excellence through cost discipline. This strategy is designed to leverage the company's foundational assets, including its extensive North American store base (increasingly shifting off-mall), its growing digital presence, and its highly effective loyalty program, which boasts approximately 39 million active members.

A critical, albeit less visible, differentiator for Bath & Body Works is its vertically integrated, predominantly U.S.-based supply chain, anchored by its Beauty Park manufacturing facility in Ohio. This operational capability provides tangible benefits over competitors who rely more heavily on overseas production. It enables significant speed and operational agility, allowing the company to respond rapidly to shifting consumer trends and demand. For instance, the manufacturing process for foaming hand soap was reduced from three months to just three weeks by consolidating production at Beauty Park. With approximately 85% of its products manufactured in North America, this domestic exposure offers a key advantage, particularly in the face of potential import tariffs, allowing BBWI to potentially maintain pricing and profitability better than competitors with greater international supply chain reliance. This agile model supports the company's ability to introduce newness and manage inventory effectively, contributing to its competitive moat.

Building Momentum: Recent Performance and Operational Drivers

Bath & Body Works commenced fiscal year 2025 with a solid performance in the first quarter, demonstrating positive momentum despite a challenging macroeconomic backdrop. Net sales increased by 2.9% year-over-year to $1,424 million, reaching the high end of the company's guidance range. This growth was primarily fueled by strength in the North American stores segment, where sales rose 4.3% driven by increased transactions and average dollar sales, including a notable contribution from buy online, pick up in store (BOPIS) fulfilled orders. While the Direct channel saw a 4.3% decrease in reported net sales, this was largely a function of the shift to BOPIS, and the channel outperformed stores when adjusted for this dynamic. International net sales also contributed positively, growing 10.1% due to the timing of product shipments to partners.

Profitability saw meaningful improvement in Q1 2025. Operating income increased 11.7% to $209 million, resulting in an operating income rate of 14.7%, up from 13.5% in the prior year period. This expansion was primarily driven by a 160 basis point improvement in the gross profit rate, which reached 45.4%. The higher gross margin reflected a 100 basis point improvement in merchandise margin, attributed to strategic pricing and strong cost management, alongside favorable leverage on occupancy expenses due to sales growth. General, administrative, and store operating expenses increased, primarily due to higher payroll costs driven by wage inflation and incremental marketing investments, partially offsetting the gross profit gains. Net income for the quarter was $105 million, resulting in diluted earnings per share of $0.49, exceeding the high end of guidance.

This performance builds on sequential improvements seen throughout fiscal year 2024, where normalized net sales trends improved each quarter. Key product categories demonstrated resilience and growth in Q1 2025, with Body Care and Home Fragrance growing low-single digits and Soaps & Sanitizers growing mid-single digits. Innovation played a crucial role, with the Disney collaboration highlighted as a significant driver exceeding expectations. The Everyday Luxuries line and gifting assortments also performed well, indicating customer responsiveness to compelling newness and value propositions.

Operationally, the company continues to execute its strategic priorities. The shift towards off-mall locations in North America is progressing, with 57% of stores now in these formats and a long-term target of 75%. New store designs (Gingham Plus) are being rolled out, featuring elevated aesthetics and integrated technology aimed at enhancing the customer experience and driving higher sales while maintaining comparable build costs and payback periods. The loyalty program remains a powerful tool, driving engagement and value from its large member base through enhanced redemption options and targeted marketing. Adjacent categories, representing about 10% of sales, continue to grow faster than the core business, offering opportunities to expand the customer base, particularly in Men's and Lip products. Cost optimization efforts under the Fuel for Growth program have yielded over $300 million in savings over the past two years, contributing to margin expansion and providing resources for strategic investments in real estate and technology.

Outlook and Strategic Inflection Under New Leadership

Looking ahead, Bath & Body Works has maintained its full-year fiscal 2025 guidance, signaling confidence in its strategic trajectory and operational execution. The company expects net sales growth between 1% and 3% and diluted earnings per share in the range of $3.25 to $3.60. This outlook incorporates the anticipated impact of current tariff rates, which the company believes it is well-positioned to absorb thanks to its predominantly U.S.-based supply chain and ongoing mitigation strategies. The guidance assumes sales growth will be generally consistent across the remaining quarters of the year. For the second quarter of 2025, the company forecasts net sales growth of flat to 2% and diluted EPS between $0.33 and $0.38, reflecting current trends and the impact of lapping prior-year accounting items.

