Filing identity and reporting period
The supplied filing is L Brands, Inc.’s unaudited Form 10-Q for the 13 and 39 weeks ended October 29, 2016, compared with periods ended October 31, 2015. This does not match the request metadata of Bath & Body Works, Inc. and “2015 Q3”; Bath & Body Works is one of L Brands’ reportable segments. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Year to date 2016 | Year to date 2015 |
|---|---|---|---|---|
| Net sales | $2.581 billion | $2.482 billion | $8.085 billion | $7.759 billion |
| Gross profit | $1.025 billion | $1.031 billion | $3.181 billion | $3.201 billion |
| Gross margin | 39.7% | 41.6% | 39.3% | 41.3% |
| Operating income | $284 million | $339 million | $1.015 billion | $1.114 billion |
| Operating margin | 11.0% | 13.7% | 12.6% | 14.4% |
| Net income | $122 million | $164 million | $526 million | $617 million |
| Diluted EPS | $0.42 | $0.55 | $1.81 | $2.08 |
Q3 comparable sales rose 2% overall; comparable store sales were flat. Bath & Body Works sales increased 9% to $770 million and segment operating income rose 7% to $145 million. Victoria’s Secret sales increased 1% to $1.584 billion, but operating income fell 22% to $164 million. International segment sales increased 12% to $104 million, while operating income declined 51% to $9 million.
Year-to-date operating cash flow was $316 million, versus $262 million in 2015. Capital expenditures were $825 million, compared with $603 million. Cash declined by $1.894 billion during the period to $654 million, primarily reflecting dividends, share repurchases, debt repayment and investment spending. Working capital was $879 million.
Liquidity, debt and capital returns
At October 29, 2016, long-term debt, net of current portion, was $5.701 billion; total debt was $5.724 billion. Cash was $654 million, and shareholders’ equity was a deficit of $1.190 billion. The company had no borrowings under its $1 billion revolving facility and reported $992 million of remaining availability after letters of credit. It was in compliance with facility covenants; debt to EBITDA was below 3.00 to 1.00, against a maximum of 4.00 to 1.00.
Year-to-date cash dividends totaled $1.096 billion, including a $2.00-per-share special dividend, and common stock repurchases totaled $410 million. A new $700 million 6.75% note due 2036 was issued; proceeds helped fund repurchase of $700 million of notes due 2017 for $742 million, resulting in a $36 million pretax extinguishment loss.
Material changes, management commentary and risks
- Sales grew 4% in both Q3 and year to date, but operating income and margins declined. Management attributed margin pressure to promotions and clearance activity, Victoria’s Secret category repositioning, higher store occupancy and selling costs, and Greater China expenses.
- Bath & Body Works delivered stronger comparable sales and segment profit; Victoria’s Secret comparable sales declined 1% in Q3, with management citing lower transactions and softness in certain categories.
- Management described the retail environment as uncertain, while emphasizing merchandise, store and digital experience execution. No specific earnings or sales guidance is stated in the supplied filing text.
- Special items affected year-to-date comparisons: 2016 included $35 million of Victoria’s Secret restructuring charges, a $36 million debt extinguishment loss and a $108 million Easton Town Center distribution gain; 2015 included a $78 million gain on divestiture of the apparel sourcing business. Adjusted year-to-date diluted EPS was $1.72 in 2016 versus $1.84 in 2015.
- Risks include consumer spending and mall traffic, competition and merchandise trends, international expansion and partner relationships, foreign exchange, sourcing and supply-chain disruption, data security, debt servicing, and the ability to sustain dividends and repurchases. The company disclosed $18 million of lease guarantees for disposed businesses and $105 million of sale-leaseback residual-value guarantees, with a $3 million liability recorded for the latter.
Important facts for investors to verify
- Confirm the issuer and period: this is L Brands’ 2016 Q3 filing, not a standalone Bath & Body Works 2015 Q3 filing.
- Assess whether sales growth can translate into restored gross and operating margins, particularly at Victoria’s Secret and International.
- Review cash generation against capital spending and substantial dividends and repurchases, and monitor cash and debt levels.
- Evaluate the recurrence and comparability of the Easton gain, restructuring charges and debt-refinancing loss when interpreting adjusted results.
- Monitor the seasonal inventory build, foreign currency exposure, covenant headroom, tax uncertainties and disclosed guarantees.