On Tuesday, Citi adjusted its financial outlook for Bath & Body Works Inc. (NYSE: BBWI), raising the price target from $35.00 to $40.00 while retaining a Neutral rating on the stock. This adjustment comes after the company reported that third-quarter sales increased by 3% and earnings per share (EPS) were $0.49, surpassing consensus estimates despite a slight underperformance in gross margin compared to expectations.
The third quarter marked a significant turnaround for the retailer, as it was the first quarter since the fourth quarter of 2021 where comparable store sales did not decline. Early trends for the fourth quarter to date have been described as solid. Notably, home fragrance sales, which had been struggling since 2021, showed positive growth in low single digits, reversing the negative trend observed in the first half of the year.
Management's commentary suggested an end to the anticipated post-Covid normalization challenges in certain categories, which has increased optimism about the company's ability to achieve comparable sales growth in fiscal year 2025. Although Bath & Body Works is exercising caution with promotions, which limits the upside potential for merchandise margins, cost-saving initiatives are expected to help mitigate average unit retail (AUR) pressures in the first half of fiscal year 2025.
The updated analysis from Citi reflects a belief in a clearer path to margin expansion for Bath & Body Works in fiscal year 2025 and beyond. However, with the stock price having risen 17% following the earnings report, and with expectations now elevated, Citi views the risk/reward balance for the shares as even at their current price levels.
In other recent news, Bath & Body Works has posted impressive financial results in the third quarter, with net sales hitting $1.6 billion, marking a 3% increase from the previous year. The company's earnings per diluted share were reported at $0.49. This strong performance led to an upward revision of its full-year financial guidance.
Morgan Stanley (NYSE:MS), Deutsche Bank (ETR:DBKGn), Goldman Sachs, and Piper Sandler have all acknowledged these recent developments. Morgan Stanley raised its price target to $49, maintaining an Overweight rating on the stock. Deutsche Bank and Goldman Sachs maintained a Buy rating, with Deutsche Bank raising the price target to $52. Piper Sandler, while acknowledging the strong results, maintained a neutral stance and raised its price target to $36.
The company's growth has been attributed to strong sales in core categories and effective margin management. Additionally, Bath & Body Works has expanded its loyalty program membership to 38 million active members, launched new product lines and collaborations, and opened its 5100th store internationally. Despite challenges from the conflict in the Middle East affecting sales, Bath & Body Works is preparing for a strong Q4 holiday season and expects to generate significant adjusted free cash flow.
InvestingPro Insights
Bath & Body Works Inc. (NYSE: BBWI) has shown resilience in its recent performance, as reflected in Citi's updated price target. This positive outlook is further supported by InvestingPro data and tips. The company's P/E ratio of 7.45 suggests that it may be undervalued relative to its earnings, which aligns with the InvestingPro Tip indicating that BBWI is "Trading at a low P/E ratio relative to near-term earnings growth."
Additionally, the company's strong financial health is evident in its ability to maintain dividend payments for 52 consecutive years, as highlighted by another InvestingPro Tip. This consistency in dividend payments, coupled with a current dividend yield of 2.24%, may appeal to income-focused investors.
The recent stock performance aligns with the InvestingPro Tips mentioning "Significant return over the last week" and "Strong return over the last month," with data showing a 18.31% 1-week price total return and a 18.55% 1-month price total return. These figures corroborate the 17% rise in stock price noted in the article following the earnings report.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Bath & Body Works, providing a deeper understanding of the company's financial position and market performance.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.