Bath Body Works Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Basis of Presentation

Description of Business

Bath & Body Works, Inc. (the “Company”) is a global omnichannel retailer focused on personal care and home fragrance. The Company sells merchandise through its retail stores in the United States of America (“U.S.”) and Canada, and through its websites and other channels, under the Bath & Body Works, White Barn and other brand names. The Company’s international business is conducted through franchise, license and wholesale partners. The Company operates as and reports a single segment.

Fiscal Year

The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2024” and “first quarter of 2023” refer to the thirteen-week periods ended May 4, 2024 and April 29, 2023, respectively.

Basis of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method.

Interim Financial Statements

The Consolidated Financial Statements as of and for the periods ended May 4, 2024 and April 29, 2023 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2023 Annual Report on Form 10-K.

In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.

Seasonality of Business

The Company’s operations are seasonal in nature and consist oftwo principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Historically, the Company’s sales are highest during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Due to the seasonal variations in the retail industry, the results of operations for the interim periods are not necessarily indicative of the results expected for the full fiscal year.

Derivative Financial Instruments

The Company’s Canadian dollar denominated earnings are subject to exchange rate risk as substantially all the Company’s merchandise sold in Canada is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure. Amounts are reclassified from Accumulated Other Comprehensive Income upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income. All designated cash flow hedges are recorded on the Consolidated Balance Sheets at fair value. The fair value of designated cash flow hedges is not significant for any period presented. The Company does not use derivative financial instruments for trading purposes.

Concentration of Credit Risk

The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom it transacts and limits the amount of credit exposure with any one entity. The Company’s investment portfolio is primarily composed of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.

The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which it grants credit terms in the normal course of business. The Company determines the required allowance for expected credit losses using information such as customer credit history and financial condition. Amounts are recorded to the allowance when it is determined that expected credit losses may occur.

Easton Investments

The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $121 million as of May 4, 2024, $120 million as of February 3, 2024 and $126 million as of April 29, 2023, are recorded in Other Assets on the Consolidated Balance Sheets.

As of May 4, 2024, the Company’s Easton investments included equity interests in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and develop commercial entertainment and shopping centers. On May 10, 2024, the Company sold its entire interest in the business associated with EG and received cash proceeds of $23 million at closing (the “EG Transaction”).

The Company’s investment in ETC is accounted for using the equity method of accounting. The Company has a majority financial interest in ETC, but an unaffiliated member manages it, and certain significant decisions regarding ETC require the consent of unaffiliated members in addition to the Company. Prior to the closing of the EG Transaction, the Company also accounted for its investment in EG using the equity method of accounting.

Under the equity method of accounting, the Company recognizes its share of the investee’s net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of all unconsolidated entities is included in Other Income in the Consolidated Statements of Income. The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Improvements to Reportable Segment Disclosures, that expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance, and applies to companies with a single reportable segment. The standard is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its disclosures.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, that requires enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. This standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and may be applied either prospectively or retrospectively. The Company is currently evaluating the impact of adopting this standard on its disclosures.

2. Revenue Recognition

Accounts receivable, net from revenue-generating activities were $74 million as of May 4, 2024, $84 million as of February 3, 2024 and $79 million as of April 29, 2023. These accounts receivable primarily relate to amounts due from the Company’s franchise, license and wholesale partners. Under these arrangements, payment terms are typically 45 to 75 days.

The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty points and rewards and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue, which is recorded within Accrued Expenses and Other on the Consolidated Balance Sheets, was $178 million as of May 4, 2024, $198 million as of February 3, 2024 and $171 million as of April 29, 2023. The Company recognized $71 million as revenue during the first quarter of 2024 from amounts recorded as deferred revenue at the beginning of the Company’s fiscal year.

The following table provides a disaggregation of Net Sales for the first quarters of 2024 and 2023:

(a)Results include fulfilled buy online-pick up in store orders.

