Wall Street can be very demanding and, sometimes, push management teams to make decisions that may not be in the best interest of the business. That, in turn, usually means that whatever has been done is also not in the best interests of shareholders. So far, it looks like Bath & Body Works (BBWI -0.05%), formerly known as L Brands, has fallen into this trap. And 2023 does not look like it will be providing investors a respite from the pain.
Unlock the value
When a company has multiple divisions, a frequent refrain from Wall Street analysts and investors is that it should split up so that the divisions can be valued separately. Often it is suggested that the laggard division can better focus on its problems and improve results while the better-performing operation can be valued based on its own merits.
That sounds good, but it doesn't always work out quite that way. L Brands is a prime example, with the company once housing both Bath & Body Works and Victoria's Secret (VSCO 1.20%).
Image source: Getty Images.
Not too long ago, Bath & Body Works was a fast-expanding business with a strong growth profile. Victoria's Secret was the laggard, falling behind competitors in the lingerie space. So, to unlock value for shareholders, the two were split up. And since that point, in early August 2021, Victoria's Secret has continued to suffer, with the stock down roughly 56%. But Bath & Body Works has hardly shined, with its shares falling by a nearly-as-bad 53%. This split-up was terrible on both sides of the equation.
You might have expected Victoria's Secret to keep struggling, but what went wrong with Bath & Body Works, which was the stronger of the two nameplates? The simple answer is that a once-hot retail brand started to cool off. That's not actually so surprising as retail is a highly competitive sector. But just how bad has it been?
A terrible year
In 2022, Bath & Body Works' sales fell 4%. That's not huge, but it also experienced a roughly 7% increase in its product costs, leading to a gross profit decline of just over 15%. Following the income statement to the bottom line, earnings per share declined from $4.88 in 2021 to $3.43 in 2022 -- a huge 30% year-over-year drop.
There are some things that are out of management's control, the most notable of which is inflation. Given the rise in cost of goods sold in 2022, that was a material issue. However, it's worth highlighting that sales in the fourth quarter of 2022 dropped 5%, slightly more than the full-year figure. This is notable because the fourth quarter includes the vital holiday shopping period, when buyers tend to be out in force and more willing to splurge.
Having a weak holiday suggests that consumers aren't as upbeat about the brand as they once were.
BBWI Revenue (Quarterly) data by YCharts
That dour view is buttressed by the fact that the retailer had 1,802 stores opened at the end of 2022 compared to 1,755 at the end of 2021. It's logical to expect that a higher number of stores should have boosted the top line. That it didn't hints that the problems at Bath & Body Works may be bigger than they seem, which is where the company's 2023 guidance comes in.
Sales in 2023 are projected to be flat to down mid-single digits. But 2023 will include a 53rd week, so that fairly weak outlook comes despite the fact that there are seven additional selling days in the year. That's not insignificant as management projects that the week will add as much as $0.07 per share to earnings. And yet, full-year 2023 earnings are projected to be between $2.50 and $3 per share, a year-over-year decline of roughly 25% at the low end.
It's also worth noting that the range is extremely wide, which suggests that management itself may not be sure what to expect as the year unfolds.
Lots of work to do
When consumers decide to shift gears, retailers often get hit hard and fast. That's generally evident on their financial statements and on Wall Street. It looks like Bath & Body Works is facing just such a situation after a long period of strength. And now that it's a stand-alone company, the poor performance is center stage.
Meanwhile, based on management's guidance for 2023, the situation isn't likely to change anytime soon. Investors should probably start looking at this stock as a turnaround play. And that means all but the most aggressive investors will probably be better off watching from the sidelines.
