The oddest number in Bath & Body Works’ latest filing is $80 million. That is the approximate value of tariff refunds that helped push operating income up 38% during the six months ended August 1, even as sales declined 2.3%.

The result looks like a retailer suddenly finding operating leverage. Gross margin rose to 45.7% from 41.3%, operating cash flow more than doubled to $316 million, and net income climbed 84% to $118 million. The stock closed at $18.89 on August 26, up 7.5% for the day.

The turn is in the composition. The merchandise-margin improvement came primarily from refunds tied to the International Emergency Economic Powers Act, or IEEPA. That is money affecting this period’s results, but it is not the same thing as a recurring improvement in the economics of selling body lotion and candles.

Management put the tariff benefit plainly in its explanation of operating income:

"The Operating Income results were primarily due to the increase in the merchandise margin rate, as a result of approximately $80 million of International Emergency Economic Powers Act (“IEEPA”) tariff refunds, partially offset by the decline in Net Sales."

10-Q 2026-08-26

The business still had a sales decline inside the stronger margin result. Direct net sales increased $8 million, or 3%, because more orders were fulfilled, but lower average order size and shipping and handling revenue reduced the benefit. The company’s wider sales base was down, and it does not disclose a single operating cause for that decline.

A second one-off arrived below the merchandise line. Selling expenses fell primarily because Bath & Body Works recorded an $88 million pre-tax gain from cash proceeds related to payment-card interchange-fee litigation, net of legal fees.

"Selling Expenses decreased primarily driven by an $88 million pre-tax gain related to cash proceeds received, net of legal fees, for favorable settlements of payment card interchange fee litigation, as well as lower store sales."

10-Q 2026-08-26

That settlement is cash, unlike a paper remeasurement, but it is still not a normal retail sale. Together with the tariff refunds, it helps explain why operating income rose to $216 million from $157 million while revenue moved in the opposite direction.

The balance sheet offers a cleaner operating receipt. Inventory fell 9.6% to $883 million, while accounts receivable rose 17.6% to $154 million. The company ended the six months with $794 million of cash, compared with $364 million a year earlier, and diluted shares fell 4.3% to 202 million.

There is a longer backdrop to the stock. Annual revenue has held at $7.3 billion for the past two fiscal years, while operating margin fell to 15.4% in the latest year from 17.3% two years earlier. The shares carry a 6.1x P/E, but Bath & Body Works also reports $2.7 billion of net debt, which makes the equity multiple only one part of the capital-structure math.

The next quarterly report’s specific tariff-refund amount, compared with the $80 million recorded in these six months, will put a number on how much of this margin step-up has a second act.

Source: Bath & Body Works 10-Q filed August 26, 2026.