What's In Store For Bath & Body Works In Q4? Analyst Sees Strong Merchandise Margin Improvement

Telsey Advisory Group analyst Dana Telsey reiterated the Outperform rating on Bath & Body Works, Inc.BBWI with an unchanged price target of $50.

The company is scheduled to report its fourth-quarter earnings on Thursday, February 29, before the market opens.

On the topline, the analyst projects sales to decline 1.9% year over year to $2.833 billion, roughly in line with the consensus of $2.835 billion and guidance for sales to decrease between (5.0%)-(1.0%), driven by a same-store sales decline of 5%.

According to Telsey, the primary drivers of the outperformance came below the topline, with gross margin benefiting from strong merchandise margin improvement and ongoing benefits from cost optimization initiatives helping deliver better SG&A results.

The analyst projects just over 100 bps of gross margin expansion year over year in the fourth quarter to 44.4%, vs. guidance of a gross margin of approximately 44.0%.

Taken together, the analyst sees an operating margin of 22.6% (broadly flat to last year), slightly below the market’s expectation of up 30 bps to 22.9%.

Telsey adds that the company remains on track to generate $200 million in annual cost savings related to its profit improvement plan, with $150 million to be realized in FY23 and the full amount to be realized in FY24.

The analyst highlighted that Bath & Body Works is an established brand with a loyal customer base within an increasingly attractive consumer space characterized by strong purchase frequency of a consumable category. 

With the recent rollout of its new loyalty program, increased investments in infrastructure and systems, and efforts to streamline operations and the organization, the company can build a stronger foundation to drive incremental growth and profitability longer term, the analyst adds.

Price Action: BBWI shares are trading higher by 0.80% to $46.79 on the last check Thursday.

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