Bath & Body Works reported a second-quarter earnings beat driven by an $80 million tariff refund and raised its full-year guidance, though management flagged near-term headwinds in the third quarter.
The retailer posted adjusted earnings per share of $0.31, excluding the tariff refund, which still exceeded guidance. Reported EPS reached $0.62, a 158% surprise versus the $0.24 consensus estimate. Gross margin expanded to 45.7%, up 530 basis points from the prior year, primarily due to the refund. Without the refund, gross margin would have been approximately 40.4%, according to the company.
Full-year guidance was increased to $2.60–$2.80 from $2.40–$2.65, reflecting confidence in margin resilience despite softer sales trends. However, management projected a 2.5%–5% sales decline in the third quarter, with EPS forecasted at $0.07–$0.12 versus a $0.26 consensus. The company also guided to a full-year gross margin of roughly 43.3%, including the refund impact.
Segment performance showed divergence, with U.S. and Canada store sales declining 5.4% to $1.1 billion amid ongoing mall traffic erosion. The direct channel grew 3% to $275 million, marking the first digital growth since 2021. International sales rose 24.9% to $108 million, representing 7% of total revenue. Amazon sales tripled from the first quarter, positioning Bath & Body Works as a leading candle brand on the platform.
Store activity included 10 closures and 24 openings, predominantly in off-mall locations. Strategic initiatives such as the "Consumer First Formula" transformation and the "Free Shipping over $50" initiative, launched in Q4 2025, were cited as contributors to margin improvement, though the latter is expected to cannibalize some store sales while boosting direct-channel profitability.
Product launches, including the Fruit Fusion line, Reserve Collection home fragrances, and the A Thousand Wishes refresh, were noted as exceeding expectations. Analysts remain mixed on the stock, with Citi upgrading to Buy in August with a $25 target and JPMorgan maintaining a Neutral rating at $24. The overall consensus stands at 4 Buy, 13 Hold, and 1 Sell. InvestingPro estimates a fair value of $28.83, implying 52.4% upside from the current price, while the stock trades at a 5.2x P/E ratio compared to its historical range of 12–15x.
The company’s debt load remains elevated at $4.71 billion, and its dividend yield stands at 4.6%. Revenue has declined for three consecutive years, from $7.43 billion to $7.31 billion. The next catalyst is the October 2026 Q3 results, with holiday performance, including Black Friday and Christmas, serving as critical inflection points. CEO Daniel Heaf has indicated that the full impact of the transformation strategy is expected to materialize more meaningfully in 2027.
