Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
1. Description of Business and Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments whichthat are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. Typically, theThe Company’s investment portfolio is primarily comprisedcomposed of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.
The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company records andetermines the required allowance for uncollectable accountsexpected credit losses using information such as customer credit history and financial condition. Amounts are recorded to the allowance when it becomes probableis determined that expected credit losses may occur.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries.
The following table provides a summary of the principal value and estimated fair value of long-termoutstanding debt excluding foreign facility borrowings, as of October 28, 2017, April 29, 2023, January 28, 20172023 and October 29, 2016:April 30, 2022:
The following table provides the rollforward |
| | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Cash Flow Hedges | | Marketable Securities | | Accumulated Other Comprehensive Income (Loss) |
| (in millions) |
Balance as of January 30, 2016 | $ | 28 |
| | $ | 4 |
| | $ | 8 |
| | $ | 40 |
|
Other Comprehensive Income (Loss) Before Reclassifications | (25 | ) | | (1 | ) | | (6 | ) | | (32 | ) |
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | — |
| | 5 |
| | (4 | ) | | 1 |
|
Tax Effect | — |
| | (1 | ) | | 4 |
| | 3 |
|
Current-period Other Comprehensive Income (Loss) | (25 | ) | | 3 |
| | (6 | ) | | (28 | ) |
Balance as of October 29, 2016 | $ | 3 |
| | $ | 7 |
| | $ | 2 |
| | $ | 12 |
|
The following table provides a summary of the reclassification adjustments out of accumulated other comprehensive income (loss) for the third quarter and year-to-date 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
Details About Accumulated Other Comprehensive Income (Loss) Components | | Amount Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location on Consolidated Statements of Income |
| | Third Quarter | | Year-to-Date | | |
| | 2017 | | 2016 | | 2017 | | 2016 | | |
| | (in millions) | | |
(Gain) Loss on Cash Flow Hedges | | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | — |
| | Cost of Goods Sold, Buying and Occupancy |
| | (4 | ) | | (4 | ) | | 3 |
| | 5 |
| | Other Income |
| | — |
| | — |
| | 1 |
| | — |
| | Provision for Income Taxes |
| | $ | (4 | ) | | $ | (4 | ) | | $ | 1 |
| | $ | 5 |
| | Net Income |
| | | | | | | | | | |
Sale of Available-for-Sale Securities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4 | ) | | Other Income |
| | — |
| | — |
| | — |
| | 1 |
| | Provision for Income Taxes |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3 | ) | | Net Income |
14.9. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Lease Guarantees
In connection with the dispositionspin-off of Victoria's Secret & Co. and the disposal of a certain businesses,other business, the Company hashad remaining guaranteescontingent obligations of $11$278 million as of April 29, 2023 related to lease payments under the current terms of noncancellablenoncancelable leases, primarily related to office space, expiring at various dates through 2021.2037. These guaranteesobligations include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of thethese businesses. In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended. The Company has not recorded a liability with respect to these guarantee obligations as of October 28, 2017, January 28, 2017 or October 29, 2016 as it concluded that payments under these guarantees were not probable.
In connection with noncancellable operating leases of certain assets, the Company provides residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire at various dates through 2021, and the total amount of the guarantees is $104 million. The Company recorded a liability of less than $1 million as of October 28, 2017, a liability of $1 million as of January 28, 2017, and a liability of $3 million as of October 29, 2016Company's reserves related to these guarantee obligations which are included in Other Long-term Liabilities on the Consolidated Balance Sheets.
15. Retirement Benefits
The Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement planwere not significant for substantially all of its associates within the U.S. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.
The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $17 million for the third quarter of 2017 and $15 million for the third quarter of 2016. Total expense recognized related to the qualified plan was $49 million for year-to-date 2017 and $47 million for year-to-date 2016.
The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions up to a maximum percentage of eligible compensation. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a fixed rate determined by the Company and reviewed by the Compensation Committee of the Board of Directors, prior to the beginning of each year. Associate contributions and the related interest vest immediately. Company contributions, along with related interest, are subject to vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specifiedany period of up to 10 years. Total expense recognized related to the non-qualified plan was $6 million for the third quarter of 2017 and $7 million for the third quarter of 2016. Total expense recognized related to the non-qualified plan was $15 million for year-to-date 2017 and $20 million for year-to-date 2016.
16. Segment Information
The Company has three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International.
The Victoria’s Secret segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold through retail stores located in the U.S. and Canada and its website, www.VictoriasSecret.com.
The Bath & Body Works segment sells body care, home fragrance products, soaps and sanitizers under the Bath & Body Works, White Barn, C.O. Bigelow and other brand names. Bath & Body Works merchandise is sold at retail stores located in the U.S. and Canada and through its website, www.BathandBodyWorks.com.
The Victoria's Secret and Bath & Body Works International segment includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores located outside of the U.S. and Canada, as well as its online business in Greater China on the Tmall domestic platform. This segment includes the following:
Victoria's Secret International, comprised of company-owned stores in the U.K. and Greater China, as well as stores operated by partners under franchise and license arrangements;
Victoria's Secret Beauty and Accessories, comprised of company-owned stores in Greater China, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature Victoria's Secret branded beauty and accessories products in travel retail and other locations; and
Bath & Body Works International stores in travel retail and other locations operated by partners under franchise, license and wholesale arrangements.
Other consists of the following:
Mast Global, a merchandise sourcing and production function serving the Company and its international partners;presented.
La Senza, which sells women's intimate apparel through company-owned stores located in the U.S. and Canada, its website, www.LaSenza.com, as well as stores operated by partners under franchise and license arrangements;12
Henri Bendel, which sells handbags, jewelry and other accessory products through company-owned stores and its website, www.HenriBendel.com;andCorporate functions including non-core real estate, equity investments and other governance functions such as treasury and tax.
The following table provides the Company’s segment information for the third quarter and year-to-date 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | |
| Victoria’s Secret | | Bath & Body Works | | Victoria’s Secret and Bath & Body Works International | | Other | | Total |
| (in millions) |
2017 | | | | | | | | | |
Third Quarter: | | | | | | | | | |
Net Sales | $ | 1,539 |
| | $ | 816 |
| | $ | 115 |
| | $ | 148 |
| | $ | 2,618 |
|
Operating Income (Loss) | 134 |
| | 138 |
| | — |
| | (40 | ) | | 232 |
|
Year-to-Date: | | | | | | | | | |
Net Sales | $ | 4,718 |
| | $ | 2,354 |
| | $ | 332 |
| | $ | 405 |
| | $ | 7,809 |
|
Operating Income (Loss) | 476 |
| | 396 |
| | 1 |
| | (131 | ) | | 742 |
|
2016 | | | | | | | | | |
Third Quarter: | | | | | | | | | |
Net Sales | $ | 1,584 |
| | $ | 770 |
| | $ | 104 |
| | $ | 123 |
| | $ | 2,581 |
|
Operating Income (Loss) | 164 |
| | 145 |
| | 9 |
| | (34 | ) | | 284 |
|
Year-to-Date: | | | | | | | | |
|
|
Net Sales | $ | 5,192 |
| | $ | 2,232 |
| | $ | 299 |
| | $ | 362 |
| | $ | 8,085 |
|
Operating Income (Loss) | 679 |
| | 405 |
| | 30 |
| | (99 | ) | | 1,015 |
|
The Company's international net sales include sales from company-owned stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s international net sales across all segments totaled $365 million and $330 million for the third quarter of 2017 and 2016, respectively. The Company's international net sales across all segments totaled $1.014 billion and $958 million for year-to-date 2017 and 2016, respectively.
17. Subsequent Events
Subsequent to October 28, 2017, the Company retired 36 million shares of its treasury stock.
Subsequent to October 28, 2017, the Company repurchased an additional 0.1 million shares of common stock for $6 million under the September 2017 repurchase program. For additional information, see Note 3, “Earnings Per Share and Shareholders' Equity (Deficit).”
18. Supplemental Guarantor Financial Information
The Company’s 2019 Notes, 2020 Notes, 2021 Notes, 2022 Notes, 2023 Notes, 2035 Notes and 2036 Notes are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The Company is a holding company, and its most significant assets are the stock of its subsidiaries. The Guarantors represent: (a) substantially all of the sales of the Company’s domestic subsidiaries, (b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.
The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries: the Condensed Consolidating Balance Sheets as of October 28, 2017, January 28, 2017 and October 29, 2016 and the Condensed Consolidating Statements of Income, Comprehensive Income and Cash Flows for the periods ended October 28, 2017 and October 29, 2016.
L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| October 28, 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
ASSETS | | | | | | | | | |
Current Assets: | | | | | | | | | |
Cash and Cash Equivalents | $ | — |
| | $ | 377 |
| | $ | 358 |
| | $ | — |
| | $ | 735 |
|
Accounts Receivable, Net | 1 |
| | 181 |
| | 103 |
| | — |
| | 285 |
|
Inventories | — |
| | 1,519 |
| | 196 |
| | — |
| | 1,715 |
|
Other | (1 | ) | | 74 |
| | 122 |
| | — |
| | 195 |
|
Total Current Assets | — |
| | 2,151 |
| | 779 |
| | — |
| | 2,930 |
|
Property and Equipment, Net | — |
| | 2,056 |
| | 864 |
| | — |
| | 2,920 |
|
Goodwill | — |
| | 1,318 |
| | 30 |
| | — |
| | 1,348 |
|
Trade Names and Other Intangible Assets, Net | — |
| | 411 |
| | — |
| | — |
| | 411 |
|
Net Investments in and Advances to/from Consolidated Affiliates | 4,552 |
| | 18,111 |
| | 1,687 |
| | (24,350 | ) | | — |
|
Deferred Income Taxes | — |
| | 10 |
| | 13 |
| | — |
| | 23 |
|
Other Assets | 130 |
| | 26 |
| | 640 |
| | (612 | ) | | 184 |
|
Total Assets | $ | 4,682 |
| | $ | 24,083 |
| | $ | 4,013 |
| | $ | (24,962 | ) | | $ | 7,816 |
|
LIABILITIES AND EQUITY (DEFICIT) | | | | | | | | | |
Current Liabilities: | | | | | | | | | |
Accounts Payable | $ | 2 |
| | $ | 567 |
| | $ | 468 |
| | $ | — |
| | $ | 1,037 |
|
Accrued Expenses and Other | 108 |
| | 485 |
| | 303 |
| | — |
| | 896 |
|
Current Portion of Long-term Debt | — |
| | — |
| | 80 |
| | — |
| | 80 |
|
Income Taxes | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
Total Current Liabilities | 110 |
| | 1,052 |
| | 857 |
| | — |
| | 2,019 |
|
Deferred Income Taxes | (2 | ) | | (82 | ) | | 451 |
| | — |
| | 367 |
|
Long-term Debt | 5,705 |
| | 597 |
| | — |
| | (597 | ) | | 5,705 |
|
Other Long-term Liabilities | 3 |
| | 766 |
| | 90 |
| | (15 | ) | | 844 |
|
Total Equity (Deficit) | (1,134 | ) | | 21,750 |
| | 2,615 |
| | (24,350 | ) | | (1,119 | ) |
Total Liabilities and Equity (Deficit) | $ | 4,682 |
| | $ | 24,083 |
| | $ | 4,013 |
| | $ | (24,962 | ) | | $ | 7,816 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| January 28, 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
ASSETS | | | | | | | | | |
Current Assets: | | | | | | | | | |
Cash and Cash Equivalents | $ | — |
| | $ | 1,562 |
| | $ | 372 |
| | $ | — |
| | $ | 1,934 |
|
Accounts Receivable, Net | — |
| | 228 |
| | 66 |
| | — |
| | 294 |
|
Inventories | — |
| | 976 |
| | 120 |
| | — |
| | 1,096 |
|
Other | — |
| | 53 |
| | 88 |
| | — |
| | 141 |
|
Total Current Assets | — |
| | 2,819 |
| | 646 |
| | — |
| | 3,465 |
|
Property and Equipment, Net | — |
| | 1,897 |
| | 844 |
| | — |
| | 2,741 |
|
Goodwill | — |
| | 1,318 |
| | 30 |
| | — |
| | 1,348 |
|
Trade Names and Other Intangible Assets, Net | — |
| | 411 |
| | — |
| | — |
| | 411 |
|
Net Investments in and Advances to/from Consolidated Affiliates | 4,923 |
| | 15,824 |
| | 1,350 |
| | (22,097 | ) | | — |
|
Deferred Income Taxes | — |
| | 10 |
| | 9 |
| | — |
| | 19 |
|
Other Assets | 130 |
| | 28 |
| | 639 |
| | (611 | ) | | 186 |
|
Total Assets | $ | 5,053 |
| | $ | 22,307 |
| | $ | 3,518 |
| | $ | (22,708 | ) | | $ | 8,170 |
|
LIABILITIES AND EQUITY (DEFICIT) | | | | | | | | | |
Current Liabilities: | | | | | | | | | |
Accounts Payable | $ | 3 |
| | $ | 326 |
| | $ | 354 |
| | $ | — |
| | $ | 683 |
|
Accrued Expenses and Other | 100 |
| | 526 |
| | 371 |
| | — |
| | 997 |
|
Current Portion of Long-term Debt | — |
| | — |
| | 36 |
| | — |
| | 36 |
|
Income Taxes | (11 | ) | | 221 |
| | 88 |
| | — |
| | 298 |
|
Total Current Liabilities | 92 |
| | 1,073 |
| | 849 |
| | — |
| | 2,014 |
|
Deferred Income Taxes | (3 | ) | | (93 | ) | | 448 |
| | — |
| | 352 |
|
Long-term Debt | 5,700 |
| | 597 |
| | — |
| | (597 | ) | | 5,700 |
|
Other Long-term Liabilities | 3 |
| | 761 |
| | 81 |
