Bath & Body Works (BBWI) shares advanced 3.6% on Friday, as investors focused on a core earnings beat rather than the one-time boost from an $80 million tariff refund. The retailer's stock traded at $19.33 by 14:48 EDT, adding roughly $136 million to its market capitalization based on approximately 202 million shares outstanding.
Earnings Breakdown
For the second quarter, the company reported adjusted earnings of $0.62 per share, significantly surpassing the consensus estimate of $0.24. However, half of that figure was attributed to the tariff reimbursement. Excluding that benefit, adjusted EPS stood at $0.31, still exceeding the analyst forecast by about 29% and coming in above the company's own guidance range of $0.20 to $0.25.
Revenue declined 2.3% year over year to $1.514 billion, down from $1.549 billion, but it managed to top the $1.50 billion consensus. Net income rose to $118 million from $64 million in the prior-year period, while operating income climbed 38% to $216 million.
Margin Impact
The tariff refund contributed approximately 530 basis points to the reported gross margin of 45.7%. Excluding that benefit, gross margin was 40.4%, which is about 90 basis points lower than the previous year. The refund accounted for 37% of reported operating income, underscoring its significance to the headline numbers.
Strategic Initiatives
Despite the mixed results, the company achieved some operational improvements. Direct sales posted their first increase since 2021, and international and other segments grew 24.9%, supported by wholesale distribution gains. Chief Executive Daniel Heaf noted that the turnaround is still in its early stages, with store and mall traffic continuing to decline. The retailer is expanding its presence on Amazon and Ulta Beauty to attract younger consumers.
Guidance and Outlook
Bath & Body Works raised its full-year adjusted EPS forecast to $2.60–$2.80, up from the previous range of $2.40–$2.65, representing a 6.9% increase at the midpoint. Management also projects approximately $650 million in free cash flow.
However, the outlook for the third quarter is less optimistic. The company forecasts a sales decline of 2.5% to 5% and expects adjusted EPS of $0.07 to $0.12, sharply below the $0.26 analysts had anticipated. This weaker guidance reflects ongoing challenges in traffic and promotional activity.
Analyst Sentiment
Analysts remain cautious, with five of 18 surveyed recommending Buy, 12 suggesting Hold, and one advising Sell. The consensus price target is $24.33, implying a potential 26% upside from Friday's levels, though some firms trimmed their targets following the earnings release.
The stock trades at about 5.1 times trailing earnings and remains nearly 40% below its 52-week high, even after Friday's gain. The market's reaction suggests a tempered assessment: while core earnings outperformed, consistent sales growth has yet to materialize. Key risks include holiday-season performance, inventory levels, and the sustainability of margin improvements beyond the one-time refund benefit.
