Business context and reporting period
The filing is for Limited Brands, Inc., the parent of Bath & Body Works and Victoria’s Secret—not a standalone Bath & Body Works, Inc. filing. Fiscal 2012 ended February 2, 2013, comprised 53 weeks; the prior fiscal year ended January 28, 2012, comprised 52 weeks. Fiscal Q4 2012 had 14 weeks versus 13 weeks in Q4 2011.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $10.459 billion | $10.364 billion |
| Gross profit / margin | $4.386 billion / 41.9% | $4.057 billion / 39.1% |
| Operating income / margin | $1.573 billion / 15.0% | $1.238 billion / 11.9% |
| Net income | $753 million | $850 million |
| Diluted EPS | $2.54 | $2.70 |
| Cash from operations | $1.351 billion | $1.266 billion |
| Capital expenditures | $588 million | $426 million |
| Cash and cash equivalents, year-end | $773 million | $935 million |
| Long-term debt, net of current portion | $4.477 billion | $3.481 billion |
| Working capital / current ratio | $667 million / 1.4 | $842 million / 1.6 |
Reported FY 2012 net income included $134 million of operating special-item charges, chiefly La Senza impairment and restructuring charges, and a $13 million gain from Easton investments. Management’s non-GAAP adjusted figures were operating income of $1.707 billion, net income of $867 million and diluted EPS of $2.92; these exclude specified special items and are not GAAP measures. Debt-to-capitalization rose to 129% from 96%; the company reported compliance with revolving-credit covenants and no revolver borrowings, with $988 million available after letters of credit.
In Q4 2012, sales were $3.856 billion versus $3.515 billion, gross profit $1.717 billion versus $1.528 billion, operating income $788 million versus $641 million, and net income $411 million versus $360 million. Comparable-store sales rose 5%. The extra fiscal week contributed approximately $125 million of Q4 sales, so the reported growth is not fully comparable on a week-adjusted basis.
Material changes versus the prior comparable period
- FY sales rose 1% as reported; comparable-store sales increased 6%, versus 10% in 2011. The 53rd week added approximately $125 million to FY 2012 sales.
- Victoria’s Secret sales rose 7% to $6.574 billion and segment operating income increased to $1.188 billion. Bath & Body Works sales rose 9% to $2.902 billion and operating income increased to $604 million.
- Reported operating income improved, while reported net income and diluted EPS declined. Interest expense increased to $316 million from $246 million, and the effective tax rate rose to 41.2% from 30.7%.
- Comparisons were affected by prior-year items, including Express-related gains and contribution expense, a sourcing-business divestiture gain, and larger La Senza impairments. The company’s 2011 results also included $702 million of sales from the third-party apparel sourcing business before its majority-interest divestiture.
- Cash declined by $162 million during 2012. The company paid $1.449 billion in dividends and repurchased $629 million of shares; shareholders’ equity shifted from positive $137 million to a deficit of $1.015 billion.
Outlook, commentary, risks and unusual items
Management described the retail environment as uncertain and said it would manage conservatively while focusing on merchandise, marketing and customer experience. No company-wide earnings or sales forecast is stated in the supplied filing text. Plans included $600–$700 million of 2013 capital expenditures, approximately 80 new stores, about 50 new Victoria’s Secret stores, and continued North American and international expansion.
- La Senza remained a significant concern: the company recorded $93 million of FY 2012 goodwill and intangible-asset impairment, fully reducing its remaining La Senza goodwill and trade name to zero. It also continued store closures and restructuring; 72 company-owned stores closed during the year.
- Henri Bendel recorded a $27 million long-lived-store-asset impairment following continued negative operating results.
- Key risks include consumer spending and mall traffic, holiday-season dependence, fashion and inventory execution, competition, sourcing and shipping disruption, input costs, international expansion and currency exposure, technology and data security, labor costs, and debt service and credit-rating risks.
- A patent case had a $9 million jury award plus future royalties through 2015; the company appealed, and the appeal was stayed pending another court proceeding concerning patent validity. Management said ordinary-course litigation was not expected to materially affect results or financial position.
- Contractual obligations totaled $12.575 billion, including $7.344 billion of debt principal and interest, $3.439 billion of operating leases and $1.334 billion of purchase obligations. The company also disclosed $54 million of remaining lease guarantees related to previously divested businesses.
Important facts for investors to verify
- Confirm the intended issuer and period: this is Limited Brands’ FY 2012 Form 10-K, not a Bath & Body Works standalone filing or a filing for fiscal 2011 Q4.
- Assess underlying earnings after adjusting for the extra week and nonrecurring items; compare the company’s adjusted measures with GAAP results and its stated reconciliation.
- Track La Senza and Henri Bendel performance, restructuring, store closures, and any further impairment risk.
- Review leverage, interest expense, debt maturities, covenant headroom, liquidity, and the sustainability of dividends and buybacks.
- Monitor the outcome of the patent appeal and material changes in tax uncertainties or other contingencies.