Filing summary
Period and issuer: The supplied filing is L Brands, Inc.’s unaudited Form 10-Q for the 13 weeks and 26 weeks ended August 3, 2019—not a 2018 Q2 filing. L Brands reported Victoria’s Secret, Bath & Body Works and international operations; Bath & Body Works was one segment, not the issuer.
Financial performance
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net sales | $2.902 billion | $2.984 billion | $5.530 billion | $5.610 billion |
| Gross profit | $983 million | $1.059 billion | $1.916 billion | $2.003 billion |
| Gross margin | 33.9% | 35.5% | 34.6% | 35.7% |
| Operating income | $175 million | $228 million | $328 million | $383 million |
| Operating margin | 6.0% | 7.6% | 5.9% | 6.8% |
| Net income | $38 million | $99 million | $78 million | $147 million |
| Diluted EPS | $0.14 | $0.36 | $0.28 | $0.52 |
- Q2 comparable sales fell 1% overall and comparable store sales fell 4%. Victoria’s Secret comparable sales declined 6%; Bath & Body Works comparable sales grew 8%.
- Q2 Victoria’s Secret sales were $1.606 billion, down 7%, and operating income was $17 million versus $114 million. Bath & Body Works sales were $1.061 billion, up 10%, and operating income was $180 million versus $169 million.
- For the first half, operating cash flow was $162 million, down from $212 million. Capital expenditures were $244 million; investing cash use was $237 million and financing cash use was $483 million. Cash declined by $560 million to $853 million.
- At August 3, 2019, total debt was $5.550 billion, including $75 million of current debt; long-term debt was $5.475 billion. Shareholders’ deficit was $933 million. Cash was $853 million, and the $1 billion revolving facility had no borrowings and $990 million available after letters of credit.
Changes, outlook and key matters
- Results weakened overall: Q2 sales decreased 3% and operating income fell 23%. Management attributed Victoria’s Secret pressure to lower traffic, weaker merchandise performance and promotional activity. Bath & Body Works growth reflected strength across key categories and increased store conversion and digital traffic.
- Management described the retail environment as uncertain and said it would focus on retail fundamentals while pursuing compelling merchandise, marketing, and store and online experiences. It expected approximately $550 million of 2019 capital expenditures. The filing provides no specific earnings or sales guidance and says available capital resources are believed sufficient for foreseeable requirements.
- In June 2019, L Brands issued $500 million of 7.50% notes due 2029 and repurchased notes due 2020–2022; it recorded a $40 million pretax ($30 million after-tax) debt-extinguishment loss. Adjusted Q2 net income was $68 million and adjusted diluted EPS was $0.24, excluding that after-tax charge.
- Adoption of lease accounting added operating lease assets of $3.3 billion and liabilities of $3.7 billion at the start of 2019. At quarter-end, reported operating lease assets were $3.209 billion and lease liabilities totaled $3.621 billion. Prior periods were not restated.
- The quarterly dividend was $0.30 per share, versus $0.60 in Q2 2018. A shareholder class action filed in July alleges misleading statements about the November 2018 dividend reduction; the company calls the suit meritless and intends to defend it. L Brands also disclosed $67 million of La Senza lease guarantees and $94 million of lease residual-value guarantees.
- Other disclosed risks include competition, mall traffic, consumer demand, merchandise and supply-chain execution, foreign exchange, international operations, debt servicing, and data security. The company reported compliance with revolving-facility covenants. The facility was subsequently amended to extend maturity to August 2024.
Most important facts for investors to verify
- Confirm the filing and period: this is L Brands’ Q2 2019 10-Q, despite the request referring to Bath & Body Works and 2018 Q2.
- Assess whether Bath & Body Works’ sales and operating-income growth can continue, and whether Victoria’s Secret’s comparable-sales and margin declines are stabilizing.
- Review cash generation against dividends, planned capital spending, debt service and seasonal working-capital needs.
- Evaluate total leverage and refinancing costs, including the 7.50% 2029 notes, covenant headroom and the effect of lease obligations.
- Track the shareholder lawsuit and guarantees associated with divested businesses and leased assets.
The auditor performed an interim review, not a full audit, and reported no material modifications needed for GAAP conformity.