Bath & Body Works Earnings: Return to Growth in Sight as Demand Stabilizes; Shares Attractive

Shares of narrow-moat Bath & Body Works popped 16% during Nov. 25 trading, as the business surfaced improving trends in its third-quarter results. Notably, a 3% increase in sales, to $1.6 billion, marked the first quarter of positive growth since the third quarter of 2021, a trend we believe will be restored in 2025. Positive store traffic and conversion as well as a normalization in candle demand supported low-single-digit growth across all three segments (body care, home fragrance, and soaps and sanitizers) in both the quarter and year-to-date period, signaling demand BBW may have finally bottomed out. Additionally, operating margin performance of 13.5% was slightly better than the 13% we had forecast, as some marketing expense shifted closer to the holidays. Although 2024's fourth quarter is set for a top-line decline, lapping a 14-week quarter last year, it appears the operating margin should remain flat, benefiting from pricing (AUR improvement and flat merchandise margin), buying and occupancy prowess, and supply chain improvements.