SEC filing summary: L Brands, Inc. Form 10-K
Period clarification: The supplied filing is L Brands, Inc.’s annual report for the 52 weeks ended February 1, 2020, with fourth-quarter results for the 13 weeks ended that date. It is not a standalone Bath & Body Works filing or a 2018 Q4 report; the filing compares fiscal 2019 with fiscal 2018.
Business context and reporting period
L Brands operated Victoria’s Secret and PINK, Bath & Body Works, and international businesses through company-owned stores, digital channels, and franchise, license, and wholesale partners. At year-end it had 2,920 company-owned stores and 722 partner-operated international stores. Bath & Body Works was the stronger business; Victoria’s Secret faced declining sales and profitability.
Financial performance and key metrics
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $12.914 billion | $13.237 billion |
| Gross profit / margin | $4.450 billion / 34.5% | $4.899 billion / 37.0% |
| Operating income / margin | $258 million / 2.0% | $1.237 billion / 9.3% |
| Net income (loss) | $(366) million | $644 million |
| Diluted EPS | $(1.33) | $2.31 |
| Cash from operations | $1.236 billion | $1.377 billion |
| Capital expenditures | $458 million | $629 million |
| Cash and cash equivalents at year-end | $1.499 billion | $1.413 billion |
| Long-term debt, net of current portion | $5.487 billion | $5.739 billion |
| Working capital / current ratio | $873 million / 1.4 | $1.274 billion / 1.6 |
Fourth quarter: Net sales were $4.707 billion, down 3% year over year; gross profit was $1.794 billion, with a 38.1% margin versus 40.6%; operating income was $82 million, with a 1.7% margin versus 16.5%; and net loss was $192 million versus net income of $540 million.
Segment performance: Fiscal 2019 Bath & Body Works sales rose 12% to $5.170 billion, comparable sales increased 10%, and operating income increased 11% to $1.191 billion (23.0% operating margin). Victoria’s Secret sales fell 8% to $6.805 billion, comparable sales declined 7%, and the segment reported a $616 million operating loss. International segment sales were $600 million and its operating loss widened to $236 million.
The company reported adjusted fiscal 2019 operating income of $1.231 billion, adjusted net income of $638 million, and adjusted diluted EPS of $2.29, excluding specified special items. These are non-GAAP measures; reported results include substantial impairment charges.
Material changes versus the prior comparable period
- Annual net sales declined 2%, while operating income fell $979 million and the company swung from net income to a net loss. The filing attributes the operating decline principally to Victoria’s Secret underperformance and impairment charges.
- Fiscal 2019 included $720 million of goodwill impairment—$690 million at Victoria’s Secret and $30 million in Greater China—and $263 million of long-lived store asset impairment. Victoria’s Secret’s goodwill was fully impaired.
- Bath & Body Works grew despite the consolidated decline: its digital sales increased 32% to $958 million, and its total sales rose 12%. Victoria’s Secret comparable sales fell 7%; lower traffic and promotions pressured its merchandise margins.
- Cash from operations decreased by $141 million. Capital expenditures declined by $171 million. Year-end cash increased by $86 million, while the current ratio and working capital fell.
- The company issued $500 million of 7.50% notes due 2029 and used proceeds and cash to repurchase or redeem earlier-maturing notes. Long-term debt declined, but reported debt-to-capitalization rose to 138% from 118%, reflecting the shareholders’ deficit and other balance-sheet changes.
Outlook, commentary, risks, and unusual items
- Victoria’s Secret transaction: On February 20, 2020, L Brands agreed to sell Sycamore Partners a 55% interest in Victoria’s Secret for approximately $525 million, retaining 45%. The transaction was expected to close in the second quarter of 2020, subject to conditions. Management planned to use the proceeds and approximately $500 million of excess cash to reduce debt. The filing said Victoria’s Secret would be reported as discontinued operations beginning in Q1 2020 and anticipated a held-for-sale loss. These were expectations at the filing date, not completed outcomes.
- Bath & Body Works priorities: Management cited North American growth, international expansion, product innovation, direct-channel investment, inventory discipline, store remodeling, and selective new stores. No clear numerical full-year 2020 earnings or sales guidance is provided.
- Coronavirus and liquidity: After year-end, the company borrowed $950 million under its revolving facility on March 16, 2020, leaving $22 million of facility availability. As of March 27 it reported more than $2 billion in cash, including that borrowing. North American stores were temporarily closed, with reopening timing uncertain; the company continued serving customers through direct channels. It announced expense and capital-expenditure reductions, lower forward inventory receipts, executive compensation reductions, associate furloughs, and suspension of the dividend beginning in Q2 2020.
- Covenant risk: Management warned that the revolving facility’s debt-to-consolidated-EBITDA covenant might be breached as early as the quarter ending May 2, 2020. Lenders could accelerate debt, require cash collateral for letters of credit, and terminate commitments following a breach. The company was seeking a waiver or replacement facility but could not assure it would obtain one.
- Other exposures: Risks include weak consumer demand, mall traffic, competitive and promotional pressure, fashion and inventory execution, supply-chain disruption, foreign exchange, lease obligations, and transaction completion and separation risks. The filing also describes shareholder litigation concerning statements about the 2018 dividend reduction and a related derivative suit; management intended to defend the claims. It recorded $37 million of additional La Senza-related reserves in 2019.
- The company adopted the new lease standard in 2019, recording $3.7 billion of operating lease liabilities at adoption; year-end operating lease liabilities were $3.530 billion. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the proposed Victoria’s Secret transaction closed on the expected terms and timing, and how proceeds, retained ownership, separation costs, and transition services affected L Brands.
- Whether the company obtained covenant relief or replacement financing, and how liquidity, debt maturities, interest costs, and facility availability changed after March 2020.
- The duration and financial effects of store closures and supply-chain disruption, including online-channel performance and the dividend suspension.
- Whether Bath & Body Works sustained sales growth and margins, and whether Victoria’s Secret or international impairment and operating losses continued.
- The assumptions underlying goodwill and store-asset valuations, the remaining lease burden, and any material developments in La Senza obligations or shareholder litigation.