Bath & Body Works, Inc.: Form 10-Q for the period ended Aug 2, 2025

The following discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as codified in the Accounting Standards Codification. The following information should be read in conjunction with our financial statements and the related notes included in Part I, Item 1. Financial Statements in this Quarterly Report on Form 10-Q.

Executive Overview

In the second quarter of 2025, total Net Sales were $1,549 million, which increased $23 million, or 1.5%, compared to the second quarter of 2024. Total North American Net Sales increased $26 million, primarily due to modest increases in transactions and average dollar sales, partially offset by a $3 million decline in International Net Sales. Our second quarter Operating Income was $157 million, which decreased $26 million, or 13.9%, compared to the second quarter of 2024, and our Operating Income rate (expressed as a percentage of Net Sales) decreased to 10.2% from 12.0%. The Operating Income rate decrease was primarily due to higher General, Administrative and Store Operating Expenses driven by leadership transition costs, partially offset by an increase in the Gross Profit rate.

For additional information related to our second quarter 2025 financial performance, see “Results of Operations.”

Outlook

We expect consumers to remain cautious and value-seeking, with intentional purchasing behavior that prioritizes personal well-being and convenience, while spending selectively. We believe that our brand, stores, loyalty members, passionate store associates and a predominantly U.S. based vertically integrated supply chain form a strong foundation, and our investments in recent years have strengthened this foundation. In order to deliver durable and profitable growth and drive long-term shareholder value, we are taking swift action in the short-term while we actively shape our long-term strategy by making strategic moves that resonate with both current and future customers. We are focused on elevating our owned digital platform to meet the expectations of today’s consumers by enhancing functionality and storytelling, which we believe will boost brand equity and direct channel sales. We are also amplifying our efficacy message by more clearly communicating claims and modernizing packaging to better reflect key product attributes, such as efficacy, safety, and emotional benefits, especially to younger and ingredient-conscious consumers, reinforcing the value of our products. Finally, we are focused on putting our product in the path of the consumer by strategically and thoughtfully exploring new forms of distribution beyond the owned channels we currently sell through to reach and engage new and younger consumers and drive brand discovery.

We expect consumer sentiment to remain volatile as the broad-based tariffs imposed by the U.S. government, and threatened or imposed retaliatory measures by other countries, have increased macroeconomic uncertainty in global markets and we are actively monitoring the changes in shifting trade policies and related market disruptions. We believe our vertically integrated, predominantly U.S. based supply chain positions us well to compete in the current environment and to absorb the impacts of tariffs at the existing levels in the current year. We also believe we have the ability to further mitigate these costs over time through strategic sourcing, operational efficiencies, and other targeted initiatives. Continued changes in trade policies and disruptions could have substantial impacts on the global economy and may magnify the impact of the risks to our business described in our Annual Report on Form 10-K.

Adjusted Financial Information

In addition to our results provided in accordance with GAAP above and throughout this Quarterly Report on Form 10-Q, provided below are non-GAAP measures that presents Operating Income, Net Income and Net Income Per Diluted Share for the second quarters of and year-to-date 2025 and 2024 on an adjusted basis to remove certain items. We believe that these items are not indicative of our operations due to their size and nature.

We use adjusted financial information as key performance measures for the purpose of evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definitions of adjusted financial information may differ from similarly titled measures used by other companies.

The table below reconciles our GAAP financial measures to our non-GAAP financial measures:

(in millions, except per share amounts)

(a) In the second quarter of 2025, we recognized pre-tax costs of $15 million (after-tax costs of $14 million) due to the transition of certain members of the leadership team, primarily related to severance benefits.

(b) In the second quarter of 2024, we sold our investments in Easton Town Center and Easton Gateway, resulting in an aggregate pre-tax gain of $39 million (after-tax gain of $25 million). For additional information, see Note 1, “Description of Business and Basis of Presentation” included in Part I, Item 1. Financial Statements.

(c) In the second quarter of 2024, we recognized a $44 million tax benefit related to the release of a valuation allowance on a deferred tax asset.

Company-operated Stores

The following table compares Company-operated U.S. store data for the second quarters of and year-to-date 2025 and 2024:

(a) Sales per average selling square foot and sales per average store, which are indicators of store productivity, are calculated based on store sales for the period divided by the average, including the beginning and end of period, of total selling square footage and store count, respectively.

The following table represents Company-operated store activity for year-to-date 2025:

Partner-operated Stores

The following table represents Partner-operated store activity for year-to-date 2025:

(a) Includes store locations only and does not include kiosks, shop-in-shops, gondola or beauty counter locations.

