Good morning. My name is Danielle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bath & Body Works Fourth Quarter 2022 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Ms. Heather Hollander, Vice President, Investor Relations at Bath & Body Works. Heather, you may begin.

Thank you, Danielle. Good morning, and welcome to Bath & Body Works Fourth Quarter and Fiscal 2022 Earnings Conference Call. 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 & Baby Works 2021 Form 10-K for factors that could cause the actual results to differ materially from these forward-looking statements. Today's call may contain certain non-GAAP financial measures. Please refer to this morning's press release for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measure. Joining me on the call today are Gina Boswell, Chief Executive Officer; Julie Rosen, Brand President; and Wendy Arlin, Chief Financial Officer. All of the 2021 results we will discuss today are adjusted and exclude the significant items detailed in our press release. Additionally, the results represent results from continuing operations and exclude the discontinued operations related to Victoria's Secret in 2021. I'll now turn the call over to Gina.

Thank you, Heather, and Good morning, everyone. Thank you for joining us. First, let me say how thrilled I am to be here at such a dynamic time. It is an honor to lead Bath & Body Works and the more than 55,000 associates worldwide. I look forward to working with this team, our leadership and our Board to capitalize on the tremendous opportunities that I see for the business and for creating long-term shareholder value. On today's call, I'm going to talk about why I joined Bath & Body Works, discuss some of my early observations and then outline my initial areas of focus to drive growth and profitability. But before I dive in, I'd like to first thank the team. Their efforts enabled us to deliver fourth quarter sales at the high end of our guidance range and EPS that exceeded expectations. This was despite a challenging macroeconomic environment. As to share a bit about why I chose to join Bath & Body Works through nearly 3 decades in the consumer industry, I have developed a true love for beauty, personal care and fragrance where customers are passionate and engaged, and quality and innovation are critical. And I was immediately drawn to Bath & Body Works as a company with its history of superior growth and a highly differentiated business model. This is a company truly positioned at the intersection of consumer goods and retail. The company is a market leader and innovator with leading share in its major categories of home fragrance, body care and soaps and sanitizers, and we have a top position in the U.S. in 10 forums. This includes body lotions, shower gel, 3-Wick Candles, and soaps and hand sanitizers. And we have also been significant share in the men's category. These are all growth categories with a long runway ahead in large addressable markets. As one of the premier fragrance companies in the world, we deliver customers their favorite fragrances in multiple forms and categories with industry-leading speed and innovation. We bring affordable luxuries in personal care and home fragrance to life like no other. Our strong relationships with our domestic vendor partners and fragrance houses enables us to continually deliver newness and meet the demands of an omnichannel customer. We manage every touch point throughout the customer journey to deliver a highly differentiated shopping experience. As I was visiting stores, I was also struck by the fact that Bath & Body Works offers products for the whole family and we're part of so many people's lives, we estimate that our products are in 40% of American households. And in my first 3 months, I've immersed myself in the business, and visited our stores and distribution centers and meeting with our supplier network at Beauty Park. I've also had an opportunity to engage with customers and store associates across the country as well as talk with investors to hear their perspective. I've conducted detailed business reviews with each of our functional leaders, and I've been impressed with the talent in our company and how engaged, knowledgeable and dedicated our associates are. This holiday season, I saw firsthand how our passionate sales force brings our seasonal storytelling to life in our stores. I've seen the strong connection customers have with our brand, which is underscored by our best-in-class brand engagement and loyalty. And I'm excited to see customers celebrate our events. I was delighted to learn that many customers consider our Candle Day, a national holiday. Overall, I'm pleased with the reach of Bath & Body Works with top brand awareness in our industry and customers indicating a strong propensity to recommend our brand. During the pandemic, our integrated and predominantly domestic supply chain positioned the company to meet elevated customer demand, which enabled us to drive significant growth in 2020 and 2021. In 2022, the company continued to grow unit share across our 3 major categories of body care, home fragrance and soaps and sanitizers. This team has demonstrated remarkable innovation capabilities, delivering a pipeline of newness in fragrance and product forms that powers our deep customer connections. Our product offering serves multiple customer occasions, including gifting, replenishment and self-purchase. We also connect with customers across touch points by telling stories through our fragrance and packaging. And finally, I've witnessed the company's key competitive advantage in bringing products to market with industry-leading speeds. Our vertically integrated supply chain allows us to respond quickly to changing customer and macro trends. So my early days of Bath & Body Works have reinforced why I joined the company and reaffirm the opportunity that we have to strengthen our position as a leading global omnichannel home and personal care brand. At the same time, there are areas where we can improve to drive top line growth and increase profitability. Looking forward, key areas of focus for us will be driving growth by expanding our customer base, delivering effective personalized marketing, optimizing our product offering, expanding our international reach, advancing our digital capabilities and unlocking the potential of our omnichannel model, all while focusing on improving profitability. So just starting with the customer. We have a large loyal customer