Did Bath & Body Works Doom Itself By Spinning Off Victoria’s Secret?

After stirring up a lather with its spin-off of Victoria’s Secret (NYSE:VSCO) and its retirement of its former “L Brands” name, Bath & Body Works (NYSE:BBWI) saw its stock price go down the drain. Wall Street analysts piled on with lowered per-share price targets, in one case slashing a forecast from $95 to $78, with others predicting more modest reductions.

The company’s share price plunged from over $80 to below $62, an approximate 22.9% drop. Inexperienced investors might think this heralds bad times for the company, but there are at least three reasons to be bullish about the changes being made at the company.

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Image source: Getty Images.

1. Bath & Body Works has a record of good performance

Even during the dark days of L Brands’ decline before the COVID-19 pandemic, Bath & Body Works was a frequent bright spot amid a picture that was growing progressively more dismal overall. According to the company’s 2021 annual report, the brand grew through 2020 despite all of its stores being closed for parts of three months during the government lockdown the coronavirus pandemic prompted. The brand was worth $5.4 billion at the year’s start and $6.4 billion at its end, with most of the growth coming from its direct channel. L Brands noted it believes Bath & Body Works is “is on a multi-year path to become a $10 billion stand-alone company.”

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Even before that, recently published Bank of America analysis showed Bath & Body Works as a significant source of growth. Its compound annual sales rose 10% yearly for the past decade, according to the research note, while it also experienced a 15% increase in earnings before interest and taxes (EBIT). In fact, Bath & Body Works played a significant role in keeping L Brands afloat despite the losses of Victoria’s Secret, and as a stand-alone company, it should be able to demonstrate its economic merits more strongly.

2. Its recent metrics were strongly positive

Before L Brands split in two and Bath & Body Works was still a subsidiary brand of the overall company, it was not only rebounding strongly from 2020’s lockdown lows, but outperforming 2019. L Brands’ first-quarter 2021 infographic, providing highlights of the quarter, made Bath & Body Works’ vigorous performance very plain, with a 60% jump in total sales over 2019, direct channel sales up 123% from that year, and its operating income rate at 25.9%, while operating income itself reached $379.9 million.

The fact this growth occurred relative to pre-pandemic 2019 and not 2020 puts a spotlight on Bath & Body Works’ upward trajectory as a brand, which should also translate into similar momentum now that it’s a company. The positive energy matches up to Bath & Body Works’ long-term trends, perhaps augmented a little with some additional strength gathered from the COVID-19 rebound and release of pent-up demand.

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Bath & Body Works is also in the process of opening a plethora of new stores during 2021, according to information in L Brands’ Q1 earnings presentation. Starting from a total of 288 retail locations at 2020’s end, it expects five to eight closures and 60 to 70 new store openings, leading to a total of 340 to 353 stores by Dec. 31, 2021, with a potential upper limit of a 22.6% boost to its retail footprint. With evidence potentially pointing to the delta variant of COVID-19 having peaked already and declining again soon, this increase in physical retail locations could be a boon to the company’s sales heading into the holiday shopping season and beyond.

3. It has several features attractive to investors

Bath & Body Works offers some extra value to shareholders beyond its noteworthy rate of growth across time and its expanding retail network. It is also a dividend stock and recently announced it will be paying a $0.15 per-share dividend on Sept. 3, as originally planned. While the dividend isn’t particularly large, it was not reduced by the Victoria’s Secret divestiture. The annual dividend is currently $0.60 per share.

With its revenue growth success and high cash flow, Bath & Body Works has also greatly expanded its share repurchase program. Its board of directors (then the directors of L Brands) authorized a $500 million share buyback in March. However, in July, the board authorized another to $1.5 billion, with only $36.2 million remaining from the $500 million authorization. Reduction of the share count through these significant repurchases will have the effect of increasing the earnings per share (EPS) of the remaining shares, increasing their value for investors holding them. The company is also looking to increase its balance sheet health by paying off $500 million in debt, on top of an earlier $1.1 billion debt repayment.

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Investor takeaway

All of these factors show that, when it comes to Bath & Body Works’ future, there’s no need to throw the baby out with the bathwater. The dip in the stock price, while quite sharp, is a natural correction to the lost revenue from the spin-off of Victoria’s Secret, which had recovered significantly in the final months of being a part of L Brands and was nearly equaling Bath & Body Works’ performance. With its ongoing growth and popularity, the enterprise will likely remain a good choice among retail stocks over the long term, and the current drop in prices is just a buy-in opportunity to launch or expand a stake.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/08/14/bath-body-works-doom-spin-off-victoria-secret/

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