Bath & Body Works, Inc. (BBWI) FY 2026 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 (“ASC”). The following information should be read in conjunction with our financial statements and the related notes included in Item 8. Financial Statements and Supplementary Data.

Our operating results are generally impacted by economic changes and, therefore, we monitor the retail environment using, among other things, certain key industry performance indicators including competitor performance and traffic data. These indicators can provide insight into consumer spending patterns and shopping behavior in the current retail environment and assist us in assessing our performance as well as the potential impact of industry trends on our future operating results. Additionally, we evaluate a number of key performance indicators including net sales, gross profit, operating income and other performance metrics, such as sales per average selling square foot and sales per average store, in assessing our performance.

A discussion regarding our financial condition and results of operations for 2025 compared to 2024 is presented below. A discussion regarding our financial condition and results of operations for 2024 compared to 2023 can be found under Item 7. of our Annual Report on Form 10-K for the year ended February 1, 2025, filed with the SEC on March 14, 2025.

Executive Overview

Our 2025 performance did not meet our expectations. While we believe macroeconomic pressures impacted consumer sentiment throughout the year, we also underperformed in our sector. Accordingly, we took actions to help return the Company to sustainable growth. During the second quarter, we welcomed our new Chief Executive Officer, Daniel Heaf, to the business and, in the third quarter, launched the Consumer First Formula, our multi-year, comprehensive transformation plan to revitalize Bath & Body Works across brand, product and marketplace. The Consumer First Formula invests behind our four largest revenue driving opportunities to try to attract new, younger consumers to the brand, which we expect will help us unlock our next era of sustainable growth:

•Creating Disruptive and Innovative Products: We intend to reestablish best in class product leadership in our hero categories.

•Reigniting the Brand: We expect to invest in marketing to build a brand with cultural currency, showing up in culture through creators, in store visuals and bigger storytelling, creating meaningful emotional connections with consumers.

•Winning in the Marketplace: We plan to expand access and ease of discovery through an enhanced digital experience, third party channels and refreshed in-store merchandising to acquire new and lapsed consumers.

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•Operating with Speed and Efficiency: We are working to transform Bath & Body Works to be a faster and more efficient organization by empowering teams, working with focus and agility to prioritize what customers care about most. We have plans to deliver $250 million in cost savings over the next two years, with $175 million expected in fiscal 2026. We expect that these savings will be used to invest in revenue-generating initiatives across product and brand.

Fiscal 2025 Overview

For 2025, total Net Sales were $7,291 million, which decreased $16 million, or 0.2%, compared to 2024. Total North American Net Sales decreased $31 million compared to 2024, due to a decline in transactions mostly offset by increased order size, and International Net Sales increased $15 million. For 2025, Operating Income was $1,126 million, which decreased $140 million, or 11%, compared to 2024, and our Operating Income rate (expressed as a percentage of Net Sales) decreased to 15.4% from 17.3%. The Operating Income results were impacted by an increase in General, Administrative and Store Operating Expenses and a decline in our Gross Profit rate.

For additional information related to our 2025 financial performance, see “Results of Operations – 2025 Compared to 2024.”

Fiscal 2026 Outlook

We expect 2026 to be a year of disciplined investment behind the Consumer First Formula, balancing rigorous cost control with targeted reinvestment intended to position the business for sustainable long-term growth. We are confident in our strategy and our ability to reposition the Company as a premier, global brand. While we anticipate a macroeconomic environment similar to 2025, with continued value-oriented consumer behavior, we are focused on translating our strategy into action as we realign the business to evolving consumer expectations.

Adjusted Financial Information

In addition to our results provided in accordance with GAAP above and throughout this Annual Report on Form 10-K, provided below are non-GAAP measures that present Operating Income, Net Income and Net Income per Diluted Share in 2025 and 2024 on an adjusted basis, which removes certain items. We believe that these items are not indicative of our ongoing 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.

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

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(a)In 2025, we recognized aggregate pre-tax costs of $15 million (after-tax costs of $12 million), primarily included in General, Administrative and Store Operating Expenses, resulting from business transformation activities in connection with the Consumer First Formula. These costs are primarily related to severance benefits.

