Bath & Body Works / Limited Brands 10-Q Summary
Filing-period note: The supplied filing is for Limited Brands, Inc. (the parent company that operated Bath & Body Works), for the 13 and 26 weeks ended July 28, 2012. It is not a 2011 Q2 filing, despite the request metadata. Amounts are in U.S. dollars; financial statements are unaudited interim statements reviewed by the independent auditor.
Business context and reporting period
Limited Brands operated Victoria’s Secret, Victoria’s Secret Pink, Bath & Body Works, La Senza and Henri Bendel through stores, direct channels and international partners. The company reported two principal segments: Victoria’s Secret and Bath & Body Works; “Other” included corporate functions, international operations and other businesses. The company cautioned that interim results are seasonal and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Net sales | $2,399 million | $2,458 million | $4,553 million | $4,675 million |
| Gross profit / margin | $942 million / 39.3% | $902 million / 36.7% | $1,844 million / 40.5% | $1,744 million / 37.3% |
| Operating income / margin | $305 million / 12.7% | $194 million / 7.9% | $598 million / 13.1% | $410 million / 8.8% |
| Net income | $143 million | $231 million | $268 million | $396 million |
| Diluted earnings per share | $0.49 | $0.73 | $0.90 | $1.23 |
| Operating cash flow | — | $205 million | $223 million | |
| Capital expenditures | — | $329 million | $162 million |
At July 28, 2012, cash was $1.193 billion; total debt carrying value was $4.537 billion, including $57 million current and $4.480 billion long-term. Working capital was $1.316 billion, shareholders’ equity was a $245 million deficit, and total assets were $6.589 billion. Debt fair value was reported at $4.927 billion.
Bath & Body Works Q2 sales were $609 million, up 8%, and operating income was $88 million, up 25%; its operating margin rose to 14.4% from 12.5%. YTD segment sales were $1.114 billion, up 7%, and operating income was $148 million versus $124 million.
Material changes versus the prior comparable period
- Consolidated sales fell 2% in Q2 and 3% YTD, principally because prior-year sales included the third-party apparel sourcing business, divested in November 2011. Comparable sales rose 8% in both periods. Q2 2011 included $217 million of sourcing-business sales; YTD 2011 included $431 million.
- Operating income increased $111 million in Q2 and $188 million YTD. The prior-year periods included $113 million and $163 million, respectively, of expense related to donating Express shares to the Limited Brands Foundation; 2012 included $4 million of La Senza restructuring charges.
- Net income was lower despite higher operating income. Prior-year other income included gains associated with Express shares, and the 2011 tax rate benefited from the charitable contribution. Q2 other income declined to $3 million from $146 million; YTD other income declined to $1 million from $234 million.
- YTD operating cash flow was $205 million versus $223 million, while capital expenditures increased to $329 million from $162 million. Operating cash flow less capital expenditures was negative $124 million, compared with positive $61 million in 2011.
- Debt increased by approximately $1.0 billion from January 28, 2012 following issuance of $1 billion of 5.625% notes due 2022. Cash rose from $935 million at fiscal year-end to $1.193 billion.
Outlook, management commentary, risks and unusual items
- Management described Q2 performance as strong, citing comparable-sales growth and improved operating income. It also noted an uncertain global retail environment, and said it would manage conservatively while investing in merchandise, marketing, stores and online customer experience. No specific full-year earnings or sales guidance is provided in the supplied filing text.
- La Senza announced closures of 39 additional stores in Q2; two had closed by July 28, with most of the remainder expected to close in Q3. The company expected an additional $13 million of restructuring charges in Q3. A prior La Senza restructuring had a $13 million accrued balance at quarter-end.
- After quarter-end, the board declared a $1.00-per-share special dividend, estimated at $290 million, in addition to the $0.25-per-share ordinary Q3 dividend. The company also repurchased 0.2 million shares for $8 million after quarter-end.
- The $1 billion revolving credit facility had no borrowings outstanding; $15 million of letters of credit reduced availability to $985 million. The company reported compliance with its financial covenants and a debt-to-EBITDA ratio below 3.00x. Management said available short- and long-term capital resources were sufficient for foreseeable requirements.
- Potential exposures include a $9 million jury award in a patent case, which the company intended to appeal; it could not estimate possible losses from future infringement through 2015. Lease guarantees related to disposed businesses totaled approximately $66 million; no liability was recorded for those guarantees because payment was not considered probable.
- Management identified consumer demand, seasonality, mall traffic, competition, fashion and merchandise execution, international expansion, foreign sourcing and currency, costs, debt service and legal and tax matters among risks that could affect results. It reported no material changes to contractual obligations since January 28, 2012 other than the new 2022 notes.
Most important facts for investors to verify
- Confirm the period and issuer: this is Limited Brands’ Q2 2012 filing, with Bath & Body Works reported as a segment.
- Separate underlying sales trends from divestiture effects: reported consolidated sales declined, while comparable sales and both major brands’ sales grew.
- Assess earnings quality by reconciling the large year-over-year changes in Express-related gains, charitable-contribution expense and effective tax rates.
- Evaluate funding and shareholder returns together: debt rose, capital spending increased, and a large special dividend was declared after quarter-end.
- Monitor La Senza store closures and expected restructuring costs, as well as the patent appeal and lease-guarantee exposure.