Bath & Body Works (BBWI) received a bearish outlook from Barclays analyst Adrienne Yih, who downgraded the stock from Equal-Weight to Underweight and lowered the price target from $31 to $28. The news sent the stock tumbling, as Yih raised concerns about the company’s ability to navigate a challenging retail landscape.
Yih’s analysis points to a number of headwinds facing Bath & Body Works. Foremost among these is the rising level of inventory, which she believes is not aligned with the pace of sales recovery. This suggests that the company is resorting to promotional activities to offload excess stock, signaling weak consumer demand.
Further compounding the issue is the deteriorating US consumer environment, coupled with negative trends observed in the beauty segment. Data from competitors like Estée Lauder (EL), Coty (COTY), and Ulta Beauty (ULTA) further support these concerns.
Yih identifies three key catalysts that could exacerbate Bath & Body Works’ stock performance:
*
Promotional Stockpiling:
Yih suggests that Bath & Body Works’ heavy promotional activity could lead customers to stockpile products, particularly in categories like candles and body care. This could negatively impact future sales momentum, as customers may have already purchased enough for the foreseeable future.*
Elevated Inventory Risk:
The persistent inventory build-up could lead to negative gross margin inflection, potentially impacting the company’s profitability. Bath & Body Works has shown negative growth in sales-to-inventory ratios for two consecutive quarters, raising concerns about the sustainability of their margins.*
Need for Premiumization:
Yih believes that Bath & Body Works needs to invest in premium product offerings to shift away from its heavily promotional strategy and support long-term brand elevation. While this could be a positive move, it would also entail additional costs.Yih’s revised financial outlook reflects her cautious outlook on Bath & Body Works’ prospects. For the fourth quarter of 2024, she forecasts revenue between $1.205 billion and $1.215 billion, factoring in the impact of the company’s promotional strategies. However, she has also lowered her earnings estimates for fiscal years 2024, 2025, and 2026, citing risks of continued sales decline and gross margin pressure.
Yih’s analysis highlights the challenges facing Bath & Body Works, including significant competitive pressures, rising costs, and changing consumer preferences. The market is increasingly favoring health-conscious and “clean” product offerings, and while the company has made strides in reformulating products to meet these standards, there remains an opportunity to further elevate its product line, particularly in the candle segment.
While Yih acknowledges the robust business model of Bath & Body Works, with high initial margins and strong free cash flow, she cautions that 2025 may still prove to be a difficult year for the company. The stock’s recent decline reflects the market’s sentiment towards the company’s future prospects.
The downgrade highlights the need for Bath & Body Works to address these challenges and adapt to the evolving retail landscape. Success will likely hinge on its ability to manage inventory levels, control promotional activity, and meet the growing demand for premium and health-conscious products.
