Bath and Body Works's (NYSE:BBWI) Posts Q3 Sales In Line With Estimates

Full Report / November 16, 2023

Personal care and home fragrance retailer Bath & Body Works (NYSE:BBWI) reported results in line with analysts' expectations in Q3 FY2023, with revenue down 2.6% year on year to $1.56 billion. Turning to EPS, Bath and Body Works made a GAAP profit of $0.52 per share, improving from its profit of $0.40 per share in the same quarter last year.

Bath and Body Works (BBWI) Q3 FY2023 Highlights:

  • Revenue: $1.56 billion vs analyst estimates of $1.56 billion (small beat)
  • EPS: $0.52 vs analyst estimates of $0.34 (51.8% beat)
  • Raised full year 2023 EPS guidance
  • Free Cash Flow was -$121 million compared to -$105 million in the same quarter last year
  • Gross Margin (GAAP): 43.7%, up from 42.3% in the same quarter last year
  • Store Locations: 2,301 at quarter end, increasing by 120 over the last 12 months

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 revenue has declined over the last four years, dropping 13.2% annually despite opening new stores and expanding its reach.

Bath and Body Works Total Revenue

This quarter, Bath and Body Works reported a rather uninspiring 2.6% year-on-year revenue decline, in line with Wall Street's expectations. Looking ahead, analysts expect sales to grow 2.6% over the next 12 months.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.

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 43.3% 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's gross profit margin came in at 43.7% this quarter, marking a 1.4 percentage point increase from 42.3% 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.

In Q3, Bath and Body Works generated an operating profit margin of 14.1%, up 1.6 percentage points year on year. This increase was encouraging, and we can infer Bath and Body Works was more disciplined with its expenses or gained leverage on fixed costs because its operating margin expanded more than its gross margin.

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%. However, Bath and Body Works's margin has declined by 3.5 percentage points year on year(on average). Although this isn't the end of the world, some investors were likely hoping for better results.


These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q3, Bath and Body Works reported EPS at $0.52, up from $0.40 in the same quarter a year ago. This print beat Wall Street's estimates by 51.8%.

Bath and Body Works EPS (GAAP)

Between FY2019 and FY2023, Bath and Body Works's adjusted diluted EPS grew 99.8%, translating into a remarkable 24.9% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 10.5% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Bath and Body Works burned through $121 million of cash in Q3, representing a negative 7.7% free cash flow margin. The company increased its cash burn by 15.2% year on year.

Bath and Body Works Free Cash Flow Margin

Over the last eight quarters, Bath and Body Works has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 5.2%, well above the broader consumer retail sector. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.

Return on Invested Capital (ROIC)

We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.

Bath and Body Works has a strong competitive position and its management team has a wonderful track record of successfully investing in profitable growth initiatives. Its five-year average ROIC is 45.3%, placing it among the best consumer retail companies.

Key Takeaways from Bath and Body Works's Q3 Results

With a market capitalization of $7.39 billion, Bath and Body Works is among smaller companies, but its $412 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

Despite only a small beat on the revenue line, Bath and Body Works blew past analysts' EPS expectations this quarter. The company also raised its full year 2023 EPS guidance. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $32.5 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 think Bath and Body Works is a good business. Its new stores openings have increased its brand equity, and its stellar ROIC suggests it has been a well-run company historically.

Bath and Body Works's price-to-earnings ratio based on the next 12 months is 9.7x. There are definitely a lot of things to like about Bath and Body Works, and looking at the consumer landscape right now, it seems the company trades at a pretty interesting price.

Wall Street analysts covering the company had a one-year price target of $46.8 per share right before these results, implying that they saw upside in buying Bath and Body Works even in the short term.

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