Bath & Body Works / Limited Brands, Inc. — Form 10-Q Summary
Reporting-period clarification: The supplied filing is Limited Brands, Inc.’s Form 10-Q for the quarter ended July 30, 2011—not a 2010 Q2 filing. Bath & Body Works is one of the company’s reportable segments; the consolidated results below cover Limited Brands as a whole. Amounts are in U.S. dollars unless noted.
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 quarter comprised 13 weeks; year-to-date (“YTD”) comprised 26 weeks. The interim financial statements were unaudited and reviewed by Ernst & Young, which reported no material modifications it believed were needed.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Net sales | $2.458B | $2.242B | $4.675B | $4.174B |
| Gross profit / margin | $902M / 36.7% | $778M / 34.7% | $1.744B / 37.3% | $1.472B / 35.3% |
| Operating income / margin | $194M / 7.9% | $236M / 10.5% | $410M / 8.8% | $421M / 10.1% |
| Net income | $231M | $178M | $396M | $291M |
| Diluted EPS | $0.73 | $0.54 | $1.23 | $0.87 |
| Operating cash flow | Not separately presented | Not separately presented | $223M | $184M |
Bath & Body Works Q2 sales were $563M, up 5%; segment operating income was $70M, up from $64M, and operating margin was 12.5% versus 12.0%. Its comparable-store sales rose 4%. YTD segment sales were $1.043B, up 8%, and operating income was $124M versus $102M; comparable-store sales increased 7%.
At July 30, cash and cash equivalents were $1.035B, current assets $2.652B, current liabilities $1.347B and working capital $1.305B. Long-term debt was $3.524B, up from $2.507B at fiscal year-end; shareholders’ equity was $625M, down from $1.476B. YTD capital expenditures were $162M, and cash declined $95M to $1.035B. The company had no revolver borrowings, $970M of remaining availability after letters of credit, and reported compliance with its financial covenants. Debt to EBITDA was below 3.0x; the facility limit was 4.0x.
Material changes versus comparable periods
- Consolidated Q2 sales increased 10%, supported by 9% comparable-store sales growth. YTD sales increased 12%, with comparable-store sales up 12%.
- Gross margin improved 2.0 percentage points in both Q2 and YTD, while operating income declined $42M in Q2 and $11M YTD. Higher general, administrative and store operating expenses included a $113M Q2 charge and $163M YTD charge associated with the Express share contribution and Foundation pledge.
- Q2 net income increased despite lower operating income, with results materially affected by a $147M non-taxable gain on donating the remaining Express shares. The contribution expense and tax benefits also affected reported results. YTD other income included an $86M gain on the sale of Express shares and the $147M contribution gain.
- In March 2011, the company issued $1B of 6.625% notes due 2021, receiving $981M net of issuance costs. It used substantial financing proceeds and cash for share repurchases and dividends: YTD cash-flow statements show $890M of repurchases and $431M of dividends paid. The company repurchased $905M of shares under programs during the period, including $15M recorded in accounts payable at quarter-end.
- The revolving credit facility was increased from $800M to $1B, extended to July 2016, and amended to reduce certain fees and the borrowing spread.
Outlook, management commentary, risks and contingencies
Management described the retail environment as uncertain and said it would maintain a conservative financial-management approach, focusing on merchandise, marketing and store experience. The filing provides no specific forward earnings or sales guidance. Management noted retail seasonality: sales generally peak in the fourth quarter and inventory funding needs typically rise in summer and fall.
Principal disclosed risks include economic conditions and consumer spending, seasonality and mall traffic, competition and changing fashion preferences, international expansion and foreign sourcing, shipping and input-cost volatility, foreign exchange and interest rates, debt service and credit ratings, labor and technology matters, and legal, tax and regulatory issues.
The company disclosed approximately $82M of remaining lease guarantees related to previously disposed businesses, with lease terms extending through 2017. Management said guarantee payments were not probable at quarter-end for obligations without recorded liabilities. It also stated that ordinary-course litigation was not expected to have a material adverse effect. A portion of the company’s $1.035B cash balance—$395M—was held outside the U.S.; repatriation could incur additional taxes. No material changes to other contractual obligations were reported beyond issuance of the 2021 notes.
Most important facts for investors to verify
- Confirm the period: this is a 2011 Q2 filing for Limited Brands, with Bath & Body Works reported as a segment; the request metadata’s “2010 Q2” does not match the filing.
- Assess underlying earnings separately from the Express-related gains, charitable pledge/contribution expenses and associated tax effects.
- Track Bath & Body Works’ comparable-store sales, segment margin and sales trends, and compare them with the stronger Victoria’s Secret contribution to consolidated growth.
- Review the effect of increased debt, major buybacks and dividends on liquidity, equity and future interest expense.
- Monitor seasonal inventory and cash-flow needs, covenant headroom, foreign-held cash and the possible exposure from legacy lease guarantees.