Operator: Good morning, my name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Fourth Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

I will now turn the call over to Mike McGuire, Interim Head of Investor Relations. Mike, you may begin.

Michael McGuire: Thank you, Paul. Good morning, and welcome to Bath & Body Works Fourth Quarter 2023 Earnings Conference Call. Joining me on the call today are Gina Boswell, Chief Executive Officer; Julie Rosen, President Retail; 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 our prepared remarks as well as some additional facts and figures regarding our operating performance and guidance.

Today's call may contain forward-looking statements related to future events and expectations. Please refer to this morning's press release and the risk factors in Bath & Body Works 2022 Form 10-K for factors that could cause the actual results to differ materially from these forward-looking statements.

Today's call 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. Additionally, the fourth quarter and full year 2023 earnings results we shared today are on a continuing operations basis.

I'll now turn the call over to Gina.

Gina Boswell: Thank you, Mike, and good morning, everyone. Thank you for joining us today. Before we begin, I want to thank our outstanding teams, especially our store and distribution center associates. They do a terrific job delivering a great experience to our customers and executing on our strategic initiatives. Our fourth quarter performance is a great example of just that as we ended the year strongly, generating sales and earnings that both exceeded our expectations.

It's been just over a year since I joined Bath & Body Works as CEO, and the team has made significant progress in delivering against the 5 key growth drivers, I outlined at the beginning of 2023. While we've been pleased with the headway we've made, I know that we have more work ahead of us.

In the 14-week fourth quarter of 2023, net sales of $2.9 billion grew 0.8% compared to the 13-week fourth quarter in the prior year. This result was above the high end of our outlook. Fourth quarter adjusted earnings per diluted share of $2.06 was better than anticipated and up nearly 11% from the prior year's fourth quarter. This outperformance was driven by strong merchandise margin as we drove an improvement of 290 basis points year-over-year.

As expected, EPS benefited from the extra week by about $0.05. Average unit retails grew by 2%, which was greater than the growth we saw in all previous quarters during the year. This increase in AUR was driven by a thoughtfully planned pricing strategy. Overall, our promotional activities were comparable to last year, that is we had the same number of events of slightly longer duration, but we didn't need to go as deep.

During holiday, we were pleased to see customers responding positively to our core merchandise along with gifting and our traditional holiday favorites. Notably, we delivered a low single-digit sales increase in our critical Thanksgiving to Christmas time period, even after adjusting for the longer holiday period. Both Black Friday week and Candle Day weekend were successful and our Candle event was a great example of our omnichannel strategy in action. It's an event that our customers look forward to given their general love of our brand and the category and we successfully amplified it with BOPIS and day 1 exclusive loyalty access for members.

We are pleased that we're beginning to see the benefits of the decisions we've made within the Candle category. However, we recognize that normalization is still impacting the business.

Our Men's Shop continues to grow with 2/3 of category growth coming from the addition of new products. This new assortment was further supported by our first ever large-scale influencer program featuring professional and college football stars and an experiential tour, which enabled hundreds of thousands of men to sample our products in less than 2 months. We continue to lean into this category to drive increased awareness and customer acquisition.

And we were well positioned in our newest categories such as fragrance hair care, our expanded lip collection and laundry and we'll continue to roll these out throughout the year. While dual channel traffic was up through the holiday period, we experienced softness during January, and that continued into early February. Consistent with external market data, we are continuing to see customers carefully manage their spending, which has pressured basket size and conversion.

Let me now turn to our 5 key growth drivers. First, elevating the brand through innovation and product upgrades; second, extending our reach through new category adjacencies and international growth; third, engaging the customer fostering a deeper connection with the customer through our loyalty program, enhanced technology and greater personalization; fourth, enabling a seamless omnichannel experience; and finally, is enhancing operational excellence to drive efficiency.

Foundational to these growth drivers is the creation of great products and delivering innovation and newness for our customers. Other critical elements to support those are a focus on marketing and technology initiatives, and I'd like to take time for a click down into each of these this morning.

First, marketing. We know that in order to achieve our long-term net sales target of $10 billion, we need to grow spend with our existing customers as well as grow the number of customers who shop with us each year. We have invested and will continue to invest in multiple types of marketing to reach further into the market of 175 million consumers who buy fragrance products each year in the U.S. and drive higher penetration.

Our high-value loyalty program that we have quickly scaled also plays an important role in our efforts, and I'll talk more about that shortly. As we're executing our marketing programs, we are working to make our brand more top of mind, increase the likelihood to purchase, drive more conversion and deepen brand loyalty.

Last fall, our team developed a new brand campaign called Come Back to Your Senses, and we launched that during the fourth quarter. This campaign was a full funnel program designed to reach more people at greater frequency, and we are seeing high levels of engagement. We're continuing this campaign, expanding into other new channels such as connected TV and out-of-home. We're also giving consumers more reason to consider our brand through influencer campaigns, pop-up experiences and new collaborations.

