Business context and reporting period
The supplied filing is Limited Brands, Inc.’s unaudited Form 10-Q for the 13 and 39 weeks ended October 31, 2009—not a 2008 quarter or a standalone Bath & Body Works filing. Limited Brands operated Victoria’s Secret, Bath & Body Works and other retail businesses. The filing was reviewed, not audited, by Ernst & Young.
Financial results and liquidity
Amounts are in millions except per-share data. Comparisons are with the corresponding 2008 period.
| Metric | Third quarter 2009 | Year to date 2009 |
|---|---|---|
| Net sales | $1,777; down 4% | $5,569; down 8% |
| Gross profit / margin | $563 / 31.7%, versus $580 / 31.5% | $1,779 / 31.9%, versus $1,982 / 32.7% |
| Operating income / margin | $59 / 3.3%, versus $41 / 2.2% | $282 / 5.1%, versus $436 / 7.2% |
| Net income attributable to Limited Brands | $15, versus $4 | $92, versus $204 |
| Diluted earnings per share | $0.05, versus $0.01 | $0.28, versus $0.60 |
| Operating cash flow | Not separately stated | $130, versus $3 |
| Capital expenditures | Not separately stated | $160, versus $406 |
Quarterly operating income improved despite lower sales, principally as Bath & Body Works returned to operating profit and company expenses fell. Victoria’s Secret operating income declined. Year-to-date earnings were lower, and the prior-year comparison included a substantial joint-venture gain.
At October 31, cash was $968, current assets $2,914 and current liabilities $1,237. Long-term debt was $2,880 and shareholders’ equity $1,864. Cash declined $205 from the start of the fiscal year. The company paid $145 in dividends year to date; dividends were $0.15 per share each quarter.
Material changes versus the prior comparable period
- Third-quarter comparable sales fell 2% overall: Victoria’s Secret declined 4%, while Bath & Body Works increased 2%. Year-to-date comparable sales fell 7% overall.
- Year-to-date Victoria’s Secret sales declined 9%; Bath & Body Works sales were approximately flat. “Other” sales fell 18%, primarily reflecting lower third-party Mast sales.
- Year-to-date operating income decreased $154, including the absence of the prior-year $128 pre-tax gain on a joint-venture divestiture. The 2008 period also included a $19 impairment charge; 2009 included a $9 pre-tax joint-venture gain.
- Interest expense rose to $176 year to date from $136, reflecting higher average borrowing costs and borrowings, including the 2009 debt issuance and facility amendment fees.
- In June 2009, the company issued $500 of 8.50% notes due 2019 and used proceeds to prepay $392 of its term loan and repurchase $108 of 2012 notes. The term loan balance was $358 at quarter-end.
Outlook, management commentary, risks and unusual items
Management described the U.S. and Canadian retail environment as challenging and said it was emphasizing retail execution, inventory, expense, capital-spending and liquidity management while pursuing compelling merchandise, marketing and store experiences. No numerical earnings or sales guidance is provided in the supplied filing text. Management said available capital resources were sufficient for foreseeable requirements and reported compliance with amended debt covenants at quarter-end.
The amended credit agreements impose fixed-charge coverage and leverage tests, increase borrowing costs, and generally limit dividends, repurchases and other restricted payments to $220 annually, subject to specified terms. The $1 billion revolving facility had no borrowings outstanding; $86 of letters of credit reduced availability, leaving reported additional availability of $914.
Key risks cited include weak consumer spending and mall traffic, seasonality, competition, fashion and merchandise execution, foreign sourcing and currency exposure, debt service and credit-rating changes, and litigation. A securities class action filed November 6, 2009 names the company and certain officers; the company disputes the claims and said it could not estimate a possible loss. Lease guarantees related to disposed businesses totaled approximately $146; management said payments were not probable for guarantees without a recorded liability. A fourth-quarter 2009 foreign-subsidiary reorganization subsequently generated an approximately $20 non-cash tax benefit.
Most important facts for investors to verify
- Confirm the filing identity and period: this is Limited Brands’ third-quarter 2009 10-Q, despite the request metadata identifying Bath & Body Works and 2008 Q3.
- Assess the quality and sustainability of earnings: quarterly results benefited from a tax-reserve resolution, and year-to-date comparisons are affected by prior-year divestiture gains and other joint-venture items.
- Review holiday-season inventory and working-capital needs: inventory was $1,426 at quarter-end, and management noted seasonal inventory builds ahead of the holiday period.
- Monitor debt covenants, credit ratings, interest costs and restricted-payment limits, alongside the company’s liquidity and debt maturities.
- Track the securities lawsuit, lease guarantees and the timing and accounting treatment of the subsequent $20 tax benefit.