Bath and Body Works

Bath and Body Works is Limited Brands' (LTD) second most valuable division after Victoria's Secret, representing 25% of the firm's estimated equity value. These two divisions make up almost 60% of the stock value by our estimates and help differentiate the company from other retailers like Abercrombie & Fitch (ANF), American Eagle (AEO), AnnTaylor (ANN) and Gap (GPS).

Below, we take a quick look at the outlook for the two main drivers to our Bath & Body Works forecast: its U.S. sales per square foot, and its EBITDA margins.

Bath and Body Works U.S. Stores at a Glance

Bath and Body Works caters to the complete well being of customers by providing shower gels and lotions, aromatherapy, antibacterial soaps, candles and personal care accessories. The core of Bath & Body Works offerings are its Signature Collection, antibacterial and home fragrance product lines, which together make up the majority of its sales and profits.

The key drivers of profitability for Bath and Body Works stores in U.S. include:

1. Revenue Per Square Foot

The average annual revenue per square foot of Bath and Body Works stores in U.S. decreased from $697 in 2006 to $587 in 2009 before rising to about $600 in 2010. The three-year decline primarily resulted from falling sales due to weak store traffic and the challenging economic environment. Bath and Body Works U.S. stores' revenue per square foot increased in 2010 from the low of 2009 as the economic environment improved and store traffic increased.

Going forward, we believe the revenue per square foot for Bath and Body Works stores in the U.S. will grow at a constant rate reaching almost $800 by the end of our forecast period.


2. U.S. Stores' EBITDA Margin

We estimate that EBITDA margin for Bath and Body Works stores in the U.S. decreased from 20% in 2005 to just under 12% in 2008. The decrease was attributable to two factors: First, a decline in stores' gross profit margins due to higher expenses and increased promotional activities designed to drive sales, and second, higher general, administrative and store operating expenses.

In 2010, the EBITDA margin for Bath and Body Works stores in the U.S. increased to over 20%, due primarily to an increase in gross profit driven by a better sales mix, which helped gross margins, as well as lower operating expenses. Going forward, we estimate Bath and Body Works US stores' EBITDA margin will remain constant at current levels through the Trefis forecast period.