Business context and reporting period
Filing identity differs from request metadata: the supplied filing is L Brands, Inc.’s Form 10-Q for the thirteen and thirty-nine weeks ended October 31, 2020, not a 2019 Q3 filing for Bath & Body Works, Inc. L Brands reported Bath & Body Works and Victoria’s Secret as its two segments. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
All amounts are in U.S. dollars; figures are in millions except per-share amounts.
| Metric | Third quarter 2020 | Third quarter 2019 | Year-to-date 2020 | Year-to-date 2019 |
|---|---|---|---|---|
| Net sales | $3,055 | $2,677 | $7,029 | $8,207 |
| Gross profit / gross margin | $1,359 / 44.5% | $741 / 27.7% | $2,360 / 33.6% | $2,657 / 32.4% |
| Operating income (loss) / rate | $581 / 19.0% | $(151) / (5.6)% | $307 / 4.4% | $177 / 2.2% |
| Net income (loss) | $331 | $(252) | $(16) | $(174) |
| Diluted EPS | $1.17 | $(0.91) | $(0.06) | $(0.63) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $706 | $(90) |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $200 | $392 |
- Segment results: Q3 Bath & Body Works sales were $1,702 and operating income was $494; Victoria’s Secret sales were $1,353 and operating income was $145, including a $30 joint-venture gain. Year-to-date, Bath & Body Works operating income was $907, while Victoria’s Secret recorded a $427 operating loss.
- Cash and liquidity: October 31 cash and cash equivalents were $2,622; cash, cash equivalents and restricted cash totaled $2,750. Working capital was $1,597. The $1 billion asset-backed revolving facility had no borrowings outstanding, but the company could not draw under it while consolidated cash exceeded $350; outstanding letters of credit were $63.
- Debt: Total debt, net of issuance costs and discounts, was $6,462, including $6,451 of long-term debt and $11 current debt, versus $5,548 total debt at February 1, 2020. Q3 interest expense was $121, compared with $92 a year earlier; year-to-date expense was $322 versus $286.
- Dividends: The company paid $0.30 per share in Q1 2020 and suspended quarterly dividends beginning in Q2. It paid $0.90 per share in the first three quarters of 2019.
Material changes versus comparable periods
- Q3 sales rose 14%, and operating income improved by $732, moving from a loss to profit. Bath & Body Works sales increased 55%, supported by strong digital and store demand; Victoria’s Secret sales fell 14%, primarily due to store closures and lower store traffic.
- Q3 comparable sales increased 56% at Bath & Body Works and 4% at Victoria’s Secret; comparable store sales rose 38% and fell 10%, respectively. Direct sales increased 132% at Bath & Body Works and 42% at Victoria’s Secret.
- Year-to-date sales declined 14%. Bath & Body Works sales grew 19%, but Victoria’s Secret sales fell 34%, reflecting pandemic-related store closures and reduced store traffic. Digital/direct sales grew at both brands.
- Year-to-date operating cash flow improved to $706 from cash used of $90. Management cited working-capital movements, including inventory builds and related accounts payable, as significant cash-flow factors.
Outlook, management commentary, risks and unusual items
- Management gave no specific Q4 earnings or sales guidance. It described a cautious Q4 outlook amid pandemic uncertainty, capacity limits, fewer store hours, possible further restrictions, and constraints on fulfillment and shipping. It expected higher store, safety, fulfillment and parcel-carrier costs, while planning to spread major promotions across longer periods.
- The company said its profit-improvement plan remained on track to deliver $400 million in annual savings. It planned approximately 240 Victoria’s Secret North American store closures in 2020 and reported 239 closures year-to-date.
- L Brands remained committed to establishing Bath & Body Works as a standalone public company and preparing Victoria’s Secret to operate separately. A proposed sale of a 55% interest in Victoria’s Secret to Sycamore was terminated by mutual agreement in May 2020. In October, L Brands formed a U.K. and Ireland joint venture with Next PLC, retaining 49%; Next owns 51% and assumes operating responsibility.
- COVID-19 materially affected operations, with North American stores closed beginning March 17 and most reopened by the start of Q3. Management cited ongoing uncertainty in customer traffic, restrictions, supply chains and shipping. Rent negotiations continued; where no executed amendment existed, rent was accrued at contractual amounts.
- Q3 reported results included a $30 joint-venture gain and a $53 debt-extinguishment loss. Year-to-date items also included $81 of restructuring costs, $214 of Victoria’s Secret store and lease impairments, a $39 Hong Kong lease-termination gain and tax benefits. Company-reported adjusted Q3 net income was $320 and adjusted diluted EPS was $1.13; these are non-GAAP measures.
- Debt actions included issuing $2.25 billion of notes during 2020 and repurchasing or redeeming $1.259 billion of notes in Q3. Average daily borrowings and borrowing rates increased year over year. Moody’s and S&P outlooks were negative and stable, respectively, at quarter-end; Moody’s later updated its outlook to positive.
- Risks include continued pandemic disruption, store traffic and mall dependence, execution of the planned separation, ability to service or refinance debt, supply-chain disruption, foreign-exchange exposure, and contingent obligations. La Senza-related lease obligations were $34, with $35 of reserves recorded. Management did not expect current legal proceedings to materially adversely affect financial position or results; a dividend-related putative class action was dismissed with prejudice and no appeal was filed by the deadline.
Most important facts for investors to verify
- Confirm the intended issuer and period: the supplied text is L Brands’ 2020 Q3 10-Q, notwithstanding the request’s Bath & Body Works, 2019 Q3 metadata.
- Assess the sustainability of Q3 profitability and sales growth, including the separate performance of Bath & Body Works and Victoria’s Secret and the effects of store closures and unusual gains or charges.
- Review the debt maturity, interest-cost and refinancing profile, alongside cash availability and the ABL facility’s borrowing restrictions.
- Track holiday-period operating constraints, direct-channel capacity, vendor and shipping costs, and progress toward the $400 million savings target and planned store closures.
- Monitor the standalone-company separation plans, U.K. joint-venture performance, lease negotiations and any changes in contingent or legal obligations.