Barclays analyst Adrienne Yih recently made the decision to downgrade Bath & Body Works Inc from Equal-Weight to Underweight while reducing the price target from $31 to $28. Yih expressed apprehensions regarding the company's potential challenges related to supply and demand risks that could have adverse effects over the upcoming 12 to 15 months. The market responded to the rerating with a decline in the company's stock value.
Yih's analysis emphasizes several key concerns for Bath & Body Works moving forward. One significant issue highlighted by Yih is the imbalance between rising inventory levels and the rate of sales recovery, indicating that promotional activities might be suggestive of weakened consumer demand. She also points out the necessity for Bath & Body Works to move away from its heavy reliance on promotional strategies towards investing in premium product offerings, which could enhance long-term brand positioning but may also entail additional expenses.
The analyst's revised financial forecast underscores a more cautious outlook for the company's performance in the coming fiscal periods. Yih's estimates for revenue in the fourth quarter of 2024 range between $1.205 billion and $1.215 billion, taking into account the impact of recent promotional tactics. Additionally, she has adjusted the earnings estimates for fiscal years 2024, 2025, and 2026 downwards, citing concerns about persistent sales declines and pressure on gross margins.
Yih also mentions the challenges that Bath & Body Works faces in terms of increasing competition, escalating costs, and evolving consumer preferences towards health-conscious and clean product choices. While the company has made efforts to reformulate products to meet these changing standards, there is still a need for further enhancement of the product line, especially within the candle segment. Despite the risks outlined, Bath & Body Works' strong business model featuring high initial margins and solid free cash flow could potentially help offset some of these obstacles, although Yih cautions that difficult times may lie ahead for the company in 2025.