Filing summary
Entity and period: The supplied filing is Limited Brands, Inc.’s Form 10-K, filed March 26, 2010, for the 52-week fiscal year ended January 30, 2010 (fiscal 2009). It is not a Bath & Body Works standalone filing, and it does not report fiscal 2008 Q4 as the main reporting period. Bath & Body Works is one of Limited Brands’ operating segments. The filing separately compares fiscal Q4 2009 with Q4 2008.
Business context
Limited Brands operated Victoria’s Secret, Bath & Body Works and other businesses, selling through stores, websites, catalogues and international partners. At year-end it operated 2,971 company-owned stores, including 1,627 Bath & Body Works stores. Fiscal Q4, including the holiday season, typically accounts for about one-third of annual sales and is usually the most profitable quarter.
Financial performance
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net sales | $8.632 billion | $9.043 billion |
| Gross profit / margin | $3.028 billion / 35.1% | $3.006 billion / 33.2% |
| Operating income / margin | $868 million / 10.1% | $589 million / 6.5% |
| Net income attributable to Limited Brands | $448 million | $220 million |
| Diluted earnings per share | $1.37 | $0.65 |
| Cash from operations | $1.174 billion | $954 million |
| Capital expenditures | $202 million | $479 million |
| Cash and cash equivalents at year-end | $1.804 billion | $1.173 billion |
| Long-term debt at year-end | $2.723 billion | $2.897 billion |
| Working capital / current ratio | $1.928 billion / 2.5 | $1.612 billion / 2.3 |
Comparable-store sales fell 4% for the year, versus a 9% decline in 2008. Bath & Body Works recorded fiscal 2009 sales of $2.383 billion, up slightly from $2.374 billion, while comparable-store sales declined 1% versus a 9% decline. Its operating income rose to $358 million from $215 million, and its operating margin increased to 15.0% from 9.1%.
For Q4 2009, company sales were $3.063 billion, up 2%, and comparable-store sales increased 1%, compared with a 10% comparable-store decline in Q4 2008. Q4 operating income was $586 million versus $153 million; gross margin was 40.8% versus 34.3%. Bath & Body Works Q4 sales were $1.008 billion versus $998 million, comparable-store sales rose 2% versus a 11% decline, and segment operating income was $294 million versus $209 million.
Material changes and financial position
- Annual sales declined 5%, but operating income improved substantially as gross margin increased, promotions were reduced during the holiday season, and management controlled expenses. Lower sales and weak consumer conditions continued to weigh on the business.
- Operating cash flow increased to $1.174 billion, including a $156 million cash-flow benefit from lower inventory. Year-end inventory was down 12% from 2008.
- Capital spending fell to $202 million from $479 million. Debt declined by about $174 million year over year; the company issued $500 million of 8.5% notes due 2019 and used proceeds and cash to repay debt.
- The current ratio was 2.5 and the company reported $935 million available under credit agreements at year-end, after outstanding letters of credit. In March 2010 it repaid the remaining $200 million term loan and amended its revolver; these are subsequent events, not year-end balances.
- Quarterly cash dividends remained $0.15 per share. In March 2010, the board declared a separate $1.00-per-share special dividend and authorized a new $200 million share-repurchase program.
Outlook, unusual items and risks
Management described the 2010 retail environment as uncertain and said it would manage conservatively while focusing on retail fundamentals, merchandise, marketing and store experience. It planned approximately $250–$300 million in capital expenditures, about 50 new stores primarily in Canada, and further Canadian expansion for Bath & Body Works and Victoria’s Secret. No specific sales or earnings guidance is provided in the supplied filing text.
- Fiscal 2009 results included a $9 million pre-tax gain from reversing a joint-venture-related contractual liability and favorable income-tax benefits, including $23 million in Q4. Fiscal 2008 included a $215 million La Senza goodwill and intangible impairment, $23 million of restructuring expense, and gains and losses on joint ventures. These items affect year-over-year comparability.
- Management cited recession-related consumer weakness, promotional competition, mall traffic, seasonal inventory exposure, fashion and product execution, international expansion, foreign sourcing and currency, suppliers, information systems, labor costs, and access to capital and debt-service capacity as important risks.
- The company disclosed approximately $135 million of lease-payment guarantees for former businesses. Management considered payment under certain guarantees not probable at year-end. A securities class action filed in November 2009 had an unestimable potential loss; management said it intended to defend the case and did not expect ordinary-course legal matters to have a material adverse effect.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer and period: this is Limited Brands’ fiscal 2009 10-K, not a Bath & Body Works-only filing or a 2008 Q4 filing.
- Assess whether the operating-margin recovery and lower promotional activity are sustainable, especially given the annual comparable-store sales decline and reliance on holiday performance.
- Separate recurring earnings and cash flow from the La Senza impairment, joint-venture items, tax benefits and other nonrecurring effects.
- Review debt maturities, credit-facility covenants and the post-year-end term-loan repayment and revolver amendment; distinguish year-end debt from contractual principal-and-interest obligations.
- Monitor the $1.00 special dividend, ongoing quarterly dividend, planned store investment and capital-allocation capacity alongside liquidity and lease commitments.