Business context and reporting period
The supplied filing is L Brands, Inc.’s Form 10-Q for the 13 weeks ended April 30, 2016, compared with the 13 weeks ended May 2, 2015. It is not a Bath & Body Works, Inc. filing, and the stated “2015 Q1” metadata does not match the filing period. L Brands operated Victoria’s Secret, PINK, Bath & Body Works, La Senza and Henri Bendel; Bath & Body Works was one of its reportable segments.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $2.614 billion | $2.512 billion |
| Gross profit / gross margin | $1.043 billion / 39.9% | $1.056 billion / 42.0% |
| Operating income / margin | $323 million / 12.4% | $372 million / 14.8% |
| Net income | $152 million | $250 million |
| Diluted EPS | $0.52 | $0.84 |
| Net cash used for operating activities | $114 million | $156 million |
Comparable sales increased 3% overall, while comparable store sales rose 2%. Cash and cash equivalents were $1.267 billion at April 30, 2016, down from $2.548 billion at January 30, 2016. First-quarter investing cash outflow was $205 million, including $187 million of capital expenditures; financing cash outflow was $964 million, including $750 million of dividends and $260 million of share repurchases.
Long-term debt, net of current portion, was $5.718 billion, versus $5.715 billion at January 30, 2016 and $4.719 billion a year earlier. The company reported $1.386 billion of working capital and $992 million of remaining availability under credit agreements. It had no borrowings under its $1 billion revolving facility, was in compliance with its financial covenants, and reported a debt-to-EBITDA ratio below 3.00 to 1.00.
Changes versus the prior comparable period
Sales increased 4%, but operating income fell 13% and net income fell 39%. The gross margin contracted 2.1 percentage points. Interest expense rose $17 million to $97 million, primarily reflecting higher average borrowings after a $1 billion note issuance in October 2015. Other income fell to $7 million from $77 million, chiefly because the prior-year quarter included a $78 million gain on divestiture.
Bath & Body Works sales rose 8% to $660 million and operating income increased to $112 million from $97 million. Victoria’s Secret sales increased 3% to $1.741 billion, while operating income declined to $235 million from $289 million. International segment sales rose 4% to $95 million, while operating income decreased to $13 million from $21 million.
Management commentary, unusual items and risks
Management attributed the weaker consolidated operating result mainly to lower Victoria’s Secret profitability, promotional activity, store investment and restructuring costs. The company recorded $35 million of pretax Victoria’s Secret restructuring charges: $11 million for fabric commitments and catalogue paper and $24 million for severance associated with eliminating approximately 200 positions. On an adjusted basis, operating income was $358 million, net income $174 million and diluted EPS $0.59; prior-year adjusted net income was $181 million and adjusted diluted EPS $0.61.
On April 18, 2016, L Brands acquired American Beauty Limited for $44 million, including reacquired rights to operate Victoria’s Secret Beauty and Accessories stores in Greater China and 26 existing stores. Management said it was carefully managing the business amid an uncertain retail environment and pursuing compelling merchandise and customer experiences. The filing provides no specific full-year earnings or sales guidance; results are subject to retail seasonality.
Disclosed risks include consumer spending and mall traffic, competition and fashion trends, international expansion and franchise relationships, foreign exchange, sourcing and shipping disruptions, store and technology execution, information security, debt service and refinancing, and legal and tax matters. Contingencies include an estimated maximum $78 million guarantee related to an investee’s interest-rate swap, approximately $22 million of legacy lease guarantees, and approximately $105 million in sale-leaseback residual-value guarantees; a $3 million liability was recorded for the latter. Management did not expect pending litigation to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended issuer and period: this is L Brands’ 2016 first-quarter filing, not a 2015 Q1 Bath & Body Works, Inc. filing.
- Assess whether the decline in operating margin reflects temporary restructuring and investment costs or ongoing pressure, particularly at Victoria’s Secret.
- Review cash usage and capital returns: operating cash flow was negative while dividends and buybacks totaled $1.010 billion in the quarter.
- Evaluate leverage, interest costs, upcoming debt maturities and covenant headroom; reported debt was $5.718 billion and the 2017 notes were among outstanding obligations.
- Track the Greater China acquisition’s final purchase-price allocation and performance, and monitor the disclosed guarantees and tax uncertainties.