Bath & Body Works Earnings: Operating Margin Stabilization Near, With Potential Expansion in View

Narrow-moat Bath & Body Works, or BBW, felt the pain of spending normalization in the second quarter. While sales of $1.56 billion kept up with the firm’s forecast for a low- to mid-single-digit decline, the downtick led to cost deleverage, resulting in a 12% operating margin (down nearly 300 basis points). Although sales were 40% higher than the same period in 2019, selling, general, and administrative costs provided a stall in profitability. However, the biggest expense headwind stemmed from technology costs, some of which should prove transitory given that this spending was necessitated a result of BBW’s split from Victoria’s Secret. Thankfully, the gross margin held up well, at 40% thanks to increased average unit revenue and improved merchandise margin, which experienced its first uptick in over two years. In our opinion, this implies the brand intangible asset is holding firm, indicated by consumer willingness to forgo discounting despite widespread concern around discretionary spending.