base, and we have diversity across income levels, age groups and ethnicity. I see a significant opportunity to acquire new customers, increase spend and further diversify the space. As you know, our loyalty program launched nationwide in August, and we've seen great early results. Our enrollment speed is one of the fastest in the industry. And just last week, Newsweek named us one of America's best loyalty program. We've enrolled a total of 33 million members to date and more than 80% of these are active. This is a testament to our customers' passion for our brand. Our loyalty sales represent approximately 2/3 of our U.S. sales since launch, and our loyalty customers also have higher spend, greater retention rates and make more trips. And while these results are certainly impressive, we are still only in the early innings of the program, we're confident that more opportunity lies ahead. For example, we can drive more value and attract more customers to the program by increasing engagement through personalization by fully integrating our loyalty program across social, physical and digital interactions and making future program enhancements like tiered accelerators and flexible rewards. We also have an opportunity to leverage data and analytics to build deeper customer connections and deliver more personalized marketing and a more targeted promotion strategy. As Wendy will explain, relative to 2019 product cost inflation has exerted over 500 basis points of pressure on our operating margin. And though we've taken price increases to offset a portion of that pressure, in 2022 customers became increasingly price-sensitive. I believe we can grow our customer base, increase engagement and drive incremental trips, all while decreasing our reliance on broad-based promotions. We can capture this opportunity by implementing a more targeted marketing approach that is rooted in advanced analytics and customer segmentation. Our product offering and assortment strategies are key to elevating our brand as well as increasing our pricing power and extending our reach. We're focused on leveraging our core strength in fragrance and innovation to extend our product leadership into categories such as men's and wellness, both of which currently represent a small portion of our total business today. And Julie is going to speak in a bit about our product and marketing strategy. We also have an opportunity to drive significant growth in our international business, which on a reported basis is approximately 4% of our sales. This business leverages a partnership-based asset-light model. In 2023, we expect our international business to continue to accelerate with double-digit top line growth and operating margins that are accretive to our overall business. We're committed to expanding our reach and strengthening our position as a leading global brand through market expansion, new stores and digital growth. Beauty and personal care category customers value a true omnichannel experience. And to that end, we have a strong fleet of profitable stores, both off mall and in mall and these position us close to the customer. We also have a strong digital business. We see a significant opportunity to better connect our stores and e-commerce platform to deliver a seamless experience and increase our customer lifetime value. As an example, dual-channel customers spend 3x more than single channel customers, but dual-channel customers represent less than 15% of our customer base. So increasing penetration by just 1 percentage point could drive up to $50 million in sales. Technology is a key enabler of our growth. And as the team has shared, we are in a process of separating our IT systems from Victoria's Secret, and we expect to complete that transition this summer. But we're also assessing and investing in the foundational tools and systems that we'll need to support the company's future growth. We're focused on building out incremental capabilities to enhance the customer experience, evolve our loyalty program, support advanced analytics, deliver more personalized marketing and strengthening our omnichannel capabilities. We also remain committed to driving margin expansion and cost savings through effective management of pricing and promotions, along with finding additional ways to operate more efficiently. Following my functional business reviews, I see meaningful opportunities to reduce expenses and improve operating efficiency. I'm mindful that we've increased revenue 40% since 2019. And while our team has done an excellent job accommodating that growth, while separating from Victoria's Secret, we now have an opportunity to position the business for margin expansion and efficiency. To that end, we are targeting $200 million of annual cost savings across the company. We expect to realize over half of those savings in 2023 and a substantial portion of the remaining savings in 2024. We've engaged external advisers to assist in a top to bottom review of the business. As we pursue opportunities for both growth and margin expansion, we are prioritizing actions which we believe will create durable value for our shareholders. While we're focused in the near term on optimizing the core business, we'll continue to explore longer-term opportunities, such as adding new adjacent categories. With respect to 2023, we expect that ongoing macroeconomic challenges will continue to impact customer spending. At the same time, we expect that we will continue to see inflationary pressure on our input costs in the first quarter before beginning to see some relief as we move through the year, and we are pleased to enter this year in a clean inventory position. Regarding SG&A, the technology investments we're making to separate our systems and develop critical capabilities will help to reinvigorate growth and support the long-term success of the business. This will, however, create cost pressure in 2023. We're focusing on what we can control, and we're taking aggressive actions to drive profitable growth in the future. And despite near-term macroeconomic pressures, I am very optimistic about our future and our ability to reach our $10 billion sales target and deliver industry-leading operating margins of 20%. We look forward to updating you on our progress as we work to realize the full potential of our omnichannel model and profitably grow our business and deliver long-term shareholder value. So with that, I will turn the call over to Julie, who will review our brand and category performance.

