Release Date: June 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Better-than-expected Q1 sales and earnings performance.
- Net sales of $1.4 billion, down only 0.9% from the prior year, exceeding guidance.
- First quarter earnings per diluted share of $0.38, up 15% from the prior year's adjusted EPS.
- Strong customer response to new product introductions and marketing activities.
- Significant growth in loyalty program with active members up 18% year-over-year to approximately 37 million.
Negative Points
- International business pressured due to the war in the Middle East, leading to a 29% decline in international net sales.
- Average unit retails (AUR) declined 1% versus the expectation of flat.
- Direct net sales declined 7% compared to last year.
- Home fragrance sales were down mid-single digits, with a decline in candle sales.
- Sanitizers category declined due to the decision to exit the full-size form.
Q & A Highlights
Q: Reflecting on your marketing campaign, new product categories, and collaborations, how are you thinking about the benefits you're seeing from these initiatives? Is it incremental customers, visits, or better pricing? Also, you held B&O on the sales decline but are guiding for deleverage going forward. What's the right way to think about the leverage point now?
A: (Gina Boswell, CEO) Our full funnel marketing approach is driving top-of-brand awareness and engagement. Initiatives like the Bridgerton collaboration and Everyday Luxuries have generated significant impressions and cultural relevance. This is helping us gain more customers more often. (Eva Boratto, CFO) For B&O leverage, we continue to see improvements in gross margin. To leverage B&O, we need about 2% to 3% sales growth. Off-mall rents are slightly lower, and we had strong execution in our fulfillment operations in Q1.
Q: On the Middle East-driven pressure, can you talk about your assumptions for the second quarter and your ability to offset that? Also, how much does this represent as a percentage of international sales?
A: (Gina Boswell, CEO) The Middle East pressure is significant, but excluding those regions, our international business is healthy with system-wide retail sales up in the teens. We plan to open 35 net new international stores this year, including new markets like London and South Korea. (Eva Boratto, CFO) Our guidance assumes a range of scenarios, with improvements expected in Q2. Gross margin for the year is expected to be comparable to 2023, with merchandise margin improvements offset by B&O deleverage due to real estate investments.
Q: AURs came in at down 1% versus guidance. How did AURs play out relative to plan in the back half of the quarter? Also, how did pure product costs trend in 1Q?
A: (Gina Boswell, CEO) AUR was under pressure early in the quarter due to a floorset that didn't resonate. We used strategic promotions to drive traffic, achieving flat AUR in the latter part of the quarter. For the full year, we expect modest AUR expansion. (Eva Boratto, CFO) Product costs were essentially flat in the quarter as expected.
Q: Could you elaborate on the drivers of 1Q's net sales outperformance versus your initial plan by category? Also, any changes in traffic or consumer behavior as you've progressed into May?
A: (Julie Rosen, President) Body care grew low-single digits, driven by new categories like men's and lip. Home fragrance was down mid-single digits due to candle normalization. Soaps & sanitizers were down low-single digits, with soaps slightly above shop driven by refills. (Eva Boratto, CFO) Traffic was flat for the quarter, with stronger store traffic in the second half. Transactions were up, driven by conversion.
Q: How are you thinking about AUR for the back half? Are you raising ticket prices to cover new formulation investments, or will you give some value back to the customer through price or promotion?
A: (Julie Rosen, President) We balance engagement and traffic with pricing. We use our agile model to adjust promotional levels. We took selective pricing actions for certain product launches like Bridgerton and Everyday Luxuries due to their elevated packaging and storytelling.
Q: Can you comment on occasion buying versus shoulder period buying, especially for Q2 with fewer events compared to Q1?
A: (Julie Rosen, President) Q2 has key gifting periods like Valentine's Day, Easter, and the beginning of Mother's Day. Gift sets were up 6% in Q1. The Semi-Annual Sale is also a significant driver for Q2.
Q: Could you clarify the commentary on returning to growth in the back half? Also, how are you thinking about new product launches and their uptake by loyalty members?
A: (Eva Boratto, CFO) We expect to return to growth at the mid and high points of our guidance on a 52-week comparable basis, starting in Q3. (Julie Rosen, President) New categories like men's, lip, and hair are attracting younger, more diverse customers. 43% of loyalty enrollees in Q1 were new customers, which is promising for future growth.
Q: What are your expectations for the home fragrance category in the back half? Also, how are you measuring ROI on your increased marketing spend?
A: (Eva Boratto, CFO) Our assumptions for the back half remain consistent, focusing on moderating candle normalization, core category growth, and new adjacencies. (Gina Boswell, CEO) We measure ROI through marketing models and technology tools like machine learning algorithms for targeted offers. This helps optimize our marketing spend and drive customer engagement.
Q: Are you expecting any differences in AUR across merchandise categories as the year progresses? Also, any differences in pricing between direct and retail stores?
A: (Gina Boswell, CEO) No planned differences in AUR across categories; we aim for compelling baskets and cross-category opportunities. We strive for an omnichannel experience with no specific pricing advantage for direct or stores. (Julie Rosen, President) We're excited about new adjacencies like men's, lip, hair, and laundry, which are driving growth and attracting new customers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
