Filing summary
Period and issuer: The supplied filing is L Brands, Inc.’s Form 10-K for the 52-week fiscal year ended January 30, 2021, filed March 19, 2021. It is not a Bath & Body Works, Inc. filing for 2019 Q4. It reports L Brands’ consolidated results, including Bath & Body Works and Victoria’s Secret; the filing describes plans to separate the businesses.
Financial results
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Net sales | $11.847 billion | $12.914 billion |
| Gross profit / margin | $4.667 billion / 39.4% | $4.450 billion / 34.5% |
| Operating income / margin | $1.580 billion / 13.3% | $258 million / 2.0% |
| Net income (loss) | $844 million | $(366) million |
| Diluted EPS | $3.00 | $(1.33) |
| Cash from operations | $2.039 billion | $1.236 billion |
| Capital expenditures | $228 million | $458 million |
| Cash and cash equivalents at year-end | $3.903 billion | $1.499 billion |
| Long-term debt | $6.366 billion | $5.487 billion |
FY 2020 total comparable sales rose 21%. The company reported adjusted operating income of $1.808 billion and adjusted diluted EPS of $3.46, excluding specified special items. Interest expense increased to $438 million from $378 million.
Fourth quarter FY 2020: Net sales were $4.819 billion, up 2% from the fourth quarter of FY 2019; operating income was $1.273 billion versus $82 million; and net income was $859 million versus a $192 million loss. Gross margin was 47.9%, compared with 38.1%. These are FY 2020 fourth-quarter results, not 2019 Q4 results.
Segments and changes versus prior year
- Bath & Body Works: FY sales increased 20% to $6.434 billion; comparable sales rose 45%; direct sales rose 109% to $2.003 billion. Segment operating income increased to $1.821 billion from $1.224 billion, with a 28.3% margin.
- Victoria’s Secret: FY sales declined 28% to $5.413 billion; comparable sales increased 1%, while comparable store sales fell 15%. Direct sales rose 31% to $2.223 billion. Segment operating loss narrowed to $25 million from $782 million. The company permanently closed 241 North American stores during the year.
- Consolidated sales fell 8%, but operating income improved substantially, partly because FY 2019 included a $720 million Victoria’s Secret goodwill impairment charge. FY 2020 results also benefited from stronger Bath & Body Works merchandise margins, cost reductions, store closures and landlord relief.
Liquidity, debt and capital allocation
Year-end working capital was $2.753 billion, and the current ratio was 2.0. There were no outstanding borrowings on the asset-backed revolving credit facility (ABL); its borrowing base was $853 million, but the company could not draw while consolidated cash exceeded $350 million. Debt-to-capitalization was 112%, and shareholders’ equity remained negative at $(662) million. The filing reports $3.933 billion of cash and restricted cash in its cash-flow statement, including $30 million of restricted cash.
The company issued $2.25 billion of notes in 2020 and repurchased or redeemed notes, recording a $53 million pretax debt-extinguishment loss. The quarterly dividend was suspended after the first quarter of FY 2020. Subsequent to year-end, the Board authorized a debt repurchase expected to use approximately $1.1 billion of cash, a new $500 million share-repurchase plan, and reinstatement of an annual dividend of $0.60 per share beginning with the June 2021 payment.
Outlook, risks and unusual items
- Management expected significantly higher operating performance in the first quarter of FY 2021, with more difficult comparisons for the rest of the year but anticipated growth versus 2019. It described a low-to-mid-20% operating-margin range as appropriate for Bath & Body Works and targeted a 10–15% margin for Victoria’s Secret; these are management objectives, not guaranteed results.
- The company was targeting separation of Bath & Body Works and Victoria’s Secret in August 2021, considering either a spin-off or sale and preparing on a dual-track basis. The filing cautions that timing, approvals, costs and benefits are uncertain.
- Management cited ongoing COVID-19 uncertainty, store restrictions and traffic, supply-chain and fulfillment constraints, seasonality, competition, mall exposure, leadership transition, international and currency risks, cybersecurity and privacy risks, and the ability to service debt and comply with covenants.
- Unusual FY 2020 items included $254 million of Victoria’s Secret store and lease-asset impairment charges, $81 million of restructuring charges, gains related to the U.K. joint venture and Hong Kong store closure, a $53 million debt-extinguishment loss, and $94 million of net tax benefits from specified tax matters and legislation. Landlord amendments reduced occupancy expense by $111 million.
- Contingencies include ordinary-course litigation and $35 million of reserves primarily for La Senza-related obligations. Management stated current legal proceedings were not expected to materially adversely affect results, financial condition or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer and period: this is L Brands’ FY 2020 10-K, not a 2019 Q4 Bath & Body Works, Inc. filing.
- Review the quality and durability of FY 2020 earnings and cash generation, including COVID-related demand shifts, rent relief, tax benefits and other special items.
- Assess Victoria’s Secret turnaround progress, store productivity and the outcome, timing and costs of the planned separation.
- Check debt balances and maturities after the announced approximately $1.1 billion debt repurchase, and confirm liquidity and covenant capacity after use of cash.
- Monitor whether management’s segment margin objectives, store plans and dividend and share-repurchase actions are achieved.