Thank you, Gina. In the fourth quarter, customers responded well to our holiday assortment which included both Christmas favorites and cozy new fragrance additions. We are an affordable luxury brand with covetable gift offerings and a key tenet of our holiday strategy was offering gifts at all price points. We drove a strong gifting business in the fourth quarter, exceeding our expectations and last year's results with record high gift-set sales and particular strength in overall gifting that last week before Christmas. The season was led by our iconic holiday traditions and top fragrances such as Winter Candy Apple and Vanilla Bean Noel. We brought back these customer favorites in new packaging that spans multiple categories and forms. Offering our customers' favorites in multiple forms is really a competitive differentiator for us, and we find that it drives customer loyalty and purchases. Our cross-category assortment is the key reason for our customers to come back and visit us each year. We saw success with our ability to tell cohesive and compelling fragrance stories across the shop, which continue to resonate with customers who want to enjoy our fragrances for both body and home. The fragrance stories that performed well during the quarter include core fragrances, such as Champagne Toast, returning holiday favorites such as Fresh Balsam, and new fragrances, such as Strawberry Snowflakes. Our men's business continues to be our fastest-growing category in body care as we test new forms and merchandising ideas. In the fourth quarter, for the first time, we launched a new single fragrance launch for the men's business, After Dark. The response to this launch exceeded our expectations. And we will leverage the significant insights we gained from it to guide future innovation. Soaps continued to perform well, outpacing the total shop. Our new packaging and holiday sense met the customer's mindset during this time of year and really drove demand. We continue to expand our formulation that's made without paraben, sulfate or dyes. Our relaunch of our gel soap has performed well, and we see opportunities for meaningful future growth through this forum. 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 we know surged during the pandemic. Body care outperformed in the fourth quarter, led by body lotion and cleansers. Our customers continue to show their affinity for our body care collection as our unit sales exceeded last year's fourth quarter. Travel also outpaced other categories as customers continue to increase their mobility post pandemic. Home fragrance was down compared to last year as expected. However, we achieved the most successful Candle Day in our history as customers continue to come and celebrate one of their favorite holidays. Innovation and newness are key drivers of our business and we look ahead to spring, we are focused on delivering fresh and compelling new scents, such as our new Among the Clouds and Coco Paradise. We also have some exciting new product expansions to our Gingham fragrance portfolio coming from Mother's Day as well as additional launches later in the year. As part of our continued focus on delivering innovation and newness, we've rolled out men's antiperspirant deodorant to our entire chain, and we are seeing very promising results. We look forward to further expanding our men's portfolio later in the year. We recently also launched a new signature tumbler in candles which rounds out our candle portfolio and offers a burn time of 30 to 50 hours. We continue to increase our assortment of scent control -- Wallflower heaters that offer customers choice and how much scent to enjoy in each room of the house. We're also expanding our wellness collection that is geared toward elevating our customers' daily wellness routine with curated collections for body and home. And we will continue our sustainability initiatives. Later this year, we're excited to be offering cartons that enable our customers to refill their soap containers and minimize waste. The customer is always at the center of our innovation process, and we will continue to add new compelling products and packaging as we work to expand our brand's global potential. We're also building capabilities to better connect with our customers and drive margin expansion through more personalized marketing initiatives and more targeted promotions. And with that, I'll turn it over to Wendy.

