Dive Brief:
- Bath & Body Works slashed its profit estimates for the year as inflation eats into its business, with management now estimating a decline in income from operations of up to 15.7% compared to last year.
- The new estimates are also significantly less than previously forecasted this year, with the company now projecting earnings from continuing operations per diluted share of $3.80 and $4.15, down from prior estimates of $4.30 to $4.70.
- For the first quarter, which beat analyst estimates, Bath & Body works reported a net sales decline of 1% against a tough comparison last year. Operating income for Q1 fell by about 17% to $280 million.
Dive Insight:
Bath & Body Works is the latest retailer to trim its profit forecast for the year as inflation pressures the industry on both sides of the business.
Executives on Bath & Body Works' earnings call cited heightened costs for raw materials, transportation and wages as weighing on operations. The trim to profit outlook is a sign that retailers are coming against limits in passing costs on to customers after a year of rising prices.
Other earnings announcements this week have painted a similar picture. Leadership at Walmart and Target, which have both also taken haircuts on their profits, said that customer spending has partly shifted away from discretionary categories. It's a sign that consumers are feeling the pain from spiking food and gas prices.
Despite those challenges, Bath & Body Works still projects sales growth in the low single digits compared to last year's sales of $7.9 billion. In Q1 commentary, the retailer touted some of its successes from the period, including the launch of its "Butterfly" fragrance, which the company said was "our largest ever Spring season cross-category launch, across body and home."
The company also said its supply chain, vertically integrated and based largely in North America, allows it to "successfully navigate a dynamic environment and present full and abundant product assortments on time to our customers with speed and agility."
Along with input costs, the company said that investments in its loyalty program would weigh on profits during the year.
Telsey Advisory Group analysts led by Dana Telsey said of the spending, "We view these investments as prudent given its strong leadership position in the space, allowing [Bath & Body Works] to not only enhance its operational capabilities, infrastructure, and customer experience, but also explore new innovative categories and businesses to drive longer-term growth."
Credit Suisse analysts led by Michael Binetti pointed out that the costs of spending on the company's systems are a result of Bath & Body Works' separation from former parent L Brands. The analysts also said in a research note that, given the turnover in the company's C-suite, "We’re somewhat surprised that the interim CEO is launching a major tech investment project."
The IT plus the loyalty investments "seems to add significant complexity to what seems to be a tough FY22 ahead for specialty retailers," the analysts said.
