L Brands, Inc. Form 10-Q — First Quarter 2019
Business context and period. This filing is for L Brands, Inc., the parent of Victoria’s Secret, PINK and Bath & Body Works—not a standalone Bath & Body Works filing. It covers the 13 weeks ended May 4, 2019, compared with the 13 weeks ended May 5, 2018. The company operates specialty retail stores and direct and partner channels.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $2.629 billion | $2.626 billion |
| Gross profit / margin | $934 million / 35.5% | $944 million / 35.9% |
| Operating income / margin | $153 million / 5.8% | $155 million / 5.9% |
| Net income | $40 million | $48 million |
| Diluted earnings per share | $0.14 | $0.17 |
| Operating cash flow | $(73) million | $(79) million |
| Capital expenditures | $123 million | $160 million |
| Cash and cash equivalents, quarter-end | $1.146 billion | $1.032 billion |
| Total debt, including current portion | $5.821 billion | $5.808 billion |
| Dividend per share | $0.30 | $0.60 |
Current assets were $2.947 billion and current liabilities $2.197 billion at May 4, 2019. Shareholders’ deficit was $902 million. Interest expense was $99 million; the average borrowing rate was 6.6%, versus 6.5% a year earlier.
Changes versus prior year
- Consolidated sales were nearly unchanged, but results diverged by brand: Victoria’s Secret sales fell 5% to $1.511 billion, while Bath & Body Works sales rose 15% to $871 million.
- Victoria’s Secret operating income declined $50 million to $33 million; Bath & Body Works operating income increased $31 million to $155 million. International sales were flat at $135 million.
- Total comparable sales were flat versus 3% growth in Q1 2018. Victoria’s Secret comparable sales fell 5%; Bath & Body Works comparable sales grew 13%. Comparable store sales were down 3% overall.
- Net income fell $8 million despite slightly higher pretax income, primarily alongside a higher effective tax rate: 33.6% versus 18.5%. The company attributed the 2019 rate mainly to tax expense on vested share-based awards; the prior-year rate benefited from a deferred-tax valuation allowance release.
- Operating cash use improved by $6 million year over year. Cash fell $267 million during the quarter, compared with a $483 million decline in Q1 2018.
Liquidity, debt and notable items
- The company reported $5.821 billion of total debt and $1.146 billion of cash. Its $1 billion secured revolving facility had no borrowings outstanding; $10 million of letters of credit reduced availability. The company reported compliance with financial covenants and a debt-to-EBITDA ratio below 3.00.
- Current debt was $72 million, including $67 million under unsecured foreign facilities maturing between June and December 2019. The company also had $338 million of 7.00% notes due May 2020.
- Adoption of lease accounting (ASC 842) added $3.7 billion of operating lease liabilities and $3.3 billion of right-of-use assets at the start of 2019. At May 4, operating lease liabilities were $3.677 billion; the company reported $197 million of total lease cost for the quarter. Adoption did not materially affect income or cash flow statements.
- Operating cash flow was negative while inventory increased by $110 million and capital expenditures were $123 million. Management cited seasonal working-capital needs and said available short- and long-term capital resources were sufficient for foreseeable requirements.
- The quarterly dividend was reduced to $0.30 per share from $0.60. No shares were repurchased under the public program in the quarter; the program had approximately $79 million remaining.
- La Senza was divested in January 2019. The company received $12 million from a working-capital settlement in the quarter and retained $71 million of lease guarantees, with a recorded liability of $5 million. Henri Bendel had closed in Q4 2018; $1 million of restructuring costs remained accrued.
Management commentary, risks and contingencies
Management described performance as mixed and cited an uncertain retail environment. Its stated focus was execution of retail fundamentals, compelling merchandise, marketing, and store and online experiences. No quantified full-year guidance is provided in the supplied filing text.
- Victoria’s Secret comparable sales weakness reflected lower traffic and average unit retail, partly offset by improved conversion; management cited merchandise performance and promotional activity. PINK comparable sales declined in the low double digits.
- Bath & Body Works growth reflected higher conversion, average unit retail and digital traffic, with sales gains across home fragrance, body care, soaps and sanitizers.
- Key disclosed risks include retail competition and consumer demand, mall traffic, merchandise and fashion execution, sourcing and shipping disruptions, foreign exchange, debt service and refinancing, credit ratings, data security, and liabilities from divested businesses.
- The company reported ordinary-course litigation and other claims, but management did not expect current proceedings to have a material adverse effect. Additional potential obligations include $94 million of residual-value lease guarantees, against a recorded liability of $10 million.
The independent accountant performed a review of the interim financial statements, not a full audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Bath & Body Works’ strong sales and comparable-sales growth continue, and whether Victoria’s Secret’s declines stabilize.
- How operating cash flow, inventory and capital spending develop through the seasonal build to the holiday period.
- The company’s ability to service or refinance substantial debt, especially near-term maturities, and maintain covenant compliance and credit ratings.
- The sustainability of the reduced dividend given cash generation, debt needs and capital requirements.
- The full economic exposure from operating leases, La Senza lease guarantees and other contingencies; distinguish recognized liabilities from maximum guarantee amounts.