Bath and Body Works

BBWI is down 37.9% from its 52-week high. Trades at 7-8x forward free cash flow. Debt has been reduced. Aggressive share repurchases. New CEO from NKE.

Bath and Body Works is a home fragrance and body care retailer with a $5.9 billion market cap and $10.5 billion enterprise value. Products include trendy-looking candles, body lotions, hand creams, soaps, and sanitizers that satisfy olfactory sensors. They’re a hit across the US and make for great gifts. Per their latest 10-K, thirty-nine million Americans – roughly 10% of the population – subscribe to BBWI’s loyalty program.

Last year, this group was responsible for 80% of BBWI’s sales, which totaled $7.3 billion. So the average BBWI lover threw down around one hundred fifty dollars on things like three-wick vanilla bean candles and milk bar birthday cake hand sanitizer sprays. Customers feel they’re getting a deal as well, with the program receiving a satisfaction rate north of 90%. “Don’t underestimate the American consumer” really hits home here.

However, despite a sparkling customer base, BBWI’s sales have been lackluster, dropping in step lock fashion – 2022: $7.9 billion, 2023: $7.6 billion, 2024: $7.4 billion, 2025: $7.3 billion – and the street hates it. The stock is down sixty-odd percent since its peak in 2021 and 32.3% year to date. Abundant free cash flow has allowed management to take advantage of its battered share price, though. Share count has been reduced by roughly a quarter since 2022. They’ve also paid down $1 billion of debt over the past two years, and the current balance sits at $3.9 billion.

And the buybacks will keep going, even with a new sheriff in town. Daniel Heaf was named CEO in May, leaving his role as Chief Transformation and Strategy Officer of Nike to succeed Gina Boswell. During BBWI’s earnings call on August 28th, Heaf guided to full year sales growth of 1-3% percent, gross profit margins of 42.2%, free cash flow of $750 to $850 million, and $400 million of share repurchases, which was increased from $300 million. So BBWI trades at 7-8x forward free cash flow.

Heaf played a huge role in growing Nike’s direct-to-consumer business at double-digit rates and hit on BBWI’s digital business as a weak spot. He said their 2,424 stores are “beautiful” and “experiential” but their digital platform isn’t. Here are a couple of excerpts from Heaf on the earnings call. Note that these were said with some gusto:

“​​We know that digital drives brand relevance, discovery, and sales in all channels, and we are taking steps to address this immediately, as I said, and consumers are going to start to feel this.”

“We will relaunch Mobile Web starting in October. And we have a plan that goes three months, six months, nine months, 12 months, and we’re going to be unrelenting in improving this channel because we know that it will drive brand, and it will drive sales in-store as well as sales online, and it is key to capturing the new consumer. We believe we have so many of the fundamentals in place, but this will be a key driver in the coming months, quarters, and years, and we are on it.”

What’s more, this is BBWI’s third CEO in four years. Before Boswell was Andrew Meslow, who stepped down because of health reasons, preceding his departure was a 40% collapse of BBWI’s stock price. Coincidence? Or did Meslow develop some heartburn from that sell-off? Who knows. In any event, Boswell and Meslow didn’t get the stock up, so they got canned. Perhaps the third time is the charm.

Note: This is a retailer that sells candles and things alike. Nothing is special about their operation, but returns on tangible equity are uber high. Buffett has often said retailers can enjoy superb performance, though they eventually get crushed. Makaira Partners, which is run by Tom Bancroft, thinks BBWI is an exception.

The stock is their second-largest position and accounts for 17% of their fund. Before starting Makaira, Bancroft was an analyst at GEICO under the late, great Lou Simpson, who Buffett hired to run the investment portfolio. From 1980 to 2004, Simpson compounded capital at 20.3% versus the S&P’s 13.5%. Here’s a link to some annual reports that he penned at GEICO.