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Bath and Body Works (BBWI) Research Report: Q1 CY2024 Update


Full Report / June 04, 2024

Personal care and home fragrance retailer Bath & Body Works (NYSE:BBWI) beat analysts' expectations in Q1 CY2024, with revenue flat year on year at $1.38 billion. It made a GAAP profit of $0.38 per share, improving from its profit of $0.35 per share in the same quarter last year.

Bath and Body Works (BBWI) Q1 CY2024 Highlights:

  • Revenue: $1.38 billion vs analyst estimates of $1.37 billion (1.3% beat)
  • EPS (non-GAAP): $0.38 vs analyst estimates of $0.33 (14.6% beat)
  • Gross Margin (GAAP): 43.8%, up from 42.7% in the same quarter last year
  • Free Cash Flow of $30 million is up from -$49 million in the same quarter last year
  • Locations: 2,341 at quarter end, up from 2,246 in the same quarter last year
  • Market Capitalization: $11.59 billion

Spun off from L Brands in 2020, Bath & Body Works (NYSE:BBWI) is a personal care and home fragrance retailer where consumers can find specialty shower gels, scented candles for the home, and lotions.

While many retailers define themselves based on visuals and aesthetics, Bath & Body Works relies on the scents of their products. These scents are unique and diverse in range, and the company aims to rotate and update them on a seasonal basis in order to have fresh product every few months.

The core customer of Bath & Body Works is typically female, aged 18-45, who values self-care and indulgence. While consumers can buy generic or private label personal care products, the Bath & Body Works customer prefers the affordable luxury of higher-quality, specialty bath gels and moisturizers, for example.

The average Bath & Body Works store is around 3,000 square feet and typically located in shopping malls and strip shopping centers alongside other retailers. While stores are designed to be visually appealing, the main draw is the ability to test products and experience their scents. Bath & Body Works has an e-commerce presence, which was launched relatively late in 2006 when compared to other prominent retailers. The omnichannel approach gives the customer various options for shopping, returns, and exchanges. The e-commerce platform also features online-only promotions and customer reviews.

Beauty and Cosmetics Retailer

Beauty and cosmetics retailers understand that beauty is in the eye of the beholder, but a little lipstick, nail polish, and glowing skin also help the cause. These stores—which mostly cater to consumers but can also garner the attention of salon pros—aim to be a one-stop personal care and beauty products shop with many brands across many categories. E-commerce is changing how consumers buy cosmetics, so these retailers are constantly evolving to meet the customer where and how they want to shop.

Retailers offering specialized personal care products include Ulta Beauty (NASDAQ:ULTA) and Victoria’s Secret (NYSE:VSCO) as well as department stores such as Macy’s (NYSE:M) and Kohl’s (NYSE:KSS).

Sales Growth

Bath and Body Works is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's annualized revenue growth rate of 8.3% over the last five years was mediocre as it opened new stores and expanded its reach.

Bath and Body Works Total Revenue

This quarter, Bath and Body Works's revenue fell 0.9% year on year to $1.38 billion but beat Wall Street's estimates by 1.3%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.

Same-Store Sales

Bath and Body Works's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 5.8% year on year. This performance is quite concerning and the company should reconsider its strategy before investing its precious capital into new store buildouts.

Bath and Body Works Year On Year Same Store Sales Growth

Number of Stores

When a retailer like Bath and Body Works is opening new stores, it usually means it's investing for growth because demand is greater than supply. Bath and Body Works's store count increased by 95 locations, or 4.2%, over the last 12 months to 2,341 total retail locations in the most recently reported quarter.

Bath and Body Works Operating Retail Locations

Taking a step back, the company has opened new stores quickly over the last eight quarters, averaging 5.1% annual growth in new locations. This store growth outpaces the broader consumer retail sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Gross Margin & Pricing Power

We prefer higher gross margins because they make it easier to generate more operating profits.

Bath and Body Works has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it's averaged an impressive 43.1% gross margin over the last eight quarters. This means the company makes $0.43 for every $1 in revenue before accounting for its operating expenses.

Bath and Body Works Gross Margin (GAAP)

Bath and Body Works produced a 43.8% gross profit margin in Q1, marking a 1.1 percentage point increase from 42.7% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Bath and Body Works generated an operating profit margin of 13.5%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Bath and Body Works Operating Margin (GAAP)

Zooming out, Bath and Body Works has been a well-managed company over the last two years. It's demonstrated elite profitability for a consumer retail business, boasting an average operating margin of 17.2%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.

Bath and Body Works's EPS grew at a decent 11.7% compounded annual growth rate over the last five years, higher than its 8.3% annualized revenue growth. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.

Bath and Body Works EPS (GAAP)

We can delve even further into Bath and Body Works's quality of earnings. A five-year view shows that Bath and Body Works has repurchased its stock, shrinking its share count by 18.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, Bath and Body Works reported EPS at $0.38, up from $0.35 in the same quarter last year. This print beat analysts' estimates by 22.8%. Over the next 12 months, Wall Street expects Bath and Body Works to perform poorly. Analysts are projecting its EPS of $3.88 in the last year to shrink by 14.7% to $3.31.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Bath and Body Works's free cash flow came in at $30 million in Q1, representing a 2.2% margin and flipping from negative in the same quarter last year to positive this quarter. Seasonal factors aside, this was great for the business.

Bath and Body Works Free Cash Flow Margin

Over the last eight quarters, Bath and Body Works has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a robust cash balance. The company's free cash flow margin has been among the best in consumer retail, averaging 10.2%. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

Although Bath and Body Works hasn't been the highest-quality company lately, it historically found a few growth initiatives that worked out wonderfully. Its five-year average ROIC was 49.6%, splendid for a consumer retail business.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Unfortunately, Bath and Body Works's ROIC averaged 3.4 percentage point decreases each year over the last few years. We like what management has done in the past but are concerned its ROIC is declining, perhaps a symptom of fewer profitable business opportunities.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Bath and Body Works reported $855 million of cash and $5.46 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.57 billion of EBITDA over the last 12 months, we view Bath and Body Works's 2.9x net-debt-to-EBITDA ratio as safe. We also see its $283 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Bath and Body Works's Q1 Results

We were impressed by how significantly Bath and Body Works blew past analysts' EPS expectations this quarter. We were also excited its revenue and gross margin outperformed Wall Street's estimates. On the other hand, its quarterly and full-year earnings guidance missed analysts' projections. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The market was discouraged by its weak outlook, however, and the stock is down 7.1% after reporting. It currently trades at $48.11 per share.

Is Now The Time?

Bath and Body Works may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We have other favorites, but we understand the arguments that Bath and Body Works isn't a bad business. Although its revenue growth has been mediocre over the last five years with analysts expecting growth to slow from here, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. Investors should still be cautious, however, as its shrinking same-store sales suggests it'll need to change its strategy to succeed.

Bath and Body Works's price-to-earnings ratio based on the next 12 months is 15.4x. There are things to like about Bath and Body Works and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $52.71 per share right before these results (compared to the current share price of $48.11).

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