Bath & Body Works(BBWI) - 2023 Q4 - Annual Report

Part I Business Overview Bath & Body Works, Inc. is a global leader in personal care and home fragrance, operating under brands like Bath & Body Works and White Barn, with 1,802 company-owned stores in the U.S. and Canada and 427 partner-operated stores internationally as of January 2023 Company Profile and Competitive Strengths The company, a standalone entity since the 2021 Victoria's Secret spin-off, is a leading personal care and home fragrance retailer with 1,802 company-owned stores and strong competitive advantages in brand, innovation, and supply chain - Bath & Body Works is a segment leader focused on home fragrance, body care, and soaps, operating under the Bath & Body Works and White Barn brands, with a strategy to be an affordable luxury brand at various price points[9][12] - As of January 28, 2023, the company operated 1,802 company-owned stores in the U.S. and Canada, and 427 partner-operated stores in over 45 other countries[9] - On August 2, 2021, the company completed the spin-off of its Victoria's Secret business, becoming a standalone company focused on the Bath & Body Works brand[9] - Competitive strengths include a leading brand, a unique in-store and digital experience, rapid product development capabilities, and a predominantly domestic, vertically integrated supply chain centered around Beauty Park in Ohio[12][13][16][17] Growth Strategies Key growth strategies include expanding the loyalty program, optimizing product offerings, growing international presence through partnerships, and enhancing omnichannel capabilities like BOPIS - The company aims to expand its customer base and spending through its loyalty program, which launched nationwide in August 2022 and has over 33 million members, with loyalty sales representing approximately two-thirds of U.S. sales since launch[19] - Product offerings are optimized through innovation in existing categories and expansion into adjacent lines like Men's (the fastest-growing category in 2022) and Wellness, alongside a focus on sustainable packaging and cleaner formulations[22] - International business expansion, which was approximately 4% of Net Sales in 2022, includes partners opening 89 net new stores in 2022 and planning 50-80 more in 2023, with international e-commerce sites increasing from 27 to 31[23] - Omnichannel capabilities are advanced by rolling out Buy-Online-Pickup-In-Store (BOPIS) to over 1,300 stores and opening a new 1.1 million sq. ft. company-operated direct channel fulfillment center[24] Real Estate and Store Portfolio The company operates 1,802 stores, with a 2022 net increase of 47 stores, and is strategically shifting towards off-mall locations for future growth Company-Operated Store Count (as of Jan 28, 2023) | Region | Store Count | | :--- | :--- | | United States | 1,693 | | Canada | 109 | | Total | 1,802 | - In 2022, the company opened 95 new stores and closed 48, resulting in a net increase of 47 company-operated stores and 5% square footage growth[27] - The real estate strategy focuses on off-mall expansion, with plans for approximately 90 new off-mall stores and 25 remodels in 2023, offset by 50 mall closures, expecting 4% square footage growth[27] Human Capital Management The company employs approximately 57,200 associates, predominantly female, and prioritizes Diversity, Equity, and Inclusion initiatives - As of January 28, 2023, the company employed approximately 57,200 associates, with 94% working in stores[40] - The workforce is predominantly female, with women comprising 88% of the total associate population and approximately 55% of director-level and above positions as of December 31, 2022[40] - The company emphasizes Diversity, Equity, and Inclusion (DEI) through various initiatives, including eight Inclusion Resource Groups, and has been recognized as a "Best Place to Work for LGBTQIA+ Equality" by the Human Rights Campaign[41][42] Risk Factors The company faces a wide range of risks, including macroeconomic pressures like inflation and reduced consumer spending, the high seasonality of its business, operational risks from IT systems separation, supply chain disruptions, and reliance on key vendors - Business performance is sensitive to general economic conditions, inflation, and consumer spending patterns, with the fourth quarter holiday season being critical for sales and profitability due to high seasonality[56][57] - Significant risk is associated with the dependence on Victoria's Secret & Co. for transitional IT services and the potential for costs to exceed expectations during the separation and migration to new systems[61] - The company faces risks from its global supply chain, including political instability, pandemics, tariffs, and shipping disruptions, with a specific risk