Bath & Body Works (BBWI) Returned to Digital Growth but Still Expects Sales to Decline. Can E-Commerce Fix Weak Store Traffic?

Bath & Body Works (BBWI) has returned to growth in its North American direct business for Q2 2026, marking the first year-over-year increase since 2021. Direct net sales grew 3% to $275 million, driven by a lower free-shipping threshold and digital enhancements. However, overall net sales fell 2.3% to $1.51 billion, with U.S. and Canadian store sales declining 5.4% to $1.13 billion.

This disparity highlights the challenge at hand. While e-commerce could help Bath & Body Works reach more shoppers beyond its stores, the $8 million year-over-year increase in direct sales accounted for only a small portion of the $65 million drop in store sales. CEO Daniel Heaf stated during the August 26 earnings call that the positive signs were not yet significant enough to indicate a business inflection point.

The company reported an increase in new, existing, and reactivated digital customers, as well as better discovery, personalization, and product storytelling, which supported conversions. Expanding distribution through partnerships like Amazon and Ulta Beauty has also helped reach customers who may not visit stores. Bath & Body Works now projects approximately $650 million of company-defined non-GAAP free cash flow for 2026, which could fund marketing and digital improvements despite ongoing sales pressure.

However, the key issue lies in scale; direct sales accounted for about 18% of quarterly revenue, and the company acknowledged that free shipping on orders over $50 shifted some sales from stores to the direct channel. The softness in core categories, such as body care, which declined slightly despite improvement, also poses a challenge.

In the short term, weak store traffic and muted demand in a hero category appear more critical to Bath & Body Works' revenue trajectory than early marketplace gains. The improved profit also included temporary benefits, including $80 million in tariff refunds. Adjusted diluted EPS was $0.62, excluding $9 million of pre-tax transformation costs.

The company narrowed full-year sales guidance to a decline of 4% to 2.5%, with a third-quarter forecast of a decline of 5% to 2.5%. Despite these challenges, digital and marketplace growth are expected to continue, but they will likely remain overshadowed by weakness elsewhere in 2026. Some hedge funds are still invested in Bath & Body Works, but it appears they may be looking for other opportunities with greater upside potential and less downside risk.