| | (14 | ) | | 831 |
|
Total Equity (Deficit) | (739 | ) | | 19,969 |
| | 2,140 |
| | (22,097 | ) | | (727 | ) |
Total Liabilities and Equity (Deficit) | $ | 5,053 |
| | $ | 22,307 |
| | $ | 3,518 |
| | $ | (22,708 | ) | | $ | 8,170 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| October 29, 2016 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
ASSETS | | | | | | | | | |
Current Assets: | | | | | | | | | |
Cash and Cash Equivalents | $ | — |
| | $ | 370 |
| | $ | 284 |
| | $ | — |
| | $ | 654 |
|
Accounts Receivable, Net | 1 |
| | 260 |
| | 64 |
| | — |
| | 325 |
|
Inventories | — |
| | 1,501 |
| | 150 |
| | — |
| | 1,651 |
|
Other | — |
| | 158 |
| | 98 |
| | — |
| | 256 |
|
Total Current Assets | 1 |
| | 2,289 |
| | 596 |
| | — |
| | 2,886 |
|
Property and Equipment, Net | — |
| | 1,955 |
| | 815 |
| | — |
| | 2,770 |
|
Goodwill | — |
| | 1,318 |
| | 30 |
| | — |
| | 1,348 |
|
Trade Names and Other Intangible Assets, Net | — |
| | 411 |
| | — |
| | — |
| | 411 |
|
Net Investments in and Advances to/from Consolidated Affiliates | 4,475 |
| | 15,461 |
| | 1,815 |
| | (21,751 | ) | | — |
|
Deferred Income Taxes | 1 |
| | 11 |
| | 18 |
| | — |
| | 30 |
|
Other Assets | 133 |
| | 35 |
| | 661 |
| | (611 | ) | | 218 |
|
Total Assets | $ | 4,610 |
| | $ | 21,480 |
| | $ | 3,935 |
| | $ | (22,362 | ) | | $ | 7,663 |
|
LIABILITIES AND EQUITY (DEFICIT) | | | | | | | | | |
Current Liabilities: | | | | | | | | | |
Accounts Payable | $ | — |
| | $ | 580 |
| | $ | 382 |
| | $ | — |
| | $ | 962 |
|
Accrued Expenses and Other | 111 |
| | 513 |
| | 285 |
| | — |
| | 909 |
|
Current Portion of Long-term Debt | — |
| | — |
| | 23 |
| | — |
| | 23 |
|
Income Taxes | — |
| | (2 | ) | | 115 |
| | — |
| | 113 |
|
Total Current Liabilities | 111 |
| | 1,091 |
| | 805 |
| | — |
| | 2,007 |
|
Deferred Income Taxes | (3 | ) | | (83 | ) | | 348 |
| | — |
| | 262 |
|
Long-term Debt | 5,701 |
| | 597 |
| | — |
| | (597 | ) | | 5,701 |
|
Other Long-term Liabilities | 1 |
| | 747 |
| | 147 |
| | (14 | ) | | 881 |
|
Total Equity (Deficit) | (1,200 | ) | | 19,128 |
| | 2,635 |
| | (21,751 | ) | | (1,188 | ) |
Total Liabilities and Equity (Deficit) | $ | 4,610 |
| | $ | 21,480 |
| | $ | 3,935 |
| | $ | (22,362 | ) | | $ | 7,663 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Third Quarter 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Sales | $ | — |
| | $ | 2,508 |
| | $ | 947 |
| | $ | (837 | ) | | $ | 2,618 |
|
Costs of Goods Sold, Buying and Occupancy | — |
| | (1,639 | ) | | (717 | ) | | 727 |
| | (1,629 | ) |
Gross Profit | — |
| | 869 |
| | 230 |
| | (110 | ) | | 989 |
|
General, Administrative and Store Operating Expenses | (2 | ) | | (731 | ) | | (104 | ) | | 80 |
| | (757 | ) |
Operating Income (Loss) | (2 | ) | | 138 |
| | 126 |
| | (30 | ) | | 232 |
|
Interest Expense | (98 | ) | | (28 | ) | | (3 | ) | | 30 |
| | (99 | ) |
Other Income | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Income (Loss) Before Income Taxes | (100 | ) | | 112 |
| | 123 |
| | — |
| | 135 |
|
Provision for Income Taxes | 1 |
| | 27 |
| | 21 |
| | — |
| | 49 |
|
Equity in Earnings (Loss), Net of Tax | 187 |
| | 166 |
| | 67 |
| | (420 | ) | | — |
|
Net Income (Loss) | $ | 86 |
| | $ | 251 |
| | $ | 169 |
| | $ | (420 | ) | | $ | 86 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Third Quarter 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Income (Loss) | $ | 86 |
| | $ | 251 |
| | $ | 169 |
| | $ | (420 | ) | | $ | 86 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | | | |
Foreign Currency Translation | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Unrealized Gain (Loss) on Cash Flow Hedges | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
Reclassification of Cash Flow Hedges to Earnings | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
Total Other Comprehensive Income (Loss), Net of Tax | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Total Comprehensive Income (Loss) | $ | 86 |
| | $ | 251 |
| | $ | 173 |
| | $ | (420 | ) | | $ | 90 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Third Quarter 2016 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Sales | $ | — |
| | $ | 2,478 |
| | $ | 846 |
| | $ | (743 | ) | | $ | 2,581 |
|
Costs of Goods Sold, Buying and Occupancy | — |
| | (1,545 | ) | | (678 | ) | | 667 |
| | (1,556 | ) |
Gross Profit | — |
| | 933 |
| | 168 |
| | (76 | ) | | 1,025 |
|
General, Administrative and Store Operating Expenses | (1 | ) | | (685 | ) | | (111 | ) | | 56 |
| | (741 | ) |
Operating Income (Loss) | (1 | ) | | 248 |
| | 57 |
| | (20 | ) | | 284 |
|
Interest Expense | (97 | ) | | (20 | ) | | (2 | ) | | 22 |
| | (97 | ) |
Other Income (Loss) | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Income (Loss) Before Income Taxes | (98 | ) | | 228 |
| | 58 |
| | 2 |
| | 190 |
|
Provision (Benefit) for Income Taxes | — |
| | 82 |
| | (14 | ) | | — |
| | 68 |
|
Equity in Earnings (Loss), Net of Tax | 220 |
| | 47 |
| | 4 |
| | (271 | ) | | — |
|
Net Income (Loss) | $ | 122 |
| | $ | 193 |
| | $ | 76 |
| | $ | (269 | ) | | $ | 122 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Third Quarter 2016 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Income (Loss) | $ | 122 |
| | $ | 193 |
| | $ | 76 |
| | $ | (269 | ) | | $ | 122 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | | | |
Foreign Currency Translation | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
Unrealized Gain (Loss) on Cash Flow Hedges | — |
| | — |
| | 9 |
| | — |
| | 9 |
|
Reclassification of Cash Flow Hedges to Earnings | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
Total Other Comprehensive Income (Loss), Net of Tax | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) |
Total Comprehensive Income (Loss) | $ | 122 |
| | $ | 193 |
| | $ | 66 |
| | $ | (269 | ) | | $ | 112 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Sales | $ | — |
| | $ | 7,398 |
| | $ | 2,472 |
| | $ | (2,061 | ) | | $ | 7,809 |
|
Costs of Goods Sold, Buying and Occupancy | — |
| | (4,779 | ) | | (1,930 | ) | | 1,819 |
| | (4,890 | ) |
Gross Profit | — |
| | 2,619 |
| | 542 |
| | (242 | ) | | 2,919 |
|
General, Administrative and Store Operating Expenses | (8 | ) | | (2,059 | ) | | (290 | ) | | 180 |
| | (2,177 | ) |
Operating Income (Loss) | (8 | ) | | 560 |
| | 252 |
| | (62 | ) | | 742 |
|
Interest Expense | (298 | ) | | (61 | ) | | (8 | ) | | 67 |
| | (300 | ) |
Other Income (Loss) | — |
| | 6 |
| | 22 |
| | — |
| | 28 |
|
Income (Loss) Before Income Taxes | (306 | ) | | 505 |
| | 266 |
| | 5 |
| | 470 |
|
Provision (Benefit) for Income Taxes | 1 |
| | 92 |
| | 58 |
| | — |
| | 151 |
|
Equity in Earnings (Loss), Net of Tax | 626 |
| | 642 |
| | 447 |
| | (1,715 | ) | | — |
|
Net Income (Loss) | $ | 319 |
| | $ | 1,055 |
| | $ | 655 |
| | $ | (1,710 | ) | | $ | 319 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Income (Loss) | $ | 319 |
| | $ | 1,055 |
| | $ | 655 |
| | $ | (1,710 | ) | | $ | 319 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | | | |
Foreign Currency Translation | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
Unrealized Gain (Loss) on Cash Flow Hedges | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
Reclassification of Cash Flow Hedges to Earnings | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Unrealized Gain (Loss) on Marketable Securities | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total Other Comprehensive Income (Loss), Net of Tax | — |
| | — |
| | 3 |
| | — |
|
| 3 |
|
Total Comprehensive Income (Loss) | $ | 319 |
| | $ | 1,055 |
| | $ | 658 |
| | $ | (1,710 | ) | | $ | 322 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2016 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Sales | $ | — |
| | $ | 7,674 |
| | $ | 2,512 |
| | $ | (2,101 | ) | | $ | 8,085 |
|
Costs of Goods Sold, Buying and Occupancy | — |
| | (4,785 | ) | | (2,058 | ) | | 1,939 |
| | (4,904 | ) |
Gross Profit | — |
| | 2,889 |
| | 454 |
| | (162 | ) | | 3,181 |
|
General, Administrative and Store Operating Expenses | (6 | ) | | (1,959 | ) | | (330 | ) | | 129 |
| | (2,166 | ) |
Operating Income (Loss) | (6 | ) | | 930 |
| | 124 |
| | (33 | ) | | 1,015 |
|
Interest Expense | (295 | ) | | (40 | ) | | (7 | ) | | 47 |
| | (295 | ) |
Other Income (Loss) | (36 | ) | | 2 |
| | 117 |
| | — |
| | 83 |
|
Income (Loss) Before Income Taxes | (337 | ) | | 892 |
| | 234 |
| | 14 |
| | 803 |
|
Provision (Benefit) for Income Taxes | (13 | ) | | 216 |
| | 74 |
| | — |
| | 277 |
|
Equity in Earnings (Loss), Net of Tax | 850 |
| | 332 |
| | 268 |
| | (1,450 | ) | | — |
|
Net Income (Loss) | $ | 526 |
| | $ | 1,008 |
| | $ | 428 |
| | $ | (1,436 | ) | | $ | 526 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2016 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Income (Loss) | $ | 526 |
| | $ | 1,008 |
| | $ | 428 |
| | $ | (1,436 | ) | | $ | 526 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | | | |
Foreign Currency Translation | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
Unrealized Gain (Loss) on Cash Flow Hedges | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Reclassification of Cash Flow Hedges to Earnings | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Unrealized Gain (Loss) on Marketable Securities | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Reclassification of Gain on Marketable Securities to Earnings | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Total Other Comprehensive Income (Loss), Net of Tax | — |
| | — |
| | (28 | ) | | — |
| | (28 | ) |
Total Comprehensive Income (Loss) | $ | 526 |
| | $ | 1,008 |
| | $ | 400 |
| | $ | (1,436 | ) |
| $ | 498 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2017 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Cash Provided by (Used for) Operating Activities | $ | (289 | ) | | $ | 230 |
| | $ | 197 |
| | $ | — |
| | $ | 138 |
|
Investing Activities: | | | | | | | | | |
Capital Expenditures | — |
| | (461 | ) | | (138 | ) | | — |
| | (599 | ) |
Return of Capital from Easton Investments | — |
| | — |
| | 27 |
| | — |
| | 27 |
|
Net Investments in Consolidated Affiliates | — |
| | — |
| | (12 | ) | | 12 |
| | — |
|
Other Investing Activities | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
Net Cash Provided by (Used for) Investing Activities | — |
| | (461 | ) | | (132 | ) | | 12 |
| | (581 | ) |
Financing Activities: | | | | | | | | | |
Borrowings from Foreign Facilities | — |
| | — |
| | 67 |
| | — |
| | 67 |
|
Repayments on Foreign Facilities | — |
| | — |
| | (23 | ) | | — |
| | (23 | ) |
Dividends Paid | (516 | ) | | — |
| | — |
| | — |
| | (516 | ) |
Repurchases of Common Stock | (283 | ) | | — |
| | — |
| | — |
| | (283 | ) |
Tax Payments related to Share-based Awards | (31 | ) | | — |
| | — |
| | — |
| | (31 | ) |
Proceeds from Exercise of Stock Options | 37 |
| | — |
| | — |
| | — |
| | 37 |
|
Financing Costs | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
Other Financing Activities | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Net Financing Activities and Advances to/from Consolidated Affiliates | 1,087 |
| | (950 | ) | | (125 | ) | | (12 | ) | | — |
|
Net Cash Provided by (Used for) Financing Activities | 289 |
| | (954 | ) | | (81 | ) | | (12 | ) | | (758 | ) |
Effects of Exchange Rate Changes on Cash and Cash Equivalents | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Net Decrease in Cash and Cash Equivalents | — |
| | (1,185 | ) | | (14 | ) | | — |
| | (1,199 | ) |
Cash and Cash Equivalents, Beginning of Period | — |
| | 1,562 |
| | 372 |
| | — |
| | 1,934 |
|
Cash and Cash Equivalents, End of Period | $ | — |
| | $ | 377 |
| | $ | 358 |
| | $ | — |
| | $ | 735 |
|
L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2016 |
| L Brands, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated L Brands, Inc. |
Net Cash Provided by (Used for) Operating Activities | $ | (286 | ) | | $ | 437 |
| | $ | 260 |
| | $ | — |
| | $ | 411 |
|
Investing Activities: | | | | | | | | | |
Capital Expenditures | — |
| | (648 | ) | | (177 | ) | | — |
| | (825 | ) |
Return of Capital from Easton Investments | — |
| | — |
| | 116 |
| | — |
| | 116 |
|
Acquisition, Net of Cash Acquired of $1 | — |
| | — |
| | (33 | ) | | — |
| | (33 | ) |
Proceeds from Sale of Marketable Securities | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
Net Investments in Consolidated Affiliates | — |
| | — |
| | (27 | ) | | 27 |
| | — |
|
Other Investing Activities | — |
| | 1 |
| | 10 |
| | — |
| | 11 |
|
Net Cash Provided by (Used for) Investing Activities | — |
| | (647 | ) | | (101 | ) | | 27 |
| | (721 | ) |
Financing Activities: | | | | | | | | | |
Proceeds from the Issuance of Long-term Debt, Net of Issuance Costs | 692 |
| | — |
| | — |
| | — |
| | 692 |
|
Payment of Long-term Debt | (742 | ) | | — |
| | — |
| | — |
| | (742 | ) |
Borrowings from Foreign Facilities | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
Repayments on Foreign Facilities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
Dividends Paid | (1,096 | ) | | — |
| | — |
| | — |
| | (1,096 | ) |
Repurchases of Common Stock | (410 | ) | | — |
| | — |
| | — |
| | (410 | ) |
Tax Payments related to Share-based Awards | (56 | ) | | — |
| | — |
| | — |
| | (56 | ) |
Proceeds from Exercise of Stock Options | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
Other Financing Activities | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
Net Financing Activities and Advances to/from Consolidated Affiliates | 1,881 |
| | (1,608 | ) | | (246 | ) | | (27 | ) | | — |
|
Net Cash Provided by (Used for) Financing Activities | 286 |
| | (1,610 | ) | | (230 | ) | | (27 | ) | | (1,581 | ) |
Effects of Exchange Rate Changes on Cash and Cash Equivalents | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Net Decrease in Cash and Cash Equivalents | — |
| | (1,820 | ) | | (74 | ) | | — |
| | (1,894 | ) |
Cash and Cash Equivalents, Beginning of Period | — |
| | 2,190 |
| | 358 |
| | — |
| | 2,548 |
|
Cash and Cash Equivalents, End of Period | $ | — |
| | $ | 370 |
| | $ | 284 |
| | $ | — |
| | $ | 654 |
|
Review Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholdersof Bath & Body Works, Inc.