Thank you, Julie. Starting with our fourth quarter results, we were pleased to have exceeded our beginning of quarter guidance. We generated earnings from continuing operations per diluted share of $1.86. These results exceeded our guidance of $1.45 to $1.65 per share. This was primarily driven by a better-than-expected margin rate due principally to transportation cost improvement and a favorable inventory position leading to less clearance activity as well as lower SG&A expense compared to our expectations. Net sales for the quarter were $2.9 billion, a decline of 5% compared to last year, driven by a decrease in both transactions and average dollar sale. Our customer continued to be price sensitive given the macroeconomic pressures. Fourth quarter net sales were up 29% compared to 2019. In our U.S. and Canadian stores, fourth quarter sales were $2.08 billion, a decrease of 5% versus the prior year. Store sales increased 19% compared to 2019. Fourth quarter direct sales of $716 million decreased 6% compared to last year but increased 66% compared to 2019. Our customers continue to take advantage of our omni-focused option of buy online-pick up in store or BOPIS, and frequently add to their purchase in store. As a reminder, BOPIS sales are recognized as store sales. We have rolled BOPIS capabilities to over 800 additional stores in 2022, and we currently have BOPIS availability in more than 1,300 stores overall. For the fourth quarter, international sales were $95 million and grew 30% versus last year. As a reminder, our international operations are primarily conducted through franchise, license and wholesale partners and our recognized sales include royalties and wholesale product sales. Total international system-wide retail sales were approximately $250 million in the fourth quarter and $700 million in the full year of 2022. The gross margin rate for the fourth quarter decreased by 480 basis points to 43%, this was driven by a significant decline in the merchandise margin rate and buying and occupancy expense deleverage due primarily to lower sales and increased labor costs in our distribution and fulfillment network. The merchandise margin rate decline was primarily driven by increased product costs due to continued inflationary pressure in raw materials, transportation and labor as well as incremental promotions to drive sales. Inflationary pressures totaled approximately $60 million in the fourth quarter. Our average unit retail or AUR was down low single digits in the quarter and slightly better than expectations and what we experienced in the third quarter. We continue to focus on disciplined expense management, given sales trends and macroeconomic uncertainty. This resulted in better-than-expected SG&A expense for the quarter. Total SG&A deleveraged by 190 basis points, with technology expense accounting for approximately 100 basis points of pressure. As we have previously mentioned, we are making important strategic investments to enable future growth, and this includes investing in technology as part of our IT separation. Store wage rates also drove an additional 70 basis points of deleverage as we increase customer-facing associates' wages to stay competitive while ensuring that we manage labor hours in line with sales expectations. Taking all of this into consideration, fourth quarter total company operating income was $653 million or 22.6% of net sales. Turning to the balance sheet. Total inventories ended the quarter flat compared to last year, better than our expectations due to disciplined inventory management. Finished goods retail units were down 5% compared to last year, also better than our expectations. The difference between flat dollars and a unit decrease of 5% is due primarily to inflationary pressures in product cost, which was partially offset by lower component inventory compared to last year. Our inventory is clean, and we are well positioned heading into the new year with agility in our supply chain. Importantly, our overall real estate portfolio continues to be very healthy. Approximately 99% of our store fleet is profitable, and our stores continue to significantly outperform pre-pandemic levels, led by strength in our non-mall location. In 2022, we permanently closed 48 stores for the full year, principally in malls. We opened 95 new off-mall North American stores in 2022, resulting in net square footage growth of about 5% for the full year. For international, we had record store growth through our partnership model in 2022, ending the year with 427 stores. Next, before I outline our fiscal '23 guidance, I'll describe our core performance from 2019 to 2022, which we believe will help to better evaluate our progress going forward. I encourage you to review the supplemental slides posted on our Investor Relations website for additional details. Starting with 2019, baseline Bath & Body Works revenue was $5.4 billion, gross margin was 44% and operating margin was 19.2%. Sales in 2022 were up 40% as compared to 2019 with a balanced contribution from unit and AUR growth. And while we are guiding to lower sales in 2023, we remain confident in achieving our $10 billion sales target. While operating margin has declined 100 basis points compared to 2019, we drove 32% growth in operating income dollars. The decrease in rate was predominantly driven by over 500 basis points of cost inflation, 140 basis points of technology and transition expenses associated with our separation from Victoria's Secret and 70 basis points of pressure from store wages, which was partially offset by leverage on sales growth and AUR increases. We were able to offset a portion of the inflation pressure with pricing, but as many other retailers saw, the customer became more price sensitive in 2022. This limited our ability to increase AUR. As Gina described, we are focused on developing a more targeted, personalized marketing approach to grow our customer base and drive visits. At the same time, we are working to decrease our reliance on broad promotion which should increase our merchandise margin. We expect that cost inflation will begin to subside after the first quarter of this year. As for technology expenses, our IT efforts and investments through the end of the summer are focused on completing our separation activities. Beyond separation, we are focused on building new capabilities to drive profitable sales growth. These include advancing our loyalty program, supporting advanced analytics, evolving our marketing strategy and bolstering our omnichannel capabilities. Our model assumes that technology costs will continue at current levels as we roll off separation-related costs, establish our stand-alone capabilities and team, and invest strategically to drive future growth. As Gina indicated earlier, we are partnering with external advisers to closely evaluate our cost structure and take action to offset what we see as ongoing cost pressures in both gross margin and SG&A as well as to fund our strategic investments. We are early in this process, but we are targeting $200 million of annual cost savings, of which over half is included in our 2023 outlook, primarily impacting the second half of the year. We expect to realize a substantial portion of the remaining benefits in 2024. Our efforts are broad-based, with opportunities in transportation, product margin, store operations, home office expense and indirect spend. We have recently initiated this work and look forward to sharing more with you in upcoming quarters. As we move past recent and near-term challenges and realize the