You may recall us speaking earlier in the year about our customer segmentation analysis, designed to develop a better understanding of our core customer segments and the biggest growth opportunities. Leveraging these segmentation efforts, we have made investments in lower funnel channels, such as paid search, using first-party data and machine learning to retarget customers delivering more personalized marketing and push messaging to drive urgency.

Notably, our investments in both our full funnel marketing and other new marketing campaigns generated 9 billion media impressions in the fourth quarter, more than doubling impressions year-over-year. Our full funnel marketing and the scaling of our predictive customer retention model helped drive the 2% increase in retained customers we saw in the fourth quarter.

Turning to our technology initiatives. Our first priority this past year was the separation of our IT systems from Victoria's Secret, which was largely completed over the summer. At the same time, we have also begun investing in the foundational tools and systems needed to support future growth. There are table stakes capabilities we must build in order to continue to evolve our loyalty program, to support more advanced analytics and strengthen the omnichannel experience we deliver for our customers.

In the fourth quarter, we continue to evolve the digital experience to include features like social proofing enhanced personalized product recommendations and BOPIS enhancements, which has been proven to increase conversion. BOPIS order fulfillment increased approximately 88% in the fourth quarter versus the prior year and our total digital conversion trend in Q4 was up 3% compared to the prior year.

Looking forward, we are excited about adding personalized landing pages, immersive content and the introduction of a new AI-driven digital fragrance finder to be rolled out in the back half of this year. The investments in our marketing and technology are critical to our long-term success. I am pleased with how the team has implemented our initiatives over the past year, and we're excited about the opportunities ahead as we continue our investments in 2024.

In connection with this discussion of our marketing and technology initiatives, I'd also like to provide an update on our loyalty program. The pace of enrollment in the program since the August 2022 launch has been strong and there is still opportunity to drive even more engagement from our customers. Nearly 80% of our U.S. revenue now flows through loyalty and those who redeem rewards have been proven to spend more with our brand.

We introduced point accelerators in the fourth quarter with the goal of helping customers redeem more frequently, and we plan to test and bring additional enhancements to the program throughout 2024 including additional early access and member-only events. Holiday helped drive high levels of enrollment, especially by leveraging our big days. The omnichannel early access loyalty-only events for Candle Day and Body Care Day generated record loyalty sales penetration rates.

Of our more than 45 million enrolled members, approximately 37 million were active at the end of the year, which is up 3% from the third quarter and over 30% year-over-year. Now that we have anniversaried the program launch, active members is the right metric to track. Importantly, we are very pleased that 36% of new loyalty members in the quarter were new to our brand.

Before I turn the call over to Julie, I'd like to speak briefly to our outlook for 2024, and then Eva will provide more details. We had a strong holiday. We are well positioned for a strong spring and summer together with all the newness to come, and we are cautiously optimistic about customer spending for the year. However, we are seeing macroeconomic pressures continue and our largest product category, Candles, continues to normalize. Taking headwinds and tailwinds into consideration, we expect net sales and operating income to be down on a year-over-year basis as we begin the year. We then expect to see net sales inflect and begin to grow during the second half of the year. Importantly, the high end of our outlook contemplates holding operating income margins in line with 2023 even as we continue to reinvest in the business.

Finally, in addition to executing our strategic initiatives and creating more efficiencies in our business, we are focused on continuing to reduce our leverage and return cash to shareholders. This past year, we made good progress in all these areas and we expect to continue to do so in 2024. As part of this, I'm pleased to announce that our Board recently approved a new authorization to repurchase up to $500 million of outstanding shares.

With that, I'll turn the call over to Julie.

Julie Rosen: Thank you, Gina. I would like to echo Gina and thanking our teams for delivering an exceptional experience to our customers and for their tireless work during the holiday season. As a result of their success, we are well positioned for a strong spring and summer and all the newness to come.

In the fourth quarter, our holiday performance was supported by several key drivers including strength in our core fragrances, such as Champagne Toast, Mahogany Teakwood and Eucalyptus Mint, coupled with new and returning seasonal collections, including Holiday Traditions and Evergreen Lane.

Customers turn to us to celebrate the season and responded to how we presented a seamless and easy gifting destination by providing covetable offerings at all price points. This year, we strategically placed gift sets at the front of shop and expanded our range of price points and forms, which led to a very strong business in the fourth quarter, exceeding our expectations and prior year results with record high gift set sales. We also focused our stores and web shop on a storybook theme, which resulted in a successful floor set that yielded repeat trips and transactions.

Turning to our category performance, we continue to be very excited about the growth of our Men's business as it introduces new customers to our brand and attracts the attention of a younger, slightly more diverse customer. Our new marketing activations, amplifying this category, such as our social media influencers and pop-up shops are resonating with our customer and our fueling growth. The business continues to be our fastest-growing category in body care, and we're seeing strong growth in the new forms we introduced earlier this year, principally grooming and antiperspirant deodorant.

