Bath & Body Works earnings growth outlook turns negative as inflation continues

Diving brief:

  • Bath and body care cut its profit estimates for the year as inflation eats into its business, with management now estimating a drop in operating profit of up to 15.7% from a year ago.
  • The new estimates are also significantly lower than previous guidance this year, with the company now forecasting earnings from continuing operations per diluted share of $3.80 and $4.15, down from previous estimates of $4.30 to $4. $.70.
  • For the first trimester, which beat analyst estimates, Bath & Body Works reported a 1% drop in net sales from a tough comparison last year. First-quarter operating profit fell about 17% to $280 million.

Overview of the dive:

Bath & Body Works is the latest retailer to cut its profit forecast for the year as inflation pressures the industry from both sides of the business.

Bath & Body Works executives cited increased costs for raw materials, transport and wages as weighing on operations. The outlook for lower profits is a sign that retailers are running into limits in passing costs on to customers after a year of rising prices.

Other earnings announcements this week painted a similar picture. Executives at Walmart and Target, both of which also cut profits, said customer spending had partly shifted away from discretionary categories. It’s a sign that consumers are feeling the pain of soaring food and gasoline prices.

Despite these challenges, Bath & Body Works still plans sales growth in the low single digits compared to last year’s sales of $7.9 billion. In Comment Q1the retailer touted some of its successes from the period, including the launch of its “Butterfly” fragrance, which the company said was “our biggest cross-category launch ever for the spring season, for body and home”.

The company also said its vertically integrated, largely North American-based supply chain allows it to “successfully navigate a dynamic environment and present comprehensive and abundant product assortments to our customers on time.” with speed and agility.

Along with input costs, the company said investments in its loyalty program will weigh on earnings over the course of the year.

Analysts at Telsey Advisory Group, led by Dana Telsey, said of the spend: “We view these investments as prudent given its strong leadership position in the space, enabling [Bath & Body Works] not only to improve its operational capabilities, infrastructure and customer experience, but also to explore new categories and innovative businesses to drive longer-term growth. »

Credit Suisse analysts led by Michael Binetti have pointed to the costs of spending on the company’s systems as a result of the separation of Bath & Body Works from former parent company L Brands. Analysts also said in a research note that, given the company’s C-suite revenue, “we are somewhat surprised that the interim CEO is launching a major technology investment project.”

IT and loyalty investments “appear to add significant complexity to what appears to be a difficult FY22 ahead for specialty retailers,” the analysts said.