Bath & Body Works, Inc. — Form 10-Q Summary
Period note: The request identifies “2020 Q3,” but the supplied filing is for the thirteen and thirty-nine weeks ended October 30, 2021, with comparisons to October 31, 2020. This summary covers the filing provided.
Business context and reporting period
Bath & Body Works is a specialty retailer of home fragrance, body care, soaps and sanitizers, selling through company-operated stores, digital channels and international partners. On August 2, 2021, the company spun off Victoria’s Secret; its results are presented as discontinued operations for all periods shown. Continuing-operations results therefore reflect Bath & Body Works, while cash-flow statements include both continuing and discontinued operations.
Financial performance and position
| Metric | Third quarter 2021 | Third quarter 2020 | Year-to-date 2021 | Year-to-date 2020 |
|---|---|---|---|---|
| Net sales | $1.681 billion | $1.702 billion | $4.854 billion | $3.716 billion |
| Gross profit / margin | $839 million / 49.9% | $863 million / 50.7% | $2.409 billion / 49.6% | $1.689 billion / 45.5% |
| Operating income / margin | $409 million / 24.3% | $436 million / 25.6% | $1.130 billion / 23.3% | $735 million / 19.8% |
| Continuing-operations net income | $177 million | $196 million | $483 million | $308 million |
| Total net income (loss), including discontinued operations | $88 million | $331 million | $739 million | $(16) million |
| Diluted EPS from continuing operations | $0.66 | $0.69 | $1.74 | $1.10 |
Third-quarter sales fell 1%; store sales rose 3%, while direct sales declined 17%. Comparable sales were down 7% across stores and direct channels. Year-to-date sales rose 31%, but comparisons were affected by COVID-related store closures in 2020. Higher supply-chain and transportation costs, partly offset by pricing, lowered third-quarter gross margin. Marketing investment contributed to higher operating expenses.
Year-to-date cash from operations was $447 million, versus $706 million; capital expenditures were $241 million, and investing cash outflow was $228 million. Financing activities used $2.713 billion, primarily for debt repayments, share repurchases and spin-off-related payments. Cash and cash equivalents were $1.441 billion at October 30, 2021, compared with $3.568 billion at January 30, 2021. Inventory was $1.149 billion, up from $572 million at fiscal year-end, reflecting seasonal holiday inventory building.
Long-term debt was $4.852 billion, down from $6.366 billion at January 30, 2021. The company had no ABL borrowings and reported $734 million of availability after letters of credit. Shareholders’ deficit was $1.676 billion. The company repurchased $1.559 billion of shares year-to-date and paid $81 million in dividends.
Material changes and unusual items
- The Victoria’s Secret spin-off changed the company’s business perimeter and reporting presentation. Bath & Body Works received $976 million in cash proceeds in connection with the separation and retained no ownership in Victoria’s Secret & Co.
- Third-quarter continuing-operations net income included an $89 million pretax debt-extinguishment loss; year-to-date such losses totaled $195 million. Adjusted diluted continuing-operations EPS, a non-GAAP measure, was $0.92 for the quarter and $2.28 year-to-date.
- The August 2021 amendment to the ABL facility reduced commitments to $750 million, lowered borrowing rates, extended maturity to August 2026, and released Victoria’s Secret subsidiaries as guarantors.
Outlook, risks and contingencies
Management said it was positioned for the holiday season, citing strong customer response to fall and Halloween products and no significant third-quarter out-of-stocks. It expected inflation in raw materials, wages, supply-chain and transportation costs to put greater pressure on fourth-quarter results, and planned to manage pricing and promotions to offset costs where possible. The company estimated $100 million to $150 million of technology and other expenditures over several years to separate IT systems; this estimate was preliminary. It projected 2021 capital expenditures of $275 million to $300 million.
Risks include continuing COVID-related disruption, inflation and supply-chain constraints, retail competition and seasonality, and execution of the spin-off and IT separation. The company identified possible loss of synergies, tax-free treatment uncertainty and potential indemnification obligations related to the separation. It also reported approximately $280 million of contingent lease obligations related primarily to Victoria’s Secret and $27 million related to La Senza; reserves were not significant. A shareholder litigation settlement requires court approval and commits each separated company to invest $45 million over at least five years in governance measures. Management stated that ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is third-quarter 2021, not third-quarter 2020.
- Assess post-spin-off comparability, including the discontinued-operations presentation and the fact that cash flows still include discontinued operations.
- Track holiday sales, margins and the extent to which pricing offsets inflation and logistics costs.
- Monitor cash use from repurchases, dividends, debt service and planned IT separation spending, as well as remaining ABL availability.
- Review the final costs and execution risks of the IT separation, the status of the litigation settlement, and potential spin-off tax or indemnification liabilities.