Will Bath & Body Works (BBWI) Beat Earnings? And How Should You Trade It? While specialty retailer Bath & Body Works (BBWI) saw year-over-year declines in sales and net income in the first quarter, it surpassed analysts' expectations for earnings per share. Furthermore, the...

While specialty retailer Bath & Body Works (BBWI) saw year-over-year declines in sales and net income in the first quarter, it surpassed analysts' expectations for earnings per share. Furthermore, the company raised its guidance for the full year 2023. Let's analyze whether BBWI will beat earnings set to release tomorrow and how you should trade it. Read on to know more….

Bath & Body Works, Inc. (BBWI) is a specialty retail company that provides home fragrance, body care, and hand soap products. It serves customers by offering in-store experiences at around 1,800 company-operated Bath & Body Works locations in the US and Canada; and more than 425 international franchised locations, along with an online storefront at BathandBodyWorks.com.

BBWI is scheduled to report second-quarter earnings on August 23, 2023, before the market opens. The last reported first-quarter earnings were out on May 18, 2023. The company beat fiscal 2023 first-quarter earnings expectations and raised its guidance for the full fiscal year.

Although the retailer's net sales declined 4% year-over-year during the first quarter, they were in line with its expectations. BBWI reported adjusted EPS of $0.33, compared to the $0.26 forecast. The better-than-anticipated EPS was due to progress in the company's work to improve merchandise margin and early benefits from its cost optimization initiatives.

However, the company's net income was $81 million, or $0.35 per share, nearly half of the $155 million, or $0.64 a share, it reported in the prior year's quarter.

For the second quarter, BBWI expects adjusted EPS of $0.27 to $0.32 versus estimates of $0.32 per share and $0.52 a share reported in the year-ago quarter. The retailer anticipates sales to decrease in the low- to mid-single digits, compared to an estimate of a 3% decline.

The company's gross margin for the to-be-reported quarter is expected to be roughly 39%, reflecting a year-over-year decline of 40.8%. The decrease is due to the expected sales decline and high occupancy expenses from new sales growth.

Furthermore, BBWI updated its full-year guidance to reflect better-than-expected bottom-line results and the effect of an early debt payoff in the first quarter. For fiscal 2023, the company reaffirmed its forecast of flat net sales to a mid-single-digit decline compared to $7.56 billion last year.

The company now expects full-year EPS to be between $2.70 to $3.10, compared to the previous estimate of $2.50 to $3. Its adjusted EPS is expected to be between $2.68 and $3.08. BBWI's bottom line is expected to see some improvement, with the company's cost-saving initiatives starting to bear fruit.

According to Neil Saunders, managing director of GlobalData, "Longer term, Bath & Body Works remains well-positioned for growth once economic conditions and consumer sentiment starts to improve."

Shares of BBWI have gained 3.1% over the past month to close the last trading session at $36.72. However, the stock has plunged 15% year-to-date.

Here is what could influence BBWI's performance in the upcoming months:

Positive Recent Developments

On July 6, BBWI introduced all reformulated hand soap collection featuring bottles made with recycled plastic and a new 100% recyclable carton. The company's latest innovation and launch in the hand soap category meets consumer demand for a formula made without parabens, sulfates, and dyes in packaging that supports its ESG commitments.

On May 22, BBWI launched its first-ever fabric care collection this fall, bringing its fragrance expertise and authority to the laundry category.

"Knowing our customers love to experience their favorite fragrances in a multitude of ways, we're looking forward to leveraging our core strengths and competitive advantage in fragrance and innovation to expand into this brand-new category," said Julie Rosen, BBWI's president.

Deteriorating Financials

For the first quarter that ended April 29, 2023, BBWI's net sales declined 3.7% year-over-year to $1.40 billion, and its gross profit came in at $596 million, down 10.9% year-over-year. The company reported an operating income of $181 million, compared to $155 million a year ago.

In addition, the company's adjusted net income and adjusted EPS were $76 million and $0.33, compared to $155 million and $0.64 in the year-ago period, respectively.

Favorable Analyst Estimates

Analysts expect BBWI's revenue to increase 2.1% year-over-year to $2.95 billion for the fourth quarter ending January 2024. The consensus earnings per share estimate of $1.99 for the same period indicates an increase of 7% year-over-year. Moreover, the company surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2024, the company's revenue and EPS are expected to increase 4.6% and 19% year-over-year to $7.81 billion and $3.61, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BBWI's 12.03x is 20.2% lower than the 15.08x industry average. Its forward EV/EBIT of 10.66x is 21.7% lower than the 13.62x industry average. Also, the stock's forward EV/EBITDA of 9.02x is 6.5% lower than the 9.65x industry average.

But the stock's forward EV/Sales of 1.78x is 50.4% higher than the industry average of 1.18x. Its forward Price/Sales multiple of 1.12 is 29.5% higher than the industry average of 0.86.

Robust Profitability

BBWI's trailing-12-month gross profit margin of 42.39% is 19.7% higher than the 35.41% industry average. Likewise, its trailing-12-month EBITDA margin of 20.09% is 86.6% higher than the 10.77% industry average. In addition, the stock's trailing-12-month net income margin of 9.67% is 131.1% higher than the industry average of 4.19%.

Furthermore, BBWI's trailing-12-month levered FCF margin of 8.18% compares to the 4.81% industry average. The stock's trailing-12-month ROTC and ROTA of 22.21% and 13.54% are significantly higher than the industry averages of 5.99% and 3.65%, respectively.

POWR Ratings Show Uncertainty

BBWI has an overall rating of C, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BBWI has a grade A for Quality, consistent with its higher-than-industry profitability. The stock has a C grade for Value, in sync with its mixed valuation.

On the other hand, BBWI has a D grade for Stability, consistent with its 24-month beta of 1.20.

BBWI is ranked #39 out of 57 stocks in the B-rated Home Improvement & Goods industry.

Beyond what I have stated above, we have also given BBWI grades for Growth, Sentiment, and Momentum. Get all BBWI's POWR Ratings here.

Bottom Line

Specialty retailer company BBWI witnessed year-over-year declines in sales and profit in the first quarter. While the company's EPS also decreased year-over-year, it beat analyst expectations. Considering better-than-expected earnings per share results and the effect of an early debt payoff during the first quarter, BBWI raised its guidance for the full fiscal year.

However, the retailer will likely register a top- and bottom-line decline in its second-quarter 2023 earnings, set to release tomorrow. Given BBWI's bleak financials and near-term weak outlook, it could be wise to wait for a better entry point in this stock.

Stocks to Consider Instead of Bath & Body Works, Inc. (BBWI)

Given its uncertain short-term prospects, the odds of BBWI outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Home Improvement & Goods industry instead:

The Tile Shop Holdings, Inc. (TTSH)

Bassett Furniture Industries, Incorporated (BSET)

Flexsteel Industries, Inc. (FLXS)

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today's volatile markets:

3 Stocks to DOUBLE This Year >

BBWI shares rose $0.78 (+2.12%) in premarket trading Tuesday. Year-to-date, BBWI has declined -11.49%, versus a 15.75% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.

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