In the fourth quarter, we infused newness into the collection, resulting in our core and seasonal fragrances exceeding our expectations. We've been able to maintain our strong market leadership position in the sanitizer business. Though as expected, we continue to see a shift out of this category, which, of course, surged during the pandemic. Body Care sales grew low single digits in the quarter and outperformed expectations, driven in part by men, which I just discussed. Our customers continue to show their affinity for our Body Care collection as evidenced by the strength of our Body Care Days in December.

Travel, which also grew year-over-year outpaced other categories due to strong inventory availability and customers adding on these products to their transactions. Home Fragrance was down low single digits in the quarter compared to last year as anticipated. However, we had our first-ever loyalty Omni early access event for our Candle Day weekend and our highest U.S. dual channel sales day ever. Customers showed up in a meaningful way demonstrating the desirability and giftability of our candles. Wallflowers continue to be a strong and steady category with Wallflower Bulbs posting low single-digit growth driven by strong Holiday Fragrance selling and increased units.

Turning to innovation and newness, both of which continue to be key drivers across our products and merchandising. This spring, we're delivering fresh and compelling new scents, such as our new Sweet Heart Cherry, Valentine's Day collection and Tropidelic. We are also introducing Brightest Bloom, our fragrance for Mother's Day and have new launches planned for summer and later in the year.

As part of our continued sustainability initiatives, we have expanded our soap decanters and cartons that enable our customers to conveniently refill and reuse their soap containers. This new form is growing quickly, and we're looking forward to expanding scents and offerings this year.

Additionally, after years of hard work, we're thrilled to announce that our total body care assortment has been fully reformulated and is now made without sulfate and parabens. We're excited about completing the rollout of our fragrance haircare line to the North American fleet. This category has attracted a new customer to Bath & Body Works with 14% of fragrance hair care customers new to our brand.

Lip products have attracted new younger customers to our brand and represent an opportunity to expand our customer base. To capture this opportunity, we have relaunched our in-store assortment and the visual presentation of our lip products across 380 stores and the goal is to complete the rollout of this fixture and expanded assortment to all North American stores by July of this year.

Our new lip fixture encourages customer interaction and supports expanded assortment, which is doubling lip sales in those stores. Last quarter, we discussed the launch of our laundry line and our best-selling fragrances and a very limited number of stores and online. We have since rolled this out to just over 200 stores and have plans to continue to expand to roughly half of the U.S. fleet in the fall. Like our other new categories, laundry has attracted new customers to the brand and their feedback has been positive, noting that laundry is yet another new and exciting way to add fragrance to their lifestyle and their daily routine.

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

Eva Boratto: Thank you, Julie, and good morning, everyone. Before I jump into the review of our fourth quarter financial results and fiscal year 2024, I first want to focus on our approach to capital allocation. Our top priority is to invest in the business to drive sustainable, long-term profitable growth.

In fiscal 2023, we generated $954 million of operating cash flow. And of that, we invested $298 million into capital projects primarily related to real estate and technology. Brick-and-mortar stores are an important part of our omnichannel ecosystem and brand experience.

Gina earlier discussed the investments we've made and will continue to make in technology in projects that will provide a better shopping experience for our customers. Ultimately, we believe investments in these areas will generate profitable growth for the company and you will continue to see us focus on them. After investments in the business, we generated $656 million in free cash flow in fiscal 2023 allowing us to return cash to shareholders and deleverage our balance sheet, both of which are priorities for us.

As a reminder, we have a goal to reduce our leverage ratio to approximately 2.5x gross adjusted debt to EBITDA. In fiscal 2023, we repurchased $485 million principal amount of senior notes for $447 million. As a result, we made good progress on our goal ending the year at 2.8x, which is down from 3.1x a year ago. After paying $182 million in dividends during 2023, we were able to repurchase 4.1 million shares of common stock for $149 million for an average price of $36.38 per share.

In 2024, we will continue to prioritize investments in the business, and we expect to invest between $300 million and $325 million in capital projects during the year. We expect to generate free cash flow of $675 million to $775 million and put that towards our priorities of dividend, share repurchase and deleveraging.

We expect to continue our annual dividend of $0.80 per share with an intention to increase the dividend over time as earnings increase. Leveraging the new share repurchase authorization, our outlook includes the expectation to repurchase approximately $300 million of shares spread throughout the fiscal 2024. And finally, we will consider opportunistic debt repurchases subject to market conditions.

Now moving to the income statement. In the 14-week fourth quarter, we reported adjusted earnings per diluted share of $2.06, exceeding our outlook of $1.70 to $1.90 per diluted share. Our adjusted results exclude $112 million tax benefit from the partial release of a valuation allowance on a foreign deferred tax asset. An $8 million pretax impairment charge on an equity method investment and a $6 million pretax gain on the early extinguishment of debt associated with the repurchases in the quarter.

