Bath & Body Works Earnings: Investments Crimp Margins but Position Brand for Long-Term Success

Narrow-moat Bath & Body Works (BBW) delivered a strong fourth quarter, with sales and EPS ahead of our forecast. Fourth-quarter sales rose 1%, to $2.9 billion, a touch above our $2.8 billion estimate and more than 30% over 2019, despite the ongoing normalization of demand in certain categories. EPS of $2.06 exceeded our $1.76 projection, aided by a gross margin of 45.9% (versus our 44% estimate) that benefited from a 290-basis-point uptick in merchandise margin stemming from higher average unit retail and cost deflation. However, the initial sales and EPS outlook for 2024 sent shares lower by a mid-single-digit rate. With 2024 facing a 100-basis-point headwind from lapping an extra week in 2023, like-for-like sales are set to be down 2% to up 1%, which will still represent above-40% growth over a 5-year period. In our opinion, a stalled operating margin at 17% was the real surprise, as it was well below our 19% forecast.