A longtime shopping mall staple, Bath & Body Works Inc. (BBWI, Financial) operates as a specialty retailer of home fragrance, body care, soaps and sanitizer products. The company sell its products under the Bath & Body Works, White Barn and other brand names through specialty retail stores and websites located in North America. The company also operates in international markets through stores operated by partners under franchise, license and wholesale arrangements.
As of Jan. 29, it had 1,755 company-operated retail stores and 338 international partner-operated stores.
The company was founded in 1963 and is headquartered in Columbus, Ohio. The company used to be part of the L Brands beauty empire, which spun off the Victoria's Secret & Co. (VSCO, Financial) business in August 2021. Last year ,the company generated $7.9 billion in revenue and currently has a market capitalization of $7.1 billion.
Financial review
Like many brick-and-mortar retailers, the company has recovered nicely from pandemic levels in 2020. For fiscal year 2021, which ended in January, revenue increased 22.5%, net income increased 58% and earnings per share increased 63%.
For the first quarter of 2022, which ended in April, sales declined 1% largely due to difficult comparisons. The company’s net sales of $1.45 billion is on top of 53% net sales growth between fiscal 2019 and fiscal 2021. Excluding the estimated first-quarter 2021 benefit of $50 million related to government stimulus payments, net sales increased 2%. At that time, the company gave updated fiscal 2022 guidance where it was forecasting earnings per share from continuing operations of between $3.80 and $4.15. This compares to adjusted earnings of $4.51 per share in 2021.
On July 20, the company again updated its outlook downward based on heavy industry discounting, inflationary pressures and lower mall-based foot traffic. CEO Sarah Nash said,“Our business continues to perform at levels significantly above pre-pandemic, although we are navigating a challenging operating and macroeconomic environment with inflationary pressure affecting our customers and our business.”
Second-quarter guidance was reduced from the range of 60 cents to 65 cents to 40 cents to 42 cents and the company expects full-year sales to be down mid-high single digits compared to the prior-year period. Operating margins are expected to be in the mid-teens range. The operating margin for 2021 was 25.4%.
The company’s balance sheet showed $4.8 billion in debt and $641 million in cash as of April 30. Ebitda last year was $2.4 billion, which creates a leverage ratio of approximately 1.7 times. However, with the drop in operating margins and subsequent decrease in Ebitda this year, that ratio will move higher.
Valuation
Analyst consensus earnings per share estimates for the fiscal year ending January 2023 are $3.24. For the following year, they expect $4.09. That puts Bath & Body Works stock selling at 10 times the current year's earnings and 8 times next year's earnings. Keep in mind, this year's earnings estimates are based on lower margins due to cost pressures. Enterprise value/Ebitda estimates for this year are 7 times and for next year, the estimate is 6 times.
The company pays an annualized dividend of 80 cents, which equates to a 2.66% dividend yield at this time. The payout ratio is low at less than 25% of estimated earnings.
Guru trades
Gurus who have purchased shares of Bath & Body Works recently include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Paul Tudor Jones (Trades, Portfolio). Gurus have reduced or sold out of their positions include PRIMECAP Management (Trades, Portfolio) and Steve Mandel (Trades, Portfolio).
Summary
The company’s announcement of a drop in operating margins to the mid-teens this year was a surprise to investors. The culprit was cost inflation, deeper promotional environment in the retail industry and consumers' cautious spending patterns due to higher gas prices and other inflationary costs. The company has been taking actions to deal with these pressures by leveraging their vertically integrated supply chain, aggressively making efforts to control costs across the company. If these pressures turn out to be transitory, then Bath & Body Works appears to be substantially undervalued on a forward-looking basis.
