Business context and reporting period
This filing is L Brands, Inc.’s Form 10-Q for the thirteen weeks ended May 1, 2021, compared with the thirteen weeks ended May 2, 2020. The company operated Bath & Body Works and Victoria’s Secret, including PINK. The request metadata says “Bath & Body Works, Inc.” and “2020 Q1,” but the filing is for L Brands and reports first-quarter 2021 results; investors should verify the intended filing and period.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $3.024 billion | $1.654 billion |
| Gross profit / gross margin | $1.414 billion / 46.8% | $288 million / 17.4% |
| Operating income (loss) / margin | $572 million / 18.9% | $(318) million / (19.2)% |
| Net income (loss) | $277 million | $(297) million |
| Diluted EPS | $0.97 | $(1.07) |
| Operating cash flow | $249 million | $(342) million |
| Capital expenditures | $65 million | $55 million |
Adjusted net income was $357 million, or $1.25 per diluted share, in 2021; adjusted net loss was $275 million, or $0.99 per diluted share, in 2020. These non-GAAP figures exclude specified items, including 2021’s debt-extinguishment loss and 2020’s store impairment and tax benefit.
Bath & Body Works sales were $1.470 billion and operating income was $380 million, versus $760 million and $76 million. Victoria’s Secret sales were $1.554 billion and operating income was $245 million, versus $894 million and an operating loss of $354 million.
Liquidity, debt and capital
At May 1, 2021, cash and cash equivalents were $2.807 billion; cash, cash equivalents and restricted cash totaled $2.837 billion. Long-term debt was $5.344 billion, down from $6.366 billion at January 30, 2021. There were no borrowings under the $1 billion asset-backed revolving facility; the company said its cash balance above $350 million prevented drawing on it. The facility had $63 million of outstanding letters of credit. Reported working capital was $1.932 billion. Total equity remained in deficit at $533 million.
First-quarter financing cash outflow was $1.291 billion, primarily reflecting $1.130 billion to repurchase notes and $155 million of share repurchases. In April, the company repurchased the remaining $285 million of 2022 Notes and $750 million of 2025 Secured Notes, recording a $105 million pretax extinguishment loss. It repurchased $165 million of shares during the quarter and a further $106 million after quarter-end. The quarterly dividend was reinstated at $0.15 per share for June 2021.
Changes, outlook and risks
Sales rose 83% and operating income improved by $890 million year over year. Comparisons are heavily affected by the prior-year pandemic: North American stores closed on March 17, 2020 and nearly all remained closed through the rest of that quarter. The company attributed 2021 demand in part to stimulus payments and easing restrictions. Both brands benefited from higher sales and margins, including reduced promotional activity; management also cited improved Victoria’s Secret assortments and inventory discipline. The filing cautions that these unusual comparisons make year-over-year trends less meaningful.
The Board approved a planned tax-free spin-off of Victoria’s Secret, including PINK, expected in August 2021, subject to customary conditions. Management estimated approximately $70 million of one-time professional and deal costs, $200–$300 million of technology-platform implementation expenditures over time, and approximately $80 million of annual incremental consolidated overhead after separation. It expected the allocation of corporate overhead to result in about $100 million of additional annual cost for each standalone business compared with current segment results. These estimates were preliminary; the filing provides no specific earnings guidance.
Management forecast 2021 capital expenditures of $400–$450 million, including investment in a Bath & Body Works fulfillment center, stores, technology, distribution and logistics. Risks include COVID-related closures or restrictions; spin-off delays, costs, tax treatment, lost synergies and contingent liabilities; inflation and higher input or transportation costs; supply-chain and foreign-exchange exposures; and the ability to service or refinance debt. The company reported ordinary-course litigation and two shareholder derivative suits naming it only as a nominal defendant; management did not expect current proceedings to materially adversely affect results or financial condition. It was fully reserved for $30 million of contingent La Senza lease-related obligations.
Important facts to verify
- Confirm the intended issuer and period: the supplied filing is L Brands’ Q1 2021 10-Q, not a Bath & Body Works, Inc. 2020 Q1 filing.
- Assess how much of the sales and earnings rebound reflects recovery from 2020 store closures versus sustained demand and margin improvement.
- Track the spin-off timetable, final separation terms, costs, financing arrangements, tax treatment and post-separation overhead.
- Review debt maturities, refinancing capacity, cash requirements and the effects of buybacks and the reinstated dividend on liquidity.
- Monitor the $400–$450 million capital-expenditure plan, technology separation spending, inflation and supply-chain pressures.