L Brands, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended November 3, 2018; year-to-date covers the thirty-nine weeks ended November 3, 2018. Comparisons are to the thirteen and thirty-nine weeks ended October 28, 2017. The registrant is L Brands, Inc.; Bath & Body Works is one of its reportable segments, not the filing issuer.
Business and operating results
L Brands operates Victoria’s Secret, PINK, Bath & Body Works and other retail businesses through stores, direct channels and international partners. Amounts below are in millions except per-share figures.
| Metric | Q3 2018 | Q3 2017 | Year-to-date 2018 | Year-to-date 2017 |
|---|---|---|---|---|
| Net sales | $2,775 | $2,618 | $8,385 | $7,809 |
| Gross profit | $928 | $989 | $2,931 | $2,919 |
| Gross margin | 33.5% | 37.8% | 35.0% | 37.4% |
| Operating income | $54 | $232 | $437 | $742 |
| Operating margin | 2.0% | 8.8% | 5.2% | 9.5% |
| Net income (loss) | $(43) | $86 | $104 | $319 |
| Diluted EPS | $(0.16) | $0.30 | $0.37 | $1.11 |
- Q3 sales increased 6%; comparable sales rose 4%, while comparable store sales were flat. Year-to-date sales increased 7% and comparable sales rose 3%.
- Bath & Body Works was the strongest segment: Q3 sales rose 17% to $956 million, comparable sales increased 13%, and operating income increased to $178 million from $138 million. Year-to-date sales rose 14% and operating income increased to $470 million.
- Victoria’s Secret Q3 sales declined 1% to $1.529 billion; comparable sales fell 2% and comparable store sales fell 6%. Segment operating loss was $36 million versus operating income of $134 million a year earlier. Year-to-date operating income fell to $162 million from $476 million.
- International Q3 sales increased 17% to $134 million, but the segment recorded a $42 million operating loss. Year-to-date sales increased 25% to $415 million, with a $56 million operating loss.
Cash flow, balance sheet and liquidity
- Year-to-date operating cash flow was $13 million, down from $138 million. Capital expenditures were $561 million, resulting in operating cash flow less capital expenditures of negative $548 million.
- Cash and cash equivalents were $348 million at November 3, down $1.167 billion from $1.515 billion at the fiscal-year start. Inventory was $1.963 billion, up from $1.240 billion at fiscal-year start, reflecting seasonal holiday inventory build.
- Total debt was $5.870 billion, including $56 million current debt and $5.814 billion long-term debt. Shareholders’ deficit was $1.314 billion.
- The company reported $1 billion of availability under its secured revolving facility, had borrowed $85 million under it, and had $9 million of outstanding letters of credit. It reported compliance with facility covenants; debt to EBITDA was below 3.00x, versus a maximum covenant of 4.00x.
- Year-to-date dividends paid were $500 million and share repurchases were $198 million. The company announced a planned reduction in the annual ordinary dividend from $2.40 to $1.20 per share beginning with the March 2019 quarterly payment, citing a desire to use the cash primarily to reduce leverage over time.
Material changes, outlook and risks
- Q3 operating income included $81 million of Victoria’s Secret store-asset impairment charges and $20 million of Henri Bendel closure costs. Excluding these items, management reported adjusted operating income of $155 million, adjusted net income of $45 million and adjusted diluted EPS of $0.16; these are non-GAAP measures.
- Management attributed Victoria’s Secret weakness to merchandise performance in PINK loungewear and in unconstructed and sport bras, alongside lower store traffic and average unit retail. Bath & Body Works benefited from product innovation, higher average dollar sales and conversion, and lower promotional activity.
- The company announced closure of all 23 Henri Bendel stores and its e-commerce site; operations were expected to continue through January 2019, with additional costs, primarily contract termination costs, expected in Q4 2018. Management also said it was pursuing alternatives for La Senza.
- ASC 606 adoption changed presentation of Victoria’s Secret private-label credit-card income from an expense reduction to revenue, increasing both sales and operating expenses by $46 million in Q3 and $119 million year-to-date. Prior periods were not restated. The adoption also reduced opening retained earnings by $28 million, net of tax, principally due to loyalty-point revenue deferrals.
- Management said available capital resources were sufficient for foreseeable requirements, while noting the business is seasonal and working capital needs rise ahead of the holiday season. The filing provides no specific earnings or sales guidance.
- Key risks include weaker consumer spending, mall traffic dependence, competition, merchandise and brand execution, international operations, sourcing and shipping disruptions, foreign-exchange movements, cybersecurity and data protection, and the ability to service or refinance debt. S&P’s outlook was negative; Moody’s outlook was stable. The company expected adoption of the new lease standard in fiscal 2019 to materially increase reported assets and liabilities.
- Management said pending claims and contingencies were not expected to have a material adverse effect. The interim financial statements were reviewed by the independent auditor, not audited.
Investor verification priorities
- Check subsequent Victoria’s Secret sales, margins and impairment indicators, and whether the turnaround actions improve comparable-store performance.
- Assess whether Bath & Body Works’ strong comparable sales and margins are sustainable, including the effect of promotions and direct-channel costs.
- Track operating cash flow, holiday inventory conversion, capital spending and cash levels against the company’s substantial debt and shareholder distributions.
- Verify the dividend reduction, resulting cash allocation and progress on deleveraging, including debt maturities, facility availability and covenant headroom.
- Review Henri Bendel closure costs and La Senza developments, and distinguish underlying results from impairment and restructuring charges.
- When comparing periods, account for ASC 606 presentation changes and separately assess the disclosed non-GAAP adjustments.