What’s Next For Bath & Body Works Stock?

[Note: BBWI fiscal year ends January]

After a 20% increase in the last month, 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 higher in the long-term. BBWI stock has increased from around $31 to $38 in the last month, compared to the S&P index which saw a 6% growth during this period.  In contrast, BBWI’s peer American Eagle Outfitters (NYSE: AEO) has seen its stock rise 4% over the same period. BBWI beat both top and bottom-line estimates in the third quarter. It also raised its full-year forecast amid strong demand for its candles and fragrances during the holiday season. We believe that the franchise quality and valuation should help the stock rise in the long run. Management plans to open new off-mall stores, remodel selected stores, and invest in technology and the supply chain, with around a $250 million capital expenditure budget for FY 2024.

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 over 38 million active 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 at BBWI all segments continue to exhibit substantial growth compared to 2019 figures, which bodes well for the company’s long-term expansion. Currently, BBWI is trading at nearly a 9x P/E multiple, which is below its historical average, so there is room for multiples to re-rate higher if it can show faster growth than expected.

The growth in BBWI stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 136% in 2021, -38% in 2022, and 5% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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 recovery?

In Q3, BBWI’s sales grew by 3% year-over-year (y-o-y) to $1.6 billion, due to new store growth and an increase in buy online-pick up in-store orders. Notably, the company’s international sales took a hit, declining 11% due to the ongoing conflict in the Middle East, which accounts for roughly half of BBWI’s global business. The company reported a gross profit of $700 million for the quarter, compared to $682 million in the previous year. Operating income for the quarter was $218 million, down from $221 million in the previous year, driven by continued investment in product formulations and packaging innovation and strategically planned promotional activities. The operating income margin decreased to 13.5% from 14.1% in Q3. Consequently, the retailer’s earnings per share came in at $0.49, down 6% y-o-y.

We forecast Bath & Body Works Revenues to be $7.3 billion for the fiscal year 2024, down 2% y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $3.27. Given the changes to our revenues and EPS forecast, we have revised Bath & Body Works Valuation to $41 per share, based on a $3.27 expected EPS and a 12.5x P/E multiple for the fiscal year 2024. That said, the company’s stock appears cheap at the current levels, with our valuation at a 9% premium from the current market price.

For fiscal 2024, Bath & Body Works raised fiscal 2024 guidance and now expects net sales to decline -2.5% to -1.7%  compared to the prior view of a decline of -4% to -2%, including a 100-basis-point headwind from the 53rd week in 2023. Its adjusted earnings per share are projected to range between $3.15 to $3.28. The company projects net sales for the holiday quarter to decline from -6.5% to -4.5% y-o-y, reflecting a 500-basis-point headwind from a shifted fiscal calendar. Earnings per share are expected to come in between $1.94 and $2.07 in the fourth quarter.

It is helpful to see how its peers stack up. Check out how Bath & Body Works’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/3/2024
[2] Cumulative total returns since the end of 2016