Results of L Brands, Inc.:
Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheetsheets of L Brands,Bath & Body Works, Inc. and subsidiaries(the Company) as of October 28, 2017April 29, 2023, and October 29, 2016,April 30, 2022, and the related consolidated statements of income, and comprehensive income, for the thirteen and thirty-nine week periods ended October 28, 2017 and October 29, 2016total equity (deficit) and cash flows for the thirty-nine weekthirteen-week periods ended October 28, 2017April 29, 2023 and October 29, 2016. TheseApril 30, 2022, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements are the responsibility of the Company’s management.
for them to be in conformity with U.S. generally accepted accounting principles.
We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the consolidated balance sheet of the Company as of January 28, 2023, and the related consolidated statements of income, comprehensive income, total equity (deficit), and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated March 17, 2023, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 28, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial informationstatements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 28, 2017, and the related consolidated statements of income, comprehensive income, total equity (deficit), and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 17, 2017. In our opinion, the accompanying consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 28, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Grandview Heights, Ohio
December 1, 2017June 2, 2023
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION ACT OF 1995
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our companyCompany or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “planned,” “potential”“potential,” "target," "goal" and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our companyCompany or our management:
•general economic conditions, inflation and deflation, consumer confidence, consumer spending patterns and market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•the seasonality of our business;
•the anticipated benefits from the Victoria's Secret & Co. ("Victoria's Secret") spin-off may not be realized;
•the spin-off of Victoria’s Secret may not be tax-free for U.S. federal income tax purposes;
•our dependence on Victoria's Secret for information technology services and the transition of such services to our own information technology systems or to those of third-party technology service providers;
•our ability to attract, develop and retain qualified associates and manage labor-related costs;
•difficulties arising from turnover in Company leadership or other key positions;
•the dependence on mallstore traffic and the availability of suitable store locations on appropriate terms;
•our ability to growcontinued growth in part through new store openings and existing store remodels and expansions;
•our ability to successfully operate and expand internationally and related risks;
•our independent franchise, license and wholesale partners;
•our direct channel businesses;business;
•our ability to protect our reputation and our brand images;image;
•our ability to successfully complete environmental, social and governance initiatives, and associated costs thereof;
•our ability to successfully achieve expected annual cost savings in connection with our profit optimization efforts to reduce expenses and improve operating efficiency in the business;
•our ability to attract customers with marketing, advertising and promotional programs;
•our ability to maintain, enforce and protect our trade names, trademarks and patents;
•the highly competitive nature of the retail industry and the segments in which we operate;
•consumer acceptance of our products and our ability to manage the life cycle of our brands, keep up with fashion trends,brand, develop new merchandise and launch new product lines successfully;
•our ability to source, distribute and sell goods and materials on a global basis, including risks related to:
•political instability, significant health hazards,wars and other armed conflicts, environmental hazards or natural disasters;
•significant health hazards or pandemics, such as the COVID-19 pandemic, which could result in closed factories and/or stores, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in impacted areas;
•duties, taxes and other charges;
•legal and regulatory matters;
•volatility in currency exchange rates;
•local business practices and political issues;
potential •delays or disruptions in shipping and transportation and related pricing impacts;
•disruption due to labor disputes; and
•changing expectations regarding product safety due to new legislation;
•our geographic concentration of suppliervendor and distribution facilities in central Ohio;
fluctuations in foreign currency exchange rates;•our reliance on a limited number of suppliers to support a substantial portion of our inventory purchasing needs;
stock price volatility;
our ability to pay dividends and related effects;
our ability to maintain our credit rating;
our ability to service or refinance our debt;
our ability to retain key personnel;
our ability to attract, develop and retain qualified associates and manage labor-related costs;
•the ability of our manufacturersvendors to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
•fluctuations in foreign currency exchange rates;
•fluctuations in product input costs;
•fluctuations in energy costs;
•our ability to adequately protect our assets from loss and theft;
fluctuations in energy costs;
•increases in the costs of mailing, paper, and printing;printing or other order fulfillment logistics;
•claims arising from our self-insurance;
•our and our third-party service providers’, including Victoria’s Secret during the term of the Transition Services Agreement between us and Victoria’s Secret, ability to implement and maintain information technology systems and to protect associated data;
•our ability to maintain the security of customer, associate, supplierthird-party and Company information;
•stock price volatility;
•our ability to pay dividends and make share repurchases under share repurchase authorizations;
•shareholder activism matters;
•our ability to maintain our credit ratings;
•our ability to service, repurchase or company information;refinance our debt and maintain compliance with our restrictive covenants;
•the impact of the transition from London Interbank Offered Rate and our ability to adequately manage such transition;
•our ability to comply with laws, regulations and technology platform rules or other obligations related to data privacy and security;
•our ability to comply with regulatory requirements;
•legal and compliance matters; and
•tax, trade and other regulatory matters.
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in “ItemItem 1A. Risk Factors”Factors in our 20162022 Annual Report on Form 10-K.
| |
Item 2. | Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of financial condition and results of operations areis based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP.accounting principles generally accepted in the United States of America ("GAAP") as codified in the Accounting Standards Codification. The following information should be read in conjunction with our financial statements and the related notes included in Part I, Item 1. Financial Statements.Statements in this Quarterly Report on Form 10-Q.
Executive Overview
In the thirdfirst quarter of 2017, our operating income2023, Net Sales decreased $52$54 million, or 18%4%, to $232$1.396 billion compared to the first quarter of 2022, reflecting a decrease in both transactions and average dollar sale. In our stores and direct channels, Net Sales decreased 2% to $1.034 billion, and 12% to $280 million, respectively. In our international business, Net Sales increased 13% to $82 million.
In the first quarter of 2023, Operating Income decreased $99 million, or 35%, to $181 million, from $280 million in the first quarter of 2022, and our operating incomethe Operating Income rate (expressed as a percentage of Net Sales) decreased to 8.8%12.9% from 11.0%19.3%. These decreases were due to declines in Gross Profit dollars and rate, as a result of the decline in Net sales increased $37 million to $2.618 billion, comparable sales decreased 1%Sales as well as continued inflationary pressures in raw materials and comparable store sales decreased 3%. Atinvestments in product formulations and packaging innovation, and increases in General, Administrative and Store Operating expenses and rate, as a result of investments in technology in connection with our information technology ("IT") separation from Victoria's Secret, net sales decreased 3%,increased customer-facing associate wages and operating income decreased 18%. At Bath & Body Works, net sales increased 6%, and operating income decreased 5%. At Victoria's Secret and Bath & Body Works International, net sales increased 11%, and operating income decreasedother corporate expenses. We expect our IT separation to approximately break-even. be substantially complete in the summer of 2023.
For additional information related to our thirdfirst quarter 20172023 financial performance, see “Results of Operations.”
The global retail sectorOutlook
We anticipate continued macroeconomic uncertainty and a continuation of first quarter of 2023 sales trends in the second quarter of 2023, with a moderate improvement in the back half of the year as we anniversary softer sales trends. We anticipate modest cost deflation benefits in the second quarter of 2023 and increasing deflation benefits in the second half of 2023, which we expect will be partially offset by investments in product formulation and packaging innovation. General, Administrative and Store Operating Expenses are expected to deleverage compared to 2022, driven by lower Net Sales, expenses related to our business continue to face an uncertain environmentIT separation and as a result, we continue to take a conservative stance with respect toincreased customer-facing associate wages, partially offset by the financial managementexpected benefits of our business. profit optimization work (discussed below).
Profit Optimization
We will continueare evaluating our cost structure and taking actions to manage our business carefully,offset ongoing cost pressures in both Gross Profit and General, Administrative and Store Operating Expenses. We are targeting $200 million of annual cost savings across the Company, and we will focus on the executionexpect to achieve more than $100 million of cost savings in 2023. We expect to realize increased savings as we move through 2023, including savings in freight and store selling expenses, as well as in home office and indirect spend. We expect to realize a substantial portion of the retail fundamentals.remaining benefits in 2024.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments and store and online experiences to our customers. We will look for, and capitalize on, those opportunities available to us. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well-positioned.
Adjusted Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Quarterly Report on Form 10-Q, provided below are non-GAAP measurements which present net income and earnings per diluted share in 2016for the first quarter of 2023 on an adjusted basis, whichto remove a certain special items.item recorded in the first quarter of 2023. We believe that thesethis special items areitem is not indicative of our ongoing operations due to theirits size and nature. We did not make any adjustments to our results in the first quarter of 2022. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definitiondefinitions of adjusted financial information may differ from similarly titled measures used by other companies.