(b)In 2025, we recognized aggregate pre-tax costs of $15 million (after-tax costs of $14 million), included in General, Administrative and Store Operating Expenses, due to the transition of certain members of the leadership team, primarily related to severance benefits.

(c)In 2025, we recognized a pre-tax gain of $8 million (after-tax gain of $6 million), included in Other Income, Net, related to the sale of a non-core asset.

(d)In 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), included in Other Income, Net. For additional information, see Note 1 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

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

Company-operated Store Data

The following table compares Company-operated store data for 2025 and 2024:

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(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 data for 2025:

Partner-operated Store Data

The following table represents partner-operated store data for 2025:

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

Results of Operations—2025 Compared to 2024

Net Sales

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

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(a)Results include fulfilled buy online, pickup in store (“BOPIS”) orders.

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

Total Net Sales were $7,291 million and decreased $16 million, or 0.2%, compared to 2024. Direct Net Sales decreased $79 million, or 5.4%, due to a decline in fulfilled orders, which was primarily due to our customers continuing to select our BOPIS option (which is recognized as store Net Sales), partially offset by an increased average order size. Stores Net Sales increased $48 million, or 0.9%, primarily driven by an increase in transactions due to higher BOPIS fulfilled orders and new store growth. International Net Sales increased $15 million, or 4.9%, compared to 2024.

Gross Profit

Our Gross Profit was $3,189 million, which decreased $45 million compared to 2024, and our Gross Profit rate (expressed as a percentage of Net Sales) was 43.7%, which decreased from 44.3% in 2024. Gross Profit dollars decreased due to the decline in the merchandise margin rate, primarily driven by tariffs, partially offset by lower Buying and Occupancy Expenses, which benefited from exiting a third-party fulfillment center in the first quarter of 2025.

The Gross Profit rate decreased due to the lower merchandise margin rate, primarily driven by tariffs, partially offset by the decline in Buying and Occupancy Expenses.

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General, Administrative and Store Operating Expenses

The following table provides details for our General, Administrative and Store Operating Expenses for 2025 compared to 2024:

Our total General, Administrative and Store Operating Expenses were $2,063 million, which increased $95 million compared to 2024, and the rate (expressed as a percentage of Net Sales) was 28.3%, which increased from 26.9% in 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 and $14 million of business transformation activities.

The General, Administrative and Store Operating Expense rate increased primarily due to higher healthcare costs, leadership transition costs, business transformation activities and the increase in payroll related 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 2025 and 2024:

Our Interest Expense was $276 million, which decreased $36 million compared to 2024. The decrease was due to lower average daily borrowings and borrowing rate, which were driven by the early extinguishment of outstanding notes in 2024.

Other Income, Net

Our Other Income, Net was $32 million compared to $74 million for 2024. Included in 2025 is an $8 million pre-tax gain on the sale of a non-core asset. Included in 2024 is an aggregate $39 million pre-tax gain on sales of certain Easton investments and the recognition of a $10 million pre-tax loss on extinguishment of outstanding notes. The remaining decrease is primarily due to lower interest income on invested cash in 2025.

Provision for Income Taxes

Our effective tax rate was 26.4% compared to 22.4% in 2024. The 2025 rate was higher than our combined estimated federal and state statutory rate primarily due to accrued interest expense related to unrecognized tax benefits. The 2024 rate was lower than our combined estimated federal and state statutory rate primarily due to the sales of Easton investments, which resulted in the release of a valuation allowance on a deferred tax asset.

FINANCIAL CONDITION

A discussion regarding our financial condition for 2024 compared to 2023 can be found under Item 7. of our Annual Report on Form 10-K for the year ended February 1, 2025, filed with the SEC on March 14, 2025.

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. Our sales are typically 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 $210 million as of January 31, 2026.

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During 2025, we did not repurchase any of our outstanding senior notes. However, subsequent to January 31, 2026, we issued a notice of redemption for any and all outstanding of our 6.694% Senior Notes due January 2027. We expect the aggregate redemption price to be approximately $289 million, to be paid in the first quarter of fiscal 2026.

We repurchased 15.1 million shares of our common stock for $400 million. We may, from time to time, repurchase, or otherwise retire, additional debt or shares of our common stock, as applicable.

