Key Takeaways
Bath & Body Works (NYSE: BBWI) is at a pivotal juncture, with its international business emerging as a critical, albeit still smaller, growth engine amidst a broader strategic transformation. While the company's core North American market grapples with softening demand, the global segment is demonstrating robust expansion, offering a compelling narrative for long-term investors. In the first quarter of fiscal 2026, international and other net sales surged 9% year-over-year to $70 million, a clear highlight in an otherwise challenging quarter where total net sales declined 3.2%. This growth was further underscored by an 11% increase in system-wide international retail sales, signaling healthy consumer traction across diverse global markets.
This momentum is not merely a one-off event; management anticipates continued strength, projecting low-double-digit international retail sales growth for the fiscal second quarter. The company ended Q1'26 with 579 partner-operated international stores, having added eight net new locations during the period. This steady expansion of its global footprint reinforces the growing relevance of the Bath & Body Works brand outside its established North American base. The "Consumer First Formula" strategy, introduced in Q3 2025, explicitly aims to reposition the company from a specialty retailer to a "premier global brand," with international markets playing a central role in this ambitious transformation.
The strategic emphasis on international growth is well-founded. Compared to its extensive presence in the U.S. and Canada, Bath & Body Works remains relatively underpenetrated globally, creating substantial runway for store expansion, royalty growth, and market share gains. The brand's strong recognition and popular fragrance and personal care portfolio resonate with consumers across various geographies, providing a solid foundation for this global push. While the international segment currently accounts for a smaller portion of overall revenue, its accelerated growth rate and strategic importance cannot be overstated as the company navigates a complex retail environment.
A key differentiator in Bath & Body Works' international expansion strategy is its asset-light franchise model, which enables rapid growth with limited capital investment. This approach allows the company to generate attractive returns by leveraging local market expertise and established retail partners, effectively mitigating the financial risks typically associated with direct international market entry. By the end of fiscal 2025, Bath & Body Works operated 573 international locations, with partners adding a net of 44 stores during that year alone. Looking ahead, management expects to accelerate this pace, planning at least 60 net new international store openings for fiscal 2026.
This capital-efficient model is proving instrumental in expanding the brand's reach into high-growth markets. For instance, the company is actively pursuing expansion into new geographies like Germany and Brazil, reflecting confidence in the brand's global appeal and the scalability of its franchise partnerships. The ability to grow its store count significantly without burdening its balance sheet with substantial capital expenditures is a strategic advantage, especially as the company simultaneously invests in its domestic "Consumer First Formula" initiatives. This contrasts sharply with the capital-intensive nature of opening company-operated stores in North America, where the focus has been on optimizing the existing footprint.
The success of this model is evident in the system-wide international retail sales, which climbed 13% in fiscal Q4 2025 and continued with 11% growth in Q1 2026. This performance highlights not only increasing consumer demand but also effective inventory management and operational execution by franchise partners. The international business is approaching $1 billion in retail sales, a significant milestone that underscores its increasing importance to BBWI's overall financial health and strategic direction. This sustained momentum provides a clear pathway for Bath & Body Works to evolve from a U.S.-centric specialty retailer into a more balanced global fragrance and body care brand.
Despite the promising international growth, Bath & Body Works' core North American business continues to face significant headwinds, casting a shadow over the company's near-term outlook. In Q1 2026, total net sales for the company declined 3.2% year-over-year to $1.38 billion, falling short of the prior year's $1.42 billion. The primary drag came from the U.S. and Canada segments, where store sales fell 4.3% to $1.06 billion and direct sales decreased 1.5% to $246 million. This performance underscores a concerning trend: the company's domestic market, which still accounts for approximately 95% of its sales, is losing ground.
The broader picture for fiscal 2026 is equally challenging. Management forecasts full-year net sales to decline between 2.5% and 4.5% compared to 2025's $7.29 billion. This projected revenue contraction is expected to impact profitability, with adjusted earnings per diluted share for 2026 anticipated to be between $2.40 and $2.65, a notable step down from $3.21 in 2025. This guidance signals a profit step-down despite the company's efforts to drive operational efficiencies and cost savings through its "Fuel for Growth" program, which aims to deliver $250 million in cost savings over two years.
