Bath & Body Works, Inc. (formerly L Brands, Inc.) — Form 10-Q summary
Period and filing-date note: The supplied metadata says “2020 Q2,” but this filing reports the second quarter and first half of fiscal 2021: the 13 and 26 weeks ended July 31, 2021, compared with periods ended August 1, 2020. The interim statements are unaudited. On August 2, 2021, the company completed the Victoria’s Secret separation, changed its name to Bath & Body Works, Inc., and began trading as BBWI.
Business context and results
Results include Bath & Body Works and Victoria’s Secret before the August 2 spin-off. The prior-year comparison is heavily affected by North American store closures during COVID-19, making year-over-year sales and store-productivity comparisons less representative of underlying trends.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $3.318 billion | $2.319 billion | $6.341 billion | $3.974 billion |
| Gross profit | $1.498 billion | $711 million | $2.912 billion | $1.000 billion |
| Gross margin | 45.2% | 30.7% | 45.9% | 25.2% |
| Operating income (loss) | $599 million | $44 million | $1.171 billion | $(274) million |
| Operating margin | 18.1% | 1.9% | 18.5% | (6.9)% |
| Net income (loss) | $374 million | $(49) million | $651 million | $(346) million |
| Diluted EPS | $1.34 | $(0.18) | $2.31 | $(1.25) |
Drivers and changes versus prior year
- Q2 sales rose 43%; Bath & Body Works sales grew 36% to $1.704 billion and Victoria’s Secret sales grew 51% to $1.614 billion. Store-channel growth largely reflected stores being closed for much of Q2 2020; direct sales declined at both businesses as stores reopened.
- Management cited strong Bath & Body Works demand for fragrant body care, home fragrance and gifting. Soaps and sanitizers declined from unusually high prior-year demand. Victoria’s Secret benefited from stronger merchandise margins, disciplined inventory management and reduced promotions.
- Q2 operating income improved by $555 million. The comparison also benefited from $117 million of Victoria’s Secret store-asset impairment charges and $81 million of restructuring charges in Q2 2020. The prior period included a $36 million net gain from the Hong Kong store closure, partially offsetting those charges.
- Q2 comparable sales were down 16% overall (Bath & Body Works down 22%; Victoria’s Secret down 9%). Management cautioned that COVID-related closures in the comparison period limit the usefulness of year-over-year trends.
- First-half reported results included a $105 million pretax loss on early debt extinguishment. Excluding disclosed special items, first-half adjusted net income was $731 million and adjusted diluted EPS was $2.59, compared with adjusted net loss of $206 million and adjusted diluted loss per share of $0.74 in 2020.
Cash flow, liquidity and debt
- First-half operating cash flow was $573 million, versus $286 million in 2020. Investing cash outflow was $168 million, including $178 million of capital expenditures. Financing cash outflow was $1.752 billion, principally reflecting $1.194 billion of share repurchases and $1.130 billion of debt payments, partly offset by $600 million of Victoria’s Secret note proceeds held in escrow.
- At July 31, cash and cash equivalents were $1.988 billion, with another $600 million in escrow for the spin-off; cash and restricted cash totaled $2.588 billion. Working capital was $1.889 billion, including the escrow balance.
- Reported long-term debt was $5.938 billion, including $592 million attributable to Victoria’s Secret notes that transferred to Victoria’s Secret & Co. upon the spin-off. Debt was $6.366 billion at January 30, 2021. The filing reports no current debt at July 31.
- The $1 billion asset-backed revolver had no borrowings outstanding at July 31, but the company could not draw because its cash balance exceeded the facility’s $350 million threshold. Subsequent to quarter-end, the facility was amended: commitments fell to $750 million, maturity extended to August 2026, borrowing rates decreased by 50 basis points, and the cash-balance prepayment requirement was removed.
- On August 2, Victoria’s Secret & Co. paid approximately $976 million to Bath & Body Works in connection with the separation. Management said the proceeds could fund repurchases, dividends or debt reduction. In September, the company accepted tenders for $450 million principal amount of notes for $532 million and expected an approximately $84 million pretax loss.
Outlook, risks and unusual items
- Management estimated 2021 capital expenditures of $345–$370 million for the former total company, including $275–$300 million for Bath & Body Works. The filing provides no earnings or sales guidance.
- Management estimated $100–$150 million of information-technology separation expenditures over several years; estimates were preliminary. Victoria’s Secret was to provide transition technology services while Bath & Body Works establishes independent systems.
- The spin-off creates risks including potential loss of synergies, separation costs, possible adverse credit or earnings effects, contingent liabilities and uncertainty over tax-free treatment. COVID-19-related operating restrictions, inflation and supply-chain constraints, consumer demand, mall traffic, international operations, and debt service/refinancing are also identified risks.
- A shareholder derivative-action settlement requires governance measures, including a Diversity, Equity, and Inclusion Council. Each company committed $45 million over at least five years to fund the measures.
- The board reinstated a $0.60 annual dividend in March 2021; $0.15 per share was paid in Q2, and a further $0.15 dividend was declared in August. The company repurchased $1.194 billion of shares in the first half, including 10 million shares from its former CEO and affiliates for $730 million.
- Management said ordinary-course litigation was not expected to materially affect financial position or results. The filing also discloses approximately $30 million of contingent lease obligations related to the former La Senza business.
Important facts for investors to verify
- Review post-spin financial statements: from Q3 2021, Victoria’s Secret historical results are classified as discontinued operations, so reported periods are not directly comparable without adjustment.
- Track standalone Bath & Body Works performance, margins and cash generation after separation, distinguishing underlying growth from the COVID-affected comparison base.
- Confirm actual IT separation costs against the preliminary $100–$150 million estimate and monitor transition-service arrangements and potential dis-synergies.
- Assess post-spin debt, liquidity and use of the $976 million separation payment, including completed debt tenders and subsequent repurchases or dividends.
- Monitor spin-off tax treatment, indemnification obligations, the governance settlement funding, and ongoing COVID-19, inflation and supply-chain risks.