Business context and reporting period
This is L Brands, Inc.’s unaudited Form 10-Q for the 13 weeks ended August 3, 2013, with year-to-date results for the 26 weeks ended that date. It reports consolidated results for Victoria’s Secret, Bath & Body Works and other operations—not a standalone Bath & Body Works filing. The filing compares results with the corresponding 2012 periods.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | YTD 2013 | YTD 2012 |
|---|---|---|---|---|
| Net sales | $2.516bn | $2.399bn | $4.784bn | $4.553bn |
| Gross profit | $989m | $942m | $1.930bn | $1.844bn |
| Gross margin | 39.3% | 39.3% | 40.3% | 40.5% |
| Operating income | $358m | $305m | $669m | $598m |
| Operating margin | 14.2% | 12.7% | 14.0% | 13.1% |
| Net income | $178m | $143m | $321m | $268m |
| Diluted EPS | $0.61 | $0.49 | $1.09 | $0.90 |
| Operating cash flow | — | $354m | $205m | |
| Capital expenditures | — | $383m | $329m |
At August 3, 2013, cash was $551m, current assets were $2.098bn and current liabilities were $1.485bn. Long-term debt was $4.475bn; shareholders’ deficit was $861m. The company had no revolver borrowings, $984m of remaining credit availability after letters of credit, and was in compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Q2 sales rose 5%; comparable-store sales increased 2%, versus 8% in Q2 2012. Operating income increased $53m and operating margin expanded 1.5 percentage points.
- Bath & Body Works Q2 sales rose 3% to $630m and operating income rose 16% to $102m; comparable-store sales were up 3%.
- Victoria’s Secret Q2 sales increased 3% to $1.620bn, while direct-channel sales declined 6%. Its operating income rose 6% to $271m.
- “Other” Q2 sales increased 25% to $266m, and its operating loss narrowed to $15m from $39m, principally reflecting international growth.
- YTD cash from operations increased to $354m from $205m, but investing outflows also rose to $381m from $318m. Cash declined $222m from the fiscal-year opening balance of $773m. YTD financing used $194m, including $174m in dividends and $55m in repurchases.
- Cash was $551m versus $1.193bn a year earlier. Debt was broadly stable compared with both the prior year-end and prior-year quarter.
Outlook, commentary, risks and unusual items
- No specific financial guidance is provided in the supplied filing text. Management described the retail environment as uncertain, said it was taking a conservative financial-management approach, and emphasized merchandise, marketing, store and online execution.
- Management cited seasonality: inventory needs generally peak in summer and fall ahead of holiday sales. It said available short- and long-term capital resources were sufficient for foreseeable needs.
- Key disclosed risks include economic and consumer-spending conditions, mall traffic, competition and fashion acceptance, international expansion and sourcing, currency and input-cost changes, labor and shipping disruption, information security, debt service/refinancing, and legal and tax matters.
- Unrecognized tax benefits decreased by $34m, primarily from resolution of tax matters and current-year activity. $90m could change within 12 months; the filing notes outcomes of tax audits may differ from estimates.
- Lease guarantees related to former businesses totaled approximately $44m through 2017; no liability was recorded for guarantees where payment was assessed as not probable. A patent judgment included $9m in damages and future royalties through 2015; the company appealed, and the appeal was stayed pending another proceeding concerning patent validity.
- The company entered interest-rate swaps in June 2013 covering $100m each of its 2017 and 2019 notes, converting those portions to variable rates. The interim financial statements received an accountant’s review, not an audit opinion.
Important facts for investors to verify
- Confirm the requested issuer and period: this is an L Brands Q2 2013 filing, with 2012 shown as the comparative period; it is not a standalone Bath & Body Works filing.
- Review segment performance and drivers, particularly Bath & Body Works’ sales and profit growth and Victoria’s Secret direct-channel decline.
- Assess cash conversion, inventory growth to $1.127bn, capital spending, and the decline in cash alongside shareholder distributions.
- Evaluate leverage, debt maturities and interest-rate exposure, covenant headroom, and access to the revolving facility.
- Follow developments in the patent appeal, tax uncertainties and former-business lease guarantees.