Bath & Body Works (BBWI): Deep Value Turnaround Play

Premise

Bath & Body Works Inc (BBWI) is trading at severe lows both on a trailing and forward P/E basis. The company is trading as if it’s going out of business, but the actual story over the last few years is one of a very slow, gradual decline instead of a drastic decline. Adding to that, the company does have a game plan for a turnaround. If the company can reverse course on the top line revenues within a few years, this turns from a value play to a deep value play.

Revenues, Margins, and Net Profits

Bath & Body Works looks like a perpetually shrinking company when looking at the last few years’ top lines. Its revenues have declined from $7.56 billion in fiscal year ending January 2023 to $7.245 billion for the trailing twelve months with no turnaround during any of those years.

Gross margins have had some ebbs and flows, but nothing severe during the last few years. They were 43% for FY ending 2023, 43.5% for FY ending 2024, 44.2% for FY ending 2025 and 43.7% for FY ending 2026. Overall, they stay within a range and don’t appear to be trending in a concerning direction.

Despite the slow burning decreases of revenues, net profits have been fairly stable the last few years: $800 million FY ending 2023, $878 million FY ending 2024, $798 million for FY ending 2025, a larger decrease to $649 million for FY ending 2026 and the trailing twelve months was an increase back to $727 million. While it’s had some ups and downs, profits have been mostly stable.

Turnaround Play

I think what transcends this from a value play to a deep value play is whether it can turn its top line around, although I still think BBWI is a buy regardless. Even if the top line continues on its slow decline though, the gross margin staying strong and its net income staying stable still make this very worthwhile based on valuation.

However, we need to know if the decline is cyclical or secular. We know mall traffic in general is declining and most of Bath and Body Works stores are in enclosed shopping malls, where traffic declines have hit hardest. 

Bath and Body Works’ management has been keen on diversifying into more off-mall locations, citing that now 60% of their stores are in this category, and a long-term goal of “75% of off-mall penetration in North America.”

While this seems like an easy win and an obvious move, the reality is that the mall picture in the United States is highly bifurcated. Over the last decade, open-air shopping centers have beaten out your average enclosed shopping mall, although this isn’t always the case. High-end, enclosed shopping malls have actually seen steady growth while other enclosed shopping malls continue to deteriorate. I think what this means for Bath & Body Works is that this isn’t as simple of a solution perhaps as they’re proposing, although it may still go in the right direction. It may come down more to specific real estate selection and area selection as opposed to just what type of mall they’re opening up in.

Competition Heating Up

On top of this, I think it’s also worth discussing Bath and Body Works’ business model, which is primarily as a private-label selling fragrances, lotions, creams, candles, and how it compares to up-and-coming brands or alternatives since this will also drive whether it's a long-term turnaround play. 

Bath & Body Works is in the beauty, personal care, and fragrance categories (and some other subcategories depending on how granular you want to get). It competes with the likes of Ulta Beauty (ULTA), L’Oreal, The Estee Lauder Companies, Yankee Candle, and much, much more. The U.S. beauty and personal care products industry grew at a CAGR (compound annual growth rate) of ~3.5% from 2023 - 2025 and is expected to grow at a CAGR of 7.7% from 2026 - 2033.

Source: Grand View Research

Concerningly, the industry grew at a healthy clip the last few years but Bath & Body Works failed to not only keep up its portion of market share, but actually shrank its market share along with its revenues. So, a logical question to ask is “why?” and also “is there a way to turn this around?”

It’s important to note that the company actually peaked its revenues in an odd cycle during FY2021 due to Covid-era spending sprees. The revenues have actually been trending back to the baselines for some time now, making the last few years look weaker by comparison.

Next, just because the overall beauty and personal care market has been expanding, it doesn’t mean that all categories of it expand at the same rate, or that others don’t contract. The strongest growth has been from prestige fragrance, skincare, and makeup, which Bath & Body Works does not compete in as heavily or at all.

One of the biggest explanations for Bath & Body Works’ decreasing revenues is the increasing competition, and specifically how the competition has diversified itself. It can be argued that Bath & Body Works hasn’t been successful in marketing to Gen Z and younger, as other brands have rapidly taken market share via advertising through TikTok and influencer marketing. Ulta and Sephora and the likes made shopping for body care, lotions, etc “cool” and were able to capitalize on Gen Z’s changing preferences.

However, Bath & Body Works’ CEO has leaned into this change as well, and influencer marketing is going to be a big part of Bath & Body Works’ turnaround strategy. Announced at the end of 2025, it’s likely still too soon to tell how this will affect the top line, although it’s encouraging knowing that management is addressing the concern.

Valuation

This is the most compelling point for this stock for me. Bath and Body Works currently has a P/E of 5.76, which is eye-brow raisingly low for any company, but specifically for one with such steady net profits. The forward P/E is only ~7, which is higher but still significantly below other retailers of its size. For reference, Ulta Beauty (ULTA) has a significantly higher trailing and forward P/E, both hovering ~17 - 21.

The case for a higher forward P/E seems to be for multiple reasons, but primarily that investors are concerned about the future earnings specifically. 

The new-ish CEO’s turnaround plan is still unproven and competition in the specialty fragrance brands and beauty retailers space has intensified, which can definitely lead to long-term pressure on Bath and Body Works’ margins as well as how fast the revenues decline.

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