Bath & Body Works Hits Multi-Year Lows: Bargain or Trap?

Shares of Bath & Body Works Inc. (NYSE: BBWI) and all its investors have been through the wringer. Shares closed just under $17 on Nov. 26, up close to 20% from recent lows but still down more than 20% from the prior week’s pre-earnings levels. The stock is now trading at prices not seen in years, down more than 60% below its level in February.

It’s been a brutal stretch for a company once considered one of the most reliable cash machines in retail.

But after all this selling, investors are right to be asking if the worst may finally be priced in.

With a price-to-earnings (P/E) ratio hovering around an all-time low of 5, Bath & Body Works is among the cheapest large-cap consumer stocks in the market right now.

Yes, the stock has been painful to hold, but for those on the sidelines, the risk/reward profile taking shape has suddenly become quite attractive. 

Disastrous Earnings Report Triggers Confidence Crisis

There’s no sugarcoating the recent quarterly report. Revenue fell short, earnings missed expectations, and management gave weak forward guidance. Given the stock had already been under pressure, remaining investors wasted no time in hitting the sell button, sending shares to multi-year lows. 

The stock’s collapse was as much about lost confidence as it was about numbers. Even before the latest miss, Bath & Body Works had been trending lower for years as the business struggled to adapt to shifting tastes and declining mall traffic.

However, the company is targeting a major brand overhaul and introducing measures to achieve significant cost savings in future years. While management expects this to cause some short-term margin pressure, this kind of belt-tightening and refocus on the core brand is precisely what’s needed to stabilize operations. For the optimists among us, this is what the start of a turnaround might just look like.

Why the Worst May Be Priced In

The question isn't whether Bath & Body Works has problems; it’s whether those problems justify such a low valuation. With shares down almost 70% in less than eighteen months, it’s hard to argue that the market hasn’t already priced in the worst-case scenario. Expectations are now so low, and the stock has sold off so much, that even small signs of progress in the coming months could trigger a sharp rebound.

This week’s bounce from last week’s lows may be an early sign that some investors are thinking the same. A 20% rebound in just two sessions suggests that the dip-buyers are circling, and that a floor may finally be forming.

Analysts Are Starting to Take Notice

There’s also growing evidence that the selloff has gone too far for even cautious analysts to ignore.

Several firms that maintain neutral or even negative ratings on the stock still have price targets well above current levels.

Robert Baird, for example, rates the company as Neutral with a $19 target, which is more than 11% higher than where the stock closed on Tuesday.

Others are more openly bullish.

Citigroup recently reiterated its Buy rating, with a fresh $21 price target, while Wells Fargo did the same with a $25 target.

Bank of America went even further, as the most optimistic of the group, giving Bath & Body Works a $32 target, which represents close to 90% in potential upside.

When it comes to finding diamonds in the rough, it doesn’t get a whole lot better than that. 

Attractive Risk / Reward Setup

Bath & Body Works clearly has work to do to win back investor confidence. Execution must improve, and management will need to prove that its turnaround strategy can gain some momentum. 

But for investors willing to take a contrarian stance, the stocks valuation has the makings of a compelling setup. With so much pessimism baked in, downside appears limited—while the potential upside from even a modest recovery is substantial. 

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