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Bath & Body Works’ Lower Forecasts Could Power Activist Investor, Analyst Cautions

Third Point has revealed a proxy challenge.

An analyst has cautioned that Bath & Body Works’ lower-than-expected forecasts on the top and bottom lines could give a billionaire activist investor some “ammunition” in its proxy battle.

The retailer released its fourth quarter results Thursday, one day after Daniel Loeb’s Third Point fund, which owns a 6 percent stake in Bath & Body Works, called for shareholder representation on the board to ease concerns about the company’s corporate governance and decision-making processes.

In particular, the fund took issue with the compensation of board chair Sarah E. Nash, who recently moonlighted as chief executive officer in between permanent hires (the new CEO is former Unilever executive Gina Boswell). It also raised concerns over succession planning, capital allocation, investor communication and strategy for enduring value creation, stressing that the board’s recent director appointments hadn’t helped ease these worries. 

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Bath & Body Works beat analyst forecasts in the fourth quarter, but Wall Street zoomed in on the outlook and while Neil Saunders, managing director of GlobalData, believes a large chunk of the pessimism in the forecast is down to external economic factors, he cautioned that it will give some ammunition to Third Point, which is trying to nominate candidates to the board.

“While we have some sympathy with Third Point’s views, we believe them to be something of an overreaction and to ignore the fact that, from a retail perspective, Bath & Body Works is a very well-run business that gets most of the fundamentals of retailing right,” he said in a note. “The last thing it needs is disruption that causes a deterioration in standards or investments which are critical to allowing the business to innovate. Having to deal with activists rather than the day-to-day management of the company during a difficult time is also a distraction that is, quite frankly, not needed at this time.”

Olivia Tong, an analyst at Raymond James, added that while she has not had a chance yet to speak to Third Point, it is “interesting that the focus is on past wrongs after the company has already hired a new CEO, Gina Boswell.”

During an analysts’ call to discuss earnings, Bath & Body executives stated at the beginning that they did not want to talk about Third Point, but issued a statement late Wednesday. The statement said: “It is unfortunate that Third Point has chosen to announce its intent to pursue a costly public proxy fight despite the board’s good faith engagement efforts over the past several months.”

The retailer reported net sales of $2.89 billion for the fourth quarter ended Jan. 28. This represented a decrease of 5 percent compared with a year earlier, but beat Wall Street forecasts for $2.8 billion.

Net income was $428.2 million, compared to $592.6 million last year. The company reported earnings per diluted share of $1.86, compared to $2.27. Analysts had been expecting $1.62 per share.

It now expects first-quarter net sales to decline by low- to midsingle digits, while earnings per diluted share are expected to be between 17 cents and 27 cents, below analysts’ forecasts of 44 cents. Full-year EPS guidance came in between $2.50 and $3, also lower than Wall Street’s bet for $3.60

Of the results, Boswell said: “The team delivered better-than-expected earnings results despite a challenging macroeconomic environment, which is a testament to the strengths of this organization. Our customer base responded well to our holiday season, in part powered by our loyalty program, which now exceeds 33 million members. In addition, we continued to be disciplined in our expense and inventory management.”

At the same time, the company said that it is undertaking an enterprise-wide effort to reduce expenses and improve operating efficiency in the business. It is targeting $200 million of annual cost savings, with more than half of those savings contemplated in its 2023 outlook, primarily impacting the second half of the year.

In August, Bath & Body Works said it had eliminated about 130 roles, the majority of which were leadership positions, as it pursues “a number of initiatives to improve financial performance and better position the organization for long-term growth.”

The company was formed a year before that in August 2021, when the former L Brands split into two entities: Victoria’s Secret and Bath & Body Works. Each company trades individually on the New York Stock Exchange. Bath & Body Works was number 14 on WWD Beauty Inc’s most recent Top 100 Beauty Manufacturers list, with $4.6 billion in sales for calendar 2021.

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The retailer’s stock closed up 4 percent to $43.56.