Our outperformance in the quarter was primarily driven by strong merchandise margin and net sales outperformance. Adjusted diluted earnings per share also benefited from a lower tax rate. Net sales for the quarter were $2.9 billion and grew 0.8% compared to 2022. The extra week in 2023 added approximately $80 million to our top line. So on a comparable 13-week basis, net sales declined by 2% year-over-year. The year-over-year decline was driven by a decrease in traffic outside of the holiday period. We did see an improvement in conversion and average dollar sale versus prior quarters in the year. As Gina mentioned previously, our AURs increased 2% in the quarter.

In U.S. and Canadian stores, 14-week fourth quarter net sales totaled $2.2 billion, an increase of 4% versus the prior year. Reported fourth quarter direct net sales were $656 million, a decline of 8% compared to last year. Adjusted for BOPIS, direct demand declined 2% and in the fourth quarter. As a reminder, BOPIS net sales are recognized as store net sales, and we'll be marking the anniversary of our completion of the BOPIS rollout to all U.S. stores during the first quarter.

International net sales were $94 million and declined 1% versus last year reflecting challenges in the Middle East. As a reminder, there are 2 components to our international net sales, royalties collected from franchise retail sales and wholesale revenue generated by the product we sell to our franchise partners. Our total international system-wide retail sales declined mid-single digits in the fourth quarter and were up in the low teens outside of the areas affected by the war in the Middle East.

Fourth quarter gross profit rate was 45.9%, an increase of 260 basis points compared to the prior year. A sequential year-over-year improvement of 120 basis points from the third quarter, our second consecutive quarter of improvement versus the prior year. Merchandise margin rate improved 290 basis points year-over-year, driven by AUR increases and approximately $60 million of deflation benefiting product and transportation costs.

This margin expansion was partially offset by continued investment in product reformulation and packaging innovation as we continue to elevate the brand. Improvements in merchandise margin were partially offset by buying and occupancy expense deleverage, primarily due to increased occupancy costs associated with new store growth.

Total fourth quarter SG&A deleveraged by 130 basis points versus last year driven by investments in marketing and technology, partially offset by the benefits of our cost optimization initiatives. Additionally, included in our SG&A is approximately $10 million of expense associated with our cost reduction initiatives, primarily severance.

Our cost optimization work spans across both gross profit and SG&A and delivered benefits of approximately $50 million in the quarter, in line with our outlook. We have delivered approximately $150 million of total savings for 2023 exceeding our initial goal of $100 million. Taking all of this into consideration, fourth quarter total operating income was $696 million or 23.9% of net sales. For the full year, operating income was 17.3% of net sales.

Moving on to inventory. We continue to efficiently manage our inventory, ending the fourth quarter with total inventory dollars about flat compared to last year in a quarter that saw sales growth. As we head into the spring, we feel our inventory levels are appropriately positioned.

Turning to real estate. Our portfolio remains extremely healthy with 99% of the fleet profitable and stores significantly outperforming pre-pandemic levels. As a reminder, more than half our fleet is in off-mall locations.

We made additional progress increasing our off-fall penetration during the quarter. For the full year, we opened 94 new off-mall North American stores and permanently closed 39 mall stores. As a result of our net store openings and remodels, we grew net square footage by about 4% for the full year. And internationally, our partners opened 27 net new stores during the quarter and ended the year with 485 stores.

Now let me walk through our fiscal 2024 financial outlook. We are providing our 2024 outlook with comparisons to 2023 that include the 53rd week which, as I said earlier, added approximately $80 million to net sales and $0.05 to diluted EPS. For the year, we expect net sales results to range between down 3% to flat year-over-year. Adjusting for the 53rd week in 2023, we expect net sales to range between down 2% to up 1% with the extra week representing a headwind of about 100 basis points to our 2024 growth.

Our outlook reflects the building of capabilities and the launching of products designed to drive customer acquisition and net sales growth. We are increasing our marketing investments to drive customer acquisition and retention. This will include a variety of marketing programs as well as enhancements to our loyalty program.

We are investing in technology at comparable levels to 2023, which will support these marketing and loyalty program initiative while creating a more seamless experience overall. We plan to drive growth through our product adjacencies. These include building greater awareness of our Men's Shop, our recently completed fragrant hair care rollout and the extension of the rollout of lip and laundry while continuing to focus on the core.

We expect category normalization to continue, but moderate as we move through the year. And we will continue expansion efforts within international to provide healthy and margin accretive growth to our business. As these capabilities are scaled and benefits build through the year, we expect net sales growth to turn positive in the second half of the year, as we noted on last quarter's call.

Our total cost optimization goal is now approximately $250 million, up from our previous goal of $200 million. We now expect approximately $100 million incremental cost savings this year. We expect a full year gross margin rate of approximately 43.5% at the midpoint of our range, representing continued improvement in merchandise margin, driven by modest AUR expansion and product cost declines.

We expect buying and occupancy expense as a percent of net sales to deleverage slightly for the full year, driven by our investments in our store real estate. Our full year outlook assumes an SG&A rate of approximately 26.5%, with deleverage driven by higher marketing investments as well as wage inflation, both of which we expect to partially offset by our cost reduction initiatives. We expect full year net nonoperating expense of approximately $270 million an effective tax rate of approximately 27% and weighted average diluted shares outstanding of approximately 224 million. Considering all of these inputs, we are forecasting full year earnings per diluted share to be between $3 and $3.35.

