10-Q: Bath & Body Works Q2 2026: Profit Jumps on Tariff Refunds

Bath & Body Works reported a Q2 2026 profit increase driven by significant tariff refunds and improved merchandise margins, though net sales saw a slight decline.

Summary

• For the second quarter of 2026, Bath & Body Works reported net sales of $1,514 million, a decrease of 2.3% compared to $1,549 million in the second quarter of 2025.
• Operating income for Q2 2026 was $216 million, a significant increase of 37.0% from $157 million in Q2 2025, with the operating income rate improving to 14.2% from 10.2%.
• This improvement in operating income was largely due to a merchandise margin rate increase, significantly boosted by approximately $80 million in IEEPA tariff refunds.
• Year-to-date 2026 net sales were $2,892 million, a decrease of 2.7% compared to $2,974 million in year-to-date 2025.
• Year-to-date 2026 operating income was $447 million, an increase of $80 million compared to year-to-date 2025, with the operating income rate improving to 15.4% from 12.3%.
• The company repurchased no shares of its common stock year-to-date 2026, but did so in year-to-date 2025, spending $256 million.
• Cash and cash equivalents at the end of the period were $794 million, a decrease from $953 million at the beginning of the year.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this filing as moderately positive, reflecting improved profitability and strategic progress despite a slight revenue dip, with significant one-time gains boosting the bottom line.

Positives

• Operating income saw a substantial increase of 37.0% in Q2 2026 compared to Q2 2025, reaching $216 million.
• The merchandise margin rate significantly improved, driven by approximately $80 million in IEEPA tariff refunds.
• Year-to-date operating income increased by $80 million, reflecting improved operational efficiency and one-time gains.
• The company's 'Consumer First Formula' transformation plan is showing signs of traction, with sequential improvement in Body Care, return to growth in Direct, and continued momentum in marketplace partnerships.
• Interest expense decreased to $63 million in Q2 2026 from $68 million in Q2 2025 due to lower average daily borrowings.
• The company has a strong liquidity position, with $794 million in cash and cash equivalents and $623 million in availability under its ABL Facility.

Negatives

• Total net sales decreased by 2.3% in Q2 2026 compared to Q2 2025, totaling $1,514 million.
• Company-operated store sales decreased by 5.4% in Q2 2026, driven by a reduction in transactions and average dollar sales.
• Year-to-date net sales also saw a decline of 2.7%, amounting to $2,892 million.
• Sales per average selling square foot decreased by 6.8% for both Q2 and year-to-date periods.
• The company did not repurchase any shares of its common stock year-to-date 2026, contrasting with significant repurchases in the prior year.

Risks

• Macroeconomic factors, including the conflict between the U.S. and Iran, continue to impact global energy markets, commodity pricing, transportation costs, and foreign currency exchange rates, potentially affecting consumer demand and increasing costs.
• The company's operations are seasonal, with the fourth quarter typically being the most profitable, meaning interim results are not necessarily indicative of full-year performance.
• Foreign currency exchange rate fluctuations can impact the value of Canadian dollar denominated earnings and royalties received from international partners.
• The company is subject to various claims and contingencies, including lawsuits, though management believes these are not likely to have a material adverse effect.

Future Outlook

The company is focused on disciplined execution of its 'Consumer First Formula' to unlock sustainable growth. While macroeconomic factors present uncertainty, the company believes its current cash position, operating cash flows, and ABL Facility borrowing capacity are sufficient to meet liquidity needs for at least the next twelve months. Capital expenditures for 2026 are expected to be approximately $240 million, focused on real estate and Consumer First Formula investments.

Management Comments

• "While we are still in the early stages of our transformation, these proof points indicate that the Consumer First Formula is gaining traction."
• "We remain focused on disciplined execution and investing in the capabilities necessary to support sustainable, durable growth over the long term."
• "We believe that our current cash position, our cash flows 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."

Industry Context

StockSavvy.ai notes that Bath & Body Works' performance, particularly the impact of tariff refunds and the focus on a transformation strategy, aligns with broader retail trends of navigating supply chain impacts and investing in brand revitalization to capture evolving consumer preferences.

Comparison to Industry Standards

• The reported Q2 2026 operating income margin of 14.2% is strong for the retail sector, especially considering the slight decrease in net sales. Competitors like Ulta Beauty have reported operating margins in a similar range in recent periods, though specific comparisons depend on product mix and business models.
• The company's focus on digital growth and marketplace partnerships (e.g., Ulta, Amazon) reflects a common strategy in the retail industry to expand reach and customer engagement beyond traditional brick-and-mortar channels.
• The significant IEEPA tariff refund ($80 million) is a one-time event that substantially boosted profitability, a factor not typically seen in standard industry performance metrics and which distorts year-over-year comparisons of underlying operational profitability.

Legal Proceedings

• The company is involved in various lawsuits including commercial, tort, intellectual property, tax, customer, employment, wage and hour, data privacy, securities, anti-corruption, and putative class action lawsuits.
• Management believes that the ultimate liability from these proceedings is not likely to have a material adverse effect on the company's financial condition or results of operations.

Stakeholder Impact

• Shareholders: Improved profitability and operating income may positively impact shareholder value, though the slight decline in net sales could be a concern. The company continues to pay dividends.
• Employees: Investments in associate wages are mentioned, suggesting a focus on employee compensation.
• Suppliers: The supply chain finance program is in place, allowing suppliers early settlement options.
• Creditors: The company's debt levels have decreased, and it maintains a strong liquidity position and borrowing capacity, which should be reassuring to creditors.

Next Steps

• Continue execution of the 'Consumer First Formula' transformation plan.
• Invest in capabilities to support sustainable, durable growth.
• Monitor macroeconomic factors and their impact on consumer demand and costs.
• Manage liquidity and capital expenditures, with planned capital expenditures of approximately $240 million for 2026.

Key Dates

Recommendation

The company shows improved profitability driven by one-time gains and strategic initiatives, but the continued decline in net sales and store productivity warrants caution. While the 'Consumer First Formula' shows promise, its long-term impact and ability to offset revenue declines need further validation. The current financial health is stable, but growth acceleration is not yet clearly demonstrated.

Keywords

Bath & Body Works, Quarterly Report, Form 10-Q, Net Sales, Operating Income, Tariff Refunds, Consumer First Formula, Retail