Results of Operations

Second Quarter of 2025 Compared to the Second Quarter of 2024

Net Sales

The following table provides Net Sales for the second quarter of 2025 in comparison to the second quarter of 2024:

(in millions)

(a) Results include fulfilled buy online pick up in store (“BOPIS”) orders.

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

For the second quarter of 2025, total Net Sales were $1,549 million and increased $23 million, or 1.5%, compared to the second quarter of 2024. Stores Net Sales increased $56 million, or 4.9%, primarily driven by an increase in transactions due to an increase in BOPIS fulfilled orders (which are recognized as store Net Sales) and new store growth, and an increase in average dollar sales. Direct Net Sales decreased $30 million, or 10.1%, driven by a decline in fulfilled orders, which was primarily due to our customers continuing to select our BOPIS option, partially offset by an increase in average order size. International Net Sales decreased $3 million, or 2.9%.

Gross Profit

For the second quarter of 2025, our Gross Profit increased $14 million compared to the second quarter of 2024, to $640 million, and our Gross Profit rate (expressed as a percentage of Net Sales) increased to 41.3%, from 41.0% in the second quarter of 2024. Gross Profit dollars increased due to higher Net Sales, and the Gross Profit rate increased due to leverage on Occupancy Expenses largely driven by the exit of a third-party fulfillment center. The second quarter of 2025 merchandise margin rate was flat to the second quarter of 2024, as strategic pricing and strong cost management mitigated the impact from tariffs.

General, Administrative and Store Operating Expenses

The following table provides detail for our General, Administrative and Store Operating Expenses for the second quarter of 2025 compared to the second quarter of 2024:

(in millions)

(in millions)

(in millions)

For the second quarter of 2025, our total General, Administrative and Store Operating Expenses increased $40 million compared to the second quarter of 2024, to $483 million, and the rate (expressed as a percentage of Net Sales) increased to 31.1% from 29.1% in the second quarter of 2024. Selling Expenses increased primarily due to higher payroll related costs, mainly driven by investments in wages and new stores, and higher healthcare costs. General and Administrative Expenses increased primarily due to $15 million of costs related to the transition of certain members of the leadership team, primarily related to severance benefits.

The General, Administrative and Store Operating Expense rate increased primarily due to the leadership transition costs, increase in payroll related costs, and higher healthcare costs.

Other Income and Expenses

Interest Expense

The following table provides the average daily borrowings and average borrowing rates for the second quarters of 2025 and 2024:

For the second quarter of 2025, our Interest Expense was $68 million, compared to $77 million in the second quarter of 2024. The decrease was due to lower average daily borrowings and borrowing rate, which were driven by the early extinguishment of outstanding notes in fiscal year 2024.

Other Income, Net

For the second quarter of 2025, our Other Income, Net was $6 million, compared to $47 million in the second quarter of 2024. In the second quarter of 2024, Other Income, Net included an aggregate $39 million pre-tax gain on sales of certain Easton investments as well as a $2 million pre-tax loss on extinguishment of debt. The remaining decrease is primarily due to lower interest income on invested cash in the second quarter of 2025.

Provision for Income Taxes

For the second quarter of 2025, our effective tax rate was 32.3% compared to 0.9% in the second quarter of 2024. The 2025 second quarter rate was higher than our combined estimated federal and state statutory rates largely due to the transition of certain members of the leadership team, primarily related to severance benefits. The 2024 second quarter rate was lower than our combined estimated federal and state statutory rates primarily due to the sales of Easton investments during the quarter, which resulted in the release of a valuation allowance on a deferred tax asset.

Results of Operations

Year-to-Date 2025 Compared to Year-to-Date 2024

For year-to-date 2025, Operating Income decreased $3 million to $367 million, from $370 million year-to-date 2024, and the Operating Income rate (expressed as a percentage of Net Sales) decreased to 12.3% from 12.7%. The drivers of the year-to-date Operating Income results are discussed in the following sections.

Net Sales

The following table provides Net Sales for year-to-date 2025 in comparison to year-to-date 2024:

(in millions)

(a) Results include fulfilled BOPIS orders.

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

For year-to-date 2025, Net Sales were $2,974 million and increased $64 million, or 2.2%, compared to year-to-date 2024. Stores Net Sales increased $102 million, or 4.6%, primarily driven by an increase in transactions due to an increase in BOPIS fulfilled orders (which are recognized as store Net Sales) and new store growth, and an increase in average dollar sales. Direct Net Sales decreased $41 million, or 7.4%, driven by a decline in fulfilled orders, which was primarily due to our customers continuing to select our BOPIS option, partially offset by an increase in average order size. International Net Sales increased $3 million, or 2.3%.

