Despite Headwinds, Bath & Body Works’ Innovation Prowess Supports Long-term Demand; Shares Cheap

We don’t expect any change to our $80 fair value estimate for narrow-moat Bath & Body Works after analyzing second-quarter results, which weren't as dire as the firm's July announcement. Transaction count and average dollar sales fell as consumers ratcheted back discretionary spend to counter widespread inflationary pressures. However, the 5% drop in net sales to $1.62 billion leaves BBW on track to hit our full-year sales forecast of $7.2 billion (8% decrease). While gross margins stumbled 7.8% to 40.8%, we expect the figure to level off around 42% for the year, as the firm extracts inefficiencies and implements tactical pricing backed by innovation. Despite the degradation in sales and gross margins, the metrics continue to exceed prepandemic figures by 45% and 30 basis points, respectively, suggestive of the firm's competitive prowess.