On Wednesday, Citi reiterated a Neutral rating for Bath & Body Works Inc. (NYSE:BBWI) with a steady price target of $48.00. After the company reported its first-quarter results, which saw sales and gross margin surpassing consensus, its stock experienced a decline of approximately 13%. This drop was attributed mainly to the company's second-quarter guidance falling short of expectations, alongside only a slight increase to the lower end of its fiscal year 2024 guidance.
The company faced challenges earlier in the quarter due to product misses and resorted to increased promotional activity to clear out inventory that was moving slowly. This strategy led to a 1% decrease in average unit retail (AUR), contrary to the guidance which projected it to be flat. Nevertheless, as the quarter progressed, sales and AUR showed improvement.
Citi anticipates earnings per share (EPS) in the second quarter could outperform due to anticipated stronger gross margin, driven by cost savings, brand and operations leverage, and favorable product cost dynamics. The introduction of new product lines, including Bridgerton-themed items, fine fragrances, and products for men, lips, hair, and laundry, may contribute to potential sales outperformance in the second quarter.
The overall margin narrative for Bath & Body Works is dependent on a positive shift in sales, which management expects to occur in the third quarter. Citi's stance reflects a need for clearer signs of sales improvement, which could emerge as soon as the second quarter, before reassessing the risk/reward balance of the stock at its current market level.
InvestingPro Insights
In the wake of Citi's neutral stance on Bath & Body Works Inc. (NYSE:BBWI), it's worth noting that the company's stock is currently trading at a low P/E ratio of 13.35, suggesting that it may be undervalized relative to its near-term earnings growth potential. This aligns with an InvestingPro Tip highlighting the stock's attractive valuation metrics. Additionally, despite a recent drop in stock price, Bath & Body Works has demonstrated a significant price uptick over the last six months, with a 28.7% total return, indicating a potential rebound in investor confidence.
Another InvestingPro Tip to consider is the company's long-standing history of dividend payments, with a track record of 52 consecutive years. This could be a reassuring factor for income-focused investors, especially when considering the current dividend yield of 1.77%. Moreover, the company's liquidity position is robust, with liquid assets surpassing short-term obligations, which could provide financial flexibility in navigating the current retail environment.
From a financial perspective, Bath & Body Works displays a solid gross profit margin of 43.56% for the last twelve months as of Q4 2024, underscoring the company's ability to maintain profitability despite challenges. Furthermore, analysts predict the company will be profitable this year, which is supported by a strong return on assets of 16.03% for the same period.
For those looking to delve deeper into the financial health and future prospects of Bath & Body Works, InvestingPro offers additional InvestingPro Tips that could further inform investment decisions. To access these insights and more, visit https://www.investing.com/pro/BBWI and use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 7 more tips available on InvestingPro, investors can gain a comprehensive understanding of the company's performance and potential.
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