Gross Profit

For year-to-date 2025, our Gross Profit increased $54 million compared to year-to-date 2024, to $1,287 million, and our Gross Profit rate (expressed as a percentage of Net Sales) increased to 43.3% from 42.4% year-to-date 2024. Gross Profit dollars increased due to higher Net Sales as well as merchandise margin rate improvement, driven by strategic pricing and strong cost management partially offset by the impact from tariffs.

Gross Profit rate increased due to the merchandise margin rate improvement as well as leverage on Occupancy Expenses largely due to exit of a third-party fulfillment center and Net Sales growth.

General, Administrative and Store Operating Expenses

The following table provides detail for our General, Administrative and Store Operating Expenses for year-to-date 2025 compared to year-to-date 2024:

(in millions)

(in millions)

(in millions)

For year-to-date 2025, our General, Administrative and Store Operating Expenses increased $57 million compared to year-to-date 2024, to $920 million, and the rate (expressed as a percentage of Net Sales) increased to 30.9% from 29.6% year-to-date 2024. Selling Expenses increased primarily due to higher payroll related costs, mainly driven by investments in wages and new stores, and higher healthcare costs. General and Administrative Expenses increased primarily due to $15 million of costs related to the transition of certain members of the leadership team, primarily related to severance benefits, as well as associate wages.

The General, Administrative and Store Operating Expense rate increased primarily due to the increase in payroll related costs, leadership transition costs and higher healthcare costs as well as incremental investments in marketing.

Other Income and Expenses

Interest Expense

The following table provides the average daily borrowings and average borrowing rates for year-to-date 2025 and 2024:

21

For year-to-date 2025, our Interest Expense was $139 million, compared to $159 million for year-to-date 2024. The decrease was due to lower average daily borrowings and borrowing rate, which were driven by the early extinguishment of outstanding notes in fiscal year 2024.

Other Income, Net

For year-to-date 2025, our Other Income, Net was $13 million, compared to $61 million for year-to-date 2024. In year-to-date 2024, Other Income, Net included an aggregate $39 million pre-tax gain on sales of certain Easton investments as well as a $3 million pre-tax loss on extinguishment of debt. The remaining decrease is primarily due to lower interest income on invested cash in year-to-date 2025.

Provision for Income Taxes

For year-to-date 2025, our effective tax rate was 29.9% compared to 12.1% for year-to-date 2024. The 2025 year-to-date rate was higher than our combined estimated federal and state statutory rates largely due to accrued interest expense related to unrecognized tax benefits and the transition of certain members of the leadership team, primarily related to severance benefits. The 2024 year-to-date rate was lower than our combined estimated federal and state statutory rates primarily due to the sales of Easton investments, which resulted in the release of a valuation allowance on a deferred tax asset.

FINANCIAL CONDITION

Liquidity and Capital Resources

Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements, future common stock and debt repurchases, and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions and product and market expansions, profit margins, income taxes and inflationary pressures. Typically, our sales are highest during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period. Our cash and cash equivalents held by foreign subsidiaries were $123 million as of August 2, 2025.

We repurchased 8.468 million shares of our common stock for $256 million during year-to-date 2025. We may, from time to time, repurchase, or otherwise retire, additional shares of our common stock or debt, as applicable.

We believe that our current cash position, our cash flows generated from operations and our borrowing capacity under our asset-backed revolving credit facility (“ABL Facility”) will be sufficient to meet our liquidity needs, including capital expenditure requirements, for at least the next twelve months.

Cash Flows

The following table provides a summary of our cash flow activity during year-to-date 2025 and 2024:

(in millions)

Operating Activities

Net cash provided by operating activities for year-to-date 2025 was $145 million, including net income of $169 million. Net income included depreciation of $128 million and share-based compensation expense of $18 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Inventories, Income Taxes Payable and Accounts Receivable, with Inventories also impacted by the higher tariff levels in the current year. Accounts Payable, Accrued Expenses and Other provided a cash flow benefit primarily due to our efforts to improve working capital.

Net cash provided by operating activities for year-to-date 2024 was $30 million, including net income of $239 million. Net income included depreciation of $142 million, impacts to deferred income taxes of $102 million, an aggregate pre-tax gain on sales of certain Easton investments of $39 million and share-based compensation expense of $22 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Inventories, Income Taxes Payable, and Accounts Receivable, and the change in Accounts Payable, Accrued Expenses and Other.

Investing Activities

Net cash used for investing activities for year-to-date 2025 was $95 million, primarily related to capital expenditures. The capital expenditures included approximately $60 million related to new off-mall stores and remodels of existing stores and approximately $20 million for various technology projects primarily to support the growth and profitability of our business.

