Bath & Body Works, Inc. (NYSE: BBWI) experienced a 1.82% decline in premarket trading on Wednesday, with shares priced at $17.27 as of 07:12 EDT. This followed a more substantial 8.29% drop on Tuesday ahead of the company's second-quarter earnings release. The latest decline erased approximately $63 million in market capitalization, based on the company's 201.56 million outstanding shares.
The retailer reported adjusted earnings per share (EPS) of $0.62, significantly exceeding its guidance of $0.20-$0.25. However, this headline figure was inflated by an $80 million tariff refund. Without this one-time benefit, adjusted EPS would have been $0.31, still above the guidance range but reflecting a more modest performance.
Q2 Financial Highlights
Total net sales for the quarter decreased 2.3% year-over-year to $1.514 billion, coming in roughly $11 million above the upper end of the company's guidance of $1.472-$1.503 billion. Store sales in the U.S. and Canada fell 5.4% to $1.131 billion, representing about three-quarters of total revenue. Direct sales rose 3.0% to $275 million, marking the first quarterly growth in that channel since 2021. International and other revenue surged 24.9% to $108 million, with these smaller channels offsetting approximately 46% of the decline in store sales.
Adjusted operating income increased 30.4% to $225 million. Excluding the tariff refund, adjusted operating income would have been approximately $145 million before taxes, indicating that the underlying business remains under pressure. The refund also boosted the adjusted gross margin rate by 5.3 percentage points; without it, gross margin would have been 40.4%, a decrease of 90 basis points from the prior year.
Guidance and Strategic Outlook
Management raised its full-year adjusted EPS forecast to a range of $2.60-$2.80, up from the previous $2.40-$2.65. The midpoint increase of 17.5 cents represents a 6.9% improvement. Free cash flow guidance was also increased to approximately $650 million, $50 million higher than earlier projections. The company now expects 2026 cost savings of about $200 million, up $25 million from its original target, with roughly half benefiting gross margin and the remainder reducing operating expenses.
Chief Executive Daniel Heaf acknowledged that "underlying business trends remain pressured," while highlighting progress in body care and improved pricing for new products. He attributed direct sales growth to adjustments in the digital experience.
Analyst Sentiment and Risks
Wall Street remains divided on the stock. The consensus among 18 analysts is a Hold rating with an average price target of $25.33. Recent recommendations include a Sell from Goldman Sachs with a $19 target and a Buy from Citi with a $25 target.
Looking ahead, the company projects third-quarter adjusted EPS of $0.07-$0.12, well below the $0.35 reported in the same period last year. Sales are expected to decline between 2.5% and 5.0%. Risks include further store sales deterioration or increased promotional activity, which could offset gains in digital and international segments.
Investors will be closely monitoring management's conference call at 08:30 EDT for insights into whether growth in higher-margin digital channels can offset softer store performance once the one-time refund is no longer a factor.