For the first quarter, you can find commentary on the details of our outlook in the slide presentation, but I'll quickly provide the numbers here. Our outlook includes net sales down 4.5% to down 2%. We expect first quarter gross margin rate to be approximately 42.5%. AURs in the first quarter are expected to be flat. We expect our first quarter SG&A rate to be approximately 30.5% of net sales. We expect first quarter net nonoperating expense of approximately $70 million and a tax rate of approximately 28% with weighted average diluted shares outstanding of approximately 226 million. Considering all of these inputs, we are forecasting first quarter earnings per diluted share of $0.28 to $0.33.

And I'll now turn the call back to Gina for some closing remarks.

Gina Boswell: Thank you, Eva. As we enter 2024, we are pleased to be able to leverage our clean inventory position, a compelling product assortment and exceptional store experience with our associates who are ready to serve an omnichannel model that allows customers to shop whenever and however they want. Bath & Body Works has a strong foundation with leading market share, top brand awareness and a competitive advantage in our vertically integrated supply chain that allows us to respond quickly to changing trends. We have a healthy balance sheet, strong free cash flow generation and balanced capital allocation plans.

The outlook ranges that Eva discussed for the first quarter and the full year take into consideration the mix of headwinds and tailwinds we expect through 2024 as we continue to execute our strategic initiatives. Longer term, we remain confident in our ability to achieve our $10 billion of net sales and 20% operating income margin targets.

And with that, I'll turn it over to Mike for questions.

Michael McGuire: Thank you, Gina. For our Q&A session, we ask that participants limit their responses to one question and one follow-up. So we'll now move to the Q&A session. Paul?

Operator: [Operator Instructions] Our first question is from Lorraine Hutchinson with Bank of America.

Lorraine Maikis: Can you talk about the drivers of the fourth quarter AUR up 2%? And then why AURs would go from flat in 1Q to up for the year? What are the key reasons for that?

Gina Boswell: Thank you, Lorraine. Great to hear from you. I'll ask Julie if she can chime in with that question first.

Julie Rosen: Lauren, I hope you are well. So we are constantly balancing the need to keep engagement and traffic strong with our desire to increase pricing as well as have a very agile operating model that allows us to increase or decrease promotional levels in a meaningful way to test for outcomes. So we've taken select price increases in 2023 to raise our AURs. You see that in more differentiated assortments that really drive pricing power, whether it be 3-wick lids, our new seasonal single-wick waffle, faceted bottles. Our AURs were up 2% and better than expected and we have a very thoughtful and planned pricing strategy and really levers that we pull to manage our AUR on a constant basis.

Some of what we do is around bundles, others is that we take other opportunities. We were not more promotional this year than we were last year. We had the same number of events. They were slightly longer, but we did not have to take them as deep. And you probably noticed that in between our big events, we added in some other events to create engagement. We do have a very price-conscious consumer and so we are just ensuring that we are meeting them where they are at, while using our very agile operating model where we're constantly testing on the side for the best options. So we have robust strategies and robust testing going on to manage our AUR all the time.

Operator: Our next question is from Kate McShane with Goldman Sachs.

Katharine McShane: I wondered if there was a way that you could quantify maybe the level innovation -- level of innovation or level of newness that we can expect to see in your stores and online in fiscal year '24 versus what we saw this previous year?

Gina Boswell: Thank you for the question, Kate. I would say that we have -- clearly, we have the newness and the seasonal storytelling that Julie might speak to and she's already done so in the prepared remarks, but we also have the new adjacencies and those start to build over time. As you know, Men's is one and still a fairly low awareness. And so we've built out that assortment further, and that's why you saw sort of 2/3 of the growth coming from those new products and will continue in '24.

Our hair is also -- will be building even further and both in distribution as well as SKUs. So there's that newness as well. And then our lip assortment, which is further expanded in the fixture itself, which is beautiful and serves the role of attracting new customers, but there's more expansion within Lip, SPF and some other things.

I'm leaving Julie very little to say. But laundry as well is the next one. So Julie, you're close to it.

Julie Rosen: So as you know, our adjacent categories, we are very excited about, and we are in various stages of our rollout of these adjacencies. And so our Men's Shop is fully rolled out to all stores. We know that Men's is attracting a younger customer and a slightly more diverse customer and we have added some extra marketing here. Maybe you saw our pop-up shops or our influencers and that is really helping to fuel growth as well. Men's is also being fueled by some of the new products, some new merchandising that we added this past year in grooming and an antiperspirant deodorant. So that is the business that's probably the most furthest along from an adjacency.

