Bath & Body Works, Inc. — Form 10-K Summary
Reporting period: Fiscal 2021, the 52 weeks ended January 29, 2022. The filing also provides fourth-quarter results. The request metadata says “2020 Q4,” but the supplied filing is the fiscal 2021 10-K; its fourth-quarter comparisons are fiscal 2021 versus fiscal 2020. Unless noted, financial results below are from continuing operations. Victoria’s Secret was spun off on August 2, 2021, and is reported as discontinued operations.
Business context
The company is a specialty retailer of home fragrance, body care, soaps and sanitizers, operating Bath & Body Works and White Barn brands. At year-end it had 1,755 company-operated stores in the U.S. and Canada, plus 338 partner-operated international stores and 27 partner-operated websites.
Key financial results
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $7.882 billion | $6.434 billion | +22.5% |
| Gross profit | $3.855 billion | $3.096 billion | +$759 million |
| Gross margin | 48.9% | 48.1% | +0.8 percentage points |
| Operating income | $2.009 billion | $1.604 billion | +25% |
| Operating margin | 25.5% | 24.9% | +0.6 percentage points |
| Net income from continuing operations | $1.075 billion | $865 million | +$210 million |
| Diluted EPS from continuing operations | $3.94 | $3.07 | +$0.87 |
| Interest expense | $388 million | $432 million | −$44 million |
| Operating cash flow | $1.492 billion | $2.039 billion | −$547 million |
| Capital expenditures | $270 million | $228 million | +$42 million |
Net income from continuing operations excludes the Victoria’s Secret business. Reported total net income was $1.333 billion in 2021, including $258 million from discontinued operations, versus $844 million in 2020, which included a $21 million discontinued-operations loss. Cash-flow figures include continuing and discontinued operations because the company did not segregate those cash flows.
Fourth quarter
- Net sales were $3.027 billion, up 11.4% year over year; comparable sales rose 7% (stores and direct combined).
- Operating income was $879 million, up $9 million, while operating margin fell to 29.0% from 32.0%.
- Gross margin declined to 47.8% from 51.7%, reflecting inflationary merchandise costs, deleverage on buying and occupancy, and ongoing direct-fulfillment investment.
- Net income from continuing operations was $592 million versus $557 million. Total net income was $594 million versus $859 million, with the prior-year quarter including greater income from discontinued operations.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.979 billion at January 29, 2022, down from $3.568 billion at January 30, 2021. Working capital, excluding discontinued-operation balances, was $1.719 billion versus $3.012 billion.
- Long-term debt was $4.854 billion, down from $6.366 billion. The company had no ABL Facility borrowings and $479 million available, net of letters of credit. Adjusted debt leverage was 2.33x, compared with 3.50x.
- Operating cash flow fell year over year, including a $177 million cash use from higher inventory. Financing cash outflows included $1.964 billion of share repurchases, $1.716 billion of debt repayments and $120 million of dividends.
- Shareholders’ equity was a deficit of $1.518 billion, compared with a $662 million deficit a year earlier; substantial share repurchases contributed to the change.
Material changes and management commentary
- Sales growth was led by U.S. and Canadian stores, up 35.7%, partly because stores had been closed during portions of 2020. Direct sales decreased 5.7% as stores reopened; international sales rose 26.7%.
- Management cited strong customer response in body care, home fragrance, gifting and accessories. Soaps and sanitizers declined from 2020’s significant pandemic-related growth.
- Gross-margin improvement for the full year reflected higher sales leverage on buying and occupancy costs, partly offset by a lower merchandise-margin rate. Management estimated 2021 inflationary costs at approximately $175 million.
- The August 2021 separation established Bath & Body Works as a standalone public company. Victoria’s Secret continues to provide certain services under transition agreements; the company expects technology separation costs and investment over the next two to three years.
Outlook, risks and unusual items
- The filing does not provide a clear numerical 2022 sales or earnings forecast. Management expects inflation in raw materials, energy, fuel, transportation and wages to add an estimated $150 million to $175 million of costs in 2022. Pricing and promotional management are intended to offset part of the pressure.
- Planned 2022 capital expenditures are approximately $400 million, with about 40% for real estate; the balance is principally for information technology and a new direct-fulfillment center. Management also expects investment and some cost deleverage as it builds standalone technology capabilities.
- Growth plans include expanding the U.S. loyalty program beginning in summer 2022, introducing men’s deodorant and antiperspirant across all stores, and opening 100 off-mall stores and remodeling about 50 locations, offset by approximately 40 to 50 mall closures. Management anticipates about 6% square-footage growth. International partners plan 70 to 100 new stores.
- Key risks include supply-chain delays and transportation or labor shortages, inflation and consumer spending weakness, COVID-19 disruptions, retail traffic and seasonality, execution of the spin-off and technology separation, cybersecurity, leadership transition, and the potential tax consequences if the spin-off’s tax-free treatment is not sustained.
- Unusual items included $195 million of pretax losses on early debt extinguishments and a $9 million inventory write-off after a tornado damaged a vendor facility. The company also disclosed approximately $265 million of contingent lease obligations associated with the Victoria’s Secret spin-off and $25 million related to La Senza; reserves were not significant.
- After year-end, the board authorized a $1.5 billion repurchase program, including a $1 billion accelerated share repurchase, and raised the annual dividend to $0.80 per share. CEO Andrew Meslow announced he would step down effective May 12, 2022; Sarah Nash was to serve as interim CEO while the board searches for a permanent CEO.
Important facts for investors to verify
- How 2022 sales, margins and cash generation perform against the strong 2020–2021 comparisons and the estimated $150–$175 million of incremental cost pressure.
- Execution, cost and timing of the standalone technology transition and new fulfillment center, including the transition-services arrangements with Victoria’s Secret.
- Whether inventory levels and supply-chain conditions normalize without significant markdowns, delayed deliveries or margin deterioration.
- Cash and liquidity after the announced repurchases and higher dividend, and the company’s capacity to service its debt and meet contractual commitments.
- Whether the Victoria’s Secret separation remains tax-free and whether leadership changes affect operating execution.