benefits of our profit optimization initiatives, we are targeting industry-leading operating margins of 20% and with gross margin of approximately 45% and an SG&A rate of approximately 25%. Turning now to our fiscal '23 financial outlook. Today, we are providing our 2023 outlook with comparison to 2022. Please note that fiscal '23 will include a 53rd week, so the fourth quarter of fiscal 2023 will consist of 14 weeks. Our outlook includes the impact of the 53rd week, which we estimate at $0.07 per diluted share. Our forecast takes into consideration ongoing macroeconomic uncertainty and expected customer sentiment. For the full year, we are forecasting flat sales to a mid-single-digit sales decline. Our range assumes a continuation of fourth quarter sales trends for the first half of 2023 and a moderate improvement in the back half of the year as we anniversary softening sales trends. Quickly reading and reacting to changing business trends is part of our DNA. We will leverage our vertically integrated supply chain and our industry-leading agility to chase demand and maximize sales. We will also work to drive growth through our loyalty program as these customers make more visits and have higher spend than other customers. Our current customer segmentation work is also designed to lead to more efficient and effective marketing. Our international business continues to provide healthy and margin accretive growth to our business, we are forecasting double-digit international net sales growth in 2023. We expect full year gross margin rate to be approximately 42%, we expect inflationary costs will continue in the first quarter and begin to moderate as we move through the year. We are forecasting AURs roughly flat but we'll continue to test for opportunities to increase AURs and expand margin through more data-driven, targeted marketing efforts. We also expect buying and occupancy expense to deleverage, driven by lower sales and our investments in direct fulfillment capabilities to drive future omnichannel growth, partially offset by the benefits of our profit organization work. Our plan assumes a full year SG&A rate of approximately 26% with deleverage primarily driven by increased store wage rates, technology and -- technology, partially offset by the benefits of our cost optimization work. We expect full year net nonoperating expense of approximately $320 million, an effective tax rate of approximately 26% and weighted average diluted shares outstanding of approximately 231 million. Considering all of these inputs, we are forecasting full year earnings from continuing operations per diluted share to be between $2.50 and $3. Turning to capital expenditures. We are planning for approximately $300 million to $350 million in 2023. The majority of our capital is focused on investments to support future growth. We are planning for continued investments in select remodels and new off-mall store opening. We are also investing in our technology, distribution and logistics capabilities to support growth. Approximately $35 million of planned capital expenditures relate to payments which shifted out of 2022 into 2023. This year, we are planning approximately 115 total real estate projects consisting of approximately 90 new off-mall stores and 25 remodels to the White Barn store design, offset by about 50 mall closures. In all, this yields square footage growth of approximately 4%. We expect to generate free cash flow of $600 million to $700 million in fiscal '23. I'll now turn to our first quarter '23 outlook. For the first quarter, we are forecasting low to mid-digit sales declines. We expect the first quarter gross margin rate to be approximately 41%. The decline versus last year is principally driven by an expected lower merchandise margin rate and deleverage in buying and occupancy. We are forecasting slight AUR declines adjusted for mix, as we anticipate continued customer price sensitivity. Our forecast includes approximately $20 million of incremental inflationary cost increases in the first quarter related to raw materials, wages and transportation. Buying and occupancy expenses are also forecasted to deleverage, driven by the sales decline and our new direct-to-consumer fulfillment center as it ramps up operations in the first and second quarter. We expect our first quarter SG&A rate to be approximately 30% of sales, with the rate increase driven largely by investments in technology and increased store associate wages. We expect first quarter net nonoperating expense of approximately $80 million, a tax rate of approximately 27% and weighted average diluted shares outstanding of approximately 230 million. Considering all of these outputs, we are forecasting first quarter earnings from continuing operations per diluted share of $0.17 to $0.27. Our forecast for the first quarter assumes a continuation of current softer demand trends and elevated inflation and wage pressures. However, this is not reflective of our expectations for the full fiscal year because we anticipate that certain headwinds such as inflation and wage pressures will moderate in the second half. Turning to inventory. We have entered 2023, as I said, with a very clean inventory position. We expect to end the first quarter with a slight decrease in both inventory dollars and units compared to the first quarter of 2022. With regard to capital allocation, we are committed to taking a balanced and disciplined approach. Our first priority is investing in the business to drive profitable growth by significantly improving the customer experience, supporting advancement in existing and new product categories, investing in new off-mall stores and remodels, improving our fulfillment capabilities, completing our IT separation and standing up critical new technology capabilities. We are also committed to returning cash to our shareholders. We plan to continue paying an annual dividend of $0.80 per share with an intention to increase the dividend over time as earnings increase. Turning to capital structure. We are ending the year with a gross adjusted debt-to-EBITDA leverage ratio of 3.1x, above our target of approximately 2.5x. On a net basis, our leverage ratio is 2.4x. Although we are above our target, we remain confident we will return to our target range over time. We have no debt maturities until 2025 and a total of approximately $600 million coming due over the next 4 years. By comparison, in 2022, we generated over $600 million of free cash flow after our regular dividend. We estimate that we are starting the year with $700 million more cash than we need to fund our forecasted working capital needs for the year. We will evaluate the best use of our cash as we go through the year and we gain better visibility into macroeconomic trends. We are considering options such as debt repayment and share repurchases. In planning for the year, we believe that it is prudent to acknowledge the macroeconomic pressures continuing to impact our customers and their spending habits as well as the current trends of the business. We are striving to exceed our forecast, leveraging our agile vertically integrated supply chain to chase demand and building capabilities to drive profitable sales growth in the future. And as Gina and I mentioned earlier, we are working with external advisers on a comprehensive review of opportunities to support our profit expansion. Taking a refreshed view of our core business will enable us to move forward confidently in pursuing growth opportunities. That concludes our prepared comments. I will turn it over to Heather.