Laundry, we have now rolled out to about 200 stores. And by the middle of the year, we will be in half the fleet. The feedback has been incredibly positive from our customers. They know that laundry detergent is a great way and just another way for them to layer their favorite scents into their daily routine. And while it's a little early to speculate on the size of the business, we are very excited about the opportunity because the laundry market is a $14 billion market.

As Gina mentioned, we have finished the rollout of fragrant hair care to all stores this spring. And this is another line that we have learned that is attracting new customers to Bath & Body Works. 14% of fragrant hair care customers are new to our brand. Again, not ready quite yet to comment on the size of the prize, but we are very confident in our positioning with our fragrance first leadership as our point of differentiation.

And then finally, we have our Lip. So we are consistently looking to get new and also younger customers into the brand, and we are seeing that Lip is doing this as well. So we've been upgrading and expanding and relaunching our in-store assortment as well as our visual presentation, and this will be in all stores by Q3. So these categories are small, but they're growing and like all launches at Bath & Body Works. We test, we optimize, we roll. So you will see us testing a lot of different things this year, whether it be around pricing, whether it be around merchandising or marketing. But out of the gate, we are excited about these new lines.

Operator: Our next question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey: As you think about the merchandise margin, which accelerated up 290 basis points, and it sounds like you're expecting some continued improvement in merchandise margin. Can you talk about the drivers and when you think about the test of pricing and level of promotions, how should we think about it differently this year as compared to last year? And does it differ by category?

Gina Boswell: Eva, would you start with that question?

Eva Boratto: Sure. Dana, overall, I think we're really pleased with the progress that we've made improving our margins the last couple of -- the last several quarters. And as you look at the outlook for the year, merchandise margin, we expect to expand about 50 basis points. And that does reflect continued deflation as well as the cost reduction initiative. Now we will continue to reinvest and restage and reformulation. We're annualizing the changes that we made to Body Care and soaps this year. So that will continue to impact us.

Now offsetting that for the year, we continue to have B&O deleverage given our real estate investment. But we're really pleased with our progress here on merchandise margin. And I would just note as you look at our first quarter guidance, our merchandise margin is pretty comparable to what we were able to deliver in 2019, and that's despite costs continuing to be inflated since the pandemic.

Gina Boswell: And one extra thing I would add is that even with some of these new adjacencies so forth and Julie spoke to, the margin profile of those over time improves as the product scales post-launch also contributing in bigger ways to the merch margin.

Operator: Our next question is from Simeon Siegel with BMO Capital Markets.

Simeon Siegel: Really, nice job in the quarter. So great to hear about the Men's strength. Sorry if I missed it. Did you say how large Men's is. Maybe Julie gave the point you were bringing up with the other adjacencies or the new products and then where it goes in the mid- to long term. .

And then Eva, just how much was the investment in the product reformulations, the packaging innovation? Just how should we think about that going forward? How should we think about transport and logistics expense going forward? And then what do we need at this point to leverage buying and occupancy? Does that get better as you move off mall? So is the rent better off mall or not necessarily given which malls you're exiting from?

Gina Boswell: Thanks, Simeon. Great to hear from you. I would say on Men's, we don't report the exact, but it is a single-digit percent of our sales, so still relatively small with lots of headroom with respect to the large addressable market of $12 billion. And as I said and Julie commented as well, ample distribution as well as new SKUs. As it relates to the B&O leverage and reformulation, I will ask Eva to please comment on that.

Eva Boratto: Sure, Simeon. On the B&O leverage, I would say it would take about 2% to 3% of sales growth to leverage B&O. And you're right, moving from mall to off-mall is a benefit for us. On the mix and the investment levels in reformulation, first we'll always work to get paid for that reformulation and drive our AURs. As you think about '23 to '24, the impact on margin of the reformulation is less than it was in '23, as we're annualizing the impacts and our investments aren't as great in '23 -- in 24, excuse me.

Operator: Our next question is from Alex Straton with Morgan Stanley.

Alexandra Straton: Just a couple from me here. The first is on the first quarter sales guidance. If I look at it compared to the fourth quarter, ex the 53rd week the 53rd week, it seems like you're embedding that year-over-year sales declines worsened. So does that assume the lower January or February trend continues for the rest of the quarter? Or how do you think about what informed that?

And then the second question is just on gross margin, hitting nearly 46% this quarter, long-term guide for 45%. I'm having trouble reconciling that with the 43.5% guidance for this year, so the flat. So if you can just walk me through what's weighing on gross margin right now? That would be super helpful.

Gina Boswell: Thank you, Alex. On the first quarter, Eva, if you can speak to the...

Eva Boratto: Let me take it. Let me first speak to the high end of the guide. The high end of the guide down about 2%, right? We're assuming we continue to have a cautious consumer. It doesn't get worse. As you said, the performance trends are in line with Q4 on a comparable 13-week to 13-week basis. Good response to our product assortment and Mother's Day and introduction of partnerships.

On the low end, the low end of our guide does assume more pressure reflecting the trends that we saw coming into February, where we had weaker traffic and potentially weaker response to our assortment or our Mother's Day, but you were thinking about that right. On the margin for the -- was your question on margin for Q1 or year, Alex?

