Bath & Body Works, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Bath & Body Works is a retailer specializing in home fragrances, personal care, and soap products. While it has a significant presence in its market, challenges in changing consumer preferences and increased competition prevent a durable moat.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Bath & Body Works operates primarily as a retailer specializing in the sale of personal care and home fragrance products including soaps, candles, and lotions. The company sells its products through its own retail stores in the United States and Canada, and a small number of stores internationally. They have expanded their business through an online e-commerce channel and a wholesale segment.

  • Revenue Distribution: The company’s revenue is derived mainly from the sale of products in its core categories, which means that a large portion of revenue comes from sales of soap, lotion, and body care products in brick-and-mortar stores, online stores, as well as wholesale deals.
  • Industry Trends:
    • The retail landscape continues to evolve, with consumers becoming more value conscious, especially after the inflation seen in 2022-2023.
    • The trend towards online shopping persists, and brick and mortar retailers need to adjust their model accordingly. There is increased use of “buy now, pay later” options and use of social media for brand awareness.
    • In personal care sector there is increased consumer interest in clean and sustainable ingredients.
  • Margins: Bath & Body Works has experienced fluctuations in margins due to increased promotional activity and higher shipping costs over the past few quarters. Despite higher prices, its Gross profit margin of 44.5% is quite healthy, as seen in the most recent reporting of Q3 2024.
  • Competitive Landscape: The company competes with various large and small brands that sell similar products. Competitors include general retailers and a large number of specialty retailers and private labels. The market itself is also subject to frequent new product launches and changes in customer preferences.
  • What Makes the Company Different:
    • Bath & Body Works has a history of maintaining a good brand image in North America.
    • The company has a diverse range of products, though all products are in the same general category, unlike companies which try to cross into different sectors.
  • Other relevant information:
    • The company has been actively engaged in transforming its supply chain network to improve efficiency.
    • The company is working to expand its customer engagement through its loyalty program.
    • They are also very focussed on digital transformation, investing heavily into technologies and infrastructure to enable the shift to digital.

Financials In-Depth

  • Income Statement
    • The company reported a Net Sales of $1.967 billion for the third quarter of fiscal year 2024, a decrease of 1.0% compared to $1.987 billion in the corresponding quarter of fiscal year 2023. However, for the year to date, the company’s net sales show a gain of 0.4%
    • Operating income was $357 million for Q3 2024, which is a slight increase from the $352 million in the same quarter in 2023. For the year to date 2024, operating income is down by 14.2%.
    • Gross profit for the recent quarter was $876 million, giving the company a Gross Profit margin of around 44.5%. While this number is slightly down, its still healthy and indicative of the strong demand for its products, as well as the pricing power of the brand.
    • Net income for the third quarter was $139 million, which was lower than the $182 million reported the same quarter last year.
    • Diluted Earnings per share was $0.55 for the third quarter and $1.51 for year-to-date 2024.

The company has been facing pressures on margins over the past few quarters due to a combination of factors, such as increase in cost of goods sold, higher operating costs, especially from transportation, and increased promotional activities.

  • Cash Flow Statement
    • In the quarter, the company generated $91 million in cash from operating activities. While net cash from operating activities is down year to year, as the company generated $299 million in 2023 and $162 million in 2022, it is also typical for the third quarter to have lower operating cash flows than other quarters.
    • The company’s investing activities resulted in cash outflows of $79 million, which includes investments in Property, Plant, and Equipment for further growth.
    • Financing activities used $166 million in cash, mainly due to repurchasing common stock and paying dividends.
    • Free cash flow (Net Cash Provided By Operating Activities – Capital Expenditures) was approximately $76 million in 2024 Q3, and is down year-over-year.

It is important to note the large differences in these numbers for all of 2022 and 2023 when compared to 2024 because of a change in accounting that caused deferred revenue to decline over 2022 and increase in 2023, causing a massive difference between operating cash flows and net income.

  • Balance Sheet Health Rating: 3 / 5
    • Strengths:
      • The company has a large amount of cash ($1.284 Billion at the end of Q3 2024), which provides it with flexibility to invest and deal with fluctuations in the economy.
      • The company has a relatively consistent book value.
    • Weaknesses:
      • The company has a significant amount of long term debt, at 4.3 billion dollars.
      • The company has low equity of around 1 billion dollars, which could become problematic if debt gets too difficult to manage.
      • The company has had a history of underperforming analyst expectations and has been very volatile in the past.

The company’s balance sheet has some concerning aspects such as low equity and high debt, but these numbers also give the company financial flexibility that can be a good thing. The future will tell if management is able to leverage that flexibility.

Moat Rating: 2 / 5

  • Moat Source: The primary moat sources for Bath and Body Works are brand recognition and customer lock-in to a certain extent, mostly from the company’s loyalty programs. The company also has locations in highly desirable retail locations, which provides a decent advantage.
  • Narrow Moat: While the brand has considerable recognition and sales volume in North America, its competitive advantages don’t look durable over long periods of time. It doesn’t possess the switching costs that other companies benefit from, neither does the brand loyalty provide a very large premium over competitors. There are many companies providing the same basic product with very similar features. There is limited pricing power. Although the company does have a network of physical locations, those are not as important now as the digital landscape continues to take over.

Overall, while Bath and Body works is a strong company, their economic moat isn’t something that will offer great resilience against competition and disruption in the long term. * The company could improve this rating by improving their pricing power and creating higher barriers to entry.

Risks to the Moat and Business Resilience

  • Changing Consumer Preferences: Consumer tastes are highly fickle and could lead consumers switching to other brands very quickly. There is not much in terms of customer lock-in that a competitor will have to fight to take customers. As was mentioned before the company needs to continually try to engage consumers using their loyalty program. However there are many similar programs and companies could also offer new incentives to take customers away.
  • Increased Competition: There is no technical bar in most of the sectors the company engages in. It’s not difficult to start up a new business that makes candles, lotions, and soaps. Additionally, there are numerous well known competitors also trying to vie for marketshare.
  • Economic Downturn: In times of high economic uncertainty consumers are more likely to cut spending on non essential items such as what this company sells, and prefer cheaper alternatives.
  • Commodity Input Prices: The cost of many raw materials such as the oils used in many of its products are sensitive to price volatility, which may impact profitability.

Despite these risks, Bath & Body Works exhibits resilience:

  • The company’s core business in personal care and home fragrance products remains relatively stable.
  • The company is aggressively trying to pursue digital transformation which will make it more efficient and responsive to changing trends.
  • They are attempting to grow business overseas, reducing reliance on their american sales.

Understandability: 2 / 5

  • The business itself is not too difficult to understand, it’s a retailer that sells soaps, lotions, and home fragrances. However, the complexities in the financials and how the products are made make understanding the company difficult.
  • There are a lot of factors that determine which way the company goes, such as changes in customer preferences, cost of production, and marketing, which also make the company more difficult to understand.

Overall, while the business sounds simple on the surface, the amount of different factors involved in its success makes understanding it difficult, and this also translates to difficulties in calculating value.

Recent Concerns, Controversies, and Problems

  • As noted above, there have been some concerns about margins being squeezed, a consequence of the higher promotional expenses needed to attract consumers, as well as general increase in costs.
  • The company has a large amount of debt which could become problematic if the business doesn’t perform well.
  • While some analysts view their turnaround and growth strategy as promising, others are still skeptical of the company’s future.

In response to these issues, management has noted that they are focusing on improving operational efficiency, controlling costs, and attempting to increase sales through their loyalty program and a greater focus on the digital sphere. They also believe they are able to manage debt, but are also planning to be more flexible in managing their financial obligations.