What a brutal six months it’s been for Bath and Body Works. The stock has dropped 22.6% and now trades at $16.28, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Bath and Body Works, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Bath and Body Works Not Exciting?
Despite the more favorable entry price, we're cautious about Bath and Body Works. Here are three reasons there are better opportunities than BBWI and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Bath and Body Works’s demand has been shrinking over the last two years as its same-store sales have averaged 1.8% annual declines.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Bath and Body Works’s revenue to drop by 2.9%. This projection is underwhelming and implies its products will face some demand challenges.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Bath and Body Works, its EPS and revenue declined by 2.6% and 1.2% annually over the last three years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, Bath and Body Works’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
Bath and Body Works isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 6.5× forward P/E (or $16.28 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a top digital advertising platform riding the creator economy.
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