Bath & Body Works, Inc. — Filing Summary
Entity and period: The supplied filing is a 10-Q for Limited Brands, Inc. (now Bath & Body Works, Inc.), for the 13 weeks ended August 1, 2009, with year-to-date figures for the 26 weeks ended that date. The request metadata says 2008 Q2, but the filing itself reports 2009 Q2. Unless otherwise stated, amounts below are in millions of dollars.
Business context and reporting period
Limited Brands operated Victoria’s Secret, Pink, La Senza, Bath & Body Works and other businesses through stores and direct channels. Its two reportable segments were Victoria’s Secret and Bath & Body Works. Management described the U.S. and Canadian retail environment as challenging amid the global economic downturn.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net sales | $2,067 | $2,284 | $3,792 | $4,209 |
| Gross profit | $668 | $761 | $1,216 | $1,402 |
| Gross margin | 32.3% | 33.3% | 32.1% | 33.3% |
| Operating income | $158 | $186 | $223 | $395 |
| Operating margin | 7.6% | 8.1% | 5.9% | 9.4% |
| Net income attributable to Limited Brands | $74 | $102 | $77 | $200 |
| Diluted earnings per share | $0.23 | $0.30 | $0.24 | $0.58 |
| Cash provided by operating activities | — | — | $244 | $247 |
| Capital expenditures | — | — | $97 | $272 |
At August 1, 2009, cash and cash equivalents were $1,550; long-term debt was $3,251; current liabilities were $1,098; and working capital was $2,035. Cash increased $377 during the first half. The company reported $900 of additional availability under credit agreements, after $100 of letters of credit reduced facility availability; no commercial paper or revolving-facility borrowings were outstanding.
Material changes versus the prior comparable period
- Q2 sales fell 10%, and comparable-store sales declined 9%. YTD sales also fell 10%, with comparable-store sales down 9%.
- Victoria’s Secret drove much of the sales and operating-income decline: Q2 segment sales decreased 11% and operating income fell to $126 from $183. Bath & Body Works sales declined 3%, but segment operating income increased to $44 from $41.
- Q2 gross margin decreased 1.0 percentage point; operating margin decreased 0.5 point. YTD operating income fell $172, partly reflecting the absence of the prior-year $109 net gain on joint ventures.
- YTD operating cash flow was broadly similar to 2008 despite lower net income. Inventory decreased $102, reflecting management’s effort to reduce inventory. Capital expenditures fell to $97 from $272.
- Debt increased from $2,897 at January 31, 2009, primarily following issuance of $500 of 8.50% notes due 2019. The company used proceeds to reduce nearer-term debt; subsequent to quarter-end it reported an additional $267 Term Loan prepayment and $103 repurchase of 2012 notes.
Outlook, management commentary, risks and unusual items
- Management provided no specific numerical sales or earnings guidance in the supplied filing. It said it was emphasizing retail fundamentals, compelling merchandise and customer experience, while managing inventory, expenses, capital spending, cash and liquidity.
- Management said available short- and long-term capital resources were sufficient for foreseeable requirements. The company was in compliance with amended debt covenants at quarter-end. The covenants limit certain dividends, share repurchases and other restricted payments to $220 per year, subject to possible increases under the agreement.
- The company issued $500 of 8.50% notes in June 2009, generating $473 net proceeds. The offering and amended credit terms contributed to higher interest expense; YTD interest expense increased to $120 from $92.
- Q2 included a $9 pretax gain from reversal of an accrued joint-venture liability. YTD 2008 included a $128 pretax divestiture gain and a $19 impairment charge on another joint venture; these items affect comparability.
- Lease guarantees related to disposed businesses totaled approximately $166. The company recorded a $16 fair-value liability for certain guarantees; it recorded no liability for other guarantee obligations because payment was considered not probable. Management did not expect litigation to materially affect financial position or results.
- Risks cited include weak consumer spending and mall traffic, competition, merchandise and fashion execution, international and currency exposure, supplier and shipping disruption, debt servicing and credit-rating changes, and seasonal working-capital needs. Credit ratings were Ba2/BB/BB+ for corporate debt from Moody’s/S&P/Fitch; S&P and Fitch outlooks were negative.
- Disclosure controls were deemed adequate and effective. New Victoria’s Secret supply-chain and finance systems were implemented in June, with additional compensating controls established. The independent accountant performed an interim review, not an audit.
Important facts for investors to verify
- Confirm the filing identity and period: this is Limited Brands’ 2009 Q2 filing, not a 2008 Q2 filing.
- Track comparable-store sales, especially Victoria’s Secret and La Senza, and whether gross-margin pressure from promotions and lower sales persists.
- Review the effect of the 2019 notes and subsequent debt repayments on total debt, interest expense, maturities and covenant headroom.
- Assess liquidity and cash generation alongside seasonal inventory and working-capital requirements, capital spending, dividends and restricted-payment limits.
- Monitor the $166 of lease guarantees, including the remaining Express letter-of-credit protection, and any changes in litigation or other contingencies.
- Separate recurring operating performance from joint-venture gains, prior-year divestiture effects, restructuring payments and tax-rate changes.