[Note: BBWI fiscal year ends January]
After a 22% decline year-to-date, at the current price of around $33 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 declined from around $43 to $33 YTD, compared to the S&P index which saw an 11% growth during this period. BBWI’s 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 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 to $350 million capital expenditure budget for FY2023 (compared to $328 million CAPEX in FY2022, $270 million in FY2021 and $228 million in FY2020). 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 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 BBWI’s all product categories 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 an 11x P/E multiple, which is below its historical average, so there is room for multiples to re-rate higher if it is able to show faster growth than expected.
In Q2, BBWI’s sales declined by 4% year-over-year (y-o-y) to $1.6 billion on sluggish demand in categories like home fragrance and personal care. Traffic and ticket sales both dropped, contributing to the 3.6% decrease. However, the retailer adjusted to these issues with higher average unit revenue, lower transportation costs, and merchandising initiatives. Consequently, Bath & Body Works was able to beat earnings expectations, although operating income still fell to $188 million from $242 million a year ago. The company saw a 17% drop in earnings per share from continuing operations to $0.43. Despite sluggish sales in Q2, the company exhibited growth in all product categories compared to 2019 figures.
We forecast Bath & Body Works Revenues to be $7.4 billion for the fiscal year 2023, down marginally y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $3.07. Given the changes to our revenues and EPS forecast, we have revised Bath & Body Works Valuation to $41 per share, based on a $3.07 expected EPS and a 13.5x P/E multiple for the fiscal year 2023. That said, the company’s stock appears cheap at the current levels, with our valuation at a 25% premium from the current market price.
For fiscal 2023, the company expects net sales to decline 1.5% to 3.5%, compared to a previous expectation of flat net sales to a mid-single digit decline. The company also expects full-year 2023 adjusted earnings per diluted share to be between $2.80 and $3.10, versus the previous estimate of between $2.68 and $3.08.
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