So Far Bath & Body Works Stock is Showing No Separation Anxiety

On August 19, Bath & Body Works (NYSE: BBWI) delivered its first earnings report since separating from Victoria’s Secret (NYSE: VSCO). Bath & Body Works and Victoria’s Secret were the two signature brands that comprised the company formerly known as LBrands. 

Many analysts were curious to see how the company would perform on its own. And the early bets suggested that this was going to be a tough report. Shares of BBWI stock were down over 10% from their 52-week high in the two weeks since liquidating Victoria’s Secret in early August. 

However, BBWI stock is now soaring back towards that 52-week high after a stellar earnings report. The company reported net sales of $3.318 billion in Q2 and which was a 43% increase from the same quarter in 2020. It was also a 14% increase from the same quarter in 2019. 

What really stood out was the company’s guidance which suggested sales growth at a mid- to high-single digit level over the next three to five years. The company also believes they can achieve an operating margin in the low to mid-20% range.  

BBWI Stock is Now on Breakout Alert 

Frequently a stellar earnings report will trigger analysts to revisit their rating. When that combines with strong upward price movement, you have the right conditions for a breakout to the upside. The company already has strong price movement. In the next week, investors should get a chance to see how analysts felt about the company’s report.  

Slower Growth in Bath & Body Direct  

Of course, any successful retailer in 2021 is going to need a strong multichannel architecture. For Bath & Body Works, that means Bath & Body Direct. Throughout the pandemic, LBrands performed well due in large part to the performance of Bath & Body Works. And a good bit of that was due to the company’s ability to sell and deliver to customers outside of its brick and mortar locations.  

The numbers for the Direct unit are down 6.3% year-over-year (YOY) from 2020. That’s to be expected as the company has started to reopen its stores. And store sales are up 106.9% YOY.  

The Retail Sector Faces Headwinds 

I’ve seen some comments that the company didn’t revise their guidance higher. But this may be a case where it’s better to be safe than sorry. The retail sector does face a series of challenges.  

In its list of all the potential things that could cause the company to miss on its guidance, it didn’t specifically mention the Delta variant. It did, however, give the standard nod to the fact that “Risks related to Covid-19 persist.”  

I would be more cautious about the U.S. Retail Sales Report that showed a 1.1% month-over-month decline in retail sales in July. That report preceded retail earnings reports and did introduce concern that growth in the retail sector may be slowing. 

And then there was the monthly consumer sentiment index reading from The University of Michigan’s that showed a reading of 70.2. That was a large decline from the July reading of 81.2, and was also smaller than the number that the analysts had expected (81.3) 

Of course, the larger question is why? Certainly, there is concern about the Delta variant bringing more restrictions to the retail sector. But what would concern me more is the recent inflationary pressure in the economy.  

I understand that Bath & Body Works core products may be a bit recession-proof. However, you do have to wonder what a continuing rise in consumer staples will do to discretionary purchases.  

Analysts Believe the Stock Has Further to Run 

The company’s average 12-month price target is $78.71. Given the stock’s price at this moment, that’s a 20% increase. Since the company’s separation from Victoria’s Secret, two analysts gave the stock an upgrade with another analyst providing a boost in its price target.  

If you haven’t taken a position in BBWI stock, I’d wait just a bit to see what the analyst community has to say. If the company gets some additional upgrades, it’s former 52-week high may be its new floor.