Net cash used for investing activities for year-to-date 2024 was $40 million primarily related to capital expenditures of $101 million, partially offset by aggregate cash proceeds of $50 million related to the sales of certain Easton investments. The capital expenditures included approximately $75 million related to new, primarily off-mall, stores and remodels of existing stores, approximately $15 million for various technology projects primarily to support the growth and profitability of our business and approximately $10 million related to distribution and logistics capabilities.

In 2025, our top priority remains driving sustainable, long-term, profitable growth through strategic investments in the business. To support this, we continue to plan capital expenditures of approximately $250 million to $270 million during the year, with a focus on real estate and technology.

Financing Activities

Net cash used for financing activities during year-to-date 2025 was $362 million, primarily consisting of $254 million for share repurchases and dividend payments of $0.40 per share, or $85 million.

Net cash used for financing activities for year-to-date 2024 was $560 million, primarily consisting of $248 million for share repurchases, $202 million for open market debt repurchases, dividend payments of $0.40 per share, or $90 million and $15 million of tax payments related to share-based awards.

Common Stock and Debt Repurchases

Our Board of Directors (our “Board”) will determine share and debt repurchase authorizations, giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating and financing activities to fund our share and debt repurchase programs. The timing and amount of any repurchases will be made at our discretion, taking into account a number of factors, including market conditions.

Common Stock Repurchases

Under the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase programs during year-to-date 2025 and 2024:

(in millions)

(in thousands)

(in millions)

23

The January 2024 Program had $139 million of remaining authority as of February 1, 2025. There were share repurchases of $1 million as of February 1, 2025 and $2 million as of August 3, 2024 reflected in Accounts Payable on the Consolidated Balance Sheets.

On February 27, 2025, we cancelled the remaining $121 million authorization available under the January 2024 Program and began repurchasing shares under the January 2025 Program. There were share repurchases of $3 million as of August 2, 2025 reflected in Accounts Payable on the Consolidated Balance Sheet. The January 2025 Program had $262 million of remaining authority as of August 2, 2025.

Dividend Policy and Procedures

Our Board will determine future dividends after giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating and financing activities to fund our dividends.

We paid the following dividends during the first and second quarters of 2025 and 2024:

(in millions)

In August 2025, we declared our third quarter 2025 ordinary dividend of $0.20 per share payable on September 5, 2025 to shareholders of record at the close of business on August 22, 2025.

Long-term Debt and Borrowing Facility

The following table provides our outstanding Long-term Debt balances, net of unamortized debt issuance costs and discounts, as of August 2, 2025, February 1, 2025 and August 3, 2024:

(in millions)

24

Cash paid for interest was $143 million and $152 million for year-to-date 2025 and 2024, respectively.

Repurchases of Notes

We did not repurchase any outstanding senior notes during the second quarter of and year-to-date 2025.

During the second quarter of and year-to-date 2024, we repurchased in the open market and extinguished $91 million and $200 million principal amounts of our outstanding senior notes, respectively. The aggregate repurchase price for these notes was $92 million and $202 million for the second quarter of and year-to-date 2024, respectively, resulting in pre-tax losses of $2 million and $3 million, including the write-off of unamortized issuance costs, during the second quarter of and year-to-date 2024, respectively. These losses are included in Other Income, Net in the 2024 Consolidated Statements of Income.

The following table provides details of the outstanding principal amounts of senior notes repurchased and extinguished during the second quarter, year-to-date and full year of 2024:

(in millions)

Asset-backed Revolving Credit Facility

We and certain of our 100% owned subsidiaries guarantee and pledge collateral to secure the ABL Facility. The ABL Facility, which allows borrowings and letters of credit in U.S. and Canadian dollars, has aggregate commitments of $750 million.

In May 2025, we entered into an amendment and restatement (“Amendment”) of the ABL Facility. The Amendment removed the interest rate credit spread adjustment of 0.10%, extended the expiration date from August 2026 to May 2030 and included certain other technical amendments.

Availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on our 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, we are required to repay the outstanding amounts under the ABL Facility to the extent of such excess. As of August 2, 2025, our borrowing base was $683 million, and we had no borrowings outstanding under the ABL Facility.

The ABL Facility supports our letter of credit program. We had $9 million of outstanding letters of credit as of August 2, 2025 that reduced our availability under the ABL Facility. As of August 2, 2025, our availability under the ABL Facility was $674 million.

As of August 2, 2025, 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% per annum. The interest rate on outstanding Canadian dollar-denominated borrowings was the Canadian Overnight Repo Rate Average plus 1.25% per annum.