(b)Results include royalties associated with franchised stores and wholesale sales.

The Company’s net sales outside of the U.S. include sales from Company-operated stores and its e-commerce site in Canada, royalties associated with franchised stores and wholesale sales. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s net sales outside of the U.S. totaled $126 million and $145 million for the first quarters of 2024 and 2023, respectively.

3. Net Income Per Share and Shareholders’ Equity (Deficit)

Net Income Per Share

Net Income per Basic Share is computed based on the weighted-average number of common shares outstanding. Net Income per Diluted Share includes the weighted-average effect of dilutive restricted share units, performance share units and stock options (collectively, “Dilutive Awards”) on the weighted-average common shares outstanding.

The following table provides the weighted-average shares utilized for the calculation of Net Income per Basic and Diluted Share for the first quarters of 2024 and 2023:

(a)These awards were excluded from the calculation of Net Income per Diluted Share because their inclusion would have been anti-dilutive.

Common Stock Repurchases

2022 Share Repurchase Program

In February 2022, the Company’s Board of Directors (the “Board”) authorized a $1.5 billion share repurchase program (the “February 2022 Program”). The Company did not repurchase any shares of its common stock under the February 2022 Program during the first quarter of 2023.

Under the February 2022 Program, the Company repurchased the following shares of its common stock during the first quarter of 2024:

The February 2022 Program had no remaining authority as of May 4, 2024. There were share repurchases of $1 million reflected in Accounts Payable on the February 3, 2024 Consolidated Balance Sheet.

2024 Share Repurchase Program

In January 2024, the Board authorized a new $500 million share repurchase program (the “January 2024 Program”). Under the January 2024 Program, the Company repurchased the following shares of its common stock during the first quarter of 2024:

The January 2024 Program had $440 million of remaining authority as of May 4, 2024. There were share repurchases of $5 million reflected in Accounts Payable on the May 4, 2024 Consolidated Balance Sheet.

Common Stock Retirement

Shares of common stock repurchased under the February 2022 and January 2024 Programs are retired and cancelled upon repurchase. As a result, the Company retired the 2.171 million shares repurchased during the first quarter of 2024, which resulted in reductions of $1 million in the par value of Common Stock, $5 million in Paid-in Capital and $93 million in Retained Earnings (Accumulated Deficit).

Dividends

The Company paid the following dividends during the first quarters of 2024 and 2023:

In May 2024, the Company declared its second quarter 2024 ordinary dividend of $0.20 per share payable on June 21, 2024 to stockholders of record at the close of business on June 7, 2024.

4. Inventories

The following table provides details of Inventories as of May 4, 2024, February 3, 2024 and April 29, 2023:

Inventories are principally valued at the lower of cost or net realizable value, on an average cost basis.

5. Long-lived Assets

The following table provides details of Property and Equipment, Net as of May 4, 2024, February 3, 2024 and April 29, 2023:

Depreciation expense was $71 million and $63 million for the first quarters of 2024 and 2023, respectively.

6. Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events.

For the first quarter of 2024, the Company’s effective tax rate was 26.8% compared to 27.7% in the first quarter of 2023. The 2024 and 2023 first quarter rates are higher than the Company’s combined estimated federal and state statutory rates primarily due to accrued interest expense related to unrecognized tax benefits.

Income taxes paid were $6 million and $7 million for the first quarters of 2024 and 2023, respectively.

7. Long-term Debt and Borrowing Facility

The following table provides the Company’s outstanding Long-term Debt balance, net of unamortized debt issuance costs and discounts, as of May 4, 2024, February 3, 2024 and April 29, 2023:

Repurchases of Notes

During the first quarter of 2024, the Company repurchased in the open market and extinguished $109 million principal amount of its outstanding senior notes. The aggregate repurchase price for these notes was $110 million, resulting in a pre-tax loss of $1 million, including the write-off of unamortized issuance costs. This loss is included in Other Income in the first quarter of 2024 Consolidated Statement of Income.

