L Brands' Bath & Body Works may have reached its peak

Brian Sozzi

The candles may be starting to dim at Bath & Body Works.

After helping to prop up struggling L Brands’ (LB) bottom line as it deals with Victoria’s Secret’s identity and sales issues, Bath & Body Works posted its first unchanged quarter of store traffic in five years during the second quarter. That has Jefferies analyst Randal Konik — a longtime L Brands bear, which has been a great call — concerned the best days for the bath and candle retailer Bath & Body Works are now over.

And that could spell more bad news for L Brands just as it’s trying to pull Victoria’s Secret’s sales out of the drain.

“Our thesis from here on Bath & Body Works is pretty simple... Traffic slowing means less transactional volume ahead. Candles maxing out means that candle penetration is at the peak and the benefit from mix shift of higher average unit retail price products is therefore at the end of the road,” Konik wrote in a new note to clients on Tuesday.

“Pulling these themes together against the most difficult sales and margin comparisons in retail means that comps will slow and decline soon, margins will erode as well (rent deleverage is a big risk) and operating profits will fall,” Konik added. “A declining Bath & Beyond Beyond scenario is not contemplated at all by the Street so beware.”

For their part, Konik’s peers on Wall Street have only known a healthy Bath & Body Works for the past few years. Konik’s research highlights that Bath & Body Works’ same-store sales have increased an average of 7% over the trailing 20 quarters. That’s downright impressive considering competition from Yankee Candle, Target (TGT), and sluggish mall traffic. Bath & Body Works has won high scores on the Street for a burst of innovation across lotions and candles.

Remodeled stores have also enticed shoppers into the stores. Bath & Body Works operates more than 1,700 stores in the U.S. and Canada.

Lots of red flags

People walk by a Bath and Body Works at a shopping mall in Dallas. (AP Photo/LM Otero)

But Bath & Body Works’ second quarter had several red flags that go beyond weak store traffic.

Same-store sales at stores and online increased a total of 8%, slower than the year-to-date average increase of 10%. In the second quarter of last year, the division’s same-store sales rose 10%.

Meanwhile, just in stores — same-store sales in the second quarter gained 4%, slowing sharply from 7% achieved a year earlier.

The division’s top line sales increased 8% in the quarter, but operating profits grew a slower 7%. Konik pins that profit margin pressure on a stepped up pace of discounts designed to drive sales (not a good sign for a retailer). Those aggressive promotions have continued into the third quarter, according to several photos shared by Konik in his latest research note.

L Brands Chief Financial Officer Stuart Burgdoerfer appeared to signal to Wall Street on its August 22 earnings call that sales and profit growth at Bath & Body Works may continue to moderate into the end of the year.

“Store visits show candle fever is moderating while competition becomes more aggressive, which presents additional risk for Bath & Body Works fundamentals to slow,” Konik said.

Makes sense — how many candles does one need after five years of splurges?

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

Yahoo Finance's live morning show.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.