10-Q: Bath & Body Works Q2 Sales Up, Profit Down Amid Rising Costs

Bath & Body Works reported a 1.5% increase in second-quarter net sales to $1.549 billion, but net income fell significantly to $64 million from $152 million year-over-year, impacted by leadership transition costs.

Summary

• Net Sales for the second quarter of 2025 increased by 1.5% to $1,549 million compared to $1,526 million in the second quarter of 2024.
• Year-to-date Net Sales increased by 2.2% to $2,974 million compared to $2,910 million in the prior year.
• Net Income for the second quarter of 2025 was $64 million, a substantial decrease from $152 million in the second quarter of 2024.
• Diluted Net Income per Share for the second quarter of 2025 was $0.30, down from $0.68 in the second quarter of 2024.
• Operating Income for the second quarter of 2025 decreased by 13.9% to $157 million from $183 million in the second quarter of 2024.
• Gross Profit rate increased to 41.3% in the second quarter of 2025 from 41.0% in the second quarter of 2024, driven by leverage on Occupancy Expenses.
• General, Administrative and Store Operating Expenses increased by $40 million to $483 million in the second quarter of 2025, primarily due to higher payroll, healthcare costs, and $15 million in leadership transition costs.
• The company repurchased 8.468 million shares for $256 million year-to-date 2025.
• An amendment to the Asset-Backed Revolving Credit Facility (ABL Facility) extended its expiration date from August 2026 to May 2030.

Sentiment

Score: 4

Explanation: While sales saw modest growth and gross profit rate improved, the significant decline in net income and operating income, coupled with increased operating expenses and leadership transition costs, indicates a challenging quarter. The positive outlook on strategic initiatives is offset by current financial underperformance and ongoing consumer caution.

Positives

• Net Sales increased by 1.5% in Q2 2025 to $1,549 million and by 2.2% year-to-date to $2,974 million.
• U.S. and Canada Stores Net Sales increased by 4.9% in Q2 2025 and 4.6% year-to-date, driven by increased transactions (including BOPIS) and new store growth.
• Gross Profit rate improved to 41.3% in Q2 2025 from 41.0% in Q2 2024, primarily due to leverage on Occupancy Expenses from exiting a third-party fulfillment center.
• Merchandise margin rate was flat in Q2 2025 compared to Q2 2024, as strategic pricing and strong cost management mitigated tariff impacts.
• Interest Expense decreased to $68 million in Q2 2025 from $77 million in Q2 2024, due to lower average daily borrowings and borrowing rates from early debt extinguishment in fiscal year 2024.
• The ABL Facility expiration date was extended from August 2026 to May 2030, enhancing long-term liquidity and financial flexibility.
• The company maintains strong liquidity with $364 million in cash and cash equivalents and $674 million in ABL Facility availability as of August 2, 2025.

Negatives

• Net Income significantly decreased to $64 million in Q2 2025 from $152 million in Q2 2024, a 57.9% decline.
• Diluted Net Income per Share decreased to $0.30 in Q2 2025 from $0.68 in Q2 2024, a 55.9% decline.
• Operating Income decreased by 13.9% to $157 million in Q2 2025 from $183 million in Q2 2024.
• Operating Income rate decreased to 10.2% in Q2 2025 from 12.0% in Q2 2024.
• General, Administrative and Store Operating Expenses increased by $40 million in Q2 2025, driven by higher payroll, healthcare costs, and $15 million in leadership transition costs.
• Direct U.S. and Canada Net Sales decreased by 10.1% in Q2 2025 and 7.4% year-to-date, primarily due to customers selecting BOPIS options.
• Other Income, Net decreased significantly to $6 million in Q2 2025 from $47 million in Q2 2024, largely due to the absence of a $39 million gain on Easton investments sales recognized in Q2 2024.
• Effective tax rate increased to 32.3% in Q2 2025 from 0.9% in Q2 2024, partly due to leadership transition costs and the absence of a valuation allowance release from Easton sales in 2024.
• Inventories increased to $977 million as of August 2, 2025, from $734 million as of February 1, 2025, impacted by higher tariff levels.

Risks

• Consumer sentiment is expected to remain cautious and volatile, impacting purchasing behavior and potentially leading to selective spending.
• Broad-based tariffs imposed by the U.S. government, and threatened or imposed retaliatory measures by other countries, have increased macroeconomic uncertainty in global markets.
• Continued changes in trade policies and disruptions could have substantial impacts on the global economy and may magnify the risks to the business.
• Foreign currency exchange rate risk affects Canadian dollar-denominated earnings and royalties received from international partners.
• The company is subject to various claims and contingencies related to lawsuits, taxes, insurance, and regulatory matters arising in the ordinary course of business.
• Contingent obligations of $224 million related to lease payments under noncancelable leases from the Victoria's Secret & Co. spin-off, expiring through 2037.

Future Outlook

The company anticipates consumers will remain cautious and value-seeking, prioritizing personal well-being and convenience while spending selectively. It plans to drive durable and profitable growth by elevating its owned digital platform to enhance functionality and storytelling, amplifying efficacy messaging through clearer claims and modernized packaging for ingredient-conscious consumers, and strategically exploring new distribution channels to reach new and younger consumers. The company expects consumer sentiment to remain volatile due to broad-based tariffs and potential retaliatory measures, but believes its predominantly U.S.-based vertically integrated supply chain positions it well to absorb existing tariff impacts and mitigate future costs through strategic sourcing and operational efficiencies.

