[Note: BBWI fiscal year ends January]
After a 10% decline year-to-date, at the current price of around $39 per share, we believe Bath & Body Works stock (NYSE: BBWI), the largest specialty home fragrance & body care product retailer in the U.S, formerly known as L Brands, could go higher in the long-term. BBWI stock has declined from around $43 to $39 YTD, less than the 15% growth in the S&P index. BBWI’s stock decline can be attributed to the declining foot traffic and uncertainties from a high inflationary environment. Although the outlook is cloudy in the near term, the franchise quality and valuation should help the stock rise in the longer run. It is a positive sign that BBWI is growing, as evidenced by their growing company-operated stores, which were 1,810 in Q1 2023 (as of April 29, 2023), up from 1,759 at in prior year quarter. Management plans to open new off-mall stores, remodel selected stores, and invest in technology and the supply chain, with a $300 to $350 million capital expenditure budget for FY2023 (compared to $328 million CAPEX in FY2022, $270 million in FY2021 and $228 million in FY2020). The company offers a variety of products, including men’s deodorant and fragrance products, where management believes an $8 billion market exists. To add to this, BBWI also has an advantage with its loyalty program, which now has over 37 million members, and the loyalty sales represent approximately tw0-third of its U.S. sales. This is valuable in the current environment to drive repeat sales.
The company’s sales declined by 4% year-over-year (y-o-y) to $1.4 billion on sluggish demand in categories like home fragrance and personal care. But the retailer adjusted to these issues with effective cost-cutting and merchandising initiatives. Consequently, Bath & Body Works
We forecast Bath & Body Works Revenues to be $7.5 billion for the fiscal year 2023, down marginally y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $2.98. Given the changes to our revenues and EPS forecast, we have revised Bath & Body Works Valuation to $43 per share, based on a $2.98 expected EPS and a 14.5x P/E multiple for the fiscal year 2023. That said, the company’s stock appears modestly cheap at the current levels, with our valuation at a 10% premium from the current market price.
For fiscal 2023, the company reiterates its forecast of flat net sales to a mid-single-digit decline compared to $7.6 billion in 2022. The company now expects full-year 2023 earnings per diluted share to be between $2.70 and $3.10, compared to $3.40 in 2022. The company expects full-year 2023 adjusted earnings per diluted share to be between $2.68 and $3.08. The company’s adjusted earnings per diluted share forecast exclude the gain on the early extinguishment of debt associated with the open market repurchase and retirement of the $84 million principal amount of the company’s senior notes during the first quarter of 2023.
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