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Bath and Body Works It closed more than 10% higher Thursday after it beat fiscal first-quarter earnings expectations and lifted guidance.
While sales and net income have declined year over year, the retailer now expects earnings per share for 2023 to be between $2.70 and $3.10, compared to a range of $2.50 to $3.00 during the previous quarter. It expects adjusted earnings per share to be between $2.68 and $3.08 for the year.
The old mall store, known for its lotions, sanitizers and soaps, attributed the more optimistic guidance to “better-than-expected” earnings and the impact of an early debt repayment in the first quarter.
“We delivered first quarter sales in line with our expectations while earnings per share were better than expected as we saw benefits from our work to improve merchandise margin as well as early benefits from our cost optimization initiatives,” CEO Gina Boswell said in a statement.
The company added that fiscal year 2023 will include a 53rd week and its forecast will include this additional week, which it estimates will affect earnings of 7 cents per share.
Here’s how Bath & Body Works performed in its first fiscal quarter compared to what Wall Street was expecting, based on a survey of analysts by Refinitiv:
- Earnings per share: 33 cents, adjusted versus 26 cents expected
- Revenue: $1.40 billion vs. $1.40 billion expected
The company’s net income for the three months ended April 29 was $81 million, or 35 cents per share, nearly half of the $155 million, or 64 cents per share, it reported in the year-ago quarter.
Sales fell to $1.40 billion, down 4% from $1.45 billion a year earlier.
The retailer expects earnings per share of 27 cents to 32 cents in the coming quarter, compared to estimates of 32 cents per share. It expects sales to fall in the low to mid single digits, compared to an estimate of a decline of 3%.
It reaffirmed the full-year sales forecast for flat net sales to a mid-single-digit decline.
Bath & Body Works is emerging from a pandemic-fueled sales surge and grappling with value-conscious consumers who are more minded about discretionary purchases.
The declines in the prior quarter were against “very weak prior year numbers,” said Neil Saunders, managing director of GlobalData, so the company has to do the work to stabilize sales if it doesn’t want to give up its pandemic-era gains.
“This deterioration not only affects the top line, but it also makes the business less efficient, particularly at a time when costs are rising — something seen this quarter from the 35.4% drop in operating income,” Saunders said.
He added, “Looking ahead, we expect this year to be relatively weak for sales. At best, revenue will be flat and, realistically, down by low to mid single digits.” “However, the bottom line should see some improvement as cost-saving initiatives begin to bear fruit. In the long term, Bath and Body Works remains well positioned for growth once economic conditions and consumer sentiment begin to improve.”
As consumers became more wary and retail discounts and promotions increased in the face of a difficult macroeconomic backdrop, Bath & Body Works margins fell. It decreased by about three and a half percentage points to 42.7%, compared to 46.1% in the year-ago quarter.
Wendy Arlen, CFO, said during a call with an analyst that while the company reversed its mid-March sales slump with promotions in April, it offset those losses by raising prices. The company added 95 cents to products instead of 50 cents and changed its daily deals from five for $25 to five for $27, Arlen said.
It attributed the gross margin decrease to purchasing and occupancy expenses that were reduced due to lower sales and costs associated with the new direct-to-consumer fulfillment center and increased occupancy expenses for the new stores.
Margins were also pressured by a lower merchandise margin rate, Arlen said, which was driven by raw material price inflation and investments the company has made in product formulations and packaging.
It said inflationary pressure totaled $13 million in the quarter, with the largest amount coming from raw materials.
Margins were 41.2% better than analysts had expected, according to a research note from Simeon Siegel, retail analyst at BMO Capital Markets. Siegel noted that margins also topped out at pre-Covid levels.
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