Innovations And Global Expansion Set To Elevate Brand Loyalty And Revenue

Key Takeaways

• Investment in product innovations and expansions into new categories and international markets is poised to boost customer base and revenue growth.
  
• Efficiency enhancements and cost-saving initiatives signal a strategic move to improve net margins and sustain long-term earnings growth.
  
• Challenges in promotional strategy, economic uncertainty, and risks in international expansion could impact Bath & Body Works' revenue, margins, and growth.

Catalysts

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

• The company's ongoing investment in new product innovations and category adjacencies, such as Everyday Luxuries and expansions in men's, lip, and laundry categories, are expected to attract new customers and increase spend among existing ones, positively impacting revenue growth.
  
• Expansion in international markets and an increase in international store count, with a planned opening of approximately 50 net new stores, up from the prior expectation of 35, suggesting potential for international sales growth and brand recognition on a global scale, thereby potentially increasing overall revenue.
  
• The introduction of a native mobile app and the launch of the Bath & Body Works TikTok shop, along with the Generative AI fragrance finder Gingham Genius, are aimed at enhancing customer engagement and providing a seamless shopping experience, which could lead to higher traffic and sales, positively affecting revenue.
  
• The increase in the 2024 cost savings guidance to $130 million from $100 million, as part of a broader efficiency enhancement program expected to deliver $280 million in run rate savings, signifies operational optimizations that could improve net margins.
  
• A heightened focus on executing with precision, leveraging new category adjacencies, expanding off-mall and international locations, and rolling out integrated marketing campaigns, such as the full rollout of Everyday Luxuries and the Stranger Things Part 2 collaboration, designed to reinforce core offerings and drive brand loyalty, potentially leading to improved revenue and earnings growth.

Assumptions

• Analysts are assuming Bath & Body Works's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.7% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $848.8 million (and earnings per share of $4.1) by about October 2027, down from $937.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 7.0x today. This future PE is lower than the current PE for the US Specialty Retail industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 1.85% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

Risks

• The semi-annual sale (SAS) underperformed expectations, indicating potential challenges in promotional strategy effectiveness and merchandising, which could impact future revenue and margins.
  
• Economic uncertainty and a consumer focus on value could result in decreased spending on discretionary items like those sold by Bath & Body Works, potentially affecting net sales and earnings.
  
• International expansion carries inherent risks, including geopolitical tensions and cultural market differences, which could hinder growth in international markets and impact overall revenue.
  
• The company’s efforts to introduce new product categories and expand into new markets could dilute focus and resources, potentially affecting core product line performance and profit margins.
  
• Significant reliance on the performance of seasonal sales and new product launches to drive growth may result in volatility of earnings and revenue, influenced by consumer reception and competitive pressures.

Valuation

• The analysts have a consensus price target of $43.02 for Bath & Body Works based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.9 billion, earnings will come to $848.8 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 8.5%.
• Given the current share price of $29.82, the analyst's price target of $43.02 is 30.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.