Bath & Body Works Stock Down 46% this Year, What’s Next?

[Note: BBWI fiscal year ends January]

After a huge 46% decline so far this year, at the current price of around $38 per share, we believe Bath & Body Works stock (NYSE: BBWI), the largest specialty home fragrance & body care product retailer in the U.S, formerly known as L Brands, could go modestly higher in the long-term. BBWI stock has declined from around $70 to $38 since the beginning of 2022, much steeper than the 19% decline in the S&P index. This stock decline can be attributed to the declining foot traffic and uncertainties from a high inflationary environment. Although the outlook is cloudy in the near term, the franchise quality and valuation should help this stock rise in the longer run. It is a positive sign that BBWI is growing, as evidenced by their growing company-operated stores, which are 1,773 now (as of July 2022), up from 1,755 at the end of FY 2021. Management plans to open new stores, remodel existing ones, and invest in technology and the supply chain, with a $400 million capital expenditure budget for FY2022 (compared to $270 million CAPEX in FY2021 and $228 million in FY2020). BBWI has no material debt due for the next two fiscal years, and its pressured operations may still be able to fund its $400 million CAPEX budget. The company offers a variety of products, including men’s deodorant and fragrance products, where management believes an $8 billion market exists.

In the fiscal first half of 2022, Bath & Body Works’ net sales were down 3% year-over-year (y-o-y) to almost $3.1 billion, due to declining store foot traffic. Also, the company’s bottom line went from year-ago earnings per share of $2.31 to $1.16 during this period. BBWI struggled to control its operating margins due to inflated input costs, which resulted in its operating margins declining to 17.0% in the first six months of 2022 as compared to 22.7% in the corresponding period of last year. Consequently, the retailer is now forecasting full-year 2022 earnings per diluted share to range between $2.70 and $3.00 – down from the $3.94 recorded in FY2021. The company is also expecting a mid-to-high single-digit y-o-y decline in FY 2022 revenues.

We forecast Bath & Body Works Revenues to be $7.4 billion for the fiscal year 2022, down 6% y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $2.97. Given the changes to our revenues and EPS forecast, we have revised Bath & Body Works Valuation to $41 per share, based on a $2.97 expected EPS and a 13.9x P/E multiple for the fiscal year 2022. That said, the company’s stock appears modestly cheap at the current levels, with a 9% premium from the current market price. In light of rising interest rates and the threat of recession, the market is uncertain, but any further decline in the company’s stock could be used as an opportunity to buy the stock.

Here you’ll find our previous coverage of Bath & Body Works stock where you can track our view over time.

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