Legacy Dependence Will Squeeze Margins Amid Mounting Retail Headwinds

Key Takeaways

• Heavy reliance on physical stores and traditional products may limit adaptability to shifting consumer demands and intensifying digital competition.
  
• Rising costs for sustainability efforts, marketing, and operations threaten margins and growth amid heightened competition and evolving consumer preferences.
  
• Strategic investments in digital, store optimization, loyalty programs, and product innovation are likely to drive growth, improve margins, and diversify revenue streams.

Catalysts

Operates as a specialty retailer of home fragrance, personal and body care, soaps, and sanitizer products.

• As consumer preference continues to shift rapidly toward e-commerce and digital-native brands, Bath & Body Works faces accelerating pressure on physical store traffic, threatening to erode comparable sales growth and hinder overall revenue expansion, especially given its still-heavy dependence on a legacy store-based distribution model that is difficult to scale or reposition quickly.
  
• Heightened focus on ingredient transparency, sustainability, and eco-friendly packaging among younger consumers and stricter regulatory standards will require significant investments and overhaul of existing product lines, increasing operating costs and compressing net margins, without guaranteeing successful connection with this new demographic or compliance with evolving environmental mandates.
  
• Increased reliance on limited-edition collaborations, promotions, and newness to drive foot traffic and top-line growth risks masking deeper issues of category saturation and product fatigue, which could result in higher marketing spend and unpredictable earnings volatility if customer engagement wanes or new launches fail to resonate.
  
• Intensified competition from indie, niche, and private-label brands-many of which are better aligned with emerging preferences for clean, locally sourced, or artisanal products-threatens to displace Bath & Body Works' offerings and erode pricing power, ultimately weighing on both future revenue growth rates and gross margin sustainability.
  
• Persistent input cost inflation, rising labor expenses, and the ongoing exposure to tariff headwinds mean that even with current mitigation efforts, the company is likely to face ongoing margin compression and reduced earnings growth, as structural operating challenges are not expected to abate in the foreseeable future.

Bath & Body Works Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bath & Body Works compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bath & Body Works's revenue will grow by 2.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.9% today to 10.4% in 3 years time.
• The bearish analysts expect earnings to reach $817.0 million (and earnings per share of $4.37) by about September 2028, up from $728.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, up from 8.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 5.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.34%, as per the Simply Wall St company report.

Bath & Body Works Future Earnings Per Share Growth

Risks

• Bath & Body Works is aggressively investing in digital platform enhancements, omnichannel initiatives, and experiential in-store retailing, which can boost customer engagement and drive both online and store revenues, potentially supporting sustained top line growth.
  
• The company is shifting its focus toward product innovation, marquee collaborations such as the multiyear Disney partnership, and a robust cadence of limited-edition launches, which is likely to increase purchase frequency and allow for premium pricing, supporting same-store sales growth and stronger gross margins.
  
• An expanding loyalty program, now with 39 million active members up 5% year over year, is improving customer retention and spend per customer, which could lead to higher consumer lifetime value and more resilient net margins.
  
• The ongoing optimization of its store fleet, notably moving 58% of locations off-mall and closing underperforming mall stores, has produced strong four-wall economics and provides operational efficiencies that may lift overall profitability and return on invested capital.
  
• International expansion-currently at 537 stores with at least 30 new planned for 2025-and efforts to reach younger consumers through alternative channels, like college bookstores, represent significant untapped markets that could accelerate revenue growth and diversify earnings streams over the long term.

Valuation

• The assumed bearish price target for Bath & Body Works is $32.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bath & Body Works's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.9 billion, earnings will come to $817.0 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $30.56, the bearish analyst price target of $32.0 is 4.5% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.