We believe that our current cash position, our cash flows generated from operations and our borrowing capacity under our ABL Facility will be sufficient to meet our liquidity needs, including capital expenditure requirements, for at least the next twelve months.

Debt Leverage Ratio

Our debt leverage ratio is defined as adjusted debt, which includes our short-term and long-term debt as well as total operating lease liabilities, divided by earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”). EBITDAR is calculated as Total Company Adjusted Operating Income, or Operating Income in periods where there are no adjustments, which excludes interest and taxes, before depreciation, amortization and lease costs. Our debt leverage ratio is a non-GAAP financial measure which we believe is useful to analyze our capital structure. Our debt leverage ratio calculation may not be comparable to similarly-titled measures reported by other companies. Our debt leverage ratio should be evaluated in addition to, and not considered a substitute for, other GAAP financial measures.

The following table provides our debt leverage ratio as of, and for the years ended, January 31, 2026 and February 1, 2025:

Free Cash Flow

Our free cash flow is defined as net cash provided by operating activities less capital expenditures. Free cash flow is a non-GAAP financial measure which we believe is useful to analyze our ability to generate cash. Our free cash flow calculation may not be comparable to similarly-titled measures reported by other companies. Our free cash flow calculation should be evaluated in addition to, and not considered a substitute for, other GAAP financial measures.

The following table provides our free cash flows for 2025 and 2024:

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(a)Fiscal 2024 includes tax payments of $65 million related to the sales of our investments in Easton Town Center and Easton Gateway.

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Cash Flows

The following table provides a summary of our Consolidated Statements of Cash Flows for 2025 and 2024:

Operating Activities

Net cash provided by operating activities in 2025 was $1,102 million, including net income of $649 million. Net income included depreciation of $254 million, deferred income tax expense of $63 million and share-based compensation expense of $31 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 cash flow benefit in Accounts Payable, Accrued Expenses and Other of $111 million due to our efforts to improve working capital and the $57 million cash flow detriment associated with Income Taxes Payable.

Net cash provided by operating activities in 2024 was $866 million, including net income of $798 million. Net income included depreciation of $282 million, a deferred income tax benefit of $112 million, share-based compensation expense of $40 million and an aggregate pre-tax gain on sales of certain Easton investments of $39 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 $50 million decrease associated with Accounts Payable, Accrued Expenses and Other, the $26 million decrease associated with Inventory and the $23 million decrease associated with Income Taxes Payable.

Investing Activities

Net cash used for investing activities in 2025 was $227 million, primarily related to capital expenditures of $237 million, partially offset by aggregate cash proceeds of $9 million related to the sale of a Non-core asset. The capital expenditures included approximately $140 million related to new off-mall stores and remodels of existing stores, approximately $45 million for various IT projects, primarily to support the growth and profitability of our business, and approximately $25 million related to distribution and logistics capabilities.

Net cash used for investing activities in 2024 was $162 million, primarily related to capital expenditures of $226 million, partially offset by aggregate cash proceeds, net of fees, of $40 million related to the sales of certain Easton investments. The capital expenditures included approximately $140 million related to new off-mall stores and remodels of existing stores, approximately $45 million for various IT projects, primarily to support the growth and profitability of our business, and approximately $25 million related to distribution and logistics capabilities.

In 2026, we expect to invest approximately $270 million in capital expenditures, focused on high return real estate, Consumer First Formula investments, largely related to product assortment, and logistics and fulfillment upgrades.

Financing Activities

Net cash used for financing activities in 2025 was $599 million, primarily consisting of $401 million for share repurchases, dividend payments of $0.80 per share, or $167 million and payments on finance leases of $14 million.

Net cash used for financing activities in 2024 was $1,132 million, primarily consisting of $522 million for debt repurchases, $401 million for share repurchases, dividend payments of $0.80 per share, or $177 million, $17 million for payments on finance leases and tax payments of $16 million related to share-based awards.

Common Stock and Debt Repurchases

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.

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Common Stock Repurchases

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

There were share repurchases of $1 million reflected in Accounts Payable on the Consolidated Balance Sheet as of February 1, 2025. 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.

The January 2025 Program had $117 million and $500 million of remaining authority as of January 31, 2026 and February 1, 2025, respectively. There were no share repurchases reflected in Accounts Payable on the Consolidated Balance Sheet as of January 31, 2026.