Alexandra Straton: For the full year gross margin, please?

Eva Boratto: So for the full year gross margin, as you can appreciate, we're annualizing a lot of the deflation benefits that we achieved throughout 2023. Our margin outlook does include 50 basis points of continued merch margin improvement, reflecting those costs annualization as well as the investments that I mentioned previously in restage reformulation. Until we get to our growth, right, B&O does cause deleverage while the dollars are up modestly, you get the deleverage. So that's the summary on gross margin.

Operator: Our next question is from Matthew Boss with JPMorgan.

Matthew Boss: Gina, could -- so maybe could you just walk through or help rank order the drivers that you see supporting top line improvement through the year? Any visibility to Candle category stabilization?

And Eva, on sales to turn positive in the back half, how best to think about revenue growth quarterly beyond the first quarter, down 3% at the midpoint? And is there any way to just elaborate on what you're seeing in February? I think you cited softer traffic trends that's impacting basket and conversion. Just any elaborating on that, I think, would be great.

Gina Boswell: Thank you, Matt. This is a 3-part question. So I'll start and then Candle category, Julie if you can speak to that and then Eva finish it off with the second half.

I would say, overall, what -- when we put our full year outlook together, we built it building block by building block. And as was stated, there's a variety of scenarios that were considered from the low to the high end of our guidance, including things that are in our control with the execution of our initiatives, but also macro and consumer sentiment. But I think if you zoom out entirely, there really are 4 things that drive to our return to growth in the back half.

First is one that you touched on that we'll talk to the normalization of candles and sanitizers moderating, so effectively seeing an easing of the market decline. The second is the growth from our core categories, and that's where some of the newness that Julie spoke to and seasonal storytelling comes through. The third is the continued rollout of our new adjacencies, and they're small. As I mentioned, even in the Men's point as a percent of our shop today, but men's, hair, lip and laundry, those build and ramp through the year based on the distribution that we're talking about, whether going from 200 stores in laundry to half the chain in fall and lip, et cetera.

And then fourth, we talked about our full funnel marketing investments. We've got enhanced loyalty capabilities. We've got the personalized digital experiences. Those are driving more loyal and engaged customers. And so that's sort of the overall piece to the top line growth as it plays out throughout the year. So second question that you had was on Candle?

Julie Rosen: Yes. Matt, so candles and sanitizers do continue to normalize at an industry level. We know customers continue to spend less time at home and their mindset continues to adjust post pandemic. At an industry level, this unit normalization from Q3 to Q4 improved and our business mirrored those same exact trends. We've also been able to hold our leading industry market share in candles and we've actually gained share in sanitizers.

And as a reminder, both candles and sanitizers remain elevated versus 2019 levels, more so than the rest of shops. And I know Eva mentioned it, but just to say it again, our guidance in the back half calls for inflection even with the normalization of Candles.

Eva Boratto: Yes. So going back, Matt, to the back half of the year, I'll follow up on Julie's point. As we look at that inflection, we are expecting to inflect and return to growth in Q3. I would remind you that as we look at Q4 and if you look at the year, there are a number of factors that can -- that affect the outlook. And particularly in Q4, we have one less week between Thanksgiving and Christmas that we'll be hurdling for the business. So we're seeing that inflection driving toward Q3 as we expand the adjacencies and roll out our programs.

On February, I'll just comment -- traffic was pressured coming into February. Our initial floor set that we had in the year didn't perform as we wanted it to, and we quickly pivoted and adjusted our approach and brought some newness and our Tropidelic new fragrance to the front of the store.

Operator: Our next question is from Olivia Tong with Raymond James.

Olivia Tong Cheang: I wanted to ask you about your pricing plans for the year? And how much of that pricing increase for the full year is new pricing and promo efficiency improvements, which you expect to build that have yet to be implemented versus actions that have already been taken? And then if you could just talk about the balance between achieving AUR improvement with what sounds like a bigger than expected softness in January that has continued into February. So can you talk about your promo levels versus your peers and how to think about the risk that you can hold on to those improvements that you were able to achieve in Q4?

Gina Boswell: Thank you, Olivia. Well, to start, our assumptions on AUR for the first quarter were flat and moderate for the full year. In terms of new price actions that we've taken, Julie might want to speak to. I mean, it's a very -- it's a very agile model where we sort of look at those everyday deals and bundles and so forth. I think the last part of your question, I would ask Eva to chime in on. And I'm trying to remember exactly, do you have that?

Eva Boratto: Sure, sure. As you think about the pricing overall, I'd remind you, we've said this a few times, right? on the mix we are reducing our reliance on direct mail. We're increasing leaning into loyalty and more personalization. So there are all factors that give us the confidence that we can have modest increases for the year. In terms of the overall competitive landscape, it is a competitive landscape. And our agile model and our product assortment enables us to respond while we're -- balance both margin and top line volume.

