Equity Position Update: Bath & Body Works Inc.
We initiated a position in Bath & Body Works (BBWI, Financial) earlier in the year that we added to significantly in the Fourth Quarter. The company, which sells personal care and home fragrance products, separated from Victoria’s Secret in late 2021 and has struggled to find its footing in the public markets. Bath & Body Works was challenged by the normalization of trends following the pandemic, but also suffered from execution hiccups that made matters worse. On the operations front, the company spent much of 2022 without a permanent CEO, cut guidance multiple times given inventory and cost pressures, and did a poor job communicating meaningful increases in the company’s cost structure as a standalone business. On the capital allocation front, the execution of an accelerated share repurchase program was sloppy at best.
Despite these recent struggles, we believe BBWI can change its equity story, improve its earnings power, and earn a more premium valuation. The recent appointment of a new CEO, Gina Boswell from Unilever, is an encouraging first step.
Simply getting the core business back on track has the potential to deliver significant upside, especially given the current low double-digit P/E multiple. The company should generate substantial earnings growth driven by recharged sales, margin recovery to more normalized levels, and the deployment of excess cash to continued share repurchases. The real prize, however, would be if Ms. Boswell can seize on the potential to transform the business from a largely US retailer of soaps, lotions, fragrances, and candles into a more global direct-to-consumer home and personal care brand.
We filed a 13-D Amendment to permit us to engage in a wide-ranging dialogue with the Board and management. We see an opportunity to work constructively with the company to address its apparent governance issues and help it realize its significant potential.
From Daniel Loeb (Trades, Portfolio)'s Third Point fourth-quarter 2022 letter.