The ABL Facility requires us 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 August 2, 2025, we were not required to maintain this ratio.

Credit Ratings

The following table provides our credit ratings as of August 2, 2025:

25

Guarantor Summarized Financial Information

Certain of our subsidiaries, which are listed on Exhibit 22 to this Quarterly Report on Form 10-Q, have guaranteed our obligations under the 2027 Notes, 2028 Notes, 2029 Notes, 2030 Notes, 2035 Notes and 2036 Notes (collectively, the “Notes”).

The Notes have been issued by Bath & Body Works, Inc. (the “Parent Company”). The Notes are its senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured obligations, are senior to any of our future subordinated indebtedness, are effectively subordinated to all of our existing and future indebtedness that is secured by a lien and are structurally subordinated to all existing and future obligations of each of our subsidiaries that do not guarantee the Notes.

The Notes are fully and unconditionally guaranteed on a joint and several basis by certain of our wholly-owned subsidiaries, including certain subsidiaries that also guarantee our obligations under our ABL Facility (such guarantees, the “Guarantees”; and, such guaranteeing subsidiaries, the “Subsidiary Guarantors”). The Guarantees of the Subsidiary Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each Guarantee is limited, by its terms, to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor subject to avoidance under applicable fraudulent conveyance provisions of U.S. and non-U.S. law.

The following tables set forth summarized financial information for the Parent Company and the Subsidiary Guarantors on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Company and the Subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries.

(in millions)

(a) Includes amounts due from non-Guarantor subsidiaries of $588 million and $572 million as of August 2, 2025 and February 1, 2025, respectively.

(b) Includes amounts due to non-Guarantor subsidiaries of $1.467 billion and $1.421 billion as of August 2, 2025 and February 1, 2025, respectively.

(c) Includes amounts due to non-Guarantor subsidiaries of $25 million as of August 2, 2025.

(in millions)

(a) Includes Net Sales of $72 million to non-Guarantor subsidiaries.

Contingent Liabilities and Contractual Obligations

Lease Guarantees

In connection with the spin-off of Victoria’s Secret & Co., we had remaining contingent obligations of $224 million as of August 2, 2025 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 spin-off. Our reserves related to these obligations were not significant for any period presented.

Contractual Obligations

Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations subsequent to February 1, 2025, as discussed in “Contingent Liabilities and Contractual Obligations” in our 2024 Annual Report on Form 10-K. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations which fluctuate throughout the year as a result of the seasonal nature of our business).

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. We are currently evaluating the impact of adopting this standard on our disclosures.

In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, that requires disclosures of disaggregated information about certain prescribed expense categories within relevant income statement expense captions. This standard is effective for annual reporting of fiscal years beginning after December 15, 2026, and for interim periods in the following year, with early adoption permitted. This standard should be applied prospectively, with retrospective application permitted. We are currently evaluating the impact of adopting this standard on our disclosures.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to 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. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, valuation of long-lived store assets, claims and contingencies, income taxes and revenue recognition, including revenue associated with our loyalty program. Management bases our estimates and judgments on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

There have been no material changes to the critical accounting policies and estimates disclosed in our 2024 Annual Report on Form 10-K.

Market Risk

The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We may use derivative financial instruments like foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.

Foreign Exchange Rate Risk

Our Canadian dollar denominated earnings are subject to exchange rate risk as substantially all our merchandise sold in Canada is sourced through U.S. dollar transactions. Although we utilize foreign currency forward contracts to partially offset risks associated with our operations in Canada, these measures may not succeed in offsetting all the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.

Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange rate fluctuations.

Interest Rate Risk

Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objectives of our investment activities are the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Our investment portfolio is primarily composed of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.

All of our outstanding Long-term Debt as of August 2, 2025 has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into interest rate swap arrangements. Our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.

Concentration of Credit Risk

We maintain cash and cash equivalents and derivative contracts with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Our investment portfolio is primarily composed of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.

Fair Value Measurements

The following table provides a summary of the principal value and estimated fair value of our outstanding debt as of August 2, 2025, February 1, 2025 and August 3, 2024:

(in millions)

(a) The estimated fair values are based on reported transaction prices and are not necessarily indicative of the amounts that we could realize in a current market exchange.

As of August 2, 2025, we believe that the carrying values of our Accounts Receivable, Accounts Payable and Accrued Expenses approximate their fair values because of their short maturities.

Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred in the second quarter of 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The risk factors that affect our business and financial results are discussed in Item 1A. Risk Factors in our 2024 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in Item 1A. Risk Factors in our 2024 Annual Report on Form 10-K and those described elsewhere in this report or other SEC filings could cause actual results to differ materially from those stated in any forward-looking statements.