When your Disney Villains collection flops and tariffs cost you $35 million in a single quarter, you know it's not a great time to be selling scented candles. Bath & Body Works, Inc. (BBWI) learned that lesson the hard way Thursday, with shares cratering more than 23% after the retailer delivered disappointing third-quarter results and slashed its outlook for the rest of the year.

The numbers tell a rough story. Third-quarter adjusted earnings came in at 35 cents per share, missing analyst expectations of 40 cents. Sales dropped 1% year over year to $1.594 billion, falling short of the $1.634 billion consensus estimate. This is the kind of miss that makes investors nervous, especially heading into the critical holiday shopping season.

Following the results, Telsey Advisory Group analyst Dana Telsey maintained an Outperform rating on the stock with a $38 price target, suggesting some believe in a recovery story here.

The Tariff Problem and Margin Squeeze

Here's where things get interesting. Gross profit margin collapsed 220 basis points year over year to 41.3%, driven primarily by a merchandise margin drop of roughly 260 basis points. The culprit? A $35 million tariff hit that alone shaved about 200 basis points off margins. That's real money hitting the bottom line at exactly the wrong time.

Management also pointed to higher promotional activity as they worked to clear seasonal inventory—never a good sign when you're already dealing with tariff pressures. The one bright spot was a 40-basis-point improvement in buying and occupancy leverage, thanks to exiting a third-party fulfillment center earlier in the year. Small wins, but they help.

Operating income fell to $161 million from $218 million a year ago, with operating margin dropping 340 basis points to 10.1%. Gross profit totaled $658 million, down from $700 million in the prior-year period. The company did record a pre-tax gain of $8 million from selling a non-core asset, which provided $6 million after tax.

CEO Daniel Heaf didn't sugarcoat the situation: "Our third quarter results were below expectations, and we are lowering our outlook for the remainder of the year reflecting current business trends and continuation of recent macro consumer pressures."

A Very Challenging Holiday Season

Management specifically called out the Disney Villains collection as falling short of expectations, and described the late-October holiday kickoff as "very challenging." When a specialty retailer like Bath & Body Works struggles during what should be its peak season, it's a red flag about broader consumer discretionary spending.

The fourth-quarter outlook is particularly grim. The company expects sales to decline in the high-single-digit range, citing that very challenging holiday start and weakening macro consumer sentiment. They're assuming an intensely competitive environment, with current trends persisting and only modest help from new online purchase limits.

International retail sales offer a small ray of hope, expected to rise high-single digits systemwide, with reported net sales up mid-single digits. But that's not enough to offset domestic weakness.

Guidance That Stings

Fourth-quarter guidance projects a gross profit rate of roughly 44.5%, pressured by tariffs and elevated promotions. Tariffs alone are expected to hit gross margin by about 100 basis points even after mitigation efforts. SG&A rate should come in around 24%, reflecting deleverage from softer sales but supported by tight cost controls.

The real shocker is the EPS guidance: at least $1.70 for the fourth quarter, well below the $2.17 consensus estimate. Management is clearly pushing aggressive actions to stabilize performance, but they're fighting headwinds on multiple fronts.

For the full fiscal year 2025, the company now expects low-single-digit sales declines and has slashed adjusted EPS guidance to at least $2.87. That's a massive cut from the earlier $3.35–$3.60 range and well below the $3.44 consensus estimate. The gross profit rate outlook now sits at roughly 43.3%, including that 100-basis-point tariff drag after mitigation. Adjusted SG&A is projected at about 28.3% due to weaker sales, and free cash flow is now estimated at approximately $650 million, reflecting the reduced operating performance.

Price Action: BBWI shares were trading lower by 23.62% to $16.15 at last check Thursday.