Retail changes quickly and the internet has enhanced that.
If consumers go through the trouble of visiting a store and don’t find what they want, they can simply order the item from their phone while standing in the retailer’s shop. That’s not the biggest problem as that type of experience can lead to the customer simply skipping the store in the first place.
It’s not that people aren’t shopping in brick-and-mortar stores. Digital sales only accounted for 15.4% of total retail sales in the second quarter.
That’s a smaller number than most people would assume but it’s enough to keep brick-and-mortar chains honest. If a physical retailer repeatedly drops the ball with its customers, then those shoppers can move online or switch to other retailers.
Disappointing customers contributed to the bankruptcy and liquidation of chains including Bed Bath & Beyond, Christmas Tree Shops, Tuesday Morning, and other recent retailers. It has also factored into why Rite Aid (RAD) – Get Free Report has been closing stores and has been reported to be preparing a Chapter 11 filing.
Customer needs change quickly and retailers have to endlessly evolve to serve their audience. That’s a lesson Bath & Body Works (BBWI) – Get Free Report has learned and the chain is taking key, albeit painful steps to make needed changes.
Bath & Body Works used to be owned by Victoria’s Secret.
Image source: Shutterstock
Bath & Body Works stands on its own
Bath & Body Works used to be part of L Brands, along with Victoria’s Secret. The two brands were split in the summer of 2021 with both essentially going their separate ways. Since then, Bath & Body Works has been aggressively making changes.
That’s something CFO Wendy Arlin addressed during her company’s fourth-quarter earnings call.
“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,” she explained.
Those will not be the last store closures for the chain.
“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,” Arlin said.
The company expects to be able to save $200 million annually.
Bath & Body Works will close more stores
In 2023, Bath & Body Works plans to close 50 stores in malls. These closures, however, are strategic, as the company has a relatively health financial position.
Arlin shared the company had 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,” she said.
The CFO added that the company was considering both early debt repayment and share repurchases as potential uses for its cash.
CEO Gina Boswell believes that while brick-and-mortar stores remain important, the company has other ways to grow its 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,” she said. “So, increasing penetration by just 1 percentage point could drive up to $50 million in sales.”
Store closures will continue on a strategic basis as will openings with the company expected to slightly increase its overall brick-and-mortar square footage.