[Note: BBWI fiscal year ends January]
After a huge 46% decline in the last six months, 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 up in the long-term. BBWI stock has declined from around $73 to $39 since the beginning of 2022, much steeper than the 8% decline in the S&P index. This stock decline can be attributed to the current macroeconomic concerns relating to consumer spending. The retailer entered FY2021 with strong momentum, with revenue growth of a solid 22% year-over-year (y-o-y) to $7.8 billion, and full-year adjusted earnings up 63% y-o-y at $4.88 per share. But the raging inflation in fuel prices, food inflation, and energy worsened the selling conditions in the recent Q1. Although the outlook is cloudy in the near term, the franchise quality and valuation should help this stock rise in the longer run.
In Q1 2022, Bath & Body Works BBWI ’ net sales were down marginally y-o-y to $1.5 billion. Additionally, the company’s bottom line went from year-ago earnings per share of 97 cents to 64 cents. On an adjusted basis, Q1 EPS was 7% higher compared to the prior-year quarter.
We forecast Bath & Body Works Revenues to be $7.6 billion for the fiscal year 2022, down 4% y-o-y. Looking at the bottom line, we now forecast earnings per share to come in at $3.99. Given the changes to our revenues and EPS forecast, we have revised Bath & Body Works Valuation to $43 per share, based on a $3.99 expected EPS and a 10.9x P/E multiple for the fiscal year 2022. That said, the company’s stock appears cheap at the current levels, with an 11% premium from the current market price. BBWI’s P/E grew from around 10.0x ZRX in fiscal 2019 to 12.1x in fiscal 2021, on the back of rising investor expectations surrounding increased demand for its products. While, the company’s P/E multiple has pulled back to 9.8x now, due to the increased economic uncertainty weighing on the broader markets – it still has an upside potential when compared to the P/E multiples of the last two years.
In addition to revamping its loyalty program this year, Bath & Body Works will test a new line of hair care products. While these investments can help increase customer demand, they can also impact the company’s profits in the short term. That said, the retailer now expects diluted earnings per share to fall to a range between $0.60 and $0.65 in the second quarter, compared to $0.77 in the prior-year quarter. For the full year of 2022, the company expects EPS to range between $3.80 and $4.15, well below both the 2021 EPS levels and its previous guidance of between $4.30 and $4.70.
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