New Products And Loyalty Program Drive Growth But Geopolitical Risks And Margin Pressure Loom

Key Takeaways

• Strategic partnerships and international expansion bring growth opportunities but face geopolitical challenges impacting new markets.
  
• Cost-saving initiatives and omni-channel strategies aim to enhance margins and long-term revenue growth.
  
• Geopolitical issues and market normalization challenges pose risks to international revenue, operational costs, and revenue stability, affecting margins and shareholder returns.

Catalysts

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

• Bath & Body Works is leveraging its strategic 5E plan to drive long-term growth, focusing on new product innovation, omni-channel experience, and operational efficiency, which are expected to boost revenue and net margins.
  
• The company has seen success in its collaborations, such as the Stranger Things and Emily in Paris partnerships, enhancing brand awareness and potentially increasing revenue by attracting new customer segments.
  
• International expansion, with a focus on new markets and store openings, represents a growth opportunity, expected to contribute to revenue increases, albeit with current geopolitical challenges impacting some regions.
  
• The loyalty program continues to expand, increasing customer retention and frequency of purchase, which is projected to positively impact earnings due to higher customer spending.
  
• The Fuel for Growth cost-saving initiative is on track to deliver significant savings, aiming to improve operating margins and therefore increasing overall earnings.

Bath & Body Works Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bath & Body Works's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.4% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $864.8 million (and earnings per share of $4.15) by about November 2027, down from $924.0 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 13.6x on those 2027 earnings, up from 8.4x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 1.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.15%, as per the Simply Wall St company report.

Bath & Body Works Future Earnings Per Share Growth

Risks

• The ongoing conflict in the Middle East has significantly impacted Bath & Body Works' international sales, causing a decline where these regions represent about half of their total international business. This uncertainty poses risks to international revenue growth.
  
• The normalization of the candle market has affected their business in 2024. Although management does not expect this impact to continue in 2025 and beyond, any prolonged market challenges in their key product categories could affect revenue and earnings stability.
  
• With an expectation to repurchase $400 million in shares annually, there is a potential risk if future cash flows do not meet expectations, which could affect their ability to sustain shareholder returns.
  
• Their business model heavily relies on consumer trends and preferences. The competitive landscape with a value-conscious consumer, coupled with potential strategic promotional activities to drive traffic, could pressure gross margins if not managed effectively.
  
• The ongoing geopolitical issues and potential for fluctuating tariffs, while mitigated by their current North American manufacturing base, still pose a risk to operational costs and could impact net margins and profits if they face sudden changes in trade policies or costs.

Valuation

• The analysts have a consensus price target of $44.7 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 $69.0, and the most bearish reporting a price target of just $31.37.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.0 billion, earnings will come to $864.8 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $35.23, the analyst's price target of $44.7 is 21.2% 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.