Bath & Body Works Earnings: Merchandising Prowess Lifts Profits as Products Resonate With Consumers

Although narrow-moat Bath & Body Works delivered third-quarter sales that were in line with the firm's prior guidance—at $1.6 billion, down 3%—the profitability of the enterprise impressed. The firm delivered an operating margin of 14%, up 150 basis points over last year and well ahead of the sub-12% prognosis from consensus (FactSet). Importantly, this lift was largely attributable to the gross margin rise to 43.7%, practically in line with prepandemic third-quarter marks, buoyed by improving merchandise margins (200 basis points) as a result of successful product launches that continue to cater to customer trends. While BBW nudged the full-year outlook lower to include a sales decline of 2.5%-4% (from 1.5%-3.5% prior) and raised its EPS outlook to $2.90-$3.10 (from $2.85-$3.15), metrics are largely in line with our 2% sales decline and $3.07 EPS preprint estimates. As such, we don't plan any material change to our $78 fair value estimate and view shares as extremely attractive.