Product Innovation Helps Demand for Bath & Body Works Lineup Remain Robust

We believe Bath & Body Works BBWI has carved out a solid competitive edge in the sizable addressable markets it operates in. The company’s strong brand intangible asset is supported by its leadership position across the bath and shower and candle air freshener industries in recent years, which has been bolstered by BBW’s quick response to consumer trends. Quantitatively, the narrow moat is reinforced by a 56% average return on invested capital excluding goodwill that we expect the business to generate over the next decade, well ahead of our 8% weighted average cost of capital estimate.

We think the $71 billion bath, body, and beauty industry, $11 billion home fragrance market, and $5 billion soap and sanitizer market still offer a plethora of upside over the long term relative to BBW’s 2022 sales of $7.6 billion. The firm has outlined a compelling pipeline of opportunities across existing and adjacent categories to reach new consumers and stimulate higher sales conversion ahead. For example, not only can BBW add expansion products like shaving and facial care, but it can also expand its penetration in categories like haircare (via Moxy brand launch) and men’s care (deodorant).

This robust pipeline of opportunities should support average sales growth of 3% over fiscal 2023-27. We forecast sales of $8.9 billion in 2027, which is contingent on average sales growth of 1.4% from North American stores, 6% from the digital channel, and 15% from international opportunities. This should be supported by elevated engagement with the brand, as there is more than 80% brand awareness of women 18-59 years old (and 60% of men in the same cohort). Longer term, operating margins should return to the low 20s (from a inflation-ravaged 16% estimated rate in 2023) as the firm’s cost structure normalizes. Furthermore, while post-coronavirus consumer spending could shift back to categories like dining and travel, BBW should see solid demand trends ahead, with our forecast for organic growth slightly outpacing in line with the roughly 4% growth projection (Euromonitor) for the domestic beauty and personal care industry during 2023-27. This growth could be faster with new line extensions.