Adding to the concern is the company's same-store sales performance, which has averaged 1.6% annual declines over the last two years. This metric is crucial as it indicates a shrinking demand at existing, established locations, suggesting that new store openings have artificially boosted revenue rather than reflecting organic growth. While the company is actively working to "reclaim cultural relevance" through influencer marketing and new channel expansion, such as its recent launch on Amazon in Q1 2026, these initiatives are still in their early stages and are expected to contribute more meaningfully in the back half of 2026 and into 2027.
Bath & Body Works' "Consumer First Formula" is a comprehensive strategic transformation designed to revitalize its brand and address the underlying issues in its core markets. Introduced in Q3 2025, this strategy focuses on four key pillars: creating disruptive and innovative products, reigniting the brand, winning in the marketplace, and operating with speed and efficiency. CEO Daniel Heaf emphasized that this transformation is repositioning the company from a specialty retailer to a "premier global brand," with the full financial impact expected to build throughout 2026 and continue into 2027.
Under the product innovation pillar, the company is reestablishing leadership by focusing on core categories like body care, home fragrance, soaps, and sanitizers. This includes delivering ingredient-led formulas, enhancing sensorial experiences, and simplifying its assortment to prioritize trend-right innovation. To reignite the brand, BBWI is investing in bolder, more targeted brand moments and deeper creator advocacy, aiming for a tenfold increase in influencer activity. This is crucial for attracting new and younger consumers and building enduring fragrance franchises around iconic scents.
Winning in the marketplace involves meeting consumers where they are, making discovery effortless. A significant move in this direction was the launch of its official storefront on Amazon in the first half of 2026. This initiative is expected to generate approximately $50 million in 2026 top-line growth, accounting for about half a percentage point of total sales, by reaching new and lapsed consumers and capturing "gray market" sales. Additionally, the company is enhancing its digital and in-store experiences and expanding into other wholesale channels. The final pillar, operating with speed and efficiency, includes the "Fuel for Growth" program, targeting $250 million in cost savings over two years, with over half identified for 2026, to fund these revenue-generating initiatives.
From a valuation perspective, Bath & Body Works appears to trade at a discount compared to its industry peers, which could signal an opportunity for value investors, but also reflects the current challenges. The stock currently trades at a forward price-to-earnings (P/E) ratio of 7.15x, significantly below the industry's average of 14.66x. This valuation, coupled with a Zacks Value Score of 'A', suggests that the market may be undervaluing the company relative to its assets and future earnings potential, provided its transformation strategy gains traction. However, the discount also reflects the anticipated decline in earnings for fiscal 2026.
Analyst sentiment, as reflected by Zacks, currently assigns BBWI a #3 (Hold) rank. This neutral stance indicates that while the company has compelling aspects, particularly its international growth and strategic initiatives, there are also significant headwinds that warrant caution. The Zacks Consensus Estimate for fiscal 2026 earnings implies a year-over-year decline of 18.4%, aligning with management's guidance of adjusted EPS between $2.40 and $2.65, down from $3.21 in 2025. However, there's a more optimistic outlook for fiscal 2027, with earnings expected to tick up by 10.9%, suggesting analysts anticipate a rebound as the "Consumer First Formula" takes hold.
The stock's recent price performance also paints a mixed picture. Shares of Bath & Body Works have inched up 0.9% in the past six months, significantly outperforming the industry's decline of 17.1% over the same period. However, looking at a slightly longer window, the stock lost 28.1% in the past six months compared to the industry's decline of 4.5% as of April 15, 2026, according to a separate report. This divergence highlights the volatility and the market's ongoing reassessment of BBWI's prospects. The stock's current price of $20.92 is up 7.50% today, but remains well below its 52-week high of $33.96, indicating substantial room for recovery if the turnaround proves successful.
Bath & Body Works presents a complex investment case. While the company's international expansion is a clear bright spot, demonstrating robust growth and leveraging an efficient asset-light model, its core North American business faces significant challenges, including declining sales and a projected drop in earnings for fiscal 2026. The "Consumer First Formula" is a credible strategy to address these issues, but its full impact will take time to materialize, with more meaningful contributions expected in late 2026 and 2027.
Given the mixed signals, a "Hold" rating appears appropriate for BBWI at its current valuation. Investors should closely monitor the execution of the "Consumer First Formula," particularly the performance of its Amazon launch and the acceleration of international store openings. A sustained improvement in domestic same-store sales and a clear path to returning to overall revenue and earnings growth in fiscal 2027 would be key indicators for a more bullish stance.
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