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Should You Buy Bath & Body Works on the Dip?

Home fragrance and body care retailer Bath & Body Works (BBWI) saw stable growth in its financials in its most recent quarter. But the company expects inflationary pressures to hamper its results this year. The stock is down more than 20% in price year-to-date. Also, with Wall Street expecting a substantial decline in its earnings and revenues in the current quarter, is it worth buying the dip in BBWI? Keep reading to learn our view.

Home fragrance and body care retailer Bath & Body Works, Inc. (BBWI) in Columbus, Ohio, sells its products under Bath & Body Works, White Barn, C.O. Bigelow, and other brand names online and at retail stores. The shares of this specialty retailer have gained 18.3% in price over the past year to close yesterday’s trading session at $53.35. However, the stock has slumped 23.6% year-to-date. Adding to bearish investors’ sentiments was the company’s announcement last week that Chief Executive Officer Andrew Meslow will step down for health reasons, effective May 12.

BBWI’s guidance also disappointed investors amid its warning of inflationary pressures. Also, the escalating Russia-Ukraine war is placing further pressure on BBWI stock. BBWI plans $400 million in capital expenditures, which is double the amount spent last year. The company is facing increased inflationary costs in raw materials, transportation, and wages, which it is offsetting with price increases. But the rising expenses could squeeze its margins because BBWI intends to set up a new fulfillment center and new stores. Its gross margins could thus be 3 to 4 percentage points lower this year than the recent year’s 49%, while its sales could be flat to 4% up versus 2021.

“In 2022, we are investing in the business to support long-term growth, and there are macro factors, such as inflation that will impact our results,” the company said. BBWI projected its first-quarter earnings per share from continuing operations to be between $0.47 - $0.55, compared to $0.60 adjusted earnings per share from continuing operations in the same period last year.

Here’s what could shape BBWI’s performance in the near term:

Mixed Valuation

In terms of forward P/E, BBWI is currently trading at 11.97x, which is 14.6% lower than the 14.02x industry average. Also, the 0.78x non-GAAP forward PEG is 15.7% lower than the 0.93 industry average.

However, BBWI’s forward EV/Sales is 71.8% higher than the 1.26x industry average, and its forward Price/Sales is 63.6% higher than the 1.03x industry average.

Higher-Than-Industry Profit Margins

BBWI’s 48.92% gross profit margin is 36.4% higher than the 35.87% industry average. Also, its 16.92% net income margin is 153.4% higher than the 6.68% industry average.

Furthermore, BBWI’s 22.11% and 19.11% respective ROA and ROTC are 261.6% and 141.8% higher than the industry averages.

Stable Growth in its Last reported Quarter

BBWI’s net sales increased 11.4% from the prior-year quarter to $3.03 billion in its fiscal fourth quarter, ended Jan.30, 2022. Its operating income rose marginally from its year-ago value to $879.21 million. Also, its non-GAAP net income from continuing operations came in at $599.68 million, indicating a 7.7% increase year-over-year, while its non-GAAP earnings from continuing operations per share rose 17.3% year-over-year to $2.30.

POWR Ratings Reflect Uncertainty

BBWI has an overall C rating which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Value, which is consistent with its mixed valuation.

BBWI has a D grade for Stability, which is in sync with its 1.76 beta.

Among  the 62 stocks in the Home Improvement & Goods industry, BBWI is ranked #35.

Beyond what I have stated above, one can also view BBWI’s grades for Quality, Growth, Momentum, and Sentiment here.

View the top-rated stocks in the Home Improvement & Goods industry here.

Bottom Line

Although the company has delivered significant financial growth in its most recent quarter, its revenues have decreased at a 15.9% CAGR over the past three years and 8.9% over the past five years. Also, the Street expects its revenues to decline 50% year-over-year in its fiscal first quarter, ending April 31, 2022, while its EPS is expected to decrease 7.7%. Its EPS has declined 25.9% per annum over the past five years. So, we think it could be wise to wait to see how the company manages the anticipated near-term headwinds before investing in the stock.

How Does Bath & Body Works, Inc. (BBWI) Stack Up Against its Peers?

While BBWI has an overall POWR Rating of C, one might want to consider looking at its industry peers, Duluth Holdings Inc. (DLTH), and Acuity Brands, Inc. (AYI), which have an A (Strong Buy) rating.

Click here to checkout our Retail Industry Report for 2022

BBWI shares were trading at $52.18 per share on Thursday afternoon, down $1.17 (-2.19%). Year-to-date, BBWI has declined -24.96%, versus a -8.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.


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