Bath & Body Works / L Brands, Inc. — Form 10-Q Summary
Period and issuer: The supplied filing is L Brands, Inc.’s unaudited first quarter of fiscal 2018, the 13 weeks ended May 5, 2018, compared with the 13 weeks ended April 29, 2017. Although the request identifies “2017 Q1” and Bath & Body Works, the filing itself is for L Brands and includes Bath & Body Works as a reportable segment.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $2.626 billion | $2.437 billion | +8% |
| Gross profit / margin | $944 million / 35.9% | $903 million / 37.1% | Margin down 1.2 percentage points |
| Operating income / margin | $155 million / 5.9% | $209 million / 8.6% | Down $54 million, or 26% |
| Net income | $48 million | $94 million | Down $46 million |
| Diluted EPS | $0.17 | $0.33 | Down $0.16 |
| Operating cash flow | $(79) million | $7 million | Down $86 million |
| Capital expenditures | $160 million | $165 million | Down $5 million |
All amounts are U.S. dollars. The quarter’s cash decrease was $483 million; cash and cash equivalents ended at $1.032 billion. Financing cash outflow was $243 million, including $168 million of dividends and $81 million of share repurchases. The company paid a $0.60-per-share dividend, unchanged year over year.
Segments and comparable-period changes
- Bath & Body Works: Sales rose 12% to $761 million; comparable sales increased 8% and comparable-store sales increased 5%. Operating income increased 21% to $124 million, and segment operating margin rose to 16.3% from 15.0%. Management cited strength across home fragrance, body care, soaps and sanitizers, with higher conversion.
- Victoria’s Secret: Sales increased 4% to $1.589 billion, but operating income fell 48% to $83 million and margin declined to 5.2% from 10.4%. Comparable sales rose 1%, while comparable-store sales fell 5%. Management cited promotional pressure, lower average unit retail and reduced store traffic; direct sales increased 23%.
- International: Sales rose 31% to $135 million, primarily from new company-owned and partner stores and Greater China direct growth. Operating loss widened to $5 million from $1 million.
- Total comparable sales rose 3%, versus a 9% decline in the prior-year quarter; comparable-store sales declined 2%, versus a 9% decline.
Consolidated sales growth included a $25 million increase from presenting Victoria’s Secret private-label credit-card income as revenue under newly adopted revenue rules. That reclassification also increased general, administrative and store operating expenses by $25 million, so it did not increase operating income.
Balance sheet, debt and liquidity
- At May 5, 2018, total debt was $5.808 billion, including $89 million current debt and $5.719 billion long-term debt. Long-term debt was $5.702 billion at April 29, 2017.
- Current assets were $2.890 billion and current liabilities $1.858 billion; reported working capital was $1.032 billion. Shareholders’ equity was a deficit of $971 million.
- The company had a $1 billion secured revolving facility, no borrowings outstanding under it, and $9 million of letters of credit reducing availability. It reported compliance with its financial covenants and debt-to-EBITDA below 3.00x.
- Management stated that available short- and long-term capital resources were sufficient for foreseeable requirements. The quarter’s negative operating cash flow reflected working-capital movements, including seasonal inventory and payment changes.
Outlook, accounting, risks and unusual items
- No specific sales, earnings or full-year financial guidance is provided in the supplied filing text. Management described the retail environment as uncertain and emphasized retail execution, merchandise assortments, marketing, and store and online experiences. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
- The company adopted ASC 606 using the modified retrospective method. The adoption reduced opening retained earnings by $28 million, primarily for deferring revenue on outstanding Victoria’s Secret loyalty points. Prior-year results were not restated. Gross presentation of sales returns added $4 million to both other current assets and accrued expenses.
- The company expected adoption of the new lease standard in fiscal Q1 2019 to materially increase balance-sheet assets and liabilities as operating leases are recognized. The effect was still being evaluated.
- In January 2018, the company issued $500 million of 5.25% notes due 2028 and used the proceeds to redeem $500 million of 8.50% notes due 2019 for $540 million. It reported a $45 million pretax extinguishment loss in Q4 2017. After quarter-end, it announced exchange offers for certain 2020, 2021 and 2022 notes in exchange for new 2027 debt securities and cash.
- After quarter-end, the company repurchased another 1.2 million shares for $42 million. Fitch revised its outlook to negative on May 30, 2018, while reaffirming its ratings; Moody’s and S&P outlooks were stable as of the filing’s rating table.
- Disclosed risks include consumer and mall traffic trends, competition, merchandise and brand performance, sourcing and distribution disruptions, foreign exchange, debt service and refinancing, and information security. Management said ordinary-course litigation was not expected to materially adversely affect financial position or results. Lease-related guarantees include $9 million for a disposed business and $104 million of residual-value guarantees; a $3 million liability was recorded for the latter.
Most important facts for investors to verify
- Whether Bath & Body Works’ sales and margin momentum persists, and whether Victoria’s Secret can recover store traffic and merchandise margins.
- How much of reported sales growth reflects underlying demand versus ASC 606 presentation changes, channel mix and international expansion.
- Whether operating cash flow improves after seasonal working-capital investment, given continued dividends and repurchases alongside substantial debt.
- Debt maturities, refinancing or exchange-offer outcomes, credit-rating developments and continued compliance with facility covenants.
- The eventual balance-sheet impact of lease accounting adoption and any changes to the provisional tax accounting under the Tax Cuts and Jobs Act.