How Bath & Body Works Is a Perfect Example of a Value Stock

Key Points

• Bath & Body Works represents a classic example of a value investment, all the way from its financial profile to its discounted valuation today.
• High margins show a moat around the company's products, and sound financial management takes advantage of that.
• With compounding returns, even in an uncertain retail environment, will bring double-digit upside to shareholders.

Value investing is a proven path to wealth for common investors, based on fundamental market truths across real estate, stocks, and farmland. The price of any asset reflects its potential earnings over its lifetime.

Today’s financial media often blurs these lessons, but readers can still beat the market and improve their financial future.

For example, Bath & Body Works NYSE: BBWI illustrates key metrics to focus on when investing, especially in challenging retail sectors. Niche businesses, once seen as boring, often turn into top investments, starting with understanding how their simplicity relates to strong financials.

Painting a Clear Picture Through Margins

One of the best ways to assess a business’s strength in its market is through its margins, particularly its gross profit margin. Any company that consistently retains high gross margins must do so through two main avenues in its relative space.

First comes pricing power, meaning they can raise prices in line with inflation rates without seeing a decline or change in the amount of demand and sales they experience. This indicates the customer's willingness to continue paying more for these products despite the price increases.

The second factor ties in nicely with the first, which is the product or brand moat itself.

By retaining customer loyalty and demand despite rising prices, investors can begin to assume that there must be some sort of moat around the offer that will trickle down into financial growth and stability (which is good for compounding value down the line).

Bath & Body Works' financials show a gross profit margin of 44.6% over the past 12 months, a level that has remained steady over the years. The first check is now in place to continue into other very important financial metrics, as investors now understand that a high profit margin is typically rooted in customer loyalty and superior product offerings.

Good Financial Management: Where Compounding Grows

It’s one thing to sustain sales and meet demand; it’s another to utilize this to the company’s advantage through sound financial management, which is where the quality of the leadership team is ultimately tested. For Bath & Body Works, investors can look to the company’s return on invested capital (ROIC) rates as the ultimate evidence.

With rates as high as 28.3% for the past 12 months, and again a steady rate over the years, this is exactly where the future upside and compounding opportunity come into play. Painting a very clear scenario here, ROIC matters because any capital invested (or reinvested) in the business will start to compound at these rates for shareholders to enjoy.

Whether it is through debt retirement, acquisitions, or other benefits like dividends and stock buybacks, a high ROIC rate can do it all for investors and eventually have the market reflect the benefits of this compounding through higher valuations.

Ultimately, this shows in the company’s latest financial quarter. Even though sales grew less than 2% over the year, Bath & Body Works still managed to increase its operating cash flow to $145 million compared to only $30 million the year prior, and even buy back $254 million worth of stock to support valuations and shareholder benefits.

That leads investors to the last piece of the value investing puzzle: valuation. Because Bath & Body Works now trades at only 63% of its 52-week high, it likely remains an opportunity for buyers today, which is why Wall Street analysts still see it as a Moderate Buy valued at $39.7 per share (45.8% above today’s prices).

Even though there has been bearish price action recently, these analysts can’t deny that this company's fundamental image is still very strong. This opinion is shared by those at J.P. Morgan Chase, which recently boosted its holdings in the stock by 11.5% in August 2025, bringing its net position to $212.1 million or 3.3% ownership in the company.

Perhaps not now, or as soon as most would like, but these underlying fundamentals will ultimately be reflected in Bath & Body Works’ valuation, and that is where the most important aspect of value investing comes into play: being patient.