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 2025 and 2024:

On March 6, 2026, we paid our first quarter 2026 ordinary dividend of $0.20 per share to stockholders of record at the close of business on February 20, 2026.

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Long-term Debt and Borrowing Facility

The following table provides our outstanding debt balances, net of unamortized debt issuance costs and discounts, as of January 31, 2026 and February 1, 2025:

Repurchases of Notes

The losses and gains on the extinguishment of debt, which include the write-offs of unamortized issuance costs and discounts, are included in Other Income, Net in the Consolidated Statements of Income. There were no repurchases of outstanding senior notes in 2025.

Subsequent to January 31, 2026, we issued a notice of redemption for any and all outstanding of our 6.694% Senior Notes due January 2027. We expect the aggregate redemption price to be approximately $289 million, and to recognize a pre-tax loss of approximately $9 million in the first quarter of fiscal 2026 as a result of this redemption.

2024 Repurchases

During 2024, we repurchased in the open market and extinguished $200 million principal amount of our outstanding senior notes. The aggregate repurchase price for these notes was $202 million, resulting in an aggregate pre-tax loss of $3 million, including the write-off of unamortized issuance costs and discounts.

During 2024, we also completed a make-whole call to repurchase the remaining $314 million principal amount of our outstanding 2025 Notes. The repurchase price for these notes was $320 million, resulting in a pre-tax loss of $7 million, including the write-off of unamortized issuance costs and discounts.

The following table provides details of the outstanding principal amounts of senior notes repurchased and extinguished during 2024:

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Asset-backed Revolving Credit Facility

We and certain of our 100% owned subsidiaries guarantee and pledge collateral to secure our 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 January 31, 2026, our borrowing base was $482 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 January 31, 2026 that reduced our availability under the ABL Facility. As of January 31, 2026, our availability under the ABL Facility was $473 million.

As of January 31, 2026, 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 January 31, 2026, we were not required to maintain this ratio.

Credit Ratings

The following table provides our credit ratings as of January 31, 2026:

Guarantor Summarized Financial Information

Certain of our subsidiaries, which are listed on Exhibit 22 to this Annual Report on Form 10-K, 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.

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(a)Includes amounts due from non-Guarantor subsidiaries of $596 million as of January 31, 2026.

(b)Includes amounts due to non-Guarantor subsidiaries of $1,501 million as of January 31, 2026.

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(a)Includes Net Sales of $181 million to non-Guarantor subsidiaries.

(b)Includes a Net Loss of $23 million related to transactions with non-Guarantor subsidiaries.

Contingent Liabilities and Contractual Obligations

The following table provides our contractual obligations, aggregated by type, including the maturity profile as of January 31, 2026:

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(a)Outstanding Debt obligations relate to our principal and interest payments for outstanding notes and debentures. Interest payments have been estimated based on the coupon rate for fixed rate obligations for the contractual term of the obligation. Interest obligations exclude amounts which have been accrued through January 31, 2026. For additional information, see Note 10 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(b)Future lease obligations primarily represent minimum payments due under operating lease agreements. For additional information, see Note 6 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

(c)Purchase obligations primarily include purchase orders for merchandise inventory and other agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions.

(d)Other liabilities include future estimated payments associated with unrecognized tax benefits. The “Less Than 1 Year” category includes $127 million of these tax items because it is reasonably possible that the amounts could change in

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the next 12 months due to audit settlements or resolution of uncertainties. The remaining portion, totaling $32 million, is included in the “Other” category as it is not reasonably possible that the amounts could change in the next 12 months.

Lease Guarantees

In connection with the spin-off of Victoria’s Secret & Co., we had remaining contingent obligations of $215 million as of January 31, 2026 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.

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, which 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 adopted this standard prospectively in the fourth quarter of 2025. See Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data for the required disclosures.

In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, which 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.

In September 2025, the FASB issued ASU 2025-06, Targeted Improvements to the Accounting for Internal-Use Software, which is intended to modernize the accounting for software costs by removing project stages from capitalization criteria and further clarifies the threshold entities apply to begin capitalizing costs. This standard is effective for annual reporting of fiscal years beginning after December 15, 2027, and for interim periods within those fiscal years, with early adoption permitted. This standard can be applied prospectively, retrospectively or through a modified transition approach. We are currently evaluating the impacts of adopting this standard.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Management has discussed the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board and believes the following assumptions and estimates are most significant to reporting our results of operations and financial position.

