BBBY - Bath & Body Works: Stock Is Worth Watching Ahead Of Earnings Date

Summary

• Bath & Body Works revenue of $1.6 billion in Q3 2022, indicating a decline of 4.55% (Y/Y), beat Wall Street revenue estimates by $47.68 million.
• The company is revisiting all its promotions and adjusting pricing plans to combat the rising inflationary pressures.
• BBWI seeks to detach from the use of Victoria's Secret's technology by increasing its investment in IT into 2023.

Bath & Body Works ( BBWI ) strategies for development over the years have revolved around steering through the scientific values of fragrance chemistry while synthesizing beauty and perfection. BBWI has survived in an era when the pandemic has almost wiped out major retail chains with most struggling with sales and contracting store counts. For instance, Bed Bath & Beyond ( BBBY ) is contemplating restructuring measures such as bankruptcy options after years of net losses, inventory challenges, and changing shopper habits.

Thesis

Bath & Body Works is looking to increase CapEx on customer experience including the improvement of omnichannel functionalities and loyalty programs in the point-of-sale at stores. The company is also working to complete its separation from Victoria’s Secret & Co ( VSCO ) while focusing on its channels, stores, and website. It has continued to pride itself on new product launches such as Moxy and other aromatherapy collections with more marketing activities expected in 2023. The company has, however, decried the challenge of input costs especially raw materials, and the rising inflation that has affected product pricing.

Bath & Body Works reported revenue of $1.6 billion in Q3 2022 dropping 4.55% (Y/Y). Despite the decrease, it managed to beat Wall Street revenue estimates by $47.68 million. Earnings per share or EPS stood at $0.40 outpacing forecasts by $0.20 in the quarter. The fragrance, cream, and body lotion giant attributed part of the revenue surge to a 10% (YoY) growth in international business sales. Outside the US, net sales emanate from stores operated by the company, the e-commerce site in Canada, and royalties from franchised stores/ dealers of wholesale merchandise.

Total inventories also grew 10% (YoY) with retail units of finished goods up 7% (YoY) in line with the company’s expectations. Third-quarter store sales were higher in the US and Canada at $1.18 billion despite decreasing by $60 million or 5% (Y/Y). A closer look showed that while BBWI’s Q3 2022 sales were up 35% or $306 million as compared to Q3 2019, direct sales declined 6% (YoY) of $24 million as compared to Q3 2021. Arguably, more customers were visiting the company's omnichannel in line with the buy-online, pickup-in-store (BOPIS) in 2021 (during the pandemic) as compared to 2022.

Intention to grow Omnichannel/ Loyalty Program

BBWI ended Q3 2022 with more than 1,280 BOPIS stores globally. In its earnings call, BBWI indicated that it will continue to grow its business investments not only in product development but also in technology and especially the omni- functionalities and the loyalty program. To date, BBWI has enrolled up to 21 million members with loyalty customers making up more than a third of the entire membership base. Sales from the loyalty program account for up to third-thirds of the overall US sales since BBWI’s launch. While considering the loyalty program, members earn 1000 points after an expenditure of $100 in any BBWI store thereby enabling them to redeem any product of their choice for free up to $16.95. Customers are also awarded $1 for every 10 points earned during shopping.

The company explained in its Q3 2022 report earnings report that it was revisiting all its promotions and adjusting pricing plans. BBWI made deliberate attempts to determine the proper costs of products to improve the margins of merchandise.

A point of concern is that Victoria’s Secret provides BBWI with logistical services including information technology and marketing services. This leads to the need for transition services, especially when recording billing and costing. It came as no surprise that there was a strong emphasis on an imminent separation.

Parent company L Brands completed its tax-free spin-off of Victoria’s Secret business on August 2, 2021. However, some logistical connection such as sharing of technological assets was maintained past the spin-off. Back in 2021 after the separation, Victoria’s Secret accumulated $976 million in proceeds that were handed over to BBWI to fund cash payments during the spin-off. Additionally, BBWI reduced its accumulated deficit in Q4 2021 by $175 million with the transfer of some assets and liabilities linked to Victoria's Secret. The company hopes to increase its investment toward technological development to halt the use of Victoria's IT system in 2023 and steer long-term growth. As it is, both brands focus on a collection of body and bath products while utilizing certain packaging similarities.

