Business context and reporting period
This filing is L Brands, Inc.’s unaudited Form 10-Q for the 13 weeks ended April 29, 2017, compared with the 13 weeks ended April 30, 2016. The filing covers L Brands consolidated—not Bath & Body Works, Inc. as a standalone issuer. Bath & Body Works is one of L Brands’ reportable segments.
Key financial metrics
Amounts are in millions except per-share data, percentages, and where noted.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $2,437 | $2,614 |
| Gross profit / margin | $903 / 37.1% | $1,043 / 39.9% |
| Operating income / margin | $209 / 8.6% | $323 / 12.4% |
| Net income | $94 | $152 |
| Diluted EPS | $0.33 | $0.52 |
| Operating cash flow | $7 | ($43) |
| Capital expenditures | $165 | $187 |
| Cash and cash equivalents, period end | $1,555 | $1,267 |
| Total debt, including current portion | $5,746 | $5,726 |
Cash flow after capital expenditures was approximately negative $158 million. At April 29, 2017, working capital was $1,321 million; current assets were $3,152 million and current liabilities were $1,831 million. Shareholders’ equity was a deficit of $836 million. The company paid $0.60 per share in ordinary dividends during the quarter and repurchased $83 million of shares.
Material changes versus the prior comparable period
- Sales fell 7%; comparable sales and comparable store sales each declined 9%.
- Operating income declined $114 million, or 35%, and operating margin fell 3.8 percentage points. Net income decreased $58 million.
- Victoria’s Secret sales fell 12% to $1,533 million; segment operating income fell to $159 million from $235 million. Management attributed the sales decline to exiting swim and apparel, reduced direct mail and promotions, lower core bra prices, and beauty repositioning. PINK and sport partially offset the declines.
- Bath & Body Works sales increased 3% to $678 million, while segment operating income declined to $102 million from $112 million. Comparable sales rose 2%, but comparable store sales fell 1%; home fragrance was a growth driver.
- International segment sales increased 9% to $104 million, but operating results moved from $13 million income to a $1 million loss.
- Q1 2016 included $35 million of Victoria’s Secret restructuring charges. Excluding those charges, prior-year operating income was $358 million, net income $174 million, and diluted EPS $0.59, versus Q1 2017 reported amounts of $209 million, $94 million, and $0.33.
- Q1 2016 dividends included a $2.00-per-share special dividend; the comparable Q1 2017 dividend was $0.60 per share, ordinary only.
Liquidity, debt, outlook, and risks
- Debt was $5,746 million and cash was $1,555 million at quarter end. No borrowings were outstanding under the $1 billion revolving facility; $8 million of letters of credit reduced availability. The company reported covenant compliance and a debt-to-EBITDA ratio below 3.00:1.00.
- Management said available short- and long-term capital resources were sufficient for foreseeable requirements. It provided no specific forward financial guidance in the supplied filing text.
- After quarter end, the revolving facility was amended: its $1 billion capacity was retained and its maturity extended to May 11, 2022.
- Management described an uncertain retail environment, emphasizing careful financial management, retail execution, and improved merchandise and customer experiences. Principal disclosed risks include weak consumer spending, mall traffic, competition, fashion and product acceptance, international expansion, sourcing and supply-chain disruption, foreign exchange, debt servicing, and cybersecurity and data protection.
- Potential obligations include approximately $13 million of lease guarantees for disposed businesses, for which no liability was recorded because payment was considered not probable; approximately $133 million of residual-value guarantees, with a liability below $1 million; and a separate $9 million liability for an early lease termination. Management did not expect current litigation to materially harm results or financial condition.
- Q1 2017’s 20.6% effective tax rate included $11 million of excess share-based compensation tax benefits. The company adopted the related accounting standard in the quarter. It expects the future lease-accounting standard to materially increase balance-sheet assets and liabilities; revenue-standard adoption is planned for fiscal 2018, with impacts still under evaluation.
Important facts for investors to verify
- Whether Victoria’s Secret sales, traffic, and comparable-sales trends stabilize after the category exits and promotional changes.
- Whether Bath & Body Works can convert sales growth into improved operating income and store productivity.
- Whether operating cash flow recovers from the quarter’s low level and supports capital spending, dividends, and repurchases without increasing financial pressure.
- Debt maturities, interest costs, credit ratings, covenant headroom, and the company’s capacity to sustain shareholder returns.
- The eventual effects of revenue- and lease-accounting changes, foreign-exchange movements, and disclosed lease guarantees.