Shareholders of Bath and Body Works would probably like to forget the past six months even happened. The stock dropped 31% and now trades at $23.05. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Bath and Body Works, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Bath and Body Works Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons we avoid BBWI and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Bath and Body Works’s demand has been shrinking over the last two years as its same-store sales have averaged 2.1% annual declines.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Bath and Body Works’s revenue to rise by 2.1%, a deceleration versus This projection is underwhelming and indicates its products will see some demand headwinds.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Bath and Body Works’s unimpressive 8.5% annual EPS growth over the last six years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
Final Judgment
Bath and Body Works isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 6.5× forward P/E (or $23.05 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
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