During the first quarter of 2023, the Company repurchased in the open market and extinguished $84 million principal amount of its outstanding senior notes. The aggregate repurchase price for these notes was $76 million, resulting in a pre-tax gain of $7 million, including the write-off of unamortized issuance costs. This gain is included in Other Income in the first quarter of 2023 Consolidated Statement of Income. There were $2 million of repurchases reflected in Accounts Payable on the April 29, 2023 Consolidated Balance Sheet.

The following table provides details of the outstanding principal amount of senior notes repurchased and extinguished during the first quarters of 2024 and 2023:

Asset-backed Revolving Credit Facility

The Company and certain of the Company’s 100% owned subsidiaries guarantee and pledge collateral to secure an asset-backed revolving credit facility (“ABL Facility”). The ABL Facility, which allows borrowings and letters of credit in U.S. dollars or Canadian dollars, has aggregate commitments of $750 million and an expiration date in August 2026.

Availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on the Company’s eligible U.S. and Canadian credit card receivables, accounts receivable, inventory and eligible real property, or (ii) the aggregate commitment. If at any time the outstanding amount under the ABL Facility exceeds the lesser of (i) the borrowing base and (ii) the aggregate commitment, the Company is required to repay the outstanding amounts under the ABL Facility to the extent of such excess. As of May 4, 2024, the Company’s borrowing base was $656 million, and it hadno borrowings outstanding under the ABL Facility.

The ABL Facility supports the Company’s letter of credit program. The Company had $10 million of outstanding letters of credit as of May 4, 2024 that reduced its availability under the ABL Facility. As of May 4, 2024, the Company’s availability under the ABL Facility was $646 million.

As of May 4, 2024, the ABL Facility fees related to committed and unutilized amounts were 0.30% per annum, and the fees related to outstanding letters of credit were 1.25% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings was the term Secured Overnight Financing Rate plus 1.25% and a credit spread adjustment of 0.10% per annum. The interest rate on Canadian dollar-denominated borrowings is presently set to the Canadian Dollar Offered Rate plus 1.25% per annum. Due to the phase-out of the Canadian Dollar Offered Rate, Canadian dollar-denominated borrowings outstanding on or after June 30, 2024 will accrue at the Canadian Prime Rate plus 0.25% per annum.

The ABL Facility requires the Company to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 during an event of default or any period commencing on any day when specified excess availability is less than the greater of (i) $70 million or (ii)10% of the maximum borrowing amount. As of May 4, 2024, the Company was not required to maintain this ratio.

8. Fair Value Measurements

Cash and Cash Equivalents include cash on hand, deposits with financial institutions and highly liquid investments with original maturities of less than 90 days. The Company’s Cash and Cash Equivalents are considered Level 1 fair value measurements as they are valued using unadjusted quoted prices in active markets for identical assets.

The following table provides a summary of the principal value and estimated fair value of the Company’s outstanding Long-term Debt as of May 4, 2024, February 3, 2024 and April 29, 2023:

(a)The estimated fair value of the Company’s Long-term Debt is based on reported transaction prices, which are considered Level 2 inputs in accordance with Accounting Standards Codification 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

Management believes that the carrying values of the Company’s Accounts Receivable, Accounts Payable and Accrued Expenses approximate their fair values because of their short maturities.

9. Commitments and Contingencies

The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising in the ordinary course of business. Actions filed against the Company from time to time may include commercial, tort, intellectual property, tax, customer, employment, wage and hour, data privacy, securities, anti-corruption and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

Lease Guarantees

In connection with the spin-off of Victoria’s Secret & Co. and the disposal of a certain other business, the Company had remaining contingent obligations of $258 million as of May 4, 2024 related to lease payments under the current terms of noncancelable leases, primarily related to office space, expiring at various dates through 2037. These obligations include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of these businesses. The Company’s reserves related to these obligations were not significant for any period presented.