From scented candles to air fresheners to hand soaps, Bath & Body Works, Inc. (NYSE: BBWI) has many holiday shopping deals that are worth a sniff — not to mention its stock.

Shares of the home and beauty goods retailer are down 28% this year and firmly in the bottom decile in terms of S&P 500 performance. The decline is a reflection of both a soft U.S. spending environment and a change in the way Americans shop for personal care items.   

The National Retail Federation (NRF) forecasts that holiday spending will be as high as $966.6 billion this year, an all-time high. This shows that inflation and high credit card rates may be hampering consumers’ ability to spend — but not their willingness to spend. 

For BBWI, this is both good and bad news. The good news is that high prices and credit card bills aren’t likely to prevent shoppers from buying gifts and self-indulgences over the next few weeks. The bad — much of the shopping will happen online.

The NRF estimates that roughly 30% of holiday sales will take place outside of brick-and-mortar stores. For a mall-based retailer like BBWI, this presents a familiar challenge. Waning mall traffic has hurt the company’s ability to compete with players like Amazon, Wayfair and the newly digital Bed Bath & Beyond. The former L Brands division has watched its market share and valuation erode at the hands of e-commerce specialists since the economy reopened. 

In recent weeks, however, there have been signs of an inflection point. A solid third-quarter earnings report and ‘fresher' outlook have BBWI smelling like an intriguing bounce-back candidate for 2024.

How did Bath & Body Works perform in Q3?

BBWI sales were down 3% to $1.56 billion, which was roughly in line with Wall Street expectations. The surprise came in the earnings column, where the company beat the $0.35 consensus EPS estimate by $0.13. More importantly, the result marked a return to year-over-year profit growth, something that hasn’t happened since the second quarter of 2021. Although transactions and average tickets were down, the adjusted net profit margin expanded to 7%. 

Management is forecasting 1% to 5% lower sales and flat earnings for the holiday quarter. First, the guidance may prove overly conservative again. Second, it suggests that BBWI’s financials are stabilizing heading into the new year. As to the latter point, a healthier economic backdrop could mean better foot traffic and more spending. This would be favorable timing, given the recent margin expansion.

In an ideal world, BBWI’s direct-to-consumer business (which accounts for one-fifth of revenue) will gain traction. Realistically though, its growth story will be dictated by its U.S. and Canadian stores. 

A big catalyst here is the My Bath & Body Works rewards program, which launched last year and has become a bigger point of emphasis. With rewards ‘VIPs’ accounting for about two-thirds of U.S. sales, the success of investments in the program and myBBW app will be a key theme to watch. 

Is BBWI stock undervalued?

The consensus EPS estimate for BBWI’s next fiscal year (period ending January 31, 2025) points to a return to bottom-line growth. It also imputes a 9x forward price-to-earnings ratio for a stock that has historically traded between 7x and 19x. Since this is at the low end of the range, it suggests the stock is undervalued relative to itself. 

Another thing to consider — BBWI pays a nice dividend. Last year, the Board raised the quarterly dividend to $0.20 per share. Although the dividend was left unchanged in 2023, the leadership team deserves credit for maintaining its commitment to the dividend in a challenging time. If profitability improves over the next few years as anticipated, future dividend hikes may be in order. For now, though, a 2.7% forward yield isn’t too shabby.   

Last week sell-side research firm TD Cowen stuck with its buy rating on BBWI, highlighting the company’s long-term growth prospects over its near-term challenges. It became the ninth firm to call the stock a buy since the Q3 release. The consensus rating is currently around $39, which, combined with the dividend, implies over 30% total return potential in the coming year. 

A White Barn winter candy apple fragrance isn’t for everyone, nor is BBWI. But for patient investors, the stock may be a winning value play.