VALUATION HIGHLIGHTS

1. Bath & Body Works Stores constitute 78% of the Trefis price estimate for Bath & Body Works, Inc.'s stock.
2. Bath & Body Works Direct constitutes 18% of the Trefis price estimate for Bath & Body Works, Inc.'s stock.

WHAT HAS CHANGED?

1. Bath & Body Works Beats Q3 Estimates
   • BBWI’s third-quarter adjusted earnings per share of 49 cents, beating the analyst consensus of 47 cents. Its quarterly sales of $1.610 billion, a growth of 3.1% year-over-year (y-o-y), was above the market view of $1.579 billion.
   • The gross margin was 43.5%, down 20 bps y-o-y, and the operating margin was 13.5% compared to 14.2% y-o-y.

2. Outlook
   • In Q4, Bath & Body Works projects net sales to decline of 6.5% to a decline of 4.5% y-o-y, reflecting a 500-basis-point headwind from a shifted fiscal calendar. Earnings per share are expected to be between $1.94 and $2.07, versus the $1.98 consensus.
   • The company raised fiscal 2024 guidance and now expects net sales to decline 2.5% – 1.7% (prior view: decline of 4% – 2%), including a 100-basis-point headwind from the 53rd week in 2023. Adjusted earnings per share are projected at $3.15 – $3.28.

3. How Did BBWI Perform In 2023
   • The company saw declining foot traffic and uncertainties from a high inflationary environment in 2023. Management plans to open new off-mall stores, remodel selected stores, and invest in technology and the supply chain, with a $300 to $325 million capital expenditure budget for FY2024 (compared to $298 million in FY 2023, 328 million CAPEX in FY2022, and $270 million in FY2021). The company offers a variety of products, including men's deodorant and fragrance products, where management believes an $8 billion market exists. To add to this, BBWI also has an advantage with its loyalty program, which now has nearly 45 million enrolled members, and loyalty sales represent approximately two-thirds of its U.S. sales. This is valuable in the current environment to drive repeat sales. It should also be noted that all BBWI's product categories exhibited substantial growth compared to 2019 figures, which bodes well for the company's long-term expansion.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of BBWI's value that present opportunities for upside or downside to the current Trefis price estimate for BBWI:

Bath & Body Works Stores

• Bath & Body Works' Revenue per Square Foot: Bath & Body Works’ revenue per square foot decreased from $1219 in 2021 to $1093 in 2023, as U.S. buyers did not show much affinity towards the company's products due to the difficult macroeconomic environment. Going forward, we expect revenue per square foot to increase modestly and reach close to $1,114 by the end of the Trefis forecast period.
  If revenue per square foot crosses to $1,200 instead, driven by Bath & Body Works’ continued dominion in the beauty space, there could be a 12% upside to the Trefis estimate. On the other hand, if it falls below $900 due to cautious consumer spending and potential merchandising issues, there can be over 20% downside to the Trefis estimate.

• Bath & Body Works' Stores EBITDA Margin: Bath & Body Works U.S. stores’ EBITDA margin has declined from 30.8% in 2021 to 20.9% in 2023, primarily due to lower merchandise margins, resulting from higher discounts. Moreover, falling revenue growth has further resulted in this decline. Going forward, we expect the figure to increase in the near term and then stabilize at around 23% over the forecast period.
  If margins increase to 26% by the end of the Trefis forecast period, there could be over 15% upside to the Trefis estimate. On the other hand, if it decreases to 20%, there can be a 15% downside to the Trefis estimate.

BUSINESS SUMMARY

SOURCES OF VALUE

We believe Bath & Body Works U.S. stores are the largest sources of value for the company.

KEY TRENDS

Effective Merchandising and Marketing Key to Growth in Personal Care & Beauty Market

In the developed U.S. personal care market, price competition is fierce, brand loyalty is low, and private label is a real threat to manufacturers. The challenge for manufacturers in this category is to offer added benefits that will drive consumers away from budget product lines. With few non-users to convert and limited population growth, the burden of further expansion comes down to marketing efforts and product innovation.

International Business Shows Promise

The company operates around 485 (as of 2023) Bath & Body Works stores outside North America. It must be noted that all of BBWI formats are performing very well outside North America, and the company is expanding them gradually. Although they may not be strong enough to drive the retailer’s results at present, their continued expansion holds tremendous promise in the long run.