Business context and reporting period
This is Limited Brands, Inc.’s unaudited Form 10-Q for the 13 weeks ended April 28, 2012, compared with the 13 weeks ended April 30, 2011. The filing covers the parent company and its consolidated businesses, including Bath & Body Works; it is not a standalone Bath & Body Works filing. The company operates Victoria’s Secret, Bath & Body Works and other retail and international businesses.
Financial and operating highlights
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $2.154 billion | $2.217 billion |
| Gross profit / gross margin | $902 million / 41.9% | $842 million / 38.0% |
| Operating income / operating margin | $293 million / 13.6% | $217 million / 9.8% |
| Net income | $125 million | $165 million |
| Diluted earnings per share | $0.41 | $0.50 |
| Operating cash flow | $(183) million | $(18) million |
| Capital expenditures | $136 million | $77 million |
| Cash and cash equivalents, quarter-end | $1.286 billion | $1.557 billion |
| Long-term debt, net of current portion | $4.480 billion | $3.510 billion |
| Quarterly dividend per share | $0.25 | $0.20 |
- Comparable-store sales increased 7% overall (versus 15%); Victoria’s Secret increased 9% and Bath & Body Works increased 6%.
- Victoria’s Secret sales rose 8% to $1.470 billion and operating income rose to $278 million from $245 million. Bath & Body Works sales rose 5% to $505 million and operating income rose to $60 million from $54 million.
- Reported sales declined 3%, mainly because the prior-year period included $214 million of third-party apparel-sourcing sales; that business was divested in 2011. Excluding that comparability effect, sales growth was stronger.
- Net income fell despite higher operating income. The prior-year quarter included an $86 million gain from selling Express shares; 2012 also had higher interest expense and a higher effective tax rate.
- Cash from operations was negative, with seasonal working-capital outflows including inventory growth. Financing provided $656 million, including $985 million net proceeds from a new debt issue; the company repurchased $376 million of stock and paid $73 million in dividends.
- Working capital was $1.526 billion at quarter-end. The $1 billion revolving facility had no borrowings outstanding; $9 million of letters of credit reduced availability. The company reported compliance with its financial covenants and debt-to-EBITDA below 3.00 to 1.00.
Management commentary, outlook and risks
Management described first-quarter performance as strong, citing improved operating income and 7% comparable-store sales growth. It emphasized conservative financial management amid an uncertain retail environment, while focusing on merchandise, marketing, and store and online customer experiences. The filing provides no specific forward earnings or sales guidance.
Gross-margin improvement reflected higher merchandise margins and the removal of lower-margin sourcing-business sales; management also cited product-cost pressure and promotional activity at Bath & Body Works. The company’s risks include retail competition and consumer spending, seasonal sales and inventory needs, mall traffic, international operations, sourcing and shipping disruptions, currency and input-cost changes, brand protection, and debt service and credit ratings.
Unusual and contingent items include a $9 million jury award in a patent case; the company planned to seek reversal or amendment and appeal, and could not estimate potential losses from future infringement through 2015. It also disclosed approximately $71 million of lease guarantees associated with previously disposed businesses, with no liability recorded for guarantees management did not consider probable. A La Senza restructuring included $24 million of 2011 charges; $17 million remained accrued at quarter-end.
Most important facts for investors to verify
- Confirm that this is the intended filing: the issuer is Limited Brands, Inc., with Bath & Body Works reported as one segment, rather than a standalone Bath & Body Works filing.
- Assess comparable-period sales and earnings after accounting for the sourcing-business divestiture and the prior-year Express gain and charitable-foundation pledge.
- Review the reasons for negative operating cash flow and the seasonal inventory and working-capital movements.
- Track debt, interest costs, covenant headroom, share repurchases and dividend capacity; debt rose following the February 2012 $1 billion note issuance.
- Monitor the patent litigation, lease guarantees, La Senza restructuring and the other risks disclosed in the filing.