Bath & Body Works, Inc. quarterly report, Q1 FY2020

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Bath & Body Works, Inc. / L Brands, Inc. — Q1 2020 Form 10-Q

Reporting period: Thirteen weeks ended May 2, 2020. The filing is by L Brands, Inc., the parent of Bath & Body Works and Victoria’s Secret. Results were materially affected by COVID-19 and are not necessarily indicative of full-year performance.

Financial performance and position

  • Sales: $1.654 billion, down 37% from $2.629 billion. Bath & Body Works sales were $713 million, down 18%; Victoria’s Secret sales were $822 million, down 46%.
  • Profitability: Gross profit was $288 million versus $934 million; gross margin fell to 17.4% from 35.5%. Operating loss was $318 million versus operating income of $153 million, with operating margin at (19.2%) versus 5.8%. Net loss was $297 million, or $1.07 per diluted share, compared with net income of $40 million, or $0.14 per diluted share.
  • Adjusted results: Excluding specified special items, adjusted operating loss was $221 million and adjusted net loss was $275 million, or $0.99 per diluted share. Special items included $97 million of Victoria’s Secret store-asset impairments and a $50 million tax benefit from resolution of tax matters.
  • Segment results: Bath & Body Works operating income was $69 million versus $155 million. Victoria’s Secret had an operating loss of $300 million versus income of $33 million, including the $97 million impairment. International operating loss was $35 million versus $4 million.
  • Cash flow: Operating cash used was $342 million versus $73 million; investing cash used was $60 million versus $106 million; financing cash used was $138 million versus $86 million. Cash declined $542 million during the quarter to $957 million.
  • Liquidity and debt: Current assets were $2.849 billion and current liabilities $2.683 billion; working capital was $166 million, down from $873 million at February 1, 2020. Total debt was $5.502 billion, including $468 million classified as current. Shareholders’ deficit was $1.861 billion.
  • Other metrics: Inventory was $1.491 billion, up from $1.287 billion at February 1. Interest expense was $97 million. The company paid $0.30 per share in Q1, then suspended the quarterly dividend beginning in Q2.

Material changes and business developments

  • North American stores closed on March 17; only about 20 Bath & Body Works stores were open at quarter-end. Bath & Body Works Direct remained open and sales grew 85%; Victoria’s Secret Direct sales declined 15% and operations were temporarily suspended for about one week.
  • Comparable sales, which exclude stores closed for four consecutive days or more, increased 41% at Bath & Body Works and decreased 13% at Victoria’s Secret. Management cautioned that year-over-year trends were not meaningful given pandemic-related closures.
  • Bath & Body Works’ online demand benefited from soaps, sanitizers, body care and home fragrance. Victoria’s Secret experienced merchandise-related declines before closures, including weaker traffic and average unit retail.
  • In April, the company converted its $1 billion revolving facility to an asset-backed facility maturing in August 2024, without a leverage-ratio maintenance covenant. No borrowings were outstanding at May 2; the filing says the company could not draw while consolidated cash exceeded $350 million. Outstanding letters of credit were $28 million.
  • After quarter-end, on May 4, L Brands and Sycamore mutually terminated the agreement for Sycamore to acquire a 55% interest in Victoria’s Secret and PINK, settled related litigation and released claims; no termination penalty was incurred. Bath & Body Works remained targeted to become a standalone public company, while management prepared Victoria’s Secret to operate separately.

Outlook, actions and risks

  • Management expected the majority of stores to reopen by the end of July, subject to safety measures and government guidance, and emphasized Direct businesses for Q2. This was an expectation, not a quantified earnings or sales forecast.
  • Management reduced planned capital expenditures from $550 million to approximately $250 million; reduced spring inventory receipts year over year by about 45% at Victoria’s Secret/PINK and 20% at Bath & Body Works; extended vendor payment terms; and suspended store rent payments beginning in April while negotiating with landlords. No material rent concessions had been recognized by May 2.
  • Victoria’s Secret’s profit-improvement plan included tighter inventory and sourcing costs, tariff mitigation, higher full-price selling, lower store costs and overhead, and a significant store-footprint reduction. The company estimated approximately 250 North American Victoria’s Secret store closures in 2020 and was evaluating alternatives to reduce or eliminate losses in the U.K. and China.
  • COVID-19 risks included continued store closures or reduced traffic, weaker consumer spending, supply-chain and shipping disruption, and uncertainty over reopening. The filing also highlights leverage/refinancing, leadership changes, possible separation of Victoria’s Secret, and foreign-exchange risks.
  • Subsequent to quarter-end, Moody’s downgraded ratings and maintained a negative outlook. Leadership changes effective in May included Andrew Meslow becoming L Brands CEO and Stuart Burgdoerfer also becoming interim Victoria’s Secret CEO.
  • Contingencies include shareholder litigation related to prior dividend statements, a derivative suit concerning alleged workplace-conduct issues, $37 million of reserves for La Senza-related obligations, and $94 million of lease residual-value guarantees, for which a $17 million liability was recorded. Management did not expect current litigation to have a material adverse effect.

Key facts for investors to verify

  • Whether store reopenings and online demand developed as expected, and the durability and profitability of Bath & Body Works Direct growth.
  • Cash generation, inventory levels, working capital, upcoming debt maturities and practical access to the asset-backed facility under its cash and borrowing-base conditions.
  • Outcomes of landlord negotiations and the company’s exposure to deferred rent and ongoing occupancy costs.
  • Execution and costs of the Victoria’s Secret turnaround, planned store closures and any future separation or strategic transaction.
  • Continuation of the dividend suspension, the effect of subsequent credit downgrades, and developments in the disclosed litigation and contingent obligations.