Analyst Note| Jaime M. Katz, CFA |
While narrow-moat Bath & Body Works' second-quarter results offered a peek into the improving profitability of Victoria’s Secret prior to its Aug. 3 spin-off (it generated an 13% operating margin versus a loss in the year-ago period), we were more focused on the company's solid go-forward business performance. Efforts to pivot the BBW business strategically (shifting to more off-mall locations, White Barn remodels) have resulted in strong top- and bottom-line growth. In the second quarter, BBW reported sales that rose to $1.7 billion, an increase of 36% over the prior year and 54% over the same period in 2019, helped by solid demand in the home fragrance and body care lines. Both digital (31% of sales) and physical grew, up 128% and 39% respectively from their 2019 levels, as omnichannel efforts engaged consumers. More impressively, the brand reported a 49% gross margin despite the return of more promotional activity, which indicates to us that it has been able to take pricing, resulting in higher merchandise margins. This helped BBW maintain its topnotch operating margin, which clocked in at 23%--flat year over year and up 700 basis points from 2019 on a stand-alone basis.