Daniel Loeb (Trades, Portfolio) is the founder of Third Point LLC, an investment firm that has approximately ~$5.93 billion worth of U.S. common stocks according to its latest 13F and other filings with the SEC.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Loeb’s investment strategy focuses on a range of tactics, but he is most famous for his activist plays, which involve taking a significant stake in a company and pushing for change, hopefully generating greater shareholder value. Loeb also focuses on a variety of event-driven or catalyst-focused strategies. This can range from mergers to earnings releases and more.
In this article, we'll take a look at Loeb's recent investment into Bath & Body Works (BBWI, Financial), which he appears to be taking an activist approach to.
About the company
Bath & Body Works (BBWI, Financial) is a fragrance and body care retailer which has over 1,700 locations across the U.S. and Canada as well as over 425 locations internationally as part of its franchise program. The company was previously known as L Brands but changed its name after spinning off Victoria's Secret (VSCO, Financial) in 2021.
Mixed financials
Bath & Body Works reported mixed financial results for the fourth quarter of 2022. Its revenue was $2.89 billion, which beat analyst expectations by $82 million, despite being down ~5% year over year. A positive is its fourth quarter net sales were up 29% versus 2019 levels.
Its direct sales for the quarter were $716 million, which declined by 6% year over year, but increased by a blistering 66% versus 2019.
On its earnings call, management boasted the success of its “buy online, pick up in store” model which was rolled out across 800 stores in 2022.
According to company data, its “dual channel” customers which purchase both online and in store spend three times more than its “single channel” customers. Therefore, focusing on this customer segment makes sense, as these are the customers who are always looking for an opportunity to buy. The “dual channel” customers only made up 15% of the total customer base in 2022. Thus, if the company increased the penetration of these customers by ~1%, that could potentially result in an extra $50 million in sales.
Bath & Body Works also launched a loyalty program in August 2022, which has been tremendously successful so far. So far the program has enrolled 33 million members with over 80% being active. A report by Newsweek even labeled the loyalty program as one of the best in America. The loyalty program customers have much greater spend, higher retention and visit the stores more often.
In terms of profitability, the company reported operating income of $653 million in the quarter, which declined by ~16% year over year. A positive is its earnings per share was $1.89, which beat analyst forecasts by $0.29.
The company has annouced bold plans to target $200 million in annual savings across the company, with approximately $100 million worth of savings forecast in 2023 alone.
In terms of its balance sheet, the company reported a solid $1.2 billion in cash and short-term investments. The company does have fairly high debt of ~$6 billion, but $4.8 billion is long-term debt and thus manageable.
Loeb takes an activist stake
Loeb's Third Point has built up a substantial stake in the company beginning in the third quarter of 2022. It kept buying in the fourth quarter of 2022, increasing the position by 69% around the quarter's average share price of $37. According to GuruFocus Real-Time Picks, a Premium feature, he increased the holding by another 0.01% on March 6, 2023 around the day's average price of $39.59 per share.
Even though the March 6 increase was tiny compared to the rest of the stake, it still had to be reported outside the normal 13F filing because Loeb's firm owns more than 5% of shares outstanding. With an ownership stake of 6.02% of the company's common stock, Third Point has a solid position to take an activist stance.
According to a report by Bloomberg, Third Point has announced “significant concerns” about the financial discipline at Bath & Body Works. Loeb reportedly said he believes its current board members are struggling to make “long-term value-maximizing decisions” in relation to its capital allocation strategy.
Reports by Reuters also indicate Loeb has been pressuring the board for months to add more “industry expertise” in the consumer goods industry, and to put in checks and balances with relation to excessive executive compensation. For example, Sarah Nash, the chair of the board who stepped in as the interim CEO between May and November 2022, received an eye-watering pay package of $18 million according to Reuters, which is rather high considering the company has a market cap of just $8.88 billion and hasn't really grown its bottom line overall compared to its peak in 2016.
Executive compensation should ideally be tied to a certain stock price or the fundamentals of an organization in order for management's interests to align with the shareholders. Given the stock price was virtually flat during Nash's tenure and the company’s revenue and profits have declined year over year, it's clear to see why an activist investor would want to get involved.
Loeb already has some wins so far in this case. For example, on March 6, Bath & Body works hired a new board member, Thomas Kuhn, upon a recommendation from Third Point. Kuhn is a former banker and manages the investment firm Doorbrook LLC.
In a statement to Third Point shareholders, Loeb stated he believes that Bath & Body Works can “change its equity story, improve its earnings power, and earn a more premium valuation."
Valuation
Bath & Body works trades at a price-earnings ratio of 12, which is ~30% cheaper than its five-year average. If we take into account debt and cash, the company trades at an enterprise-value-to-Ebit ratio of 11, which is ~12% cheaper than its five-year average. The price-sales ratio sits at 1.22, which is rather cheap.
The GF Value chart indicates a fair value of $56 per share, which is lower than the share price as of this writing, but it does warn of a possible value trap due to the declining earnings results. However, I believe Loeb has the know-how to help turn things around.
Final thoughts
Bath & Body Works is an interesting company. Its products have a strong cult following, but it is currently feeling the impact of the macroeconomic environment, which looks to have impacted consumer demand. The good news is the company’s revenue and earnings have recovered from massive declines in 2019 and 2020, and the business has surpassed analyst forecasts for top and bottom line growth in the fourth quarter of 2022. Loeb's activist position is also a positive sign as it shows he sees value in the stock and can urge management to improve its strategy. The new board member that Third Point recommended is a positive start and hopefully more strategy improvements are on the way for shareholders.
