Bath & Body Works / Limited Brands, Inc. — Form 10-Q Summary
Reporting-period clarification: The filing is for Limited Brands, Inc. (the parent company that operated Bath & Body Works), not a standalone Bath & Body Works filing. It covers the 13 and 26 weeks ended July 31, 2010; the filing does not correspond to 2009 Q2 as stated in the request.
Business context and reporting period
Limited Brands operated specialty retail brands including Victoria’s Secret, Bath & Body Works, and La Senza, through stores and direct channels. The filing reports the second quarter and year-to-date results against the comparable periods ended August 1, 2009. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net sales | $2,242 | $2,067 | $4,174 | $3,792 |
| Gross profit | $778 | $668 | $1,472 | $1,216 |
| Operating income | $236 | $158 | $421 | $223 |
| Net income | $178 | $74 | $291 | $77 |
| Diluted EPS | $0.54 | $0.23 | $0.87 | $0.24 |
| Operating margin | 10.5% | 7.6% | 10.1% | 5.9% |
| Gross margin | 34.7% | 32.3% | 35.3% | 32.1% |
- Q2 comparable-store sales rose 7% overall; Victoria’s Secret increased 12%, while Bath & Body Works was flat. YTD comparable-store sales rose 8%; Bath & Body Works increased 3%.
- Bath & Body Works segment sales were $537 million in Q2, up 1%, and $967 million YTD, up 3%. Segment operating income was $64 million in Q2 versus $44 million and $102 million YTD versus $48 million.
- YTD operating cash flow was $184 million, down from $244 million. Capital expenditures were $110 million, and cash ended the period at $1.300 billion, down $504 million from the fiscal-year opening balance.
- At July 31, cash was $1.300 billion, current assets $2.805 billion, current liabilities $1.180 billion, and working capital $1.625 billion. Long-term debt was $2.532 billion (total debt carrying value $2.534 billion), down from $2.725 billion at January 30, 2010.
- Credit-agreement availability was $724 million, after letters of credit; no borrowings were outstanding under the revolving facility. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales and profitability increased substantially, with higher comparable-store sales and improved merchandise margins and lower promotional activity. Management also cited expense leverage on higher sales.
- Reported Q2 and YTD net income included material investment and transaction gains: $52 million pre-tax from the Express IPO, $20 million pre-tax from the sale of the remaining Limited Stores interest, and a $49 million pre-tax gain from an Express cash distribution. The company also recorded a $25 million pre-tax loss on extinguishing debt. These items make reported earnings less directly comparable with 2009.
- Express completed an IPO in May 2010, reducing Limited Brands’ ownership from 25% to 18%; the company said it would account for Express as an available-for-sale investment beginning in Q3 2010. Limited Brands sold its remaining 25% interest in Limited Stores in June and ceased equity-method accounting for that investment.
- The company issued $400 million of 7.00% notes due 2020 and used proceeds to repurchase portions of its 2012 and 2014 notes. It prepaid the remaining $200 million term loan and amended its revolving credit facility.
- YTD dividends paid were $422 million, including a $325 million special dividend of $1 per share. The regular quarterly dividend was $0.15 per share. The company repurchased $68 million of shares through July 31.
Outlook, management commentary, risks and contingencies
- Management described the retail environment as uncertain and said it would continue a conservative approach to inventory, expenses, and capital expenditures while focusing on retail execution and customer merchandise, marketing, store, and website experiences. The filing provides no specific earnings or sales guidance.
- Management said available short- and long-term capital resources were sufficient for foreseeable requirements. Retail seasonality affects results and working capital; interim performance may not indicate full-year results.
- Risk factors include consumer confidence and spending, mall traffic, competition, fashion and product acceptance, international operations and foreign sourcing, currency movements, shipping and input costs, credit ratings and debt service, and legal, regulatory, and tax matters.
- The company disclosed approximately $114 million of remaining lease guarantees related to previously disposed businesses. It recorded a $7 million fair-value liability for certain guarantees and no liability for other guarantees because payments were not considered probable. Management said ordinary-course legal matters were not expected to have a material adverse effect; it could not estimate potential loss, if any, from a securities class action filed in 2009.
- The interim financial statements were reviewed, not audited. The independent accountant reported no material modifications needed for conformity with U.S. GAAP.
Important facts for investors to verify
- Confirm the filing and requested period: this is Limited Brands’ Q2 2010 10-Q, not a 2009 Q2 Bath & Body Works standalone filing.
- Assess how much of reported earnings growth reflects operating performance versus the Express and Limited Stores gains and the debt-extinguishment loss.
- Review Bath & Body Works’ flat Q2 comparable sales against its 3% YTD comparable-sales growth and segment profit improvement.
- Track cash generation, seasonal inventory and working-capital needs, cash returned to shareholders, and remaining credit availability.
- Monitor the Express accounting and ownership transition, debt costs and interest-rate swaps, lease guarantees, and the disclosed securities litigation.