Bath & Body Works: Strong Business, But Macroeconomic Pressures Remain (NYSE:BBWI)

Brett_Hondow

Investment Thesis

While Bath & Body Works has the potential to see sales growth over the longer term as the company expands into the fabric care category, inflationary concerns may weigh on consumer demand in the short to medium term.

Bath & Body Works, Inc. (NYSE:BBWI) is a leading company in the personal care and home fragrance industry. When looking at the stock’s longer-term price trajectory, we can see that the stock saw a significant high above the $80 level towards the end of 2021 – before ultimately reverting to a price of $38.23 at the time of writing.

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The purpose of this article is to assess whether Bath & Body Works has the potential to rebound to prior highs going forward.

Performance

For the most recent quarter, we can see that Bath & Body Works saw a slight decline in sales across U.S. and Canada stores:

Bath & Body Works: First Quarter 2023 Earnings Results

That said, when looking at quarterly sales performance in a wider context, we can see that sales for Bath & Body Works tend to be quite seasonal.

Figures sourced from historical Bath & Body Works quarterly reports. Heatmap generated by author using Python’s Seaborn library.

We can see that Q4 shows significantly higher sales than that of other quarters throughout the year. As a leader in the personal care and home fragrance industry – sales for the company tend to see a significant spike over the Christmas months.

With that being said, we can see that with the exception of Q1 – performance across quarters in 2021 was still above that of 2022. It is notable that sales growth during the height of the COVID-19 emergency in 2020 was particularly strong – owing to higher demand for household products, as consumers spent more time at home during this period.

Additionally, Bath & Body Works reportedly had carried 30% more inventory leading up to the holiday shopping season in 2021 as compared to 2020 – which had allowed the company to continue bolstering sales. However, sales growth started to moderate in 2022, and we began to see a strong moderating of price at that point.

From a financial standpoint, Bath & Body Works has continued to show impressive results over the past year.

When looking at the company’s quick ratio (calculated as total current assets less inventories all over total current liabilities), we can see that the quick ratio is up significantly from 0.75 to 1.03.

Apr 2022 Apr 2023 Total current assets 1752 2080 Inventories 820 771 Total current liabilities 1240 1277 Quick ratio 0.75 1.03 Click to enlarge

Source: Figures sourced from Bath & Body Works, Inc First Quarter 2023 Earnings Results and provided in USD millions (except the quick ratio). Quick ratio calculated by author.

A quick ratio above 1 indicates that the company has more than sufficient liquid assets to cover its current liabilities. In this regard, the fact that Bath & Body Works has seen an increase in this ratio is encouraging.

Additionally, the company’s long-term debt to total assets ratio is also down significantly on that of last year:

Apr 2022 Apr 2023 Long-term debt 4856 4781 Total assets 4860 5363 Long-term debt to total assets ratio 1.00 0.89 Click to enlarge

Source: Figures sourced from Bath & Body Works, Inc First Quarter 2023 Earnings Results and provided in USD millions (except the long-term debt to total assets ratio). Long-term debt to total assets ratio calculated by author.

From this standpoint – while sales growth has moderated – the company’s balance sheet still looks strong.

Risks and Looking Forward

Going forward, I take the view that the main future growth prospects for the stock will be the extent to which it can bolster sales and earnings in a post-COVID environment.

When looking at the 10-year earnings trajectory for Bath & Body Works, we can see that while earnings per share is down from highs seen in 2021 – it still remains within the range seen pre-2018, while the company’s P/E ratio still remains at the lower end of the range.

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In this regard, I take the view that the stock could have further room for upside on an earnings basis. However, I also take the view that the company will need to demonstrate significant sales growth on 2022 figures before we see a significant upside.

Additionally, with the company having reported significant dips in footfall across its stores in 2022 owing to inflation – there is the risk that low consumer confidence due to broader macroeconomic concerns could continue to place pressure on sales. Longer-term, I take the view that the company’s entry into the fabric care category is a good strategic move and has the potential to bolster sales, owing to significant customer enthusiasm for the company to introduce its fragrances to the laundry category. This has significant potential to bolster store sales over the longer term. However, inflationary pressures may keep demand below potential in the short to medium term.

Conclusion

To conclude, I take the view that Bath & Body Works continues to be a strong player in its market and the company’s entry into fabric care could have the potential to bolster sales over the longer term. However, I take the view that inflationary concerns may continue to place pressure on the stock in the short to medium term, and investors are likely to look for further evidence of growth before we see a meaningful upside in the stock.