Thanks, Wendy. Before we open it up for Q&A, we want to briefly address the recent disclosure by Third Point. We issued a response last night. The Board will respond in due course to Third Point as appropriate. With that said, the purpose of today's call is to discuss our fourth quarter and fiscal year results, and we ask that you keep questions focused on those results. [Operator Instructions] We'll now move to the Q&A session. Danielle?

[Operator Instructions] Our first question comes from Jay Sole with UBS.

I guess what I'm curious about is some of the cost inflation and maybe what's been incremental that you've seen over the last 90 days. Just help us understand sort of the difference between the margin outlook for this year compared to the margin outlook for last year?

Okay. Thanks, Jay. Wendy, would you like to take that?

Yes. Great. Thank you, Jay, for the question. Yes. So in terms of inflation, as we've talked about in previous calls, there's 3 main groups of pressure points for us, raw materials and components, transportation and I would say wages and other. So first, I'll cover raw materials. We have specifically -- and one of our key raw materials is candle wax. And we are seeing, and I think I mentioned this in the last call, some improvement in costing in candle wax. So we are down to 2022 levels but still up to pre-pandemic, but we are seeing some green shoots. In terms of the rest of the raw materials, I would describe the markets in terms of what we're seeing as generally flattish. We are hoping for continued declines, but we aren't seeing or planning for significant deflation in the other components of our raw materials yet. So hopefully, that comes to fruition, but I would describe those markets as stable. In terms of transportation, what we're seeing is that volume does continue to be down in [ almost], which is great because that's creating excess capacity, which provides us options in terms of carrier selections, et cetera. So if we break it down into our 3 main pieces. In terms of trucking or line haul, we are in the process of doing our annual bidding with our partners. So we look at those contracts in the first quarter of every year after holiday. And our initial -- we're in the middle of the process, but we are seeing a decline year-over-year in our initial work here, which is good for us. And that is providing deflation for us in line haul starting in the second quarter, and that is factored into our guidance. In terms of parcel, which is another piece of transportation, we have seen surcharges declining, but the base rates actually are increasing. So right now, parcel, we aren't seeing major deflation and it's generally flat from a year-over-year basis. And then the final piece for us in transportation is Final Mile, which we are seeing continued pressure points just due to -- primarily to labor. So overall from transportation, we do have some deflation, as I said, starting in Q2, driven by line haul, which is in our guidance. Lastly, labor over the last 2 years or 3 years, I should say, we have seen wage pressures in labor, which we've talked about. Good news is I would describe what we're forecasting now as a relatively flat model in terms of inflation from our -- either -- if I'm talking about vendor wages or our distribution or fulfillment centers. We are seeing that solidified for the course of the entire year. So when you add all that up, we are forecasting, as we said in the remarks, pressure in Q1 but it should start to deflate, so to speak, in Q2, and then we'll get a better outcome in fall.

And if I can just ask one more. I think you mentioned you're still targeting 20% EBIT margin. Did you put a time frame around that? Around when you believe the company will get back to that level?

Yes. We are, and as you know, 20%, we do believe is best-in-class, and we think it is the right level for us. We don't want to obviously want to limit ourselves to 20%, but we think it's the right rate that -- where we can balance investment in the business as well as maximize our shareholder returns. Time frame is difficult to say. As you know, we're working hard to maximize margins, and we will continue to try and get there as quickly as we can.

Our next question comes from Alex Straton with Morgan Stanley.

Great. Congrats on a good quarter here. I just wanted to kind of follow up on that 20% EBIT margin target. It feels like a pretty big jump from here to there, though admittedly, you guys have been able to do that in the past. So can you just bridge the gap for me between -- I think it's about a 16-ish percent margin this year to that 20% longer term? Like what are the key puts and takes there that we should be thinking about?

Thank you, Alex. Wendy, do you want to take that one?

Sure. Yes. So as we model and think about the future, the first, and I'll just kind of work my way down the P&L. The first is obviously net sales. We want to grow net sales. We're committed to growing that top line. And a lot of the pressure points we're seeing in 2023 are deleverage -- that you get when you have a guide that has a negative sales number in it. So leverage on sales growth is obviously important for us to get back to that 20%. The other thing I would say on top line, on sales, which will help our rate is we are always focused on how do we grow AURs in a way that is positive for our customers. So we talked a lot about how this business has test and learning in our DNA. We are literally testing pricing combinations every weekend to learn, to see how we can grow AURs but do in a way that it still resonates with the customer. So as we continue to do that over the time, our AURs will increase and help margins. If you look at the long history of this company for the last 10 years, we have consistently, pre-pandemic, been able to grow AURs in the low to in some years mid-single-digit range. So we know that as we innovate and deliver a compelling assortment and newness, we can get AUR growth over time. So that's sales, very, very key to getting back to the 20%. And then the other thing is margin. Right now our merchandise margin rates in our guide are below pre-pandemic level. We've talked a lot about inflation, as I said, we've got some deflation coming this year. But at some point, hopefully, that there's a little bit more, but that will be paired obviously with the AUR increase to increase profit rates. And then the last thing I would say is on expenses, as we mentioned, we are doing a comprehensive review of our organization and our indirect spend and where we spend money. And our goal is to optimize it for the size of the business, and we are internally extremely focused on getting to that 20% and that is part of our goal as we look to optimize the organization and our spend profile.

Great. Maybe just one quick follow-up. It feels like part of the bigger SG&A guide this year is really related to kind of tech spending. So can you just walk us through sort of what the shortcomings you feel are there? Or what exactly you're trying to improve? Just so we have a better sense.

Absolutely. So I would say through -- the beginning of the year through end of summer, we are focused on separation from Victoria's Secret. So our -- the majority of our spend is to that end. And we're also in the process, obviously, as we'll be ending that TSA of establishing our own organization, our team, our partners, et cetera. So that is where we're focused on for the first part of the year. Once we complete that separation, we're excited to complete it because that allows us to unlock our future. And as we talked about, we see lots of opportunities to invest. You heard both me and Gina talk about it in the marketing space, whether that's loyalty or whether it's how we market to customers, in data analytics, we see huge opportunity to use really smart data analytics to drive marketing, drive promotions. So it's really in areas that are customer facing where we want to invest, and that is what we're focused on in the back half of the year.

Our next question comes from Matthew Boss with JPMorgan.