Inventories

Inventories are principally valued at the lower of cost or net realizable value, on an average cost basis.

We record valuation adjustments to our inventories if the cost of inventory on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand and market conditions and analysis of historical experience. If actual demand or market conditions are different than those projected by management, future period merchandise margin rates may be unfavorably or favorably affected by adjustments to these estimates.

We also record inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and current operating trends.

Management believes that the assumptions used in these estimates are reasonable and appropriate. A 10% increase or decrease in the inventory valuation adjustment would have impacted Net Income by approximately $2 million for 2025. A 10% increase or decrease in the estimated physical inventory loss adjustment would have impacted Net Income by approximately $2 million for 2025.

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Valuation of Long-lived Store Assets

Long-lived store assets, which include leasehold improvements, store-related assets and operating lease assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group. For operating lease assets, we determine the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. An individual asset within an asset group is not impaired below its estimated fair value. The fair value of long-lived store assets is determined using Level 3 inputs within the fair value hierarchy.

When a decision has been made to dispose of property and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life.

Claims and Contingencies

We are subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Our determination of the treatment of claims and contingencies in the Consolidated Financial Statements is based on management’s view of the expected outcome of the applicable claim or contingency. We consult with legal counsel on matters related to litigation and seek input from both internal and external experts with respect to matters in the ordinary course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is reasonably estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable) or if an estimate is not reasonably determinable, disclosure of a material claim or contingency is disclosed in the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

Income Taxes

We account for income taxes under the asset and liability method. Under this method, taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our Consolidated Statements of Income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In determining our provision for income taxes, we consider permanent differences between book and tax income and statutory income tax rates. Our effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of the Company’s operations and the level of earnings.

A number of countries have enacted legislation to implement the Organization for Economic Cooperation and Development’s 15% global minimum tax regime (Pillar Two) with effect from January 1, 2024. We continue to evaluate the impacts of proposed and enacted legislation for the jurisdictions in which we operate.

We follow the authoritative guidance included in ASC 740, Income Taxes, which contains a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.  We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and for which actual outcomes may differ from forecasted outcomes. Our policy is to include interest and penalties related to uncertain tax positions in income tax expense.

Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. A number of years may elapse before a particular matter for which we have established an accrual is audited and fully resolved or clarified. We adjust our tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from our established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

Revenue Recognition

We recognize revenue based on the amount we expect to receive when control of the goods or services is transferred to our customer. We recognize sales upon customer receipt of merchandise, which for direct channel revenues reflects an estimate of

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shipments that have not yet been received by the customer based on shipping terms and historical delivery times. Our shipping and handling revenues are included in Net Sales with the related costs included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income. We also provide a reserve for projected merchandise returns based on historical experience. Net Sales exclude sales and other similar taxes collected from customers.

We offer a loyalty program that allows customers to earn points based on purchasing activity. As customers accumulate points and reach point thresholds, points are converted to rewards that may be used to purchase merchandise in stores or online. Points expire if a loyalty account is inactive for a certain period of time, while rewards expire if unused after approximately three months. We allocate revenue to points earned on qualifying purchases and defer recognition of revenue until the rewards are redeemed. The amount of revenue deferred is based on the relative stand-alone selling price method, which includes an estimate for points and rewards not expected to be redeemed based on historical experience.

We sell gift cards with no expiration dates to customers. We do not charge administrative fees on unused gift cards. We recognize revenue from gift cards when they are redeemed by the customer. In addition, we recognize revenue on unredeemed gift cards when the likelihood of the gift cards being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). Gift card breakage revenue is recognized in proportion to, and over the same period as, actual gift card redemptions. We determine the gift card breakage rate based on historical redemption patterns. Gift card breakage revenue is included in Net Sales in the Consolidated Statements of Income.

We also recognize revenues associated with franchise, license, wholesale and sourcing arrangements. Revenue recognized under franchise and license arrangements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers. Revenue is generally recognized under wholesale and sourcing arrangements at the time the title passes to the partner.