• Wondering if Bath & Body Works at US$20.09 is a bargain or a value trap? This article walks you through the key numbers so you can judge the price tag with more confidence.
• The stock has recently shown mixed signals, with a 3.5% return over the last 7 days and 10.4% over the last 30 days, set against a 3.1% decline year to date and a 29.6% decline over the last year.
• Recent headlines around Bath & Body Works have continued to focus on how the business is positioned in the Specialty Retail space and how investors are responding to changing sentiment in the sector. For anyone watching the share price, this context is important when thinking about what the current valuation really reflects.
• Right now the company scores a 5 out of 6 valuation checks. This sets the stage to compare different pricing tools such as DCFs and multiples, before looking at a more complete way to think about what Bath & Body Works might be worth by the end of the article.

Approach 1: Bath & Body Works Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a company could be worth by projecting its future cash flows and discounting them back to today, so you can compare that value to the current share price.

For Bath & Body Works, the model used here is a 2 Stage Free Cash Flow to Equity approach based on cash flow projections. The company’s latest twelve month Free Cash Flow is about $849.9 million. Analysts provide detailed forecasts for the next few years, and Simply Wall St then extends those estimates out to 2035, with a projected Free Cash Flow of $1,075 million in 2030 and further extrapolated figures beyond that.

When all those future cash flows are discounted back, the model arrives at an estimated intrinsic value of about $54.77 per share. Compared with the recent share price of US$20.09, this output from the model suggests the stock may be around 63.3% undervalued on this DCF view.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Bath & Body Works is undervalued by 63.3%. Track this in your watchlist or portfolio, or discover 56 more high quality undervalued stocks.

Approach 2: Bath & Body Works Price vs Earnings

P/E is a common yardstick for profitable companies because it links what you pay per share directly to the earnings each share generates. It gives you a quick sense of how much the market is willing to pay for a dollar of current earnings.

What counts as a “normal” P/E can shift depending on expectations for future growth and the perceived risk of those earnings. Higher growth and lower risk usually go with higher P/E ranges, while lower growth and higher risk often go with lower P/E ranges.

Bath & Body Works currently trades on a P/E of 6.23x. That sits well below the Specialty Retail industry average of 20.86x and the peer average of 23.42x. Simply Wall St’s Fair Ratio framework estimates a P/E of 14.42x for Bath & Body Works, based on factors such as earnings growth, profit margins, risks, industry position and market cap. This Fair Ratio can be more tailored than a simple comparison with peers or the broad industry because it adjusts for the specific profile of the company rather than assuming all retailers should trade on the same multiple.

Comparing the current P/E of 6.23x with the Fair Ratio of 14.42x suggests the shares are trading below that Fair Ratio level.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Bath & Body Works Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you attach your own story about Bath & Body Works to the numbers by linking a view on its future revenue, earnings and margins to a Fair Value, updating that Fair Value automatically as fresh news or earnings arrive, and helping you decide what the current US$20.09 price means by comparing it with different community views such as a more cautious Fair Value around US$22.00, more optimistic views around US$40.73 and US$44.60, and the higher end around US$55.69. All of these sit side by side on the Community page so you can see how different assumptions about issues like mall exposure, digital performance, loyalty programs, debt and new channels translate into very different conclusions about the same stock.

Do you think there's more to the story for Bath & Body Works? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.