Business context and reporting period
Limited Brands, Inc. (parent of Bath & Body Works) filed this unaudited Form 10-Q for the 13 weeks ended April 30, 2011, compared with the 13 weeks ended May 1, 2010. The consolidated results cover Victoria’s Secret, Bath & Body Works and other operations; standalone Bath & Body Works financial statements are not provided. The company describes itself as a specialty retailer operating in a competitive and uncertain retail environment.
Key financial metrics
Amounts are in millions of dollars except per-share data. Percentage changes are calculated from the filing’s reported amounts.
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Net sales | $2,217 | $1,932 | +15%; comparable sales +15% versus +10% |
| Gross profit / margin | $842 / 38.0% | $694 / 35.9% | Margin +2.1 percentage points |
| Operating income / margin | $217 / 9.8% | $185 / 9.6% | Income +17%; margin +0.2 points |
| Net income | $165 | $113 | +46% |
| Diluted EPS | $0.50 | $0.34 | +47% |
| Interest expense | $55 | $61 | Down $6 |
| Cash from operating activities | $(18) | $(60) | Cash use narrowed |
| Capital expenditures | $77 | $44 | Up $33 |
Segment sales and operating income were: Victoria’s Secret $1,444 and $240, versus $1,264 and $167; Bath & Body Works $480 and $54, versus $430 and $38; and Other $293 and $(77), versus $238 and $(20). Other operating income includes a $50 million charitable-foundation pledge in 2011.
Balance sheet, liquidity and capital allocation
- At April 30, 2011, cash and equivalents were $1,557, current assets $3,164 and current liabilities $1,389; working capital was $1,775.
- Long-term debt was $3,510, up from $2,507 at January 29, 2011. The company issued $1 billion of 6.625% notes due 2021 and received $981 million net of issuance costs. Reported shareholders’ equity was $1,127.
- The $800 million revolving facility had no borrowings; $27 million of letters of credit reduced availability, leaving $773 million. The company reported compliance with its financial covenants and debt-to-EBITDA below 3.0x.
- Cash increased $427 to $1,557 during the quarter, primarily reflecting $981 million of net debt proceeds and $99 million from selling Express shares, offset in part by $556 million of share repurchases and $64 million of dividends.
- The quarterly dividend was $0.20 per share, compared with $1.15 in Q1 2010, which included a $1.00 special dividend. After quarter-end, the board declared another $1.00 special dividend, estimated at $310 million, and approved a new $500 million repurchase authorization.
Material changes and management commentary
- Management attributed sales growth to a 15% comparable-sales increase, including 17% at Victoria’s Secret and 11% at Bath & Body Works. It cited merchandise newness and innovation, more transactions and higher average dollar sales; La Senza comparable sales declined 4%.
- Gross margin improved through merchandise margin gains, lower promotional activity at Victoria’s Secret Direct, cost reductions at Bath & Body Works and sales leverage. Higher selling and marketing costs and the charitable pledge increased general, administrative and store operating expenses to $625 million from $509 million.
- Other income was $86 million, including an $86 million pre-tax realized gain from selling Express shares. The company reduced its Express ownership to 8% and began available-for-sale accounting; its remaining investment was carried at $156 million, with an unrealized gain of $140 million recorded in accumulated other comprehensive income.
- The effective tax rate was 33.6%, down from 39.8%, primarily due to favorable resolution of certain tax matters. The filing says the interim statements were reviewed by the independent accountant, not audited.
- Management gave no specific earnings or sales guidance in the supplied filing text. It described the retail environment as uncertain, said it would manage conservatively, and emphasized merchandise, marketing and store-experience execution. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Risks, contingencies and unusual items
- Disclosed risks include consumer spending and confidence, seasonality, mall traffic and store locations, competition, fashion and product acceptance, international expansion, foreign sourcing and currency exposure, input and shipping costs, labor, information systems, debt service, credit ratings, taxes and litigation.
- Lease guarantees related to previously disposed businesses totaled approximately $89 million through 2017. The fair value of certain covered obligations was $6 million; the company recorded no liability for other guarantees because payment was not considered probable.
- A $50 million multi-year charitable pledge was recorded as expense and accrued liability in Q1. A securities class action was dismissed with prejudice and was not appealed; management said current litigation was not expected to materially adversely affect results or financial position.
- Victoria’s Secret Direct implemented new finance systems in March 2011; related controls were modified and additional compensating controls established. Management concluded disclosure controls were adequate and effective.
Most important facts for investors to verify
- Whether sales and comparable-sales momentum, particularly at Victoria’s Secret and Bath & Body Works, persisted beyond this seasonal quarter.
- How much reported earnings growth depended on the $86 million Express gain, the favorable tax resolution and other nonrecurring or unusual items; confirm underlying operating trends.
- The implications of the $1 billion note issuance, higher debt, variable-rate swap exposure and planned special dividend and share repurchases for leverage and liquidity.
- Whether operating cash flow improves as seasonal working-capital movements reverse, and whether planned capital spending and shareholder distributions remain supported by cash generation.
- The effect of the $50 million charitable pledge and rising selling, marketing and store costs on ongoing operating margins, and the status of lease guarantees and other contingencies.