Business context and reporting period
This is L Brands, Inc.’s unaudited Form 10-Q for the 13 and 39 weeks ended November 2, 2019, compared with the periods ended November 3, 2018. The supplied metadata says “2018 Q3,” but the filing is for third quarter 2019. L Brands operated Victoria’s Secret, PINK and Bath & Body Works; it sold La Senza in January 2019.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net sales | 2,677 | 2,775 | 8,207 | 8,385 |
| Gross profit / margin | 741 / 27.7% | 928 / 33.5% | 2,657 / 32.4% | 2,931 / 35.0% |
| Operating income (loss) / margin | (151) / (5.6%) | 54 / 2.0% | 177 / 2.2% | 437 / 5.2% |
| Net income (loss) | (252) | (43) | (174) | 104 |
| Diluted EPS | (0.91) | (0.16) | (0.63) | 0.37 |
| Operating cash flow | Not presented quarterly | (90) | 13 |
Q3 comparable sales fell 2% overall: Victoria’s Secret decreased 7%, while Bath & Body Works increased 9%. YTD comparable sales declined 1% overall, with Victoria’s Secret down 6% and Bath & Body Works up 10%. Q3 segment sales were $1,412 million for Victoria’s Secret (down 8%), $1,064 million for Bath & Body Works (up 11%), and $134 million for International (flat).
Bath & Body Works remained the stronger business: Q3 operating income was $196 million versus $178 million a year earlier; YTD operating income was $531 million versus $470 million. Victoria’s Secret reported Q3 operating loss of $122 million versus $36 million, and YTD operating loss of $73 million versus prior-year income of $162 million. International reported Q3 operating loss of $215 million versus $42 million.
Financial position, liquidity and debt
At November 2, 2019, cash and cash equivalents were $340 million, down from $1,413 million at fiscal year-end. Current assets were $2,926 million and current liabilities $2,543 million; reported working capital was $383 million and includes current operating lease liabilities following adoption of the new lease standard. Inventory was $2,032 million, up from $1,248 million at fiscal year-end, reflecting seasonal holiday inventory build.
Total debt carrying value was $5,552 million, including $75 million current debt and $5,477 million long-term debt. Operating lease liabilities were $3,568 million in present value ($460 million current and $3,108 million long-term). The company had no borrowings under its $1 billion secured revolving facility and $990 million of availability after letters of credit. It reported compliance with its credit-facility covenants.
YTD operating cash use was $90 million; investing cash use was $408 million, including $392 million of capital expenditures; financing cash use was $570 million. Cash declined by $1,073 million over the period. The company paid $249 million of dividends, or $0.90 per share YTD, versus $500 million, or $1.80 per share, in the prior-year period. It made no program share repurchases YTD.
Material changes and unusual items
- Q3 operating results included $248 million of pre-tax impairment charges: $218 million for long-lived store assets, largely international, and $30 million of Greater China goodwill impairment. The filing says negative store performance prompted impairment testing; further sustained declines could lead to additional charges.
- Q3 included $37 million of pre-tax La Senza-related charges to increase reserves for contingent obligations. YTD also included a $40 million pre-tax loss on debt extinguishment.
- Management’s non-GAAP adjusted results excluded specified special items: adjusted Q3 net income was $6 million and adjusted diluted EPS $0.02; YTD adjusted net income was $114 million and adjusted diluted EPS $0.41. These company-defined measures are not GAAP results.
- In June 2019, L Brands issued $500 million of 7.50% notes due 2029 and used proceeds plus cash to repurchase or redeem notes due 2020–2022. Debt fell from $5,811 million at fiscal year-end to $5,552 million.
- The company adopted ASC 842 in Q1 2019, recognizing $3.7 billion of lease liabilities at adoption; prior-year balance sheets were not restated. Adoption did not materially affect income or cash flows.
- After quarter-end, S&P lowered the company’s corporate and guaranteed-debt ratings to BB- and senior unsecured debt to B, changing its outlook to Stable; ratings at November 2 had Negative outlooks.
Outlook, management commentary and risks
Management described the retail environment as uncertain and said it would focus on retail fundamentals while pursuing compelling merchandise, marketing, and store and online experiences. It anticipated approximately $500 million of fiscal 2019 capital expenditures for stores, technology and logistics. The filing provides no earnings or sales guidance.
Key disclosed risks include weak consumer spending and mall traffic, brand and merchandise execution, competition, international operations and partners, sourcing and shipping disruptions, foreign-exchange exposure, debt service and refinancing, dividend capacity, and liabilities of divested businesses. The company cautioned that sustained business or market-capitalization declines could trigger further impairment. Two shareholder class actions alleging misleading statements related to the November 2018 dividend reduction were consolidated; the company called the claims meritless and said it would defend them. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Confirm the period: this is the 2019 Q3 filing, not 2018 Q3.
- Track whether Victoria’s Secret sales and store performance stabilize and whether Bath & Body Works’ growth and margins persist.
- Assess the assumptions behind the $248 million impairment and the potential for further store, goodwill or trade-name write-downs.
- Monitor holiday inventory conversion, operating cash generation, liquidity and the ability to meet debt and lease commitments.
- Review the effect of reduced dividends, the post-quarter credit-rating downgrade, covenant headroom and upcoming foreign-facility maturities.
- Follow the La Senza contingent obligations and consolidated shareholder litigation as they develop.