Bath & Body Works, Inc. — Filing Summary
Filing and period: The supplied filing is L Brands, Inc.’s Form 10-Q for the 13 and 26 weeks ended July 30, 2016—not a 2015 Q2 filing or a standalone Bath & Body Works filing. Bath & Body Works results below are the brand segment within L Brands. Financial amounts are in millions unless stated otherwise.
Business context and financial performance
L Brands operated Victoria’s Secret, PINK, Bath & Body Works, La Senza and Henri Bendel through company-owned stores, digital channels and international partners. The company described retail conditions as uncertain and said it was concentrating on retail execution, merchandise assortments, and store and digital experiences.
| Metric | Q2 2016 | Q2 2015 | Year-to-date 2016 | Year-to-date 2015 |
|---|---|---|---|---|
| Net sales | $2,890 | $2,765 | $5,504 | $5,277 |
| Gross profit | $1,113 | $1,114 | $2,156 | $2,170 |
| Operating income | $408 | $403 | $732 | $775 |
| Net income | $252 | $202 | $405 | $453 |
| Diluted EPS | $0.87 | $0.68 | $1.39 | $1.52 |
| Gross margin | 38.5% | 40.3% | 39.2% | 41.1% |
| Operating margin | 14.1% | 14.6% | 13.3% | 14.7% |
Q2 comparable sales increased 3% overall; comparable store sales rose 1%. For Bath & Body Works, Q2 sales were $801, up 7%, and segment operating income was $148, up 8%. Its comparable sales increased 5% and comparable store sales 3%. Year-to-date, Bath & Body Works sales were $1,462, up 7%, and operating income was $260, versus $235; comparable sales increased 6%.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $421, compared with $375 a year earlier. Capital expenditures were $497, versus $358; operating cash flow less capital expenditures was therefore negative $76, compared with positive $17.
- Cash and cash equivalents were $1,273 at July 30, 2016, down from $2,548 at fiscal year-end. Current assets were $2,960 and current liabilities $1,819.
- Long-term debt, net of current portion, was $5,706; total debt before current classification was $5,719. The company reported $992 of remaining availability under credit agreements and no borrowings under its $1 billion revolving facility (letters of credit of $8 reduced availability). It was in compliance with revolving-facility covenants.
- Year-to-date financing cash outflows included $923 of dividends and $385 of share repurchases. The company paid $3.20 per share in dividends, including a $2.00 special dividend.
Material changes, outlook and notable items
- Year-to-date sales grew 4%, but operating income fell 6% and net income declined from $453 to $405. Gross margin fell 1.9 percentage points year over year, reflecting Victoria’s Secret clearance and promotional activity, restructuring costs and store investment, among other factors.
- Victoria’s Secret Q2 operating income declined 6% despite 3% sales growth. Bath & Body Works delivered higher sales and operating income. International segment operating income fell to $8 from $20 in Q2, with management citing foreign currency, promotions and costs associated with new and acquired stores.
- Special items affected comparisons: a $108 pre-tax gain from an Easton Town Center distribution and a $36 pre-tax debt-extinguishment loss in 2016; the comparable 2015 year-to-date period included a $78 pre-tax gain from a business divestiture. Year-to-date 2016 also included $35 of Victoria’s Secret restructuring charges.
- In June, L Brands issued $700 of 6.75% notes due 2036 and used the proceeds, with additional cash, to repurchase $700 of 2017 notes for $742. Average borrowing costs and interest expense increased year over year.
- The company acquired its Greater China Victoria’s Secret Beauty and Accessories franchise partner’s operations for a stated purchase price of $44, including 26 existing stores. Management provided no specific earnings or sales guidance in the supplied filing text; it said available capital resources were sufficient for foreseeable requirements.
- Risks cited include competition, consumer spending and mall traffic, fashion and merchandise execution, international expansion, foreign exchange, sourcing and supply-chain disruptions, information security, and the ability to service debt and maintain dividends. Management said ordinary-course litigation was not expected to have a material adverse effect. It disclosed approximately $20 of legacy lease guarantees and $105 of residual-value guarantees, with a $3 recorded liability for the latter.
Key facts for investors to verify
- Confirm the period: this is L Brands’ 2016 Q2 filing, despite the request metadata specifying 2015 Q2.
- Assess whether Bath & Body Works’ sales and operating-income growth can continue, and whether Victoria’s Secret margin pressure and international weakness improve.
- Separate recurring results from the Easton gain, debt-extinguishment loss and restructuring charges; review the company’s non-GAAP reconciliation when assessing adjusted earnings.
- Evaluate cash use and balance-sheet flexibility given elevated dividends and repurchases, capital expenditures above operating cash flow, and debt of approximately $5.7 billion.
- Monitor foreign-exchange exposure, tax audit outcomes, lease guarantees and the company’s stated risks; the interim financial statements received an accountant’s review, not an audit opinion.