The table below reconciles the first quarter of 2023 GAAP financial measures to the non-GAAP financial measures.measures:
|
| | | | | | | | | | | | | | | |
| Third Quarter | | Year-to-Date |
(in millions, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
Detail of Special Items included in Operating Income - Income (Expense) | | | | | | | |
Victoria's Secret Restructuring (a) | $ | — |
| | $ | — |
| | $ | — |
| | $ | (35 | ) |
Total Special Items included in Operating Income | $ | — |
| | $ | — |
| | $ | — |
| | $ | (35 | ) |
| | | | | | | |
Detail of Special Items included in Other Income - Income (Loss) | | | | | | | |
Gain on Distribution from Easton Town Center, LLC (b) | $ | — |
| | $ | — |
| | $ | — |
| | $ | 108 |
|
Loss on Extinguishment of Debt (c) | — |
| | — |
| | — |
| | (36 | ) |
Total Special Items included in Other Income | $ | — |
| | $ | — |
| | $ | — |
| | $ | 72 |
|
| | | | | | | |
Detail of Special Items included in Provision for Income Taxes - Provision | | | | | | | |
Tax effect of Special Items | $ | — |
| | $ | — |
| | $ | — |
| | $ | (11 | ) |
Total Special Items included in Provision for Income Taxes | $ | — |
| | $ | — |
| | $ | — |
| | $ | (11 | ) |
| | | | | | | |
Reconciliation of Reported Operating Income to Adjusted Operating Income | | | | | | | |
Reported Operating Income | $ | 232 |
| | $ | 284 |
| | $ | 742 |
| | $ | 1,015 |
|
Special Items included in Operating Income | — |
| | — |
| | — |
| | 35 |
|
Adjusted Operating Income | $ | 232 |
| | $ | 284 |
| | $ | 742 |
| | $ | 1,050 |
|
| | | | | | | |
Reconciliation of Reported Net Income to Adjusted Net Income | | | | | | | |
Reported Net Income | $ | 86 |
| | $ | 122 |
| | $ | 319 |
| | $ | 526 |
|
Special Items included in Net Income | — |
| | — |
| | — |
| | (26 | ) |
Adjusted Net Income | $ | 86 |
| | $ | 122 |
| | $ | 319 |
| | $ | 500 |
|
| | | | | | | |
Reconciliation of Reported Earnings Per Diluted Share to Adjusted Earnings Per Diluted Share | | | | | | | |
Reported Earnings Per Diluted Share | $ | 0.30 |
| | $ | 0.42 |
| | $ | 1.11 |
| | $ | 1.81 |
|
Special Items included in Earnings Per Diluted Share | — |
| | — |
| | — |
| | (0.09 | ) |
Adjusted Earnings Per Diluted Share | $ | 0.30 |
| | $ | 0.42 |
| | $ | 1.11 |
| | $ | 1.72 |
|
_______________
| | | | | | | | | | | | | |
(a)(in millions, except per share amounts) | In the first quarter of 2016, we made strategic changes within the Victoria’s Secret segment designed to focus the brand on its core merchandise categories and streamline operations. As a result of these changes, we recorded charges related to severance and related costs, fabric cancellations and catalogue paper write-offs. For additional information see Note 5, “Restructuring Activities” included in Item 1. Financial Statements. |
| First Quarter | | | | |
(b) | In the second quarterReconciliation of 2016, we received a $124 million cash distribution from Easton Town Center, LLC resulting in a pre-tax gain of $108 million (after-tax gain of $70 million). For additional information see Note 8, "Equity Investments and Other" included in Item 1. Financial Statements.Reported Net Income to Adjusted Net Income |
| |
(c)Reported Net Income | In the second quarter | | $ | 81 | | | | | | | |
Gain on Extinguishment of 2016, we repurchased our $700 million 6.90% Senior Unsecured Notes due July 2017 resulting in a pre-tax lossDebt (a) | | | (7) | | | | | | | |
Tax Effect of Gain on extinguishmentExtinguishment of $36 million (after-tax lossDebt (a) | | | 2 | | | | | | | |
Adjusted Net Income | | | $ | 76 | | | | | | | |
| | | | | | | | | |
Reconciliation of $22 million). For additional information see Note 10, "Long-term Debt" included in Item 1. Financial Statements.Reported Earnings Per Diluted Share to Adjusted Earnings Per Diluted Share | | |
Reported Earnings Per Diluted Share | | | $ | 0.35 | | | | | | | |
Gain on Extinguishment of Debt (a) | | | (0.03) | | | | | | | |
Tax Effect of Gain on Extinguishment of Debt (a) | | | 0.01 | | | | | | | |
Adjusted Earnings Per Diluted Share | | | $ | 0.33 | | | | | | | |
________________
(a)In the first quarter of 2023, we recognized a pre-tax gain of $7 million (after-tax gain of $5 million) related to the repurchase and extinguishment of outstanding notes. For additional information, see Note 7, "Long-term Debt and Borrowing Facilities" included in Part I, Item 1. Financial Statements.
Company-OwnedCompany-Operated Store Data
The following table compares the third quarter of 2017 company-ownedCompany-operated U.S. store data tofor the third quarterfirst quarters of 20162023 and year-to-date 20172022:
| | | | | | | | | | | | | | | | | | | | | | | |
| First Quarter | | |
| 2023 | | 2022 | | % Change | | | | | | |
Sales per Average Selling Square Foot (a) | $ | 207 | | | $ | 222 | | | (7 | %) | | | | | | |
Sales per Average Store (in thousands) (a) | $ | 576 | | | $ | 605 | | | (5 | %) | | | | | | |
Average Store Size (selling square feet) | 2,789 | | | 2,725 | | | 2 | % | | | | | | |
Total Selling Square Feet (in thousands) | 4,744 | | | 4,510 | | | 5 | % | | | | | | |
________________(a)Sales per average selling square foot and sales per average store, data to year-to-date 2016:
|
| | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | Year-to-Date |
| 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Sales per Average Selling Square Foot | | | | | | | | | | | |
Victoria’s Secret U.S. | $ | 164 |
| | $ | 174 |
| | (6 | )% | | $ | 510 |
| | $ | 563 |
| | (9 | )% |
Bath & Body Works U.S. | 162 |
| | 164 |
| | (1 | )% | | 480 |
| | 485 |
| | (1 | )% |
Sales per Average Store (in thousands) | | | | | | | | | | | |
Victoria’s Secret U.S. | $ | 1,050 |
| | $ | 1,091 |
| | (4 | )% | | $ | 3,252 |
| | $ | 3,523 |
| | (8 | )% |
Bath & Body Works U.S. | 407 |
| | 399 |
| | 2 | % | | 1,196 |
| | 1,170 |
| | 2 | % |
Average Store Size (selling square feet) | | | | | | | | | | | |
Victoria’s Secret U.S. | 6,390 |
| | 6,330 |
| | 1 | % | | | | | | |
Bath & Body Works U.S. | 2,525 |
| | 2,444 |
| | 3 | % | | | | | | |
Total Selling Square Feet (in thousands) | | | | | | | | | | | |
Victoria’s Secret U.S. | 7,234 |
| | 7,153 |
| | 1 | % | | | | | | |
Bath & Body Works U.S. | 4,045 |
| | 3,891 |
| | 4 | % | | | | | | |
which are indicators of store productivity, are calculated based on store sales for the period divided by the average, including the beginning and end of period, of total square footage and store count, respectively.
The following table represents company-ownedCompany-operated store data for year-to-date 2017:the first quarter of 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stores | | | | | | Stores |
| January 28, 2023 | | Opened | | Closed | | April 29, 2023 |
United States | 1,693 | | | 16 | | | (8) | | | 1,701 | |
Canada | 109 | | | — | | | — | | | 109 | |
Total | 1,802 | | | 16 | | | (8) | | | 1,810 | |
|
| | | | | | | | | | | |
| Stores Operating at | | | | | | Stores Operating at |
| January 28, 2017 | | Opened | | Closed | | October 28, 2017 |
Victoria’s Secret U.S. | 1,131 |
| | 10 |
| | (9 | ) | | 1,132 |
|
Victoria’s Secret Canada | 46 |
| | 2 |
| | (2 | ) | | 46 |
|
Total Victoria's Secret | 1,177 |
| | 12 |
| | (11 | ) | | 1,178 |
|
Bath & Body Works U.S. | 1,591 |
| | 25 |
| | (14 | ) | | 1,602 |
|
Bath & Body Works Canada | 102 |
| | — |
| | — |
| | 102 |
|
Total Bath & Body Works | 1,693 |
| | 25 |
| | (14 | ) | | 1,704 |
|
Victoria's Secret U.K. | 18 |
| | 2 |
| | — |
| | 20 |
|
Victoria's Secret Beauty and Accessories | 31 |
| | 1 |
| | (3 | ) | | 29 |
|
Victoria's Secret China | — |
| | 2 |
| | — |
| | 2 |
|
Total Victoria's Secret and Bath & Body Works International | 49 |
| | 5 |
| | (3 | ) | | 51 |
|
Henri Bendel | 29 |
| | — |
| | (1 | ) | | 28 |
|
La Senza U.S. | 4 |
| | 1 |
| | — |
| | 5 |
|
La Senza Canada | 122 |
| | 1 |
| | (2 | ) | | 121 |
|
Total L Brands Stores | 3,074 |
| | 44 |
| | (31 | ) | | 3,087 |
|
The following table represents Company-operated store data for the first quarter of 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Stores | | | | | | Stores |
| January 29, 2022 | | Opened | | Closed | | April 30, 2022 |
United States | 1,651 | | | 12 | | | (8) | | | 1,655 | |
Canada | 104 | | | — | | | — | | | 104 | |
Total | 1,755 | | | 12 | | | (8) | | | 1,759 | |
Partner-Operated Store Data
The following table represents company-ownedpartner-operated store data for year-to-date 2016:the first quarter of 2023:
|
| | | | | | | | | | | | | | |
| Stores Operating at | | | | | | | | Stores Operating at |
| January 30, 2016 | | Opened | | Acquired (a) | | Closed | | October 29, 2016 |
Victoria’s Secret U.S. | 1,118 |
| | 19 |
| | — |
| | (7 | ) | | 1,130 |
|
Victoria’s Secret Canada | 46 |
| | — |
| | — |
| | — |
| | 46 |
|
Total Victoria's Secret | 1,164 |
| | 19 |
| | — |
| | (7 | ) | | 1,176 |
|
Bath & Body Works U.S. | 1,574 |
| | 23 |
| | — |
| | (5 | ) | | 1,592 |
|
Bath & Body Works Canada | 98 |
| | 4 |
| | — |
| | — |
| | 102 |
|
Total Bath & Body Works | 1,672 |
| | 27 |
| | — |
| | (5 | ) | | 1,694 |
|
Victoria's Secret U.K. | 14 |
| | 3 |
| | — |
| | — |
| | 17 |
|
Victoria's Secret Beauty and Accessories | — |
| | 4 |
| | 26 |
| | (1 | ) | | 29 |
|
Total Victoria's Secret and Bath & Body Works International | 14 |
| | 7 |
| | 26 |
| | (1 | ) | | 46 |
|
Henri Bendel | 29 |
| | — |
| | — |
| | — |
| | 29 |
|
La Senza U.S. | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
La Senza Canada | 126 |
| | — |
| | — |
| | (1 | ) | | 125 |
|
Total L Brands Stores | 3,005 |
| | 56 |
| | 26 |
| | (14 | ) | | 3,073 |
|
_______________
(a) Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional
information see Note 4, “Acquisition” included in Item 1. Financial Statements.
Noncompany-Owned Store Data
The following table represents noncompany-owned store data for year-to-date 2017: |
| | | | | | | | | | | |
| Stores Operating at | | | | | | Stores Operating at |
| January 28, 2017 | | Opened | | Closed | | October 28, 2017 |
Victoria’s Secret Beauty & Accessories | 391 |
| | 25 |
| | (18 | ) | | 398 |
|
Victoria's Secret | 28 |
| | 7 |
| | — |
| | 35 |
|
Bath & Body Works | 159 |
| | 18 |
| | (1 | ) | | 176 |
|
La Senza | 203 |
| | 4 |
| | (13 | ) | | 194 |
|
Total | 781 |
| | 54 |
| | (32 | ) | | 803 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Stores | | | | | | Stores |
| January 28, 2023 | | Opened | | Closed | | April 29, 2023 |
International | 401 | | | 9 | | | — | | | 410 | |
International - Travel Retail | 26 | | | — | | | — | | | 26 | |
Total International | 427 | | | 9 | | | — | | | 436 | |
The following table represents noncompany-ownedpartner-operated store data for year-to-date 2016:the first quarter of 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Stores | | | | | | Stores |
| January 29, 2022 | | Opened | | Closed | | April 30, 2022 |
International | 317 | | | 18 | | | — | | | 335 | |
International - Travel Retail | 21 | | | — | | | — | | | 21 | |
Total International | 338 | | | 18 | | | — | | | 356 | |
|
| | | | | | | | | | | | | | |
| Stores Operating at | | | | | | | | Stores Operating at |
| January 30, 2016 | | Opened | | Closed | | Transferred (a) | | October 29, 2016 |
Victoria’s Secret Beauty & Accessories | 373 |
| | 43 |
| | (9 | ) | | (26 | ) | | 381 |
|
Victoria's Secret | 19 |
| | 7 |
| | — |
| | — |
| | 26 |
|
Bath & Body Works | 125 |
| | 26 |
| | (1 | ) | | — |
| | 150 |
|
La Senza | 221 |
| | 4 |
| | (18 | ) | | — |
| | 207 |
|
Total | 738 |
| | 80 |
| | (28 | ) | | (26 | ) | | 764 |
|
_______________
(a) Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional
information see Note 4, “Acquisition” included in Item 1. Financial Statements.
Results of Operations
ThirdFirst Quarter of 20172023 Compared to ThirdFirst Quarter of 20162022
Operating IncomeNet Sales
The following table provides our segment operating income (loss) and operating income (loss) rates (expressed as a percentage of net sales)Net Sales for the thirdfirst quarter of 20172023 in comparison to the thirdfirst quarter of 2016:2022:
|
| | | | | | | | | | | | | |
| | | | | Operating Income Rate |
| 2017 | | 2016 | | 2017 | | 2016 |
Third Quarter | (in millions) | | | | |
Victoria’s Secret | $ | 134 |
| | $ | 164 |
| | 8.7 | % | | 10.3 | % |
Bath & Body Works | 138 |
| | 145 |
| | 16.9 | % | | 18.9 | % |
Victoria’s Secret and Bath & Body Works International | — |
| | 9 |
| | (0.1 | )% | | 8.6 | % |
Other (a) | (40 | ) | | (34 | ) | | (26.9 | )% | | (28.1 | )% |
Total Operating Income | $ | 232 |
| | $ | 284 |
| | 8.8 | % | | 11.0 | % |
_______________
| |
(a) | Includes Mast Global, La Senza, Henri Bendel and Corporate. |
For the third quarter of 2017, operating income decreased $52 million, or 18%, to $232 million, and the operating income rate decreased to 8.8% from 11.0%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the third quarter of 2017 in comparison to the third quarter of 2016:
|
| | | | | | | | | | |
| 2017 | | 2016 | | % Change |
Third Quarter | (in millions) | | |
Victoria’s Secret Stores (a) | $ | 1,243 |
| | $ | 1,286 |
| | (3 | )% |
Victoria’s Secret Direct | 296 |
| | 298 |
| | (1 | )% |
Total Victoria’s Secret | 1,539 |
| | 1,584 |
| | (3 | )% |
Bath & Body Works Stores (a) | 703 |
| | 682 |
| | 3 | % |
Bath & Body Works Direct | 113 |
| | 88 |
| | 27 | % |
Total Bath & Body Works | 816 |
| | 770 |
| | 6 | % |
Victoria’s Secret and Bath & Body Works International | 115 |
| | 104 |
| | 11 | % |
Other (b) | 148 |
| | 123 |
| | 20 | % |
Total Net Sales | $ | 2,618 |
| | $ | 2,581 |
| | 1 | % |
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | % Change |
| (in millions) | | |
Stores - U.S. and Canada | $ | 1,034 | | | $ | 1,059 | | | (2 | %) |
Direct - U.S. and Canada | 280 | | | 318 | | | (12 | %) |
International (a) | 82 | | | 73 | | | 13 | % |
Total Net Sales | $ | 1,396 | | | $ | 1,450 | | | (4 | %) |
_______________
| |
(a) | Includes company-owned stores in the U.S. and Canada. |
| |
(b) | Includes Mast Global, La Senza, Henri Bendel and Corporate. |
(a)Results include royalties associated with franchised stores and wholesale sales.
