Bath & Body Works Earnings: Consumers Still Enjoy Splurging on Affordable Luxury Goods

We don’t plan to alter our $78 fair value estimate for narrow-moat Bath & Body Works, or BBW, after digesting its first-quarter results. Sales fell 4% to $1.4 billion, in line with prior guidance, and place BBW on track to deliver $7.4 billion in sales in 2023, representing a 3% decline (but still a 43% rise versus 2019). Even with consumers facing persistent inflation, BBW noted it had yet to experience any trade down patterns from its customer base or differences in spending between socioeconomic groups, displaying consumers’ willingness to spend on items that are perceived as affordable luxury. Although occupancy deleverage hurt profitability, its ability to raise prices strategically and maximize cost savings brought a 13% operating margin, in line with 2019’s comparable period. Even with BBW lifting its full-year adjusted EPS outlook to $2.68-$3.08, we think the current year’s operating margin appears to be stuck around 16%, hindered by investment into the business, expense deleverage, and raw material cost hikes that have failed to ease.