Barclays analyst Adrienne Yih downgraded Bath & Body Works Inc (NYSE:BBWI) from Equal-Weight to Underweight and lowered the price target from $31 to $28. The stock fell after the rerating.

Yih cited concerns over supply and demand risks that could negatively impact the company over the next 12 to 15 months.

While the guidance for the second half of 2024 has been adjusted to lower expectations, the analyst anticipates continued pressure in 2025 with potential declines in sales and contracting margins.

Her analysis points to rising inventory levels that are not aligned with the pace of sales recovery, suggesting that promotional activity is indicative of weaker consumer demand.

The downgrading decision comes amid signs of a deteriorating U.S. consumer environment, coupled with negative trends observed in the beauty segment, including data from competitors like Estée Lauder (EL), Coty (COTY), and Ulta Beauty (ULTA).

Yih highlights three main catalysts for Bath & Body Works that could further weigh on its stock performance. The first catalyst involves promotional activities that might lead customers to stockpile products, particularly in categories like candles and body care, impacting future sales momentum.

The second catalyst is the heightened inventory risk, which could result in negative gross margin inflection, as seen in the third quarter of 2024. The company has shown negative growth in sales-to-inventory ratios for two consecutive quarters, raising concerns about margin sustainability.

The third catalyst involves the need for Bath & Body Works to invest in premium product offerings to shift away from its heavily promotional strategy, which could support long-term brand elevation but also entail additional costs.

Yih's revised financial outlook reflects cautious estimates for the upcoming fiscal periods. For the fourth quarter of 2024, she forecasts revenue between $1.205 billion and $1.215 billion, factoring in a contribution from the company's recent promotional strategies.

The analyst has also lowered her earnings estimates for fiscal years 2024, 2025, and 2026, citing risks of continued sales decline and gross margin pressure. Earnings per share (EPS) projections have been adjusted to $3.11 for 2024, $3.24 for 2025, and $3.51 for 2026, down from her previous estimates of $3.13, $3.55, and $3.92, respectively.

Consequently, the price target has been reduced, applying a price-to-earnings multiple of 8x based on the 2026 EPS estimate.

Yih also notes that Bath & Body Works faces significant competitive pressures and must navigate rising costs and changing consumer preferences, particularly as the market shows a growing inclination towards health-conscious and “clean” product offerings.

While the company has made strides in reformulating products to meet higher standards, there remains an opportunity to further elevate its product line, especially in the candle segment.

She suggests that a shift towards more organic and premium ingredients could help the brand achieve “clean brand” status, which aligns with evolving consumer trends. Despite the risks, Bath & Body Works’ robust business model, with high initial margins and strong free cash flow, could mitigate some challenges, although Yih warns that 2025 may still prove difficult for the company.

Price Action: BBWI stock is down 5.68% to $29.95 at the last check on Friday.

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