The following table provides a reconciliation of net salesNet Sales for the thirdfirst quarter of 20172023 to the thirdfirst quarter of 2016:
|
| | | | | | | | | | | | | | | | | | | |
| Victoria’s Secret | | Bath & Body Works | | Victoria’s Secret and Bath & Body Works International | | Other | | Total |
Third Quarter | (in millions) |
2016 Net Sales | $ | 1,584 |
| | $ | 770 |
| | $ | 104 |
| | $ | 123 |
| | $ | 2,581 |
|
Comparable Store Sales | (59 | ) | | 4 |
| | (2 | ) | | 1 |
| | (56 | ) |
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net | 13 |
| | 16 |
| | 6 |
| | (1 | ) | | 34 |
|
Foreign Currency Translation | 3 |
| | 2 |
| | 1 |
| | 2 |
| | 8 |
|
Direct Channels | (2 | ) | | 24 |
| | 5 |
| | 2 |
| | 29 |
|
International Wholesale, Royalty and Other | — |
| | — |
| | 1 |
| | 21 |
| | 22 |
|
2017 Net Sales | $ | 1,539 |
| | $ | 816 |
| | $ | 115 |
| | $ | 148 |
| | $ | 2,618 |
|
The following table compares the third quarter of 2017 comparable sales to the third quarter of 2016:
|
| | | | | |
Third Quarter | 2017 | | 2016 |
Comparable Sales (Stores and Direct) (a) | | | |
Victoria's Secret (b) | (4 | )% | | (1 | )% |
Bath & Body Works (b) | 4 | % | | 7 | % |
Total Comparable Sales | (1 | )% | | 2 | % |
| | | |
Comparable Store Sales (a) | | | |
Victoria’s Secret (b) | (5 | )% | | (2 | )% |
Bath & Body Works (b) | 1 | % | | 5 | % |
Total Comparable Store Sales | (3 | )% | | — | % |
________
2022: | | | | | |
(a) | The percentage change (in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. Comparable sales attributable to our international stores are calculated on a constant currency basis.millions) |
2022 Net Sales | $ | 1,450 | |
(b)Comparable Store Sales | Includes company-owned stores in the U.S.(65) | |
Sales Associated with New, Closed and Canada.Non-comparable Remodeled Stores, Net | 44 | |
Direct Channels | (38) | |
International Wholesale, Royalty and Other | 9 | |
Foreign Currency Translation | (4) | |
2023 Net Sales | $ | 1,396 | |
The results by segment are as follows:
Victoria's Secret
For the thirdfirst quarter of 2017, net sales2023, Net Sales decreased $45$54 million, to $1.539$1.396 billion, comparable salescompared to the first quarter of 2022. Net Sales decreased 4%in the stores channel by $25 million, or 2%, and comparable store sales decreased 5%. Net sales decreased primarily due to strategic decisions to exit the swimdeclines in both average dollar sales and apparel categories, a decrease in core bra salestransactions. Direct Net Sales decreased $38 million, or 12%, primarily due to a decline in unconstructed bras and a declineorders, which was partially due to our customers continuing to select our buy online-pick up in pantiesstore ("BOPIS") option (which is recognized as store Net Sales) as we repositioncontinued to expand BOPIS availability in the category. These results were partially offset by increasesU.S. We completed our rollout of BOPIS capabilities to our U.S. stores in PINK and beauty driven by a compelling merchandise assortment that incorporated newness, innovation and fashion.
The decrease in comparable store sales was driven primarily by a decrease in total transactions driven by reduced traffic.
Bath & Body Works
For the thirdfirst quarter of 2017, net sales2023. International Net Sales increased $46$9 million, to $816 million, comparable sales increased 4%or 13%, and comparable store sales increased 1%. Net sales increased in the home fragrance and body care categories, which incorporated newness, innovation and fashion.
The increase in comparable store sales was driven by higher average dollar sales.
Victoria's Secret and Bath & Body Works International
For the third quarter of 2017, net sales increased $11 million to $115 million primarily relateddue to new company-owned Victoria's Secret stores and direct channel growth in Greater China and additional stores opened by our partners.
ForIn terms of category performance, Net Sales in home fragrance and soaps and sanitizers were down compared to 2022 primarily driven by normalization following the thirdCOVID-19 pandemic. Though total body care Net Sales decreased compared to the first quarter of 2017, net sales2022, Net Sales in our men's and wellness categories increased $25 million to $148 million primarily due to an increase in wholesale sales to our international partners.during the period.
Gross Profit
For the thirdfirst quarter of 2017,2023, our gross profitGross Profit decreased $36$73 million to $989$596 million, and our gross profitGross Profit rate (expressed as a percentage of net sales)Net Sales) decreased to 37.8%42.7% from 39.7%,46.1%. Gross Profit decreased due to the decline in Net Sales, a decline in the merchandise margin rate primarily driven by the following:
Victoria's Secret
For the third quarterapproximately $13 million of 2017, the gross profit decrease was primarily driven by lower merchandise margin dollarsinflationary pressures largely related to the decrease in net sales and higher store inventory shrink, and higher occupancy expenses due toraw materials, further investments in store real estate.
The gross profit rate decrease was driven byproduct formulations and packaging innovation, and an increase in occupancy expenses primarily due toassociated with store growth and investments in store real estateour new Company-operated direct channel fulfillment center and buying and occupancy deleverage on lower sales.
Bath & Body Works
For the third quarter of 2017, the gross profit increase was primarily driven by higher merchandise margin dollars related to the increase in net sales, partially offset by higher occupancy expenses due to investments in store real estate.other distribution capabilities.
The gross profitGross Profit rate decreasedecline was driven by a decreaseBuying and Occupancy expense deleverage due to lower Net Sales and the decline in the merchandise margin rate due to increased promotional activity and product mix, and an increase in occupancy expenses primarily due to investments in store real estate.
Victoria's Secret and Bath & Body Works International
For the third quarter of 2017, the gross profit decrease was primarily driven by higher occupancy expenses due to investments in store real estate at Victoria's Secret U.K. and in Greater China, partially offset by increased merchandise margin dollars related to higher net sales in Greater China and additional stores opened by our partners.
The gross profit rate decrease was driven by an increase in occupancy expenses due to investments in store real estate at Victoria's Secret U.K. and in Greater China.factors discussed above.
General, Administrative and Store Operating Expenses
For the third quarter of 2017, our general, administrative and store operating expenses increased $16 million to $757 million driven by an increase in marketing expenses primarily due to the return to targeted direct mail at Victoria's Secret and higher selling expenses at Bath & Body Works and in Greater China, partially offset by lower selling expenses related to lower sales volumes at Victoria's Secret and lower legal expenses.
The general, administrative and store operating expense rate increased to 28.9% from 28.7% due to increased marketing expenses.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowingsdetail for our General, Administrative and average borrowing ratesStore Operating Expenses for the thirdfirst quarter of 2017 and 2016:2023 compared to the first quarter of 2022:
|
| | | | | | | |
Third Quarter | 2017 | | 2016 |
Average daily borrowings (in millions) | $ | 5,819 |
| | $ | 5,770 |
|
Average borrowing rate (in percentages) | 6.95 | % | | 6.75 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | Change |
| (in millions) | | % of Net Sales | | (in millions) | | % of Net Sales | | (in millions) | | % of Net Sales |
Selling Expenses | $ | 243 | | | 17.4 | % | | $ | 246 | | | 16.9 | % | | $ | (3) | | | 0.5 | % |
Home Office and Marketing Expenses | 172 | | | 12.3 | % | | 143 | | | 9.9 | % | | 29 | | | 2.4 | % |
Total | $ | 415 | | | 29.7 | % | | $ | 389 | | | 26.8 | % | | $ | 26 | | | 2.9 | % |
For the thirdfirst quarter of 2017,2023, our interest expenseGeneral, Administrative and Store Operating Expenses increased $2$26 million to $99 million primarily due to higher average daily borrowings as well as a higher average borrowing rate.
Provision for Income Taxes
For the third quarter of 2017, our effective tax rate was 36.1% compared to 36.0% in the third quarter of 2016. The third quarter of 2017 rate and the third quarter of 2016 rate were lower than our combined federal and state statutory rate primarily due to the resolution of certain tax matters.
Year-to-Date 2017 Compared to Year-to-Date 2016
Operating Income
The following table provides our segment operating income (loss) and operating income (loss) rates (expressed as a percentage of net sales) for year-to-date 2017 in comparison to year-to-date 2016:
|
| | | | | | | | | | | | | |
| | | | | Operating Income Rate |
| 2017 | | 2016 | | 2017 | | 2016 |
Year-to-Date | (in millions) | | | | |
Victoria’s Secret | $ | 476 |
| | $ | 679 |
| | 10.1 | % | | 13.1 | % |
Bath & Body Works | 396 |
| | 405 |
| | 16.8 | % | | 18.2 | % |
Victoria’s Secret and Bath & Body Works International | 1 |
| | 30 |
| | 0.3 | % | | 9.9 | % |
Other (a) | (131 | ) | | (99 | ) | | (32.3 | )% | | (27.3 | )% |
Total Operating Income | $ | 742 |
| | $ | 1,015 |
| | 9.5 | % | | 12.6 | % |
_______________
| |
(a) | Includes Mast Global, La Senza, Henri Bendel and Corporate. |
For year-to-date 2017, operating income decreased $273 million, or 27%, to $742$415 million, and the operating income rate decreased to 9.5% from 12.6%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for year-to-date 2017 in comparison to year-to-date 2016:
|
| | | | | | | | | | |
| 2017 | | 2016 | | % Change |
Year-to-Date | (in millions) | | |
Victoria’s Secret Stores (a) | $ | 3,840 |
| | $ | 4,136 |
| | (7 | )% |
Victoria’s Secret Direct | 878 |
| | 1,056 |
| | (17 | )% |
Total Victoria’s Secret | 4,718 |
| | 5,192 |
| | (9 | )% |
Bath & Body Works Stores (a) | 2,044 |
| | 1,977 |
| | 3 | % |
Bath & Body Works Direct | 310 |
| | 255 |
| | 22 | % |
Total Bath & Body Works | 2,354 |
| | 2,232 |
| | 5 | % |
Victoria’s Secret and Bath & Body Works International | 332 |
| | 299 |
| | 11 | % |
Other (b) | 405 |
| | 362 |
| | 12 | % |
Total Net Sales | $ | 7,809 |
| | $ | 8,085 |
| | (3 | )% |
_______________
| |
(a) | Includes company-owned stores in the U.S. and Canada. |
| |
(b) | Includes Mast Global, La Senza, Henri Bendel and Corporate. |
The following table provides a reconciliation of net sales for year-to-date 2017 to year-to-date 2016:
|
| | | | | | | | | | | | | | | | | | | |
| Victoria’s Secret | | Bath & Body Works | | Victoria’s Secret and Bath & Body Works International | | Other | | Total |
Year-to-Date | (in millions) |
2016 Net Sales | $ | 5,192 |
| | $ | 2,232 |
| | $ | 299 |
| | $ | 362 |
| | $ | 8,085 |
|
Comparable Store Sales | (356 | ) | | 22 |
| | (7 | ) | | (4 | ) | | (345 | ) |
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net | 59 |
| | 44 |
| | 38 |
| | — |
| | 141 |
|
Foreign Currency Translation | 1 |
| | 1 |
| | (7 | ) | | 1 |
| | (4 | ) |
Direct Channels | (178 | ) | | 55 |
| | 12 |
| | 7 |
| | (104 | ) |
International Wholesale, Royalty and Other | — |
| | — |
| | (3 | ) | | 39 |
| | 36 |
|
2017 Net Sales | $ | 4,718 |
| | $ | 2,354 |
| | $ | 332 |
| | $ | 405 |
| | $ | 7,809 |
|
The following table compares year-to-date 2017 comparable sales to year-to-date 2016:
|
| | | | | |
Year-to-Date | 2017 | | 2016 |
Comparable Sales (Stores and Direct) (a) | | | |
Victoria's Secret (b) | (11 | )% | | 1 | % |
Bath & Body Works (b) | 4 | % | | 6 | % |
Total Comparable Sales | (6 | )% | | 3 | % |
| | | |
Comparable Store Sales (a) | | | |
Victoria’s Secret (b) | (9 | )% | | — | % |
Bath & Body Works (b) | 1 | % | | 4 | % |
Total Comparable Store Sales | (6 | )% | | 1 | % |
________
| |
(a) | The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable store sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. Comparable store sales attributable to our international stores are calculated on a constant currency basis. |
| |
(b) | Includes company-owned stores in the U.S. and Canada. |
The results by segment are as follows:
Victoria's Secret
For year-to-date 2017, net sales decreased $474 million to $4.718 billion, comparable sales decreased 11%, and comparable store sales decreased 9%. Net sales decreased primarily due to strategic decisions to exit the swim and apparel categories and decrease direct mail and certain other promotional activities, a decline in core bra sales and a decline in panties and beauty as we reposition the categories. These results were partially offset by increases in PINK and sport driven by a compelling merchandise assortment that incorporated newness, innovation and fashion.
