Bath & Body Works Stock Looks Attractive At $64
Bath & Body Works (NYSE: BBWI), the largest specialty home fragrance & body care product retailer in the U.S, formerly known as L Brands, spun off Victoria’s Secret (NYSE: VSCO) into a stand-alone, separately traded company, and then changed its name to Bath & Body Works on August 3, 2021. BBWI has gained roughly 3% – increasing from about $62 on August 4 to around $64 currently, outperforming the S&P500, which declined marginally. Why? Bath & Body Works was already thriving under L Brands, and after the spin-off, it looks more poised to emerge leaner, stronger, and with a healthier balance sheet going forward. The two new companies each have a simpler story to tell – Bath and Body Works will focus on bath, body, and home fragrances, while Victoria’s Secret will go after the lingerie and beauty markets. Victoria’s Secret still generated substantial revenue, over $3.1 billion in the first half of 2021 and $5.4 billion in 2020, but that was still down from $7.5 billion the year before and the peak of $7.8 billion it reached in 2016. That said, Bath & Body Works played a significant role in keeping L Brands afloat despite the losses of Victoria’s Secret, and as a stand-alone company, it should be able to demonstrate its economic merits more strongly. We discuss more in the sections below.
But is this all there is to the story?
No, not quite. Despite the company’s stock rally, Trefis estimates Bath & Body Work’s Valuation at about $71 per share, around 11% above the current market price based on two key opportunities.
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The first opportunity we see is Bath & Body Work’s Revenue growth. BBWI’s revenue (as a part of L Brands) grew at a compounded annual growth rate of 14.2% from $4.2 billion in 2017 to $6.2 billion in 2020. Bath & Body Works was a frequent bright spot through 2020 due to its direct channel despite all of its stores being closed for parts during the early months of lockdown. In the recent Q2 as well, the company’s total revenue grew 43% year-over-year (y-o-y) to $3.3 billion and grew a strong 54% compared to the second quarter of 2019. Although BBWI posted its quarterly results as a standalone business in Q2, Victoria’s Secret was still included in these results. In fact, Victoria’s Secret was responsible for almost half of BBWI’s total sales in this quarter (ended July). However, the sales of the Bath & Body Works segment were up 61% on a two-year basis that surpassed Victoria’s Secret’s flat growth during the same period. On the bottom line, the retailer, Bath & Body Works, flipped dramatically into the black with a profit of $374 million or $1.34 per share against the year-ago loss of almost $50 million.
The second key opportunity stems from BBWI’s valuation multiple compared to its peers. The stock now trades at a reasonable 14x projected 2021 earnings per share of about $5.26, per Trefis estimates. This is lower when compared to its peer, Ulta Beauty, trading at 24x forward earnings. We believe that BBWI’s underlying business is solid and the company’s shares are trading at discounts to the market, given the strong revenue growth it has posted over the past years, and a trend that is expected to continue going forward. While BBWI’s revenues grew at a CAGR of 14% between 2017 and 2020, ULTA’s revenue grew marginally during this period. While we acknowledge that BBWI’s revenue base of around $11.8 billion (in 2020) was much higher compared to around $6.1 billion for ULTA, still the growth BBWI has posted is meaningful. It should be noted that since Victoria’s Secret revenues will no longer be adding on going forward, we expect BBWI’s revenue base to shrink to $7.9 billion in fiscal 2021.
Our price estimate of $71 for Bath & Body Works stems from a 13.5x P/E multiple and $5.26 in earnings per share in 2021. This implies around an 11% premium to the current market price near $64.