Barclays Analyst Downgrades Bath & Body Works, Citing Supply and Demand Concerns
Barclays analyst Adrienne Yih downgraded Bath & Body Works (BBWI) from Equal-Weight to Underweight, lowering the price target from $31 to $28. This move comes amid concerns over supply and demand risks that could negatively impact the company over the next 12 to 15 months.
Rising inventory levels: Inventory levels are not aligned with the pace of sales recovery, suggesting that promotional activity is indicative of weaker consumer demand.
This could result in negative gross margin inflection, as seen in the third quarter of 2024. The company has shown negative growth in sales-to-inventory ratios for two consecutive quarters, raising concerns about margin sustainability.
Bath & Body Works needs to invest in premium product offerings to shift away from its heavily promotional strategy. This could support long-term brand elevation but also entail additional costs.
Yih's revised financial outlook reflects cautious estimates for the upcoming fiscal periods. She forecasts lower revenue and earnings per share (EPS) for fiscal years 2024, 2025, and 2026, citing risks of continued sales decline and gross margin pressure.
Deteriorating U.S. consumer environment: Negative trends observed in the beauty segment, including data from competitors like Estée Lauder (EL), Coty (COTY), and Ulta Beauty (ULTA), further highlight the challenging market conditions.
Bath & Body Works faces significant competitive pressures and must navigate rising costs and changing consumer preferences, particularly as the market shows a growing inclination towards health-conscious and “clean” product offerings.
Robust business model: Bath & Body Works’ robust business model, with high initial margins and strong free cash flow, could mitigate some challenges.
The company has made strides in reformulating products to meet higher standards, and a shift towards more organic and premium ingredients could help the brand achieve “clean brand” status, aligning with evolving consumer trends.
Overall, Yih's analysis suggests a challenging period ahead for Bath & Body Works. While the company has strengths to navigate these challenges, investors should be aware of the potential risks and adjust their expectations accordingly.