The decrease in comparable store sales was driven primarily by a decrease in total transactions driven by reduced traffic, impacted significantly by the exit of certain categories and the promotional changes discussed above.
Bath & Body Works
For year-to-date 2017, net sales increased $122 million to $2.354 billion, comparable sales increased 4%, and comparable store sales increased 1%. Net sales increased in the home fragrance and body care categories, which incorporated newness, innovation and fashion.
The increase in comparable store sales was driven by higher average dollar sales.
Victoria's Secret and Bath & Body Works International
For year-to-date 2017, net sales increased $33 million to $332 million primarily related to new company-owned Victoria's Secret stores and direct channel growth in Greater China and additional stores opened by our partners. These results were partially offset by declines in the Victoria's Secret International business and the negative impacts of foreign currency at Victoria's Secret U.K.
Other
For year-to-date 2017, net sales increased $43 million to $405 million primarily due to an increase in wholesale sales to our international partners.
Gross Profit
For year-to-date 2017, our gross profit decreased $262 million to $2.919 billion, and our gross profit rate (expressed as a percentage of net sales) decreasedNet Sales) increased to 37.4%29.7% from 39.3%,26.8%. Our home office expenses increased primarily driven by the following:
Victoria's Secret
For year-to-date 2017, the gross profit decrease was primarily driven by lower merchandise margin dollars relateddue to the decreaseour investments in net sales,technology, in connection with our IT separation, as well as other corporate expenses, partially offset by lower buying and occupancy expenses which decreasedthe early benefits of our profit optimization initiatives. Our Selling Expenses remained generally flat as the decreases due to the discontinuation of catalogue productiondecline in Net Sales and other cost reductions from strategic actions takenefficiencies in the first quarter of 2016. These decreasesstore labor hours were partiallymostly offset by an increase in occupancy expenses due to investmentsincreases in store real estate.wage rates.
The gross profit rate decrease was driven by deleverage of buying and occupancy expenses on lower sales, partially offset by lower catalogue costs and other cost reductions.
Bath & Body Works
For year-to-date 2017, the gross profit increase was primarily driven by higher merchandise margin dollars related to the increase in net sales, partially offset by higher occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven by an increase in occupancy expenses primarily due to investments in store real estate.
Victoria's Secret and Bath & Body Works International
For year-to-date 2017, the gross profit decrease was primarily driven by higher occupancy expenses due to investments in store real estate in Greater China, lower merchandise margin dollars in our Victoria's Secret International business due to performance and the negative impacts of foreign currency at Victoria's Secret U.K. These decreases were partially offset by increased merchandise margin dollars related to higher net sales in Greater China and additional stores opened by our partners.
The gross profit rate decrease was driven by an increase in occupancy expenses due to investments in store real estate in Greater China and buying and occupancy deleverage on lower sales in our Victoria's Secret International business.
General, Administrative and Store Operating Expenses
For year-to-date 2017, our general, administrative and store operating expensesExpense rate increased $11 million to $2.177 billion primarily driven by an increase in marketing expenses due to our investments in technology, which accounted for approximately half of the return of targeted direct mail at Victoria's Secret, higher selling expenses at Bath & Body Worksrate increase, as well as deleverage on lower Net Sales and in Greater China, and increased corporate expenses in Greater China. These increases were partially offset by lower selling expenses related to lower sales volumes at Victoria's Secret and severance charges recorded in the first quarter of 2016 related to the Victoria's Secret restructuring.
The general, administrative and store operating expense rate increased to 27.9% from 26.8% due to deleverage from lower sales and increased marketing expenses, partially offset by Victoria's Secret restructuring charges recorded in the first quarter of 2016.other expenses.
Other Income and ExpenseExpenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for year-to-date 2017the first quarters of 2023 and 2016:2022:
|
| | | | | | | |
Year-to-Date | 2017 | | 2016 |
Average daily borrowings (in millions) | $ | 5,804 |
| | $ | 5,843 |
|
Average borrowing rate (in percentages) | 6.98 | % | | 6.73 | % |
| | | | | | | | | | | |
| 2023 | | 2022 |
Average daily borrowings (in millions) | $ | 4,896 | | | $ | 4,915 | |
Average borrowing rate | 7.3 | % | | 7.1 | % |
For year-to-date 2017,the first quarter of 2023, our interest expense increased $5was $89 million, which was flat to $300the first quarter of 2022. Our lower average daily borrowings were offset by a higher average borrowing rate.
Other Income
For the first quarter of 2023, our other income was $20 million, primarily due to a higher average borrowing rate partially offset by lower average daily borrowings.
Other Income
For year-to-date 2017, our otherinterest income decreased $55 million to $28 million primarily driven by 2016 activity which included a distribution received from Easton Town Center, LLC resulting inon cash balances and a pre-tax gain of $108$7 million partially offset by a $36 million pre-tax loss on extinguishmentassociated with the repurchases and early extinguishments of the 2017 Notes. The 2016 activity was partially offset by gains in 2017 related to distributions from certain of our Easton investments.outstanding notes.
Provision for Income Taxes
For year-to-date 2017,the first quarter of 2023, our effective tax rate was 32.2%27.7% compared to 34.5% year-to-date 2016.19.4% in the first quarter of 2022. The year-to-date 2017 first quarter of 2023 rate was lowerhigher than our combined estimated federal and state statutory rate primarily due to the recognitionaccrued interest expense related to unrecognized tax benefits. The first quarter of tax benefits resulting from stock options exercised. The year-to-date 2016 2022 rate was lower than our combined estimated federal and state statutory raterates primarily due to the resolutionrecognition of certainexcess tax matters.benefits recorded through the Consolidated Statements of Income on share-based awards that vested.
FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements, future common stock and debt repurchases, and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins, income taxes and income taxes.inflationary pressures. Historically, our sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.
We believe in returning value to our shareholders through a combination of dividends and share repurchase programs. During 2017, we have paid $516 million in regular dividends and repurchased $282 million of our common stock. We use cash flow generated from operating and financing activities to fund our dividends and share repurchase programs.
Our total cash and cash equivalents held by foreign subsidiaries were $357$101 million as of October 28, 2017. Under current tax laws and regulations, if cash and cash equivalents held outsideApril 29, 2023.
During the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional income taxes.
The following table provides our debt balance, net of unamortized debt issuance costs and discounts, as of October 28, 2017, January 28, 2017 and October 29, 2016: |
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in millions) |
Senior Unsecured Debt with Subsidiary Guarantee | | | | | |
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”) | $ | 990 |
| | $ | 989 |
| | $ | 989 |
|
$1 billion, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”) | 993 |
| | 992 |
| | 992 |
|
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”) | 994 |
| | 992 |
| | 992 |
|
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”) | 692 |
| | 692 |
| | 692 |
|
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”) | 497 |
| | 497 |
| | 497 |
|
$500 million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”) (a) | 496 |
| | 496 |
| | 498 |
|
$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”) | 398 |
| | 397 |
| | 396 |
|
Total Senior Unsecured Debt with Subsidiary Guarantee | $ | 5,060 |
| | $ | 5,055 |
| | $ | 5,056 |
|
Senior Unsecured Debt | | | | | |
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”) | $ | 348 |
| | $ | 348 |
| | $ | 348 |
|
$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”) | 297 |
| | 297 |
| | 297 |
|
Foreign Facilities | 80 |
| | 36 |
| | 23 |
|
Total Senior Unsecured Debt | $ | 725 |
| | $ | 681 |
| | $ | 668 |
|
Total | $ | 5,785 |
| | $ | 5,736 |
| | $ | 5,724 |
|
Current Portion of Long-term Debt | (80 | ) | | (36 | ) | | (23 | ) |
Total Long-term Debt, Net of Current Portion | $ | 5,705 |
| | $ | 5,700 |
| | $ | 5,701 |
|
_______________
| |
(a) | The balances include a fair value interest rate hedge adjustment which increased the debt balance by $1 million as of October 28, 2017, $2 million as of January 28, 2017 and $6 million as of October 29, 2016. |
Issuance of Notes
In June 2016, we issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by our Guarantors. The proceeds from the issuance were $692 million, which were net of issuance costs of $8 million. These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the Consolidated Balance Sheets.
Repurchase of Notes
In July 2016, we used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. In the secondfirst quarter of 2016,2023, we recognized a pre-tax loss on extinguishment of this debt of $36repurchased and extinguished $84 million (after-tax net loss of $22 million), which is net of gains of $7 million related to terminated interest rate swaps associated with the 2017 Notes. This loss is included in Other Income in the year-to-date 2016 Consolidated Statement of Income.
Revolving Facility
In May 2017, we entered into an amendment and restatementprincipal amount of our securedoutstanding senior notes for an aggregate repurchase price of $76 million. We may, from time to time, repurchase, or otherwise retire, additional debt or shares of common stock, as applicable.
We believe that our current cash position, our cash flow generated from operations and our borrowing capacity under our asset-backed revolving credit facility. The Amendment maintainsfacility (“ABL Facility”) will be sufficient to meet our liquidity needs, including capital expenditure requirements, for at least the aggregate amount of the commitments of the lenders under the Revolving Facility at $1 billion and extends the termination date from July 18, 2019 to May 11, 2022. The Amendment allows certain of our non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
In addition, the Amendment reduced the commitment fees payable under the Revolving Facility, which are based on our long-term credit rating, to 0.25% per annum. The Amendment did not modify our quantitative covenant requirements, but did provide an increased limit on restricted payments in the event we do not meet the criteria to make these payments without limitation and provides greater flexibility with respect to our ability to grant liens on assets.
We incurred fees related to the Amendment of the Revolving Facility of $5 million, which were capitalized and recorded in Other Assets on the October 28, 2017 Consolidated Balance Sheet and are being amortized over the remaining term of the Revolving Facility.
The Revolving Facility fees related to committed and unutilized amounts are 0.25% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings is LIBOR plus 1.50% per annum. The interest rate on outstanding foreign denominated borrowings is the applicable benchmark rate plus 1.50% per annum.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. We are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of October 28, 2017, we were in compliance with both of our financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of October 28, 2017, there were no borrowings outstanding under the Revolving Facility.
The Revolving Facility supports our letter of credit program. We had $8 million of outstanding letters of credit as of October 28, 2017 that reduced our remaining availability under our Revolving Facility.
Foreign Facilities
In addition to the Revolving Facility, we maintain various revolving and term loan bank facilities with availability totaling $100 million to support our foreign operations. Current borrowings on these Foreign Facilities mature between October 31, 2017 and October 18, 2018. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing.
For year-to-date 2017, we borrowed $67 million and made payments of $23 million under the Foreign Facilities. The maximum daily amount outstanding at any point in time during 2017 was $80 million.
Interest Rate Swap Arrangements
We have interest rate swap arrangements related to $300 million of the outstanding 2019 Notes that are designated as interest rate fair value hedges as of October 28, 2017. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
next twelve months.
Working Capital and Capitalization
We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements.
The following table provides a summary of our working capital position and capitalization as of October 28, 2017,April 29, 2023, January 28, 20172023 and OctoberApril 30, 2022: | | | | | | | | | | | | | | | | | |
| April 29, 2023 | | January 28, 2023 | | April 30, 2022 |
| (in millions) |
Net Cash Provided by Operating Activities (a) | $ | 44 | | | $ | 1,144 | | | $ | 66 | |
Capital Expenditures (a) | 93 | | | 328 | | | 88 | |
Working Capital | 803 | | | 887 | | | 512 | |
Capitalization: | | | | | |
Long-term Debt | 4,781 | | | 4,862 | | | 4,856 | |
Shareholders’ Equity (Deficit) | (2,171) | | | (2,206) | | | (2,659) | |
Total Capitalization | $ | 2,610 | | | $ | 2,656 | | | $ | 2,197 | |
Amounts Available Under the ABL Facility (b) | $ | 607 | | | $ | 509 | | | $ | 604 | |
_______________ (a)The January 28, 2023 amounts represent a fifty-two-week period, and the April 29, 2016:2023 and April 30, 2022 amounts represent thirteen-week periods.