New product Offerings

BBWI announced in Q3 2022 that it had introduced men’s antiperspirant deodorant that was already available in 650 stores. The balance of this deodorant chain is expected to be launched later in 2023. The company also launched a test for its new face/ skin, hair, and dietary supplements line dubbed Moxy. BBWI has made this product available both online and in at least 11 stores.

The ingredients are animal-free legit skin care ointment and gummy vitamins. Moxy's launch into 2023 is also proof that the men's category has improved performance. The company hopes to increase its market share in the men's sector since it is already testing the antiperspirant deodorant mentioned earlier in at least 650 stores. Already, Moxy is retailing at $10 to $30 exclusively at BBWI stores. The company is also intending to increase its marketing strategies for the new products to spur sales growth in 2023.

How about the dividend?

Bath & Body Works announced its regular dividend of $0.20 per share due for payment on March 3, 2023. It means that the dividend yield or FWD is 1.71% representing a decline of 20.62% from the sector’s average of 2.15%.

Over the past 5 years, BBWI’s dividend yield has declined more than 65% on TTM basis. A look at BBWI’s cash flow in 2020 and 2021 shows that the dividend was supported by a relatively higher amount of cash from Q2 2020 to Q2 2021. Cash available in Q1 2020 stood at $3.57 billion against $295 million as of Q3 2022. As it turns out, most of the company's earnings are now directed toward CapEx and operational activities.

As an income investor, I am very considerate of the dividend yield. The decline in the quarter may also be attributed to the 6-month increase in the share price. BBWI rose 20.09% in the past 6 months and is also up 6.55% (YTD). Overall, I will wait to see if the company will increase its EPS in Q4 2022 and also hope that the payout ratio increases later in 2023.

Risks to Consider

BBWI indicated that it expected a decline in sales in Q4 2022 to below $3.03 billion realized in Q4 2021. The company is also forecasting an EPS ranging from $1.45 to $1.65 with the full-year revenue guidance also falling below the $7.9 billion recorded in 2021. As an income investor, I am very considerate of the dividend yield. The decline in the quarter may be attributed to the 6-month increase in the share price. BBWI rose 20.09% in the past 6 months and is also up 6.55% (YTD).

This decrease is anticipated due to inflationary costs that the company estimated to range from $220 million to $230 million. Additionally, the loyalty program is expected to defer at least $40 million in the year, since the company will also include the new products in the rollout.

Higher costing continues to be a challenge for BBWI, especially in the volatile market. Total operating expenses have grown 13.9% (QoQ) to $476 million against $418 million noted in Q2 2022. However, the company has worked to contain this surge with appropriate product pricing. These expenses hit a record high in Q4 2021 at $671 million.

BBWI’s operating activities consumed $14 million in Q3 2022 up 193% (QoQ) from $15 million generated in Q2 2022. Additionally, CapEx took up $90 million, an increase of 21.6% (QoQ) from $74 million used in Q2 2022. This negative cash flow may continue in Q4 2022 since BBWI intends to increase expenditure, especially in technology as it seeks to separate from Victoria's technological hold.

Bottom Line

BBWI is recording an increase in customer acquisition trends through its loyalty program. The company is also advancing new product lines as it seeks to explore higher market share in the fragrance, hair, and body market. The dividend yield is also something to consider with the payout due later in March 2023. However, an increase in input costs has made it to provide lower revenue guidance into Q4 2022 which may translate to the overall FY 2022. Still, this conclusion remains hypothetical and I hope positive market trends may cause an upswing. However, I feel that the company may require more money to conduct its technological upgrade away from VSCO. For these reasons, I propose a hold rating for BBWI stock ahead of its Q4 2022 earnings release on February 22, 2023.

For further details see: