Bath & Body Works Faces Profitability Challenges Amid Economic Headwinds
Question: How would you respond if you owned Bath & Body Works Stock (NYSE: BBWI) and its value plummeted by 60% or more in the coming months? This scenario, while drastic, has occurred previously and could happen again. The personal care and home fragrance retailer’s Stock is currently down 27% year-to-date, significantly trailing the S&P 500, which has dropped by 10%. In Q4 2024, Bath & Body Works reported a 4% decline in net sales and an 18% drop in earnings per diluted share, attributing this to a shifted fiscal calendar and reduced consumer demand. Moving forward, BBWI confronts growing pressure from new U.S. tariffs on Chinese imports, diminishing discretionary spending, and escalating competition from cost-effective private-label alternatives. Permanently high interest rates and economic uncertainty continue to weaken consumer interest in non-essential products, further complicating the company’s outlook.
Here’s the point: The main takeaway is that during a market downturn, BBWI Stock may experience significant losses. Historical data from 2020 shows that BBWI Stock lost approximately 63% of its value within a few quarters, while during the inflation spike in 2022, the stock saw a peak-to-trough decline of about 64%, faring significantly worse than the S&P 500. This raises concerns: if similar challenges arise, could the Stock drop from its current level of $28 to as low as $11? Individual stocks generally exhibit greater volatility compared to diversified portfolios. Thus, if you are seeking growth with reduced risk, consider the High-Quality portfolio, which has surpassed the S&P 500 and produced returns exceeding 91% since its inception.
Image by Ольга from Pixabay
Why Is It Relevant Now?
The new U.S. tariffs could adversely affect BBWI’s supply chain expenses and profit margins. This includes a 25% tax on imports from Canada and Mexico and a steep 145% tax on Chinese imports, collectively impacting about 17% of the company’s supply chain. These cost increases pose a risk to earnings growth and raise concerns for investors, contributing to recent Stock volatility.
Nevertheless, BBWI’s primarily U.S.-based supply chain may act as a buffer against global trade disruptions. This domestic focus might serve as a strategic advantage, especially if trade tensions escalate, distinguishing BBWI from competitors that rely heavily on international sourcing.
How resilient is BBWI Stock during a downturn?
Historically, BBWI Stock has underperformed the benchmark S&P 500 during recent downturns. While many hope for a soft landing in the U.S. economy, the potential for another recession raises concerns. Our dashboard titled “How Low Can Stocks Go During A Market Crash” illustrates how various key stocks fared during and following the last six significant market crashes.
Inflation Shock (2022)
- BBWI Stock dropped 63.9% from a high of $76.47 on December 10, 2021, to $27.62 on July 1, 2022, while the S&P 500 saw a peak-to-trough decline of 25.4%.
- The Stock has not yet rebounded to its pre-Crisis high.
- Since then, the highest the Stock has reached is $51.94 on June 2, 2024, and it currently trades around $28.
COVID Pandemic (2020)
- BBWI Stock declined 62.9% from a high of $19.77 on February 12, 2020, to $7.33 on March 23, 2020, against a peak-to-trough drop of 33.9% for the S&P 500.
- The Stock completely recovered to its pre-Crisis peak by July 29, 2020.
Valuation
As BBWI currently stands at approximately $28 per share, it is trading at roughly 8x the consensus earnings estimate for 2025, which is an attractive valuation compared to its three-year average multiple of 12x. Analysts have set an average price target of $44, suggesting around 57% upside and indicating potential for meaningful growth. However, the company’s management is taking a cautious approach for 2025, forecasting sales growth between 1% and 3% and expected earnings per share in the range of $3.25 to $3.60. The midpoint signifies a slight decline from 2024 results, with consensus predicting about 2% revenue growth in FY’25 and 3% in FY’26, reflecting tempered expectations amid ongoing macroeconomic challenges.
In light of potential slowdowns and broader economic uncertainties, consider this question: Will you hold onto your BBWI Stock or sell if it begins to decline to $25, $20, or lower? Maintaining a position in a declining Stock can be challenging. Trefis works with Empirical Asset Management, a Boston-based wealth manager, known for its asset allocation strategies that produced positive returns during the 2008-09 financial crisis when the S&P lost over 40%. Empirical incorporates the Trefis HQ Portfolio within its asset allocation framework to deliver improved returns and lower risks compared to benchmark indexes, as demonstrated by the HQ Portfolio performance metrics.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