(b)Our borrowing base was $623 million, $525 million and $620 million as of April 29, 2023, January 28, 2023 and April 30, 2022, respectively. We had outstanding letters of credit, which reduce our availability under the ABL Facility, of $16 million as of each of these dates. |
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in millions) |
Net Cash Provided by Operating Activities (a) (b) | $ | 138 |
| | $ | 1,990 |
| | $ | 411 |
|
Capital Expenditures (a) | 599 |
| | 990 |
| | 825 |
|
Working Capital | 911 |
| | 1,451 |
| | 879 |
|
Capitalization: | | | | | |
Long-term Debt | 5,705 |
| | 5,700 |
| | 5,701 |
|
Shareholders’ Equity (Deficit) | (1,121 | ) | | (729 | ) | | (1,190 | ) |
Total Capitalization | $ | 4,584 |
| | $ | 4,971 |
| | $ | 4,511 |
|
Remaining Amounts Available Under Credit Agreements (c) | $ | 992 |
| | $ | 992 |
| | $ | 992 |
|
_______________
| |
(a) | The January 28, 2017 amounts represent a fifty-two week period, and the October 28, 2017 and October 29, 2016 amounts represent thirty-nine week periods. |
| |
(b) | As further discussed in Note 2 included in Item 1. Financial Statements, prior year amounts have been recast to reflect the retrospective application of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.
|
| |
(c) | Letters of credit issued reduce our remaining availability under the Revolving Facility. We had outstanding letters of credit that reduce our remaining availability under the Revolving Facility of $8 million as of October 28, 2017, January 28, 2017 and October 29, 2016. |
Credit RatingsCash Flows
The following table provides a summary of our credit ratings ascash flow activity during the first quarters of October 28, 2017:2023 and 2022:
| | | | | | | | | | | |
| 2023 | | 2022 |
| (in millions) |
Cash and Cash Equivalents, Beginning of Period | $ | 1,232 | | | $ | 1,979 | |
Net Cash Flows Provided by Operating Activities | 44 | | | 66 | |
Net Cash Flows Used for Investing Activities | (94) | | | (88) | |
Net Cash Flows Used for Financing Activities | (135) | | | (1,306) | |
Effects of Exchange Rate Changes on Cash and Cash Equivalents | (1) | | | — | |
Net Decrease in Cash and Cash Equivalents | (186) | | | (1,328) | |
Cash and Cash Equivalents, End of Period | $ | 1,046 | | | $ | 651 | |
|
| | | | | |
| Moody’s | | S&P | | Fitch |
Corporate | Ba1 | | BB+ | | BB+ |
Senior Unsecured Debt with Subsidiary Guarantee | Ba1 | | BB+ | | BB+ |
Senior Unsecured Debt | Ba2 | | BB- | | BB |
Outlook | Stable | | Stable | | Stable |
Operating ActivitiesOur borrowing costs underNet cash provided by operating activities in the first quarter of 2023 was $44 million, including net income of $81 million. Net income included depreciation of $63 million, share-based compensation expense of $7 million and a pre-tax gain on extinguishment of debt of $7 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Accounts Payable, Accrued Expenses and Other, Accounts Receivable and Inventories.
Net cash provided by operating activities in the first quarter of 2022 was $66 million, including net income of $155 million. Net income included depreciation of $53 million and share-based compensation expense of $12 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Inventories, Accounts Payable, Accrued Expenses and Other, and Accounts Receivable. Additionally, we proactively pulled forward the purchase and delivery of certain Inventory items in the first quarter of 2022 to mitigate against potential global supply chain and distribution network disruptions.
Investing Activities
Net cash used for investing activities in the first quarter of 2023 was $94 million, primarily related to capital expenditures. The capital expenditures included approximately $40 million related to new, off-mall stores and remodels of existing stores, and approximately $35 million for various IT projects primarily supporting the separation of our Revolving FacilityIT systems from Victoria's Secret's IT systems.
Net cash used for investing activities in the first quarter of 2022 was $88 million related to capital expenditures. The capital expenditures included $37 million related to new off-mall stores and remodels, $27 million for our new Company-operated direct channel fulfillment center and $12 million related to IT projects.
We continue to plan for approximately $300 million to $350 million of capital expenditures in 2023, focused on investments to support long-term growth. We are linkedprioritizing investments in select remodels to the White Barn store design and new off-mall store openings. We are also investing in our technology, distribution, and logistics capabilities to better serve our customers.
Financing Activities
Net cash used for financing activities in the first quarter of 2023 was $135 million, consisting of $74 million for open market debt repurchases, dividend payments of $0.20 per share, or $46 million, and $8 million of tax payments related to share-based awards.
Net cash used for financing activities in the first quarter of 2022 was $1.306 billion consisting of $1.227 billion in payments for share repurchases, including the payment of $1 billion related to our credit ratings at Moody’s, S&Paccelerated share repurchase program, dividend payments of $0.20 per share, or $48 million, and Fitch. If we receive an upgrade or downgrade$26 million of tax payments related to our corporate credit ratings by Moody’s, S&P or Fitch, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Revolving Facility by the Guarantors and the security interests granted in our, and the Guarantors’, collateral securing such obligations are released if our credit ratings are higher than a certain level. Additionally, the restrictions imposed under the Revolving Facility on our ability to make investments and to make restricted payments cease to apply if our credit ratings are higher than certain levels. Credit rating downgrades by any of the agencies do not accelerate the repayment of any of our debt.share-based awards.
Common Stock Shareand Debt Repurchases
Our Board of Directors (the "Board") will determine share and debt repurchase authorizations, giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating and financing activities to fund our share or debt repurchase programs. The timing and amount of any repurchases will be made at our discretion, taking into account a number of factors, including market conditions.
2022 Share Repurchase Program
Under the authority ofIn February 2022, our Board of Directors, we repurchasedauthorized a $1.5 billion share repurchase program (the "February 2022 Program"). We did not repurchase any shares of our common stock under the following repurchase programs for year-to-date 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount Authorized | | Shares Repurchased | | Amount Repurchased | | Average Stock Price of Shares Repurchased within Program |
Repurchase Program | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| (in millions) | | (in thousands) | | (in millions) | | | | |
September 2017 | $ | 250 |
| | 935 |
| | NA |
| | $ | 39 |
| | NA |
| | $ | 41.30 |
| | NA |
|
February 2017 | 250 |
| | 5,500 |
| | NA |
| | 240 |
| | NA |
| | $ | 43.57 |
| | NA |
|
February 2016 | 500 |
| | 51 |
| | 5,270 |
| | 3 |
| | $ | 410 |
| | $ | 58.95 |
| | $ | 77.75 |
|
Total | | | 6,486 |
| | 5,270 |
| | $ | 282 |
| | $ | 410 |
| | | | |
In the third quarter of 2017, our Board of Directors approved a new $250 million share repurchase program, which included the $10 million remaining under the February 2017 repurchase program.
Induring the first quarter of 2017, our Board2023. The February 2022 Program had $188 million of Directors approved a $250 million share repurchase program, which included the $59 million remaining under the February 2016 repurchase program.
In the first quarter of 2016, our Board of Directors approved a $500 million share repurchase program, which included the $17 million remaining under the June 2015 repurchase program.
The September 2017 repurchase program had $211 million remainingauthority as of October 28, 2017.April 29, 2023. Subsequent to October 28, 2017,April 29, 2023 through June 2, 2023, we repurchased an additional 0.1 million216 thousand shares of our common stock for $6$8 million under this program.
There were $2 million and $3 million of share repurchases reflected in Accounts Payable on the October 28, 2017 and January 28, 2017 Consolidated Balance Sheets, respectively. There were no share repurchases reflected in Accounts Payable on the October 29, 2016 Consolidated Balance Sheet.
Treasury Stock Retirement
Subsequent to October 28, 2017, we retired 36 million shares of our treasury stock to reduce the related administrative expense.February 2022 Program.
Dividend Policy and Procedures
Our Board of Directors will determine future dividends after giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating activities to fund our ordinary dividends and a combination of cash flow generated from operating activities and financing activities to fund our special dividends.
Under the authority and declaration
We paid the following dividends during year-to-date 2017the first quarters of 2023 and 2016:2022: | | | | | | | | | | | | | | | |
| Ordinary Dividends | | | | | | Total Paid |
| (per share) | | (in millions) |
2023 | | | | | | | |
First Quarter | $ | 0.20 | | | | | | | $ | 46 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
2022 | | | | | | | |
First Quarter | $ | 0.20 | | | | | | | $ | 48 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
In May 2023, our Board declared the second quarter 2023 ordinary dividend of $0.20 per share payable on June 16, 2023 to stockholders of record at the close of business on June 2, 2023. |
| | | | | | | | | | | | | | | | |
| | Ordinary Dividends | | Special Dividends | | Total Dividends | | Total Paid |
| | (per share) | | (in millions) |
2017 | | | | | | | | |
Third Quarter | | $ | 0.60 |
| | $ | — |
| | $ | 0.60 |
| | $ | 172 |
|
Second Quarter | | 0.60 |
| | — |
| | 0.60 |
| | 172 |
|
First Quarter | | 0.60 |
| | — |
| | 0.60 |
| | 172 |
|
2017 Total | | $ | 1.80 |
| | $ | — |
| | $ | 1.80 |
| | $ | 516 |
|
2016 | | | | | | | | |
Third Quarter | | $ | 0.60 |
| | $ | — |
| | $ | 0.60 |
| | $ | 173 |
|
Second Quarter | | 0.60 |
| | — |
| | 0.60 |
| | 173 |
|
First Quarter | | 0.60 |
| | 2.00 |
| | 2.60 |
| | 750 |
|
2016 Total | | $ | 1.80 |
| | $ | 2.00 |
| | $ | 3.80 |
| | $ | 1,096 |
|
Cash FlowLong-term Debt and Borrowing Facilities
The following table provides a summaryour outstanding long-term debt balance, net of unamortized debt issuance costs and discounts, as of April 29, 2023, January 28, 2023 and April 30, 2022:
| | | | | | | | | | | | | | | | | |
| April 29, 2023 | | January 28, 2023 | | April 30, 2022 |
| (in millions) |
Senior Debt with Subsidiary Guarantee | | | | | |
| | | | | |
$314 million, 9.375% Fixed Interest Rate Notes due July 2025 ("2025 Notes") | $ | 312 | | | $ | 317 | | | $ | 317 | |
$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”) | 284 | | | 283 | | | 281 | |
$500 million, 5.250% Fixed Interest Rate Notes due February 2028 (“2028 Notes”) | 498 | | | 498 | | | 497 | |
$500 million, 7.500% Fixed Interest Rate Notes due June 2029 ("2029 Notes") | 491 | | | 491 | | | 490 | |
$999 million, 6.625% Fixed Interest Rate Notes due October 2030 ("2030 Notes") | 990 | | | 991 | | | 990 | |
$986 million, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”) | 979 | | | 993 | | | 992 | |
$643 million, 6.750% Fixed Interest Rate Notes due July 2036 (“2036 Notes”) | 638 | | | 694 | | | 694 | |
Total Senior Debt with Subsidiary Guarantee | $ | 4,192 | | | $ | 4,267 | | | $ | 4,261 | |
Senior Debt | | | | | |
$347 million, 6.950% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”) | $ | 346 | | | $ | 349 | | | $ | 349 | |
$245 million, 7.600% Fixed Interest Rate Notes due July 2037 (“2037 Notes”) | 243 | | | 246 | | | 246 | |
Total Senior Debt | 589 | | | 595 | | | 595 | |
Total Long-term Debt | $ | 4,781 | | | $ | 4,862 | | | $ | 4,856 | |
| | | | | |
| | | | | |
Repurchases of Notes
During the first quarter of 2023, we repurchased in the open market and extinguished $84 million principal amount of our cash flow activityoutstanding senior notes. The aggregate repurchase price for year-to-date 2017 and 2016:
|
| | | | | | | |
| Year-to-Date |
| 2017 | | 2016 |
| (in millions) |
Cash and Cash Equivalents, Beginning of Period | $ | 1,934 |
| | $ | 2,548 |
|
Net Cash Flows Provided by Operating Activities | 138 |
| | 411 |
|
Net Cash Flows Used for Investing Activities | (581 | ) | | (721 | ) |
Net Cash Flows Used for Financing Activities | (758 | ) | | (1,581 | ) |
Effects of Exchange Rate Changes on Cash and Cash Equivalents | 2 |
| | (3 | ) |
Net Decrease in Cash and Cash Equivalents | (1,199 | ) | | (1,894 | ) |
Cash and Cash Equivalents, End of Period | $ | 735 |
| | $ | 654 |
|
Operating Activities
Net cash provided by operating activitiesthese notes was $76 million, resulting in 2017 was $138a pre-tax gain of $7 million, including net income of $319 million. Net incomethe write-off of unamortized issuance costs. This gain is included depreciation and amortizationin Other Income in the first quarter of $4262023 Consolidated Statement of Income. There were $2 million and share-based compensation expense of $74 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Inventories (and related increasesrepurchases reflected in Accounts Payable), as we build our inventory levels in anticipationPayable on the April 29, 2023 Consolidated Balance Sheet.
The following table provides details of the holiday season, which generates a substantial portionoutstanding principal amount of senior notes repurchased and extinguished during the first quarter of 2023:
| | | | | |
| (in millions) |
2025 Notes | $ | 6 | |
2030 Notes | 2 | |
2033 Notes | 3 | |
2035 Notes | 14 | |
2036 Notes | 57 | |
2037 Notes | 2 | |
Total | $ | 84 | |
Subsequent to April 29, 2023 through June 2, 2023, we repurchased in the open market and extinguished $50 million principal amount of our operating cash flowoutstanding senior notes for the year. In addition, our Income Taxes Payable decrease was due to seasonal tax payments.an aggregate repurchase price of $46 million.
Net cash provided by operating activities in 2016 was $411 million, including net income of $526 million. Net income included depreciationAsset-backed Revolving Credit Facility
We and amortization of $378 million, a gain on distribution from Easton investments of $112 million, share-based compensation expense of $70 million and loss on extinguishment of debt of $36 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Inventories (and related increases in Accounts Payable), as we build our inventory levels in anticipation of the holiday season, which generates a substantial portion of our operating cash flow for the year. In addition, our Income Taxes Payable decrease was due to seasonal tax payments.