from the U.S. Uyghur Forced Labor Prevention Act (UFLPA) potentially impacting imports from China[83][84] - Evolving data privacy laws, such as the CCPA in California and GDPR in Europe, pose significant compliance risks and potential for fines and litigation[102][103] - The company relies on a limited number of vendors, with the largest supplier accounting for 13% of merchandise purchases and the top five accounting for 38% in 2022[86] Properties The company owns approximately 3.9 million square feet of office and distribution facilities in the Columbus, Ohio area and leases an additional 1.1 million square foot direct channel fulfillment center nearby, while also leasing all of its 1,802 company-operated retail stores in the U.S. and Canada Company-Operated Facilities (as of Jan 28, 2023) | Location | Use | Square Footage (sq. ft.) | | :--- | :--- | :--- | | Ohio area | Office, distribution, fulfillment, and shipping centers | 4,951,000 | | Other North America | Office and product development/design | 69,000 | - As of January 28, 2023, the company operated 1,693 retail stores in the U.S. and 109 in Canada, all in leased facilities, with U.S. leases typically having an initial term of 10 years[108] - The company utilizes six permanent third-party operated direct channel fulfillment centers (3.2 million sq. ft.) and six third-party regional distribution centers (1.1 million sq. ft.) in North America[110] Legal Proceedings The company is involved in various lawsuits arising from the ordinary course of business, including three putative class-action lawsuits related to the Fair and Accurate Credit Transactions Act (FACTA), which management believes will not have a material adverse effect - The company is a defendant in three putative class action lawsuits (Smidga, Dahlin, and Blanco) alleging violations of the Fair and Accurate Credit Transactions Act (FACTA)[113] - Management believes current legal proceedings are not expected to have a material adverse effect on the company's results of operations, financial condition, or cash flows[112][113] Part II Market for Common Equity and Shareholder Matters The company's common stock trades on the NYSE under the symbol 'BBWI', paid a quarterly dividend of $0.20 per share in fiscal 2022, and had minimal share repurchase activity in Q4 2022 related to tax payments on vested employee stock awards - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol BBWI[116] - A quarterly dividend of $0.20 per share was paid in each quarter of 2022[117] Common Stock Repurchases (Q4 2022) | Fiscal Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | November 2022 | 5 | $33.07 | | December 2022 | 7 | $41.27 | | January 2023 | 2 | $43.72 | | Total | 14 | - | Management's Discussion and Analysis (MD&A) In fiscal 2022, Net Sales decreased 4% to $7.56 billion, and Operating Income fell 32% to $1.38 billion, driven by lower sales, inflationary cost pressures, and increased promotions, while the company launched a nationwide loyalty program and initiated a profit optimization plan targeting $200 million in annual savings Executive Overview and Outlook Fiscal 2022 marked the first full year as a standalone entity, with a focus on profit optimization targeting $200 million in savings and an outlook of continued macroeconomic uncertainty for 2023 - Fiscal 2022 was the first full year as a standalone company, with key actions including leveraging the supply chain, launching a nationwide loyalty program, and initiating profit optimization efforts[122][124] - The company is targeting $200 million in eventual annual cost savings from its profit optimization program, with over half expected to be realized in 2023[127] - The 2023 outlook anticipates ongoing macroeconomic uncertainty and customer price sensitivity, with sales trends from Q4 2022 expected to continue in the first half of the year before moderately improving[126] Results of Operations In fiscal 2022, Net Sales decreased by 4.1% to $7.56 billion, and Operating Income fell by 31.5% to $1.38 billion, primarily due to inflationary costs and increased promotions Full Year 2022 vs. 2021 Financial Performance (in millions) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $7,560 | $7,882 | (4.1%) | | Gross Profit | $3,255 | $3,855 | (15.6%) | | Operating Income | $1,376 | $2,009 | (31.5%) | | Net Income from Cont. Ops. | $794 | $1,075 | (26.1%) | - The decrease in 2022 Gross Profit was driven by a lower merchandise margin rate due to inflationary cost pressures (estimated $225 million), increased promotions, and lower sales volume[141] Q4 2022 vs. Q4 2021 Financial Performance (in millions) | Metric | Q4 2022 | Q4 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,889 | $3,027 | (4.6%) | | Gross Profit | $1,250 | $1,446 | (13.6%) | | Operating Income | $653 | $879 | (25.7%) | Liquidity and Capital Resources Operating cash flow decreased to $1.14 billion in 2022, while the debt leverage ratio increased to 3.1, with significant capital allocated to share repurchases and dividends - Net cash provided by operating activities decreased to $1.144 billion in 2022 from $1.492 billion in 2021[164][165] - The company's debt leverage ratio (Adjusted Debt / Adjusted EBITDAR) increased to 3.1 in 2022 from 2.3 in 2021[160] - In 2022, the company used $1.562 billion for financing activities, including $1.312 billion for share repurchases and $186 million for dividend payments[167] - As of January 28, 2023, the company had total long-term debt of $4.862 billion and $509 million available under its ABL Facility[159][178] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in areas such as inventory valuation, long-lived assets, contingencies, income taxes, and loyalty program revenue recognition - Management identifies key critical accounting policies and estimates that require significant judgment, including inventories, valuation of long-lived assets, claims and contingencies, income taxes, and revenue recognition[190] - For revenue recognition, the company defers revenue for its loyalty program based on the relative stand-alone selling price method, which includes an estimate for points and awards not expected to be redeemed[196][197] - Inventory valuation adjustments are recorded if cost exceeds net realizable value, and a 10% change in this adjustment would have impacted 2022 net income by approximately $2 million[191] Financial Statements and Supplementary Data This section includes the audited consolidated financial statements for fiscal years 2022, 2021, and 2020, showing a decline in revenue and profitability in 2022, with the balance sheet reflecting a shareholders' deficit primarily due to share repurchases, and the auditor's report highlighting loyalty program deferred revenue as a critical audit matter Consolidated Statement of Income Highlights (in millions) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $7,560 | $7,882 | $6,434 | | Gross Profit | $3,255 | $3,855 | $3,096 | | Operating Income | $1,376 | $2,009 | $1,604 | | Net Income from Cont. Ops. | $794 | $1,075 | $865 | | Diluted EPS from Cont. Ops. | $3.40 | $3.94 | $3.07 | Consolidated Balance Sheet Highlights (in millions) | Metric | Jan 28, 2023 | Jan 29, 2022 | | :--- | :--- | :--- | | Total Current Assets | $2,266 | $3,009 | | Total Assets | $5,494 | $6,026 | | Long-term Debt | $4,862 | $4,854 | | Total Liabilities | $7,699 | $7,543 | | Total Shareholders' Equity (Deficit) | $(2,206) | $(1,518) | Consolidated Statement of Cash Flows Highlights (in millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $1,144 | $1,492 | | Net Cash for Investing Activities | $(328) | $(259) | | Net Cash for Financing Activities | $(1,562) | $(3,188) | | Net (Decrease) in Cash | $(747) | $(1,954) | - The auditor's report from Ernst & Young LLP identified the estimation of deferred revenue for the new loyalty program as a Critical Audit Matter due to the complexity and management judgment involved in the assumptions[218][219] Controls and Procedures Based on an evaluation as of January 28, 2023, the company's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during Q4 2022 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of January 28, 2023[323] - No changes in internal control over financial reporting occurred in the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, internal controls[323] Part III Directors, Executive Compensation, and Corporate Governance Information required for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, certain relationships, related transactions, director independence, and principal accountant fees, is incorporated by reference from the company's Proxy Statement for its 2023 Annual Meeting of Stockholders - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees and Services is incorporated by reference from the Registrant's 2023 Proxy Statement[325][326][327][329] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements filed as part of the report under Item 8, notes the omission of financial statement schedules as not applicable or material, and provides a comprehensive list of all exhibits filed with the 10-K, including governance documents, debt indentures, material contracts, and various certifications - This section contains a list of all financial statements, schedules, and exhibits filed with the Form 10-K[330] - Key exhibits include the Amended and Restated Certificate of Incorporation, various debt indentures, executive compensation plans and agreements, and agreements related to the Separation from Victoria's Secret & Co., such as Transition Services Agreements and the Tax Matters Agreement[333][339][340]