Julie Rosen: So I just would add one more or a couple more things. In 2023, we raised a lot of our prices. We raised for all of the forms that we invested in, we raised at least $1. We added all endings on all products $0.95. We took our Wallflowers from 5 for $20 to 5 for $27, we did soaps 5 for $20, 5 for $27. So when I say we have an agile testing model, every single weekend, we're testing alternative pricing to figure out where we can garner more AUR. We don't plan for this business to be more promotional over time. So I want to make sure that we're all clear on that.

We believe that our products are affordable luxuries, we believe that they're meant to be used daily and replenished often. And we know that our customer loves to celebrate seasons, holidays, fragrances and loves newness. And we can do this in a way that nobody else can. We can tell these transportive emotional stories.

So I believe it's the celebrations and the newness along with the promo that's going to drive traffic to our stores. Again, as I keep saying, we use that operating model, right? to increase or decrease promotion. So promotions will be a traffic driver for our business, but we're hoping by sharpening our approach with the right technology in place. We're going to leverage some data and analytics, and we'll deliver more personalized targeted messages, which hopefully will increase trips and spends and engagement while reducing reliance on broad-based promos.

Operator: Our next question is from Paul Lejuez with Citi.

Paul Lejuez: I just wanted to clarify on February, you said that I think traffic was pressured coming into February. Can you talk about February specifically what you saw and if there's any change from beginning of the month to the end of the month? And then just separate on the SG&A line in 4Q, what came in above and below plan? What drove that? And can you talk about the opportunity to leverage SG&A and F '24 if sales perform above your expectations?

Eva Boratto: Thanks for the question. This is Eva. On the SG&A, as I referenced, we had a severance charge of about $10 million associated with our cost reduction initiatives. Also sales outperformed. So we had additional costs related to -- related to that. Could you repeat your other question?

Paul Lejuez: February traffic.

Eva Boratto: February traffic. Thank you. So overall, as I said, we came into February, traffic was pressured. We referenced that our initial floor set didn't perform to our expectations. We adjusted that, performance has improved during the month. It's reflected in our outlook and the guidance range that we provided.

Paul Lejuez: Was that performance improved during the month driven by promotions. Is that the message?

Eva Boratto: No, I apologize. That was not my message. Overall, we changed our floor set and promotions is always part of our strategy, but we're adapting and adjusting to our customers.

Gina Boswell: With the guidance of flat AUR in the first quarter. I think we have time for one more question, please.

Operator: Our last question is from Adrienne Yih with Barclays.

Adrienne Yih-Tennant: Very nice end of the year. So congrats on the fourth quarter. Gina and/or Julie, can you talk about the elevation strategy? I've seen it coming through, particularly in the candle packaging, which categories are sort of optimal for price elevation or premiumization and is that through packaging? Is it through innovation, formulations, et cetera? And then the carry on to that is, does that acquire. When you do that, do you see sort of an elevation in age or demographic or any statistics associated with that?

Gina Boswell: As it relates to the categories, overall, we sort of look at the masstige sort of as the -- as the pricing sort of segment that we operate in and many of those categories, I mean, if you just think about the beautiful laundry package that we have and what that connotes and even the price value proposition there being sort of in that sweet spot of masstige. But you're right, there are other things like the beveling of some of the products. And then the reformulations as well, which is an important elevation from the customer's mindset.

In terms of -- so I would say overall, the categories and Julie will chime in, I'm sure -- but overall, they all have opportunities to elevate, not necessarily raise entirely, right, because we want to make sure we always meet the mindset of our customers and increase their usage. We are a highly replenishable business. So we want to make sure of that and get the trial that we need.

But I would say that in terms of what we're seeing by cohort, which I think was the other part of your question, we are actually not seeing any discernible changes with respect to income or age based on all the things that we've seen. And we're not seeing trade down in our assortment as well.

Julie Rosen: Yes. And I think from an elevation perspective, just to follow up, we are seeing nice response from our neutral collection, both across soaps and candles, which are very elevated products. My design and merchandising teams do an excellent job scanning the market and the world, looking for trends to sort of see what is going on. I think one of the things that we try to hit on in our store is there are at times multiple mindsets that the customer is having and we try to hit on all of those.

So if you look at Men's, we upgraded the packaging on our shower gels, we just relaunched our Champagne Toast in new faceted bottles. So we're constantly looking, but it is about a balance. We do have some customers that still like some of those more brightly colored fun, but we are seeing elevation as in pretty products and as in neutral, really responding with customers. And because we have an agile model, we're able to go out and react and ensure we have enough of that.

Adrienne Yih-Tennant: Julie, just feedback-wise, the neutrals look very sophisticated and lovely. So congrats on that. Best of luck.

Julie Rosen: Thank you. I'll pass that on to the team. So that concludes our call. I want to thank you for joining today's call. Over to you, Mike.

Michael McGuire: So a replay will be available for 90 days on our website. Thanks again for your interest in Bath & Body Works. If anybody has any questions, contact us here. Thanks.

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