L Brands, Inc. — Form 10-K Summary
Period and entity: This filing is for L Brands, Inc., the parent of Bath & Body Works, Victoria’s Secret and other businesses—not a standalone Bath & Body Works filing. Fiscal 2014 ended January 31, 2015, and comprised 52 weeks. The filing includes fourth-quarter results; the 2014 and 2013 fourth quarters each comprised 13 weeks. Thus, the source does not match the request’s “2013 Q4” period exactly.
Financial performance
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net sales | $11.454 billion | $10.773 billion | +6% |
| Gross profit | $4.808 billion | $4.429 billion | +9% |
| Gross margin | 42.0% | 41.1% | +0.9 percentage points |
| Operating income | $1.953 billion | $1.743 billion | +12% |
| Operating margin | 17.1% | 16.2% | +0.9 percentage points |
| Net income | $1.042 billion | $903 million | +15% |
| Diluted EPS | $3.50 | $3.05 | +15% |
| Operating cash flow | $1.786 billion | $1.248 billion | +$538 million |
| Capital expenditures | $715 million | $691 million | +$24 million |
Fiscal 2014 comparable-store sales increased 4%, versus 2% in fiscal 2013. Fourth-quarter sales were $4.069 billion, up 7%; operating income was $957 million, up 11%; net income was $565 million versus $490 million; and diluted EPS was $1.89 versus $1.65. Fourth-quarter gross margin was 45.1% versus 43.0%, and operating margin was 23.5% versus 22.6%.
Segment highlights: Victoria’s Secret sales rose 5% to $7.207 billion, with comparable-store sales up 3%; segment operating income was $1.271 billion. Bath & Body Works sales rose 7% to $3.350 billion, comparable-store sales rose 6%, and operating income was $737 million. International segment sales increased 51% to $336 million, with operating income of $78 million. “Other,” including La Senza, Henri Bendel, Mast Global and corporate functions, recorded an operating loss of $133 million.
Financial position and capital allocation
- Cash and cash equivalents were $1.681 billion at year-end, up from $1.519 billion. Working capital was $1.553 billion; the current ratio was 1.9.
- Long-term debt was $4.765 billion, compared with $4.761 billion a year earlier. The company repaid $213 million of notes at maturity during 2014. Average borrowings were $4.910 billion and the average borrowing rate was 6.6%.
- The company had no revolving-facility borrowings and $981 million of remaining availability, net of letters of credit. It reported compliance with its credit-facility covenants.
- Shareholders’ equity was $18 million, versus a $370 million deficit in the prior year. Debt-to-capitalization was reported at 100%.
- Cash dividends paid in 2014 totaled $691 million, including a $1-per-share special dividend; $84 million of common stock was repurchased. After year-end, the company paid a $2-per-share special dividend and increased its regular quarterly dividend to $0.50 per share.
Changes, outlook and noteworthy items
- Management attributed stronger results primarily to higher sales, less promotional activity at key brands, and improved merchandise margins. Bath & Body Works comparable-store sales accelerated to 6% from 1%; Victoria’s Secret rose to 3% from 2%.
- Victoria’s Secret exited most non-core apparel categories in its direct business and discontinued the make-up category in stores, emphasizing lingerie, PINK and beauty. Direct sales at Victoria’s Secret were down 1% for the year, while Bath & Body Works direct sales increased 20%.
- Management described the retail environment as uncertain and said it would take a conservative approach to financial management while pursuing merchandise, marketing and customer-experience opportunities.
- For 2015, the company planned capital expenditures of approximately $800–$850 million, about 75 new company-owned stores, and continued North American and international expansion. Plans included approximately 26 net new Victoria’s Secret stores and 24 Bath & Body Works stores in North America, alongside partner-led international openings.
- After year-end, L Brands sold its remaining interest in the third-party apparel sourcing business for $85 million cash proceeds and expected to recognize an approximately $78 million pretax gain in first-quarter 2015.
- A patent-infringement judgment, including $9 million of damages and future royalties, was reversed by the appeals court after year-end; the plaintiff petitioned for rehearing. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Key risks include seasonal and holiday dependence, consumer spending and mall traffic, fashion and inventory execution, competition, international expansion and currency exposure, sourcing and shipping disruptions, cybersecurity, labor costs, and the ability to service or refinance debt. Contractual obligations totaled $12.845 billion, including $3.870 billion of operating lease obligations and $7.285 billion of scheduled debt principal and interest.
Most important facts for investors to verify
- Confirm the intended period: this is L Brands’ fiscal 2014 Form 10-K, not a standalone Bath & Body Works filing or a fiscal 2013 Q4 report.
- Review the drivers and sustainability of margin improvement, particularly promotional levels, merchandise margins, and occupancy and selling costs.
- Assess the effect of the planned 2015 capital spending, store openings, and international expansion on returns and cash generation.
- Evaluate leverage, fixed debt-service costs, lease commitments, covenant headroom, and the capacity to sustain large dividends and repurchases.
- Check subsequent filings for the sourcing-business divestiture gain, the patent-case rehearing, and the effect of the post-year-end $731 million dividend payment.