Management Comments

• "We expect consumers to remain cautious and value-seeking, with intentional purchasing behavior that prioritizes personal well-being and convenience, while spending selectively."
• "We believe that our brand, stores, loyalty members, passionate store associates and a predominantly U.S. based vertically integrated supply chain form a strong foundation, and our investments in recent years have strengthened this foundation."
• "In order to deliver durable and profitable growth and drive long-term shareholder value, we are taking swift action in the short-term while we actively shape our long-term strategy by making strategic moves that resonate with both current and future customers."
• "We are focused on elevating our owned digital platform to meet the expectations of todays consumers by enhancing functionality and storytelling, which we believe will boost brand equity and direct channel sales."
• "We are also amplifying our efficacy message by more clearly communicating claims and modernizing packaging to better reflect key product attributes, such as efficacy, safety, and emotional benefits, especially to younger and ingredient-conscious consumers, reinforcing the value of our products."
• "Finally, we are focused on putting our product in the path of the consumer by strategically and thoughtfully exploring new forms of distribution beyond the owned channels we currently sell through to reach and engage new and younger consumers and drive brand discovery."
• "We believe our vertically integrated, predominantly U.S. based supply chain positions us well to compete in the current environment and to absorb the impacts of tariffs at the existing levels in the current year."
• "We also believe we have the ability to further mitigate these costs over time through strategic sourcing, operational efficiencies, and other targeted initiatives."

Industry Context

The company operates in a retail environment characterized by cautious and value-seeking consumers, a trend that aligns with broader macroeconomic uncertainties and inflationary pressures impacting discretionary spending. The focus on enhancing digital platforms, modernizing product messaging for ingredient-conscious and younger consumers, and exploring new distribution channels reflects a common industry response to evolving consumer preferences and competitive landscapes. The mention of tariffs and trade policies highlights ongoing global economic challenges that affect many international retailers and supply chains.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for global benchmarks.

Management Changes

Corporate Governance

Legal Proceedings

• The company is a defendant in various lawsuits arising in the ordinary course of business, including commercial, tort, intellectual property, tax, customer, employment, wage and hour, data privacy, securities, and anti-corruption claims. Management believes the ultimate liability is not likely to have a material adverse effect on results of operations, financial condition, or cash flows.

Related Party Transactions

• The summarized financial information for the Parent Company and Subsidiary Guarantors includes amounts due from non-Guarantor subsidiaries of $588 million and $572 million as of August 2, 2025 and February 1, 2025, respectively.
• It also includes amounts due to non-Guarantor subsidiaries of $1.467 billion and $1.421 billion as of August 2, 2025 and February 1, 2025, respectively, and $25 million as of August 2, 2025 (noncurrent).
• Net Sales to non-Guarantor subsidiaries were $72 million year-to-date 2025.

Stakeholder Impact

• Shareholders are impacted by decreased net income and diluted EPS, but also by ongoing share repurchase programs ($256 million YTD 2025) and consistent dividend payments ($0.20 per share declared for Q3 2025).
• Employees are affected by 'leadership transition costs' (severance benefits) for certain leadership team members and investments in wages for store associates.
• Customers may benefit from enhanced digital platforms, modernized packaging, clearer product efficacy messaging, and potential new distribution channels.
• Suppliers participating in the supply chain finance program have the opportunity for early settlement of payment obligations, potentially improving their cash flow.
• Creditors benefit from the extension of the ABL Facility expiration date to May 2030 and the company's commitment to maintaining adequate liquidity.

Next Steps

• Continue to elevate the owned digital platform to enhance functionality and storytelling.
• Amplify efficacy messaging and modernize packaging to reflect key product attributes for younger and ingredient-conscious consumers.
• Strategically explore new forms of distribution beyond owned channels to reach and engage new and younger consumers.
• Monitor changes in shifting trade policies and related market disruptions, and mitigate tariff impacts through strategic sourcing and operational efficiencies.
• Pay third quarter 2025 ordinary dividend of $0.20 per share on September 5, 2025.
• Plan capital expenditures of approximately $250 million to $270 million during 2025, focusing on real estate and technology.
• Evaluate the impact of adopting ASU 2023-09 (Income Tax Disclosures) for fiscal years beginning after December 15, 2024.
• Evaluate the impact of adopting ASU 2024-03 (Disaggregation of Income Statement Expenses) for annual reporting of fiscal years beginning after December 15, 2026.

Key Dates

Recommendation

The company reported mixed results with modest sales growth but a significant decline in net income and operating income, largely due to increased expenses including leadership transition costs and a higher effective tax rate. While strategic initiatives to enhance digital presence and expand distribution are positive for long-term growth, the immediate financial performance indicates challenges. The consistent share repurchases and dividend payments offer some support, but the overall picture suggests a period of adjustment and investment rather than strong immediate upside, warranting a 'hold' position for investors awaiting clearer signs of improved profitability from strategic efforts.

Keywords

Retail, Personal Care, Home Fragrance, Omnichannel, SEC Filing, 10-Q, Financial Results, Earnings, Bath & Body Works, BBWI, Quarterly Report, Consumer Goods, Specialty Retail