Business context and reporting period
This is L Brands, Inc.’s consolidated Form 10-K, not a Bath & Body Works standalone filing. Bath & Body Works is one of the company’s reportable segments. Fiscal 2017 ended February 3, 2018 and comprised 53 weeks; fiscal 2016 ended January 28, 2017 and comprised 52 weeks. Fiscal 2017’s fourth quarter was 14 weeks versus 13 weeks in the prior-year quarter.
L Brands operated Victoria’s Secret, PINK, Bath & Body Works, La Senza and Henri Bendel through stores, direct channels and international partners. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $12.632 billion | $12.574 billion |
| Gross profit / margin | $4.959 billion / 39.3% | $5.125 billion / 40.8% |
| Operating income / margin | $1.728 billion / 13.7% | $2.003 billion / 15.9% |
| Net income | $983 million | $1.158 billion |
| Diluted EPS | $3.42 | $3.98 |
| Cash from operations | $1.406 billion | $1.990 billion |
| Capital expenditures | $707 million | $990 million |
| Cash and cash equivalents at year-end | $1.515 billion | $1.934 billion |
Sales were approximately flat as reported, but the extra fiscal week contributed an estimated $160 million of sales and $46 million of operating income. Comparable sales declined 3%. Cash from operations less capital expenditures was approximately $699 million, down from $1.000 billion in fiscal 2016.
At year-end, long-term debt was $5.707 billion and current debt was $87 million; working capital was $1.262 billion and the current ratio was 1.6. The company reported $5.328 billion of operating lease obligations and total contractual obligations of $16.774 billion. Its $1 billion revolving facility had no borrowings outstanding, with $991 million available after letters of credit. The company said it complied with its financial covenants.
Fiscal 2017 included $686 million in regular dividends and $445 million in share repurchases. Reported net income included a net $92 million tax benefit from U.S. tax legislation and a $29 million after-tax loss on early debt redemption. Excluding disclosed special items, adjusted net income was $920 million and adjusted diluted EPS was $3.20; these are non-GAAP measures.
Material changes versus the prior comparable period
- Victoria’s Secret sales declined 5% to $7.387 billion; comparable sales fell 8%, and segment operating income declined 21% to $932 million. Management cited weaker traffic and pressure in core lingerie, alongside strategic exits from swim and apparel categories.
- Bath & Body Works sales rose 8% to $4.148 billion, comparable sales rose 5%, and operating income increased 5% to $953 million. Direct-channel sales increased 24%.
- International segment sales increased 19% to $502 million, but operating income fell to $5 million from $40 million, reflecting investment and losses in company-owned China operations and challenges in the U.K.
- Gross margin contracted 1.5 percentage points and operating margin contracted 2.2 points. The filing attributes pressure in part to promotions, lower sales leverage and store-investment costs.
- Operating cash flow decreased $584 million; inventory increased $144 million year over year, and the increase in inventory reduced fiscal 2017 operating cash flow by $137 million.
In the 14-week fourth quarter, sales rose 7% to $4.823 billion, while operating income was nearly unchanged at $987 million versus $988 million. The extra week contributed approximately $160 million of sales. Fourth-quarter net income was $664 million versus $632 million, including the tax benefit and debt-redemption loss noted above.
Outlook, management commentary and risks
Management characterized fiscal 2017 performance as below expectations and described the retail environment as uncertain. Priorities include improving Victoria’s Secret merchandise and customer experience, growing Bath & Body Works through product innovation and store upgrades, expanding internationally, and exercising discipline over inventory, expenses and capital. The filing does not provide a specific 2018 earnings or revenue forecast.
- For 2018, management planned approximately $750 million of capital expenditures and about 100 new company-owned stores, primarily Bath & Body Works stores in the U.S. and stores in Greater China. Planned store-area growth was about 3% for Bath & Body Works North America; Victoria’s Secret North American square footage was expected to remain flat.
- Plans included approximately 10 additional full-assortment Victoria’s Secret stores in China, further U.K. openings, and partner-led international expansion.
- Fiscal 2017 debt actions included issuing $500 million of 5.25% notes due 2028 and redeeming $500 million of 8.50% notes due 2019 for $540 million, generating a $45 million pretax extinguishment loss.
- Principal risks include declining mall traffic and changing shopping patterns, competition and promotional pressure, fashion and inventory execution, seasonal dependence on holiday sales, international expansion and currency exposure, vendor and distribution disruption, cybersecurity, and the ability to service or refinance substantial debt. Management identified no current litigation expected to have a material adverse effect.
- ASC 606 adoption in fiscal 2018 was expected to increase reported sales and general, administrative and store operating expenses by approximately $110 million due to a credit-card income classification change, and reduce opening retained earnings by approximately $28 million, net of tax, mainly from loyalty-point revenue deferral. Lease-accounting adoption in fiscal 2019 was expected to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Separate the 53rd-week contribution and the 14-week fourth-quarter comparison from underlying sales trends; assess comparable sales alongside reported growth.
- Track whether Victoria’s Secret can stabilize traffic, comparable sales and operating margins, and whether Bath & Body Works can sustain growth without further margin erosion.
- Reconcile reported and adjusted earnings, especially the $92 million tax benefit and $29 million after-tax debt-extinguishment loss, and monitor the provisional tax effects of the Tax Cuts and Jobs Act.
- Review debt maturities, interest burden, covenant headroom, lease commitments and the sustainability of dividends and share repurchases against reduced operating cash flow.
- Assess whether planned store and technology investment—particularly in China—earns adequate returns, and review the reported adoption effects of ASC 606 and upcoming lease accounting.