The recent appointment of Daniel Heaf as Chief Executive Officer marks a significant strategic inflection point. Building on the foundation established by his predecessor, Mr. Heaf brings a consumer-centric philosophy and a track record of driving transformative growth at global brands like Nike (NKE) and Burberry (BRBY). His initial focus areas include accelerating growth by putting the consumer at the center, exploring opportunities in digital enhancements, improving packaging and labeling, investigating new forms of distribution, and accelerating international expansion. These initiatives aim to deepen customer connection, attract new consumers (including younger audiences and men), and reduce reliance on promotional activity. The company plans to communicate a clearer long-term strategy in the coming quarters, emphasizing fewer, bolder priorities and consistent, repeatable growth drivers.

Planned capital expenditures for 2025 are between $250 million and $270 million, primarily focused on strategic real estate investments (new off-mall stores and remodels) and technology projects aimed at enhancing the customer experience and operational efficiency. The company anticipates generating strong free cash flow of $750 million to $850 million in 2025, supported by working capital improvements from cost initiatives.

This robust cash generation enables continued investment in the business, further debt reduction (including the $314 million notes maturing in July 2025), and returning value to shareholders through dividends ($0.80 per share annual dividend expected) and share repurchases ($300 million planned for 2025). The company's improved debt profile, having achieved its target gross adjusted debt-to-EBITDAR ratio of 2.5 times in 2024, provides financial flexibility.

Risks and Competitive Dynamics

Despite the positive momentum and strategic clarity, Bath & Body Works faces several pertinent risks that could impact its performance and the investment thesis. The macroeconomic environment remains challenging, with consumer sentiment volatile and value-seeking behavior persisting. This could pressure sales and require continued promotional activity, potentially impacting margins.

The retail landscape is intensely competitive. While BBWI holds leadership positions in its core categories, it faces competition from broad beauty retailers like ULTA, which offer a wider product assortment and strong loyalty programs, and luxury players like EL, whose innovation in premium fragrances could influence consumer preferences. BBWI's strategy of expanding into adjacent categories like men's, hair, lip, and laundry directly competes with established players in those markets, requiring significant investment in brand awareness and product differentiation to gain meaningful share. The success of these adjacency expansions and the ability to attract new customer segments are crucial for future growth.

Execution risk is inherent in the strategic initiatives underway, particularly the digital transformation, the evolution of the store format, and the acceleration of international expansion. The recent CEO transition also introduces a period of potential strategic refinement and organizational adjustment. While the predominantly U.S.-based supply chain offers a significant advantage in mitigating tariff impacts (with China exposure limited to ~10% of global spend), potential changes in trade policies or disruptions could still pose headwinds. Geopolitical factors, such as the ongoing conflict in the Middle East, continue to pressure international sales in affected regions, although the year-over-year impact has begun to moderate.

Conclusion

Bath & Body Works is navigating a pivotal period, transitioning from stabilizing the business post-spin-off to focusing on accelerating sustainable, profitable growth. The company's Q1 2025 performance demonstrates positive momentum, driven by effective product innovation, disciplined cost management, and the foundational strength of its brand, loyal customer base, and agile supply chain. The appointment of Daniel Heaf as CEO signals a renewed emphasis on consumer-centric strategies, digital enhancement, and international expansion, building on the solid base established over the past few years.

While macroeconomic uncertainty and competitive pressures persist, BBWI's maintained full-year guidance reflects confidence in its ability to leverage its core strengths, execute strategic initiatives, and generate strong free cash flow to invest for growth and return value to shareholders. The company's differentiated operational model, particularly its U.S.-based manufacturing, provides a unique advantage in the current environment. The success of new initiatives, particularly in digital and adjacent categories, alongside effective international market penetration, will be key determinants of whether BBWI can achieve its long-term growth aspirations and enhance shareholder value.