Upbeat Q2 Earnings Should Mark Reversal In Fortune For Bath & Body Works Stock

Bath & Body Works (NYSE: BBWI), the largest specialty home fragrance & body care product retailer in the U.S., formerly known as L Brands, is scheduled to report its fiscal second-quarter results on Wednesday, August 28. We expect BBWI stock to likely trade higher with revenues and earnings beating expectations in its second-quarter results. Notably, BBWI stock has decreased 17% from around $43 to $35 since the beginning of this year, underperforming the broader indices, with the S&P growing 18% over the same period. In contrast, BBWI’s peer American Eagle Outfitters (NYSE: AEO) has seen its stock rise 6% over the same period to $22.

BBWI saw better-than-expected first-quarter earnings but still faces risks such as consumer spending patterns and competition in the high inflationary environment. Although the outlook is cloudy in the near term, the franchise quality and valuation should help the stock rise in the longer run. Management plans to open new off-mall stores, remodel selected stores, and invest in technology and the supply chain, with a $300-325 million capital expenditure budget for FY 2024 (compared to $298 million in FY 2023). The company offers a variety of products, including men’s deodorant and fragrance products, where management believes an $8 billion market exists. In addition, BBWI also has an advantage with its loyalty program, which now has nearly 37 million enrolled members, and loyalty sales represent approximately 80% of its U.S. sales. This is valuable in the current environment to drive repeat sales. It should also be noted that all of BBWI’s product categories continue to exhibit substantial growth compared to 2019 figures, which bodes well for the company’s long-term expansion.

BBWI stock has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in BBWI stock has been far from consistent. Returns for the stock were 136% in 2021, -38% in 2022, and 5% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BBWI underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including H, WMG, and AMZN, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BBWI face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that BBWI’s valuation is $43 per share, which is more than 20% above the current market price. Look at our interactive dashboard analysis on BBWI Earnings Preview: What To Expect in Fiscal Q2? for more details.

(1) Revenues expected to come in ahead of the consensus estimates marginally

Trefis estimates BBWI’s Q2 2024 revenues to be around $1.6 Bil, slightly ahead of the consensus estimate. In Q1, net sales were down 0.7% year-over-year (y-o-y) to $1.4 billion on sluggish demand in categories like home fragrance and personal care. However, the retailer adjusted to these issues with effective cost-cutting and merchandising initiatives. For the full year 2024, we expect Bath & Body Works Revenues to fall marginally to $7.4 billion.

The company’s management narrowed its guidance by raising the midpoint for both the top and bottom lines through the end of this year. For 2024, the company expects to earn a profit between $3.05 and $3.35 per share on sales that will likely be down 2.5% to flat y-o-y. This includes the anticipated impact of approximately $300 million cash for share repurchases. For reference, the company’s FY 2023 revenue came in at $7.5 billion, with earnings per diluted share (EPS) of $3.84 and adjusted EPS of $3.27 in fiscal 2023.

(2) EPS is also likely to beat consensus estimates

BBWI’s Q2 2024 EPS is expected to come in at 39 cents per Trefis analysis, higher than the consensus estimate. The company’s gross, operating, and net profits all increased, resulting in a respectable 9% profit growth y-o-y to $0.38.

(3) Stock price estimate is higher than the current market price

Our Bath & Body Works Valuation expects an earnings per share (EPS) estimate of around $3.30 and a P/E multiple of 13.1x in fiscal 2024, translating into a price of $43, which is more than 20% higher than the current market price.

It is helpful to see how its peers stack up. BBWI Peers shows how Bath & Body Works’ stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.