Investing Activities
Net cash used for investing activities in 2017 was $581 million consisting primarily of capital expenditures of $599 million partially offset by a $27 million return of capital from certain of our Easton investments.100% owned subsidiaries guarantee and pledge collateral to secure our ABL Facility. The capital expenditures included $527ABL Facility, which allows borrowings and letters of credit in U.S. dollars or Canadian dollars, has aggregate commitments of $750 million for opening new stores and remodelingan expiration date in August 2026.
Availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on our eligible U.S. and improving existing stores. Remaining capital expenditures were primarilyCanadian credit card receivables, accounts receivable, inventory and eligible real property, or (ii) the aggregate commitment. If at any time the outstanding amount under the ABL Facility exceeds the lesser of (i) the borrowing base and (ii) the aggregate commitment, we are required to repay the outstanding amounts under the ABL Facility to the extent of such excess. As of April 29, 2023, our borrowing base was $623 million, and we had no borrowings outstanding under the ABL Facility.
The ABL Facility supports our letter of credit program. We had $16 million of outstanding letters of credit as of April 29, 2023 that reduced our availability under the ABL Facility. As of April 29, 2023, our availability under the ABL Facility was $607 million.
As of April 29, 2023, the ABL Facility fees related to spendingcommitted and unutilized amounts were 0.30% per annum, and the fees related to outstanding letters of credit were 1.25% per annum. In addition, the interest rate on technologyoutstanding U.S. dollar borrowings was the London Interbank Offered Rate plus 1.25% per annum. The interest rate on outstanding Canadian dollar-denominated borrowings was the Canadian Dollar Offered Rate plus 1.25% per annum.
The ABL Facility requires us to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 during an event of default or any period commencing on any day when specified excess availability is less than the greater of (i) $70 million or (ii) 10% of the maximum borrowing amount. As of April 29, 2023, we were not required to maintain this ratio.
Credit Ratings
The following table provides our credit ratings as of April 29, 2023:
| | | | | | | | | | | |
| Moody’s | | S&P |
Corporate | Ba2 | | BB |
Senior Unsecured Debt with Subsidiary Guarantee | Ba2 | | BB |
Senior Unsecured Debt | B1 | | B+ |
Outlook | Stable | | Stable |
Guarantor Summarized Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22 to this Quarterly Report on Form 10-Q, have guaranteed our obligations under the 2025 Notes, 2027 Notes, 2028 Notes, 2029 Notes, 2030 Notes, 2035 Notes and infrastructure2036 Notes (collectively, the "Notes").
The Notes have been issued by Bath & Body Works, Inc. (the “Parent Company”). The Notes are its senior unsecured obligations and rank equally in right of payment with all of our existing and future senior unsecured obligations, are senior to support growth.any of our future subordinated indebtedness, are effectively subordinated to all of our existing and future indebtedness that is secured by a lien and are structurally subordinated to all existing and future obligations of each of our subsidiaries that do not guarantee the Notes.
Net cash usedThe Notes are fully and unconditionally guaranteed on a joint and several basis by certain of our wholly-owned subsidiaries, including certain subsidiaries that also guarantee our obligations under our ABL Facility (such guarantees, the “Guarantees”; and, such guaranteeing subsidiaries, the “Subsidiary Guarantors”). The Guarantees of the Subsidiary Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each Guarantee is limited, by its terms, to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor subject to avoidance under applicable fraudulent conveyance provisions of U.S. and non-U.S. law.
The following tables set forth summarized financial information for investing activitiesthe Parent Company and the Subsidiary Guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Company and the Subsidiary Guarantors and (ii) investments in 2016 was $721and equity in the earnings of non-Guarantor subsidiaries.
| | | | | | | | | | | |
SUMMARIZED BALANCE SHEETS | April 29, 2023 | | January 28, 2023 |
| (in millions) |
ASSETS | | | |
Current Assets (a) | $ | 2,507 | | | $ | 2,642 | |
Noncurrent Assets (b) | 2,595 | | | 2,561 | |
| | | |
LIABILITIES | | | |
Current Liabilities (c) | $ | 3,002 | | | $ | 3,084 | |
Noncurrent Liabilities | 6,113 | | | 6,143 | |
_______________
(a)Includes amounts due from non-Guarantor subsidiaries of $613 million consisting primarilyand $589 million as of capital expendituresApril 29, 2023 and January 28, 2023, respectively.
(b)Includes amounts due from non-Guarantor subsidiaries of $825$40 million and$33as of January 28, 2023.
(c)Includes amounts due to non-Guarantor subsidiaries of $1.977 billion and $1.987 billion as of April 29, 2023 and January 28, 2023, respectively.
| | | | | | | |
FIRST QUARTER OF 2023 SUMMARIZED STATEMENT OF INCOME | | | (in millions) |
Net Sales (a) | | | $ | 1,352 | |
Gross Profit | | | 556 | |
Operating Income | | | 162 | |
Income Before Income Taxes | | | 91 | |
Net Income (b) | | | 63 | |
_______________
(a)Includes net sales of $50 million to non-Guarantor subsidiaries.
(b)Includes a net loss of $6 million related to the acquisition of our Victoria's Secret Beauty and Accessories franchise partner's operations and stores in Greater China, partially offset by a $116 million return of capital from certain of our Easton investments and proceeds from the sale of marketable securities of $10 million. The capital expenditures included $691 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Financing Activities
Net cash used for financing activities in 2017 was $758 million consisting primarily of quarterly dividend payments of $1.80 per share, or $516 million, payments for repurchases of common stock of $283 million, tax payments related to share-based awards of $31 million and $44 million of net new borrowings under our foreign facilities, partially offset by proceeds from the exercise of stock options of $37 million.
Net cash used for financing activities in 2016 was $1.581 billion consisting primarily of quarterly and special dividend payments aggregating to $3.80 per share, or $1.096 billion, $742 million to repurchase our 2017 Notes, payments for repurchases of common stock of $410 million, and tax payments related to share-based awards of $56 million, partially offset by net proceeds of $692 million from the 2036 Notes issuance and proceeds from the exercise of stock options of $17 million.
transactions with non-Guarantor subsidiaries.
Contingent Liabilities and Contractual Obligations
Lease Guarantees
In connection with the dispositionspin-off of Victoria's Secret and the disposal of a certain businesses,other business, we havehad remaining guaranteescontingent obligations of $11$278 million as of April 29, 2023 related to lease payments under the current terms of noncancellablenoncancelable leases, primarily related to office space, expiring at various dates through 2021.2037. These guaranteesobligations include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of thethese businesses. In certain instances, our guarantee may remain in effect if the term of a lease is extended. We have not recorded a liability with respect to these guarantee obligations as of October 28, 2017, January 28, 2017 or October 29, 2016 as we concluded that payments under these guarantees were not probable.
In connection with noncancellable operating leases of certain assets, we provided residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire at various dates through 2021, and the total amount of the guarantees is $104 million. We recorded a liability of less than $1 million as of October 28, 2017, a liability of $1 million as of January 28, 2017, and a liability of $3 million as of October 29, 2016Our reserves related to these guarantee obligations which are included in Other Long-term Liabilities on the Consolidated Balance Sheets.were not significant for any period presented.
Contractual Obligations
Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. ThereOther than the repurchase of $84 million principal amount of our outstanding senior notes during the first quarter of 2023, there have been no material changes in our contractual obligations sincesubsequent to January 28, 2017,2023, as discussed in “Contingent Liabilities and Contractual Obligations” in our 20162022 Annual Report on Form 10-K. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations which fluctuate throughout the year as a result of the seasonal nature of our operations)business).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Share-Based Compensation
In the first quarter of 2017, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. On a prospective basis, this standard requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are exercised. These effects were historically recorded in equity on the balance sheet. As a result, we recognized $13 million of excess tax benefits related to share-based awards in Provision for Income Taxes in the year-to-date 2017 Consolidated Statement of Income. The standard also requires all tax-related cash flows from share-based awards to be reported as operating activities on the statements of cash flows andWe did not adopt any cash payments made to taxing authorities on an employee's behalf from withheld shares as financing activities. The retrospective application of these changes resulted in an $95 million increase in operating cash flows and a corresponding decrease to financing cash flows on the 2016 Consolidated Statement of Cash Flows. Further, as allowed by the standard, we will continue to estimate award forfeitures at the time awards are granted and adjust, if necessary, in subsequent periods based on historical experience and expected future forfeiture rates.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers, which was further clarified and amended in 2015 and 2016. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective beginning in fiscal 2018. The standard allows for either a full retrospective or a modified retrospective transition method.
We continue to evaluate the impacts of this standard. The new standard will change current accounting related to loyalty points earned under the Victoria's Secret customer loyalty program as revenue associated with customer loyalty points will be deferred until redeemed using a relative stand-alone selling price method. The new standard will also change our accounting for sales returns which requires balance sheet presentation on a gross basis. Further, income from our Victoria's Secret private label credit card arrangement, which has historically been presented as a reduction to General, Administrative and Store Operating Expenses, will now be presented as revenue under the new standard. We are continuing to evaluate the further impacts the standard will have on the Consolidated Statements of Income and Comprehensive Income, Balance Sheets, Statements of Cash Flows and disclosures. We will adopt the standardstandards in the first quarter of fiscal 2018 under the modified retrospective approach, which will result in2023 that had a cumulative adjustment to retained earnings.
Leases
In February 2016, the FASB issued ASC 842, Leases, which requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal 2019, with early adoption permitted.
We are currently evaluating the impacts that this standard will havematerial impact on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows. We currently expect that most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption of the standard. Thus, we expect adoption will result in a material increase to the assets and liabilities on our Consolidated Balance Sheet. We will adopt the standard in the first quarter of fiscal 2019.
Hedging Activities
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which is intended to better align risk management activities and financial reporting for hedging relationships. The new standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements. This guidance will be effective beginning in fiscal 2019, with early adoption permitted. We are currently evaluating the impact of this standard on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
IMPACT OF INFLATION
While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on theconsolidated results of operations, and financial conditionposition or cash flows. In addition, as of June 2, 2023, there were no new accounting standards that we have been minor.not yet adopted that are expected to have a material impact on our consolidated results of operations, financial position or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, valuation of long-lived store assets, claims and contingencies, income taxes and revenue recognition.recognition, including revenue associated with our loyalty program. Management bases our estimates and judgments on historical experience and various other factors that we believe are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to the critical accounting policies and estimates disclosed in our 20162022 Annual Report on Form 10-K, other than the adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.10-K.
| |
Item 3. | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We may use derivative financial instruments like cross-currency swaps, foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rate Risk
We have operations in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations. To mitigate the translation risk to our earnings and the fair value of ourOur Canadian operations associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate, we entered into a cross-currency swap related to a Canadian dollar denominated intercompany loan. This cross-currency swap requires the periodic exchange of fixed rate Canadian dollar interest payments for fixed rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. The swap arrangement matures in January 2018 at the same time as the related loan. As a result of the Canadian dollar denominated intercompany loan and the related cross-currency swap, we do not believe there is any material translation risk to our Canadian net earnings associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate.
In addition, our Canadian dollar, British pound, Chinese yuan and Hong Kong dollar denominated earnings are subject to exchange rate risk as substantially all of our merchandise sold in Canada the U.K. and Greater China is sourced through U.S. dollar transactions. Although we utilize foreign currency forward contracts to partially offset risks associated with Canadian dollar and British pound denominated earnings,our operations in Canada, these measures may not succeed in offsetting all of the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.
Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange rate fluctuations.
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities areis the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Typically, ourOur investment portfolio is primarily comprisedcomposed of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.
The majorityAll of our long-term debtLong-term Debt as of October 28, 2017,April 29, 2023 has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into interest rate swap arrangements. As of October 28, 2017, we have interest rate swap arrangements with notional amounts of $300 million related to a portion of our 2019 Notes.
The effect of the interest rate swap arrangements is to convert the respective amount of debt from a fixed interest rate to a variable interest rate. The variable interest rate associated with these swap arrangements fluctuates based on changes in three-month LIBOR.
For the balance of our long-term debt that is not subject to interest rate swap arrangements, ourOur exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.
Fair Value of Financial Instruments
As of October 28, 2017,April 29, 2023, we believe that the carrying values of accounts receivable, accounts payable, accrued expensesAccounts Receivable, Accounts Payable and current debtAccrued Expenses approximate fair value because of their short maturity.
The following table provides a summary of the principal value and estimated fair value of long-termoutstanding debt excluding foreign facility borrowings, and swap arrangements as of October 28, 2017, April 29, 2023, January 28, 20172023 and October 29, 2016:April 30, 2022: | | | | | | | | | | | | | | | | | |
| April 29, 2023 | | January 28, 2023 | | April 30, 2022 |
| (in millions) |
Principal Value | $ | 4,831 | | | $ | 4,915 | | | $ | 4,915 | |
Fair Value, Estimated (a) | 4,589 | | | 4,707 | | | 4,866 | |
_______________ (a) The estimated fair values are based on reported transaction prices and are not necessarily indicative of the amounts that we could realize in a current market exchange.
|
| | | | | | | | | | | |
| October 28, 2017 | | January 28, 2017 | | October 29, 2016 |
| (in millions) |
Long-term Debt: | | | | | |
Principal Value | $ | 5,750 |
| | $ | 5,750 |
| | $ | 5,750 |
|
Fair Value, Estimated (a) | 6,033 |
| | 6,030 |
| | 6,352 |
|
Foreign Currency Cash Flow Hedges (b) | (11 | ) | | (17 | ) | | (26 | ) |
Interest Rate Fair Value Hedges (b