Bath & Body Works: Lowering Uncertainty Rating to High From Very High

We are lowering our Uncertainty Rating for narrow-moat Bath & Body Works to High from Very High, consistent with our quantitative methodology. A lower Uncertainty Rating signals that a narrower margin of safety is generally required for shares to appear attractive. While the rating is primarily driven by the volatility in the share price, it also considers the firm's fundamental exposure to the economy and economic cycles. We believe Bath & Body Works faces similar risks to most other consumer discretionary retailers, including the impact of inflationary pressures, employment levels, wage growth, and low barriers to entry. Additionally, on the input side, less favorable changes to trade where portions of the supply chain are located could hurt top-line growth and margins (although most inventory is produced in its Beauty Park facilities in the US). Favorably, our current risk assessment incorporates the mitigation of share erosion based on continued investment in innovation and brand elevation, which should help maintain a solid pricing structure across categories. The change in the Uncertainty Rating doesn’t sway our $73 fair value estimate, which is predicated on long-term sales growth of 3% and a return to 20%-plus operating margin performance.