Bath & Body Works / L Brands, Inc. 10-Q Summary
Issuer and period: The filing is for L Brands, Inc., the parent company of Bath & Body Works and Victoria’s Secret, rather than a standalone Bath & Body Works filing. It covers the 13 weeks ended November 2, 2013, and year-to-date results for the 39 weeks ended that date. Comparative periods ended October 27, 2012. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Year-to-date 2013 | Year-to-date 2012 |
|---|---|---|---|---|
| Net sales | $2.171 billion | $2.050 billion | $6.955 billion | $6.603 billion |
| Gross profit | $857 million | $825 million | $2.787 billion | $2.669 billion |
| Operating income | $211 million | $187 million | $880 million | $785 million |
| Net income | $92 million | $74 million | $413 million | $342 million |
| Diluted EPS | $0.31 | $0.25 | $1.40 | $1.15 |
| Operating margin | 9.7% | 9.1% | 12.7% | 11.9% |
| Gross margin | 39.5% | 40.2% | 40.1% | 40.4% |
- Q3 sales increased 6%; operating income rose $24 million and net income rose $18 million year over year. Comparable sales increased 3%, versus 5% in Q3 2012.
- Bath & Body Works Q3 sales were $567 million, up 5%, with comparable sales up 3%; segment operating income increased 15% to $67 million. Year-to-date segment sales were $1.727 billion and operating income was $241 million.
- Victoria’s Secret Q3 sales grew 4% to $1.328 billion, but operating income fell 6% to $148 million. “Other” Q3 sales grew 19% to $276 million and its operating loss narrowed to $4 million.
- Q3 gross margin declined 0.7 percentage points, primarily reflecting promotional activity and buying and occupancy costs at Victoria’s Secret; higher sales leverage and lower prior-year La Senza restructuring charges helped operating margin.
Cash flow, liquidity and debt
- Year-to-date operating cash flow was negative $31 million, compared with positive $75 million a year earlier. Seasonal inventory investment used $642 million of cash; management said inventory was being built for the holiday season.
- Capital expenditures were $598 million, up from $491 million. Cash flow from operations less capital expenditures was negative $629 million, versus negative $416 million in the prior-year period.
- Cash and equivalents were $425 million at November 2, 2013, down from $773 million at fiscal year-end. Working capital was $846 million; current assets were $2.580 billion and current liabilities $1.734 billion.
- Total debt was $4.978 billion, including $216 million current portion, versus $4.477 billion at February 2, 2013. In October, the company issued $500 million of 5.625% notes due 2023 and received $495 million net of issuance costs. The 2014 notes had $213 million principal outstanding and were classified as current.
- The $1 billion revolving facility had no borrowings outstanding at quarter-end; $988 million remained available after letters of credit. The company reported compliance with its financial covenants, including debt-to-EBITDA below 3.0x against a covenant ceiling of 4.0x.
- Year-to-date dividends were $261 million ($0.90 per share) and share repurchases were $55 million. Shareholders’ equity remained in deficit at $820 million.
Outlook, commentary, risks and unusual items
- No specific earnings or sales guidance is provided in the supplied filing text. Management describes the retail environment as uncertain, says it is managing conservatively, and emphasizes retail execution, merchandise assortments, marketing, and store and online customer experience. Results are seasonal and interim performance may not indicate full-year results.
- Management attributed Victoria’s Secret Direct apparel weakness to reducing styles and inventory in favor of core categories, as well as an assortment that did not meet customer expectations. Bath & Body Works cited growth across key product categories, including soaps and sanitizers, home fragrance, and its Signature Collection.
- Key stated risks include consumer spending and mall traffic, competition and fashion acceptance, international expansion and sourcing, currency and input-cost fluctuations, labor and shipping disruptions, technology and data protection, debt servicing/refinancing, and legal and tax matters.
- The company reported approximately $38 million of remaining lease guarantees relating to previously disposed businesses; management said payments were not probable and recorded no liability for those guarantees, apart from $2 million fair value recorded for certain obligations. A patent-infringement judgment included $9 million damages and future royalties through 2015; the company’s appeal was stayed pending another case concerning the patents’ validity.
- Tax matters lowered the 2013 effective tax rates: 35.0% for Q3 and 37.3% year-to-date, versus 42.4% and 40.1%, respectively, in 2012. The filing attributes the 2013 reduction primarily to resolution of certain tax matters.
- The interim financial statements were reviewed by the independent registered public accounting firm, not audited. The company said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm that the intended analysis is of L Brands consolidated results; Bath & Body Works is a reportable segment, not the filing registrant.
- Track holiday-quarter sales and inventory conversion, given the seasonal inventory build and negative year-to-date operating cash flow.
- Assess whether margin pressure at Victoria’s Secret persists and whether Bath & Body Works growth and improved “Other” results continue.
- Review debt refinancing and interest-rate exposure, including the 2014 note maturity, new 2023 issuance, and $400 million of debt covered by fixed-to-floating swaps.
- Monitor tax audit resolutions, the patent appeal, and the company’s lease guarantees for changes in expected exposure.
- Evaluate shareholder distributions alongside cash generation, capital spending, debt levels, and the company’s stated liquidity and covenant position.