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Bath & Body Works (BBWI +17%) is surging today following its Q3 (Oct) earnings report this morning. At first glance, the outsized move seems unwarranted given the pretty modest EPS upside. Also, revenues rose just 3.1% yr/yr to $1.61 bln, a bit better than analyst expectations. Guidance for the all-important Q4 (Jan) holiday quarter was solid with the mid-point of EPS above expectations while revenue guidance was in-line.

• As one of the world's largest specialty retailers of fragrances for the body (fragrance mist, body lotion, body cream) and home (candles, fragrance diffusers, soap), BBWI was a huge beneficiary during the pandemic with soaps and sanitizers flying off the shelves. However, the retail chain has struggled in recent years as shopping patterns normalize.
• Digging into the Q3 results, we actually view the 3.1% sales growth a positive as it was BBWI's strongest yr/yr growth in 10 quarters, which has seen a lot of declines. In US and Canadian stores, sales growth was even stronger, up 4.4% to $1.2 bln. BBWI says consumers are responding positively to its seasonal merchandise. Each of its core categories (body care, home fragrance, soaps/sanitizers) grew low single digits.
• BBWI said it's innovating across its portfolio and raising the quality of its products, including updating ingredients, packaging, and fragrances. Its home fragrance performance was fueled by growth in the candle business due to marketing and a successful new promotional event. BBWI concedes candles are a competitive market with a value-conscious consumer, a trend that has continued. BBWI is responding with a compelling assortment at a range of price points. Normalization of the candle market has impacted BBWI this year, however, BBWI does not expect it to have a material impact in 2025 and beyond.
• A key strategy for BBWI has been to move away from malls. Approximately 55% of its North American stores are now in off-mall locations, and the portfolio remains very healthy. Also, international markets represent only 5% of sales, but BBWI sees a significant long-term opportunity as it enters new markets and expands in existing markets. BBWI recently opened its 500th international store in London.

Overall, the headline numbers do not blow us away. However, there has been a lot of negativity around BBWI as its products are highly discretionary, especially candles. Consumers are really watching their spend on discretionary items, so these results/guidance were better-than-feared. Also, with a late Thanksgiving, this is a short holiday season and BBWI relies more on in-store foot traffic than other retailers as smell is a big selling point and that needs to be in-person.

Couple that with a tight consumer, and we think investors are pleased with Q4 guidance, which is BBWI's largest revenue quarter by far. So it's very important. Finally, the stock has been under pressure since early June, but has consolidated in recent months bouncing around in the $27-32 area since early August. This report has led to a break above that range, which is a generally positive sign.