Great. So maybe dual-part question, Gina, could you elaborate on the cadence of business trends maybe as the fourth quarter progressed. Any notable change in business that you've seen post holiday here in January or February? And then Wendy, on AUR, where have you seen customers the most price-sensitive across categories? And just how best to think about your AUR plan for the first half of the year maybe relative to your back half expectation?

Okay. Thanks for the question, Matt. Actually, Wendy, do you want to start with that?

Yes. So Thanks, Matt, for the question. So let's start with the 4Q and the story of how it progressed. So for us, we -- our softest month of the quarter was November. You heard a lot of other retailers comment on that. So we -- as consistent with other retailers, the softest part of the quarter were the first 3 weeks of November. As we progressed into December, we saw improvements in trends, including improvements in traffic, and in particular, in the month of December, Julie mentioned Candle Day, we were pleased with that at the beginning of December. But in particular, we saw very strong sales performance in weeks 4 and 5 of December. So the week before Christmas and the week after Christmas is very strong for us. January continued to be strong. We had a nice first 2 weeks in January, especially when we were starting our semiannual sale. So overall, strong December and January relatively and November was our most challenging month of the quarter. In terms of AUR, so you heard us mentioned in our prepared remarks, right now, we're planning the AURs in the first quarter to be down slightly. I mean our promotional overall promotion approach in Q1 will look fairly similar to what you saw last year, but we're forecasting AURs to be down slightly. For the full year, we're forecasting it to be roughly flat. As I mentioned, we, of course, are chasing to improve that result and we'll take price ups and reduce promotions to the extent we can without damaging margin dollars, but that is our overall approach. And I'm going to let Julie add some color.

Yes. So I just want to mention that we have been very slowly and methodically been raising our prices this spring. So our everyday price ups have actually been performing very well. For example, we have soaps that 5 for $27 from 5 for $25 or wallflowers in that same deal 5 for $27, where they've been 5 for $25. And we're not seeing any price resistance from our customer. We've also increased prices across the board where we are implementing a good, better, best strategy, and we believe that, that will help us. Where we are seeing some price sensitivity is in our promos. So in the short term, we're continuing to balance the need to keep the engagement on traffic strong with our desire to increase pricing and have a very agile operating model. So that will allow us to increase or decrease promotional activity in a meaningful way and test for the best outcomes. I do just want to remind everyone, our AURs are up to close to 20% by -- from 2019. And we do, as Wendy said, have a track record of being able to raise our AURs positively in the low single digits, and we hope to continue to do that. So our guidance assumes that promotional levels are roughly flat to last year, and we're going to read and react and maximize every dollar we can out of this performance.

Wendy, just one follow-up. On the 20% operating margin target, I know that's relative to low to mid-20s in your previous plan. Is the change in the long-term operating margin target, is it driven by a lower gross margin assumption longer term?

Well, I would say a couple of things. As you know, the reality is, in the last 2 years, we've seen some major type of increases in input costs that I just talked about, labor and we've also recognized as we've worked on separation and thought about the future that there are certain parts of our business like technology that require additional investment to future growth. So I think it's both wanting to invest and also just a recognition that we've had major inflationary pressures in the business. So we -- as I mentioned earlier, we do think that this is the right balanced target for the business to allow for the investment for the future, but also deliver a return for our shareholders.

Our next question comes from Kate McShane with Goldman Sachs.

We were curious to hear a little bit more detail about what role the loyalty program played in the fourth quarter and what you're assuming the lift could be from loyalty in Q1 and your overall 2023 sales guidance?

All right. Thanks, Kate. Wendy do you want to take that one?

I think Julie -- but I can add color.

Yes. So we can tag team on this one. So we are very pleased, very pleased with our enrollment in the program. We projected to be about 30 million members by the end of the fiscal year, and we enrolled 33 members with more than 75% of those members, having shopped with us in the last 12 months. And as we've discussed on other calls, we all know that loyalty members outperformed nonloyalty in spend, trips, retention and cross-channel shopping behavior. So I think that we have a huge opportunity. We think about '22 as the year of enrollment, and we're thinking about '23 as our year of engagement. So our strategic path forward is to really capitalize on the very high rate of data collection that allows us to both identify and market to enrolled customers. So with customer segmentation and advanced analytics work that will allow us to customize our loyalty offering to maximize enrollment and engagement. We can also attract more customers by fully integrating our loyalty program across social, physical and all of our digital interactions. We want to test and try to influence member behavior by leveraging points-based incentives to drive incremental trips, trial of new product, and we will be pivoting to more member-only events, content and engagement as we have seen our sneak peaks and our exclusives be very successful.

Thanks, Julie. The only thing I would add, Kate, to your question is we did -- as you know, we had a loyalty program in test before we did the nationwide launch in August. So we did have some markets that were in test where we could measure the performance on a pre-post basis. So when we did that, we did see a moderate lift in the fall season on a pre-post basis, and that's good. But what we're -- I'm really excited about from a financial upside standpoint, which Julie mentioned is now that we have got the program and we've got the members, and we have a lot of members the opportunities for us to use the data collection, to improve our marketing and drive transactions with these customers is to me where I see the key upside for the future.

Our next question comes from Paul Lejuez with Citi.

