Bath & Body Works, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2021 Q1, but this filing covers the thirteen weeks ended April 30, 2022, compared with the thirteen weeks ended May 1, 2021. The filing reports the continuing Bath & Body Works business; Victoria’s Secret was spun off in August 2021.
Business and financial performance
Bath & Body Works sells home fragrance, body care, soaps and sanitizer through company-operated stores, digital channels and international partners. It reports one continuing operating segment.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $1.450 billion | $1.470 billion |
| Gross profit / margin | $669 million / 46.1% | $742 million / 50.5% |
| Operating income / margin | $280 million / 19.3% | $337 million / 22.9% |
| Continuing-operations net income | $155 million | $91 million |
| Continuing-operations diluted EPS | $0.64 | $0.32 |
| Net cash from operating activities | $66 million | $249 million |
Reported total net income was $155 million versus $277 million in the prior-year quarter; the 2021 amount included $186 million of after-tax income from discontinued operations. The prior-year continuing-operations results also included a $105 million pretax debt-extinguishment loss; adjusted continuing net income was $170 million and adjusted diluted EPS was $0.60 in Q1 2021, versus $155 million and $0.64 in Q1 2022.
Store sales in the U.S. and Canada rose 1% to $1.059 billion; direct sales fell 9% to $318 million; international sales increased 5% to $73 million. The company said direct-channel results were affected partly by strong prior-year sales and customers choosing buy-online-pick-up-in-store, recorded as store sales. It estimated government stimulus boosted Q1 2021 total sales by about $50 million.
Liquidity, debt and capital allocation
- At April 30, 2022, cash and cash equivalents were $651 million, down from $1.979 billion at January 29, 2022. Working capital was $512 million.
- Long-term debt was $4.856 billion, compared with $4.854 billion at fiscal year-end. The company had no ABL borrowings and reported $604 million of availability under its revolving facility.
- Shareholders’ deficit was $2.659 billion. Q1 financing cash use included $1.227 billion of share repurchases and $48 million of dividends. The company had $265 million of authorization remaining under its $1.5 billion repurchase program at quarter-end.
- Capital expenditures were $88 million. Management estimated full-year 2022 capital expenditures of approximately $400 million.
Changes, outlook and risks
- Sales decreased 1% year over year. Gross profit fell $73 million, primarily reflecting approximately $50 million of inflation-related costs, more promotional activity, and higher occupancy and direct-channel fulfillment costs. Operating income declined 17%.
- Management raised its estimate of 2022 incremental inflationary costs to $225 million–$250 million, up from its prior estimate of $150 million–$175 million; it expected about $70 million of pressure in Q2. It anticipated these costs would weigh on merchandise margin dollars and rate, while using selective price increases and managing promotions.
- The company was pulling forward some inventory purchases to mitigate supply-chain and distribution disruptions. It planned about 150 real-estate projects, including approximately 100 new off-mall stores and 50 White Barn remodels.
- Management accelerated separation from Victoria’s Secret’s technology services and expected the technology environments to be predominantly separated during 2023. IT separation investment and CEO-transition costs were expected to pressure 2022 general, administrative and store operating expenses.
- CEO Andrew Meslow stepped down on May 12, 2022; Executive Chair Sarah Nash became interim CEO. The Board declared a $0.20-per-share Q2 dividend.
- Risks highlighted include inflation and supply-chain disruption, changing consumer demand, COVID-19 impacts, labor costs, competition, technology separation and data security, foreign exchange, debt and covenant risks, and the company’s contingent lease guarantees. Lease-related contingent obligations associated with disposed businesses totaled $277 million; reserves were not significant. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Confirm the intended comparison period: this is Q1 2022, not Q1 2021.
- Track whether the $225 million–$250 million inflation-cost estimate and margin outlook were realized.
- Assess cash generation and liquidity after substantial repurchases, alongside the $4.856 billion debt balance and negative equity.
- Monitor inventory growth, promotional intensity, channel mix and the timing and cost of technology separation.
- Review the effect of the CEO transition, lease guarantees, and ongoing reliance on Victoria’s Secret for transitional services.