Business context and reporting period
This filing is Limited Brands, Inc.’s Form 10-K, not a standalone Bath & Body Works filing. Bath & Body Works is one of the company’s two reportable segments. The fiscal year covered was the 52 weeks ended January 28, 2012; the filing also reports fourth-quarter results and prior-year comparisons. This does not match the requested “2010 Q4” period.
Limited Brands operated Victoria’s Secret, Bath & Body Works and other businesses, selling through company-owned stores, direct channels and international partners. At year-end it had 2,941 company-owned stores, including 1,587 Bath & Body Works stores in the U.S. and 69 in Canada.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $10.364 billion | $9.613 billion |
| Gross profit / margin | $4.057 billion / 39.1% | $3.631 billion / 37.8% |
| Operating income / margin | $1.238 billion / 11.9% | $1.284 billion / 13.4% |
| Adjusted operating income / margin | $1.546 billion / 14.9% | $1.284 billion / 13.4% |
| Net income | $850 million | $805 million |
| Diluted EPS | $2.70 | $2.42 |
| Operating cash flow | $1.266 billion | $1.284 billion |
| Capital expenditures | $426 million | $274 million |
Sales rose 8% and comparable-store sales increased 10%. GAAP operating income declined 4%, but adjusted operating income rose 20%, excluding specified special items. Bath & Body Works sales increased 6% to $2.674 billion and segment operating income increased 11% to $513 million, with a 19.2% operating margin.
Fourth-quarter sales were $3.515 billion, up 2% from $3.456 billion; comparable-store sales increased 7% versus 10%. Fourth-quarter operating income was $641 million versus $714 million, and net income was $360 million versus $453 million. Bath & Body Works fourth-quarter sales rose 4% to $1.127 billion and segment operating income was $348 million versus $330 million.
At January 28, 2012, cash was $935 million, working capital $842 million, and the current ratio 1.6. Total debt carrying value was $3.538 billion, including $57 million current and $3.481 billion long-term; long-term debt had been $2.507 billion a year earlier. Shareholders’ equity was $137 million, and the debt-to-capitalization ratio was 96%. The company had a $1 billion revolving facility, no outstanding borrowings under it, and $987 million available after letters of credit; it reported compliance with its financial covenants. Operating cash flow less capital expenditures was approximately $840 million.
Changes, outlook and material items
- Victoria’s Secret sales rose 11% to $6.121 billion; segment operating income increased 22% to $1.081 billion. Bath & Body Works sales and operating income also grew, as noted above.
- Reported operating income included $232 million of La Senza goodwill and intangible-asset impairment, $24 million of La Senza restructuring costs, a $163 million expense related to donating Express shares to the company foundation, and a $111 million gain on divesting 51% of the third-party apparel-sourcing business. Adjusted results exclude these operating items and other specified items.
- La Senza underperformed expectations, particularly during the holiday quarter. The company began resizing its store fleet and moving its Canadian home office from Montreal to Columbus; it planned to close 38 underperforming stores. The impairment valuation depended on estimates of future cash flows, discount rates, terminal value and royalty rates, and management cautioned that further impairment could be required if results differ from projections.
- The company returned more than $2.3 billion to shareholders through dividends and share repurchases. FY 2011 dividends were $3.80 per share, including $3.00 in special dividends; share repurchases totaled $1.190 billion. After year-end it completed a further $165 million repurchase and authorized a new $500 million program. The quarterly dividend was raised to $0.25 per share.
- Management described the retail environment as uncertain and said it would manage conservatively while investing in merchandise, marketing and customer experience. For fiscal 2012, a 53-week year, it expected capital expenditures of approximately $575–$625 million and about 50 new stores, primarily in the U.S. and Canada. Planned international openings included partner-operated stores.
- Other post-year-end financing included issuance of $1 billion of 5.625% notes due 2022, with net proceeds of $985 million. The February 2012 S&P downgrade of unsecured debt without subsidiary guarantees to BB- was disclosed; agencies’ outlooks at year-end were stable.
Risks, contingencies and controls
Key risks include economic weakness and consumer spending, heavy holiday-season dependence, mall traffic and lease availability, fashion and inventory execution, competition, foreign sourcing and shipping disruption, input and labor cost inflation, international partner performance and currency movements. The company also cited debt-service and credit-rating exposure, self-insured claims, tax matters, litigation, information-technology disruption and customer-data security.
Contractual obligations totaled $10.845 billion, including $6.114 billion of debt principal and interest, $3.120 billion of operating leases and $1.193 billion of purchase obligations. The company had $78 million of remaining lease guarantees related to previously disposed businesses; it recorded no liability for certain guarantees because payment was not considered probable. Management did not expect pending ordinary-course litigation to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Confirm the intended issuer and period: this is Limited Brands’ FY 2011 filing, not a Bath & Body Works standalone filing or a 2010 Q4 filing.
- Review the reconciliation from $1.238 billion GAAP operating income to $1.546 billion adjusted operating income, especially the La Senza impairment and Express-share contribution expense.
- Assess whether La Senza’s restructuring and revised outlook address its weak comparable sales and holiday performance, and whether additional impairment is possible.
- Evaluate leverage and liquidity alongside the substantial shareholder distributions: debt rose, equity fell sharply, and the debt-to-capitalization ratio reached 96%.
- Check the assumptions behind 2012 capital spending, store-opening plans and the ability to sustain comparable-sales growth and margins amid cost and consumer-demand risks.
- Review the debt covenants, post-year-end note issuance, credit-rating change, foreign-held cash and contractual lease obligations.