This is Kelly Crago on for Paul. I wanted to dig a little further into your kind of longer-term framework around the top line. I think you mentioned you believe you can sort of grow AURs low single digits over the longer term. I guess when we think about it, top line, does that assume the coming units flattish and we should sort of take low single-digit top line growth, comp growth? And then maybe a couple of points square footage. Just curious if you could provide a little bit more color on that.

Yes. So as you think about a multiyear model, I mean, we are still focused on, as you mentioned, delivering comp growth, and we believe, over time, we can do that in the, let's say, low single digits, we are always chasing for mid-single digits or higher. And what we've been able to do the last couple of years is we've been able to do that in a balanced way through both units and AURs. So that -- if we can do both units and AURs, obviously, we can get to a low to mid comp growth, but we're focused on doing both on a multiyear basis. You also mentioned square footage. We do expect that we will get a benefit from square footage growth let's say, in the low single digits over time. So those will be key drivers for our store revenue growth as we think about a multiyear model. You've also heard us talk today about international. And although right now, that's a small part of the business. To me, that's the exciting thing because it's small today, and we see lots of opportunity for meaningful double-digit growth on a multiyear basis as we expand internationally throughout the world. So that is a key part of our growth algorithm in the future.

And Wendy you mentioned that in 1Q that the cost inflation was going to be a $20 million headwind to gross margins but that shouldn't stay as we go forward. Does that turn from a headwind to a tailwind in 2Q? Or is it just less of a headwind? And I guess, how does that -- how should we kind of think about the gross margin progressing throughout the year?

Yes. It turns to a tailwind in Q2. I would say the tailwind right now is about $10 million in Q2, but we will, of course, chase that. Hopefully, it's a bigger number.

Our next question comes from Lorraine Hutchinson with Bank of America.

I wanted to follow up on the gross margin guidance for the year. It does sound like after the first quarter, most of the inflationary pressure has actually flipped to positive, yet your guidance assumes a flattish gross margin for the rest of the year after the first quarter. Can you just bucket the pressures that you're expecting in those quarters 2 through 4 to offset these benefits from inflation and transport flipping?

Thanks, Lorraine. Wendy do you want to take that one?

Sure. So yes, on a full year, we do still have some pressure on both product -- merch margin, product margin and deleverage on P&L. Our AURs, as I mentioned, are roughly flat. So we've got a little bit of forecasted AUC growth greater than AURs, which is pressuring there. The other area we're seeing pressure is in buying and occupancy. So we've got some deleverage in store occupancy because as we've invested in stores, and that's a good investment, it's delivering a return it does delever in a negative comp model which is implied in our range. And then we've also got some deleverage on buying. As I mentioned, we are focused on all lines of the P&L in terms of getting additional favorability. And so it's not just expenses. We're also looking at continued upside in product margin that we'll be chasing to improve the results.

Our final question comes from Simeon Siegel with BMO Capital Markets.

Gina, I was hoping just higher level, maybe what you think about the right price versus 2019 architecture should be. Just curious how you're thinking about maybe the right balance between revenues and gross margin? Clearly, you guys got a lot of really nice AUR, you got great brand equity. You also may have had a little bit of over purchasing through the pandemic. So just any thoughts there on how to balance revs and gross margins.

Thanks for the question, Simeon. Gina, maybe if you want to start off with the focus on how we're growing sales in '23. And then Wendy, if you want to follow up with some detail there.

So just so I'm sure -- clear on the question. Did you say the balance between revenue and gross margin in [ 2023 ]?

Yes. Yes, you guys earned a lot of price and a lot of brand equity. So I'm just curious how you're thinking about promotions versus units just thinking about the balance there.

Yes. So we -- you probably hear it in not only maybe all 3 of our remarks around promotions and how we're trying to -- well, first of all, Julie, just talked about testing some of the lifts and so forth. But really, it's not -- it's more about broad-based promotions and which are kind of a blunt instrument. And so what we're trying to do is leverage the data and analytics to target the promotions to where they're needed most. One of the things that I've been focusing on since arriving is really building the marketing sort of infrastructure. We're doing some really exciting customer segmentation that's linking with our loyalty program. And inside of all that capability is really driving much more effective and efficient promotions. And so that gives me the confidence in terms of how we can maybe move that up and have the margin and the AURs support both top line and merch margins. So that's a huge area of focus. We have not had that before, and we're going to probably see that towards the back half because we're still building that capability. So that was sort of on the promotion piece. But I think you had another longer-term comment as well that -- Wendy that was you...

That answer your question, Simeon?

Yes, yes, that's helpful. Yes, Gina, it's more just trying to get a feel for as you look at the company as you look at -- you have the benefit of taking kind of the objective view of how you look at that 2019 versus where we are now. So that's really helpful. Wendy, can I just follow up on the last one. Do you know offhand what the implied occupancy and other fixed cost deleverage would be embedded within the full year revenue guidance?

So our -- yes, our occupancy expense for full year, we've got a forecast at plus 5%. So it's about around 50, 60 basis points of deleverage.

We want to thank you for joining today's call. A replay will be available for 90 days on our website. Thank you for your interest in Bath & Body Works.

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