Filing and reporting period
The supplied filing is L Brands, Inc.’s unaudited Form 10-Q for the 13 and 26 weeks ended August 1, 2020—not a 2019 Q2 filing or a standalone Bath & Body Works filing. Bath & Body Works is one of L Brands’ reporting segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Net sales | $2,319 | $2,902 | $3,974 | $5,530 |
| Gross profit / margin | $711 / 30.7% | $983 / 33.9% | $1,000 / 25.2% | $1,916 / 34.6% |
| Operating income (loss) / margin | $44 / 1.9% | $175 / 6.0% | $(274) / (6.9%) | $328 / 5.9% |
| Net income (loss) | $(49) | $38 | $(346) | $78 |
| Diluted EPS | $(0.18) | $0.14 | $(1.25) | $0.28 |
| Operating cash flow | Not separately presented | Not separately presented | $286 | $162 |
| Capital expenditures | Not separately presented | Not separately presented | $124 | $244 |
Q2 sales fell 20% year over year. Bath & Body Works sales rose 13% to $1,197, while Victoria’s Secret sales declined 39% to $978. Digital sales increased at both brands: Bath & Body Works Direct rose 191% to $519 and Victoria’s Secret Direct rose 65% to $614. Store closures related to COVID-19 substantially affected results; on average in Q2, Bath & Body Works stores were closed about half the quarter and Victoria’s Secret stores about 70%.
- Bath & Body Works: Q2 operating income was $326, versus $180 a year earlier. Its comparable sales increased 123%; comparable store sales rose 87% during periods stores were open.
- Victoria’s Secret: Q2 operating loss was $140, versus income of $17 a year earlier; results included $75 of store and lease impairments. Comparable sales rose 28%, but comparable store sales fell 10% during periods stores were open.
Reported Q2 results included $117 of store and lease impairments, $81 of restructuring charges and a $36 net gain from closing the Hong Kong flagship store and terminating its lease. Excluding special items, adjusted Q2 operating income was $206 and adjusted net income was $69, or $0.25 per diluted share. These are company-defined non-GAAP measures.
Balance sheet, debt and liquidity
- At August 1, 2020, cash and cash equivalents were $2,611; cash, cash equivalents and restricted cash totaled $2,739, including $128 pledged as collateral.
- Total debt was $6,729, including $460 current debt and $6,269 long-term debt. Debt increased from $5,548 at February 1, 2020. Shareholders’ deficit was $1,908.
- Working capital was $1,072. The company reported $286 of year-to-date operating cash flow and a $1,240 increase in cash and restricted cash, with financing cash inflow of $1,071, principally reflecting new note proceeds.
- In June, L Brands issued $750 of 6.875% secured notes and $500 of 9.375% notes, both due July 2025. The $1 billion asset-backed revolving facility had no borrowings outstanding at quarter-end; its $844 borrowing base was unavailable because consolidated cash exceeded the facility’s $350 cash threshold. Outstanding letters of credit were $61.
- The quarterly dividend was suspended beginning in Q2. The company paid $0.30 per share in Q1 2020.
Outlook, developments and risks
- COVID-19 materially disrupted store operations, customer traffic, supply chains and shipping. By August 1, the company had reopened approximately 1,600 Bath & Body Works and 690 Victoria’s Secret North American stores.
- Management said planned actions were expected to produce about $400 of annualized cost reductions, including about $175 in the remainder of 2020. These are expectations, not guaranteed outcomes. The company reduced its 2020 capital expenditure forecast from $550 to approximately $250.
- Management expressed caution about handling typical holiday volumes because of store social-distancing limits and direct-channel capacity constraints, and anticipated expense pressure from store safety measures, supply-chain wage inflation, fulfillment and shipping costs.
- The company continued preparing Bath & Body Works and Victoria’s Secret to operate as separate businesses after terminating its proposed Sycamore transaction in May. It planned to close approximately 250 Victoria’s Secret North American stores in 2020; 210 had closed year to date by August 1. It also entered “Light Administration” for Victoria’s Secret U.K. and was negotiating under a non-binding term sheet with a potential partner.
- Most store and select office rent for April through July was unpaid or partially paid during closures; negotiations with landlords were ongoing. The company recognized $54 of CARES Act payroll tax credits year to date.
- Risks include ongoing pandemic effects, the ability to execute a separation or other disposition, debt service and refinancing, lease and vendor obligations, and litigation. Shareholder suits relating to prior dividend statements and workplace-conduct allegations were pending or stayed; management said ordinary-course litigation was not expected to have a material adverse effect.
Key facts for investors to verify
- Confirm the intended issuer and period: this source is L Brands’ Q2 2020 10-Q, not Bath & Body Works’ 2019 Q2 filing.
- Track cash generation, debt maturities and financing costs, including the high-coupon 2025 notes and the restricted availability of the ABL facility.
- Assess whether forecast cost savings, store closures and any business separation proceed as planned, and whether one-time restructuring and impairment charges recur.
- Monitor landlord rent negotiations, holiday fulfillment capacity, and the sustainability of digital demand and Bath & Body Works’ segment performance.
- Review the company’s non-GAAP adjustments alongside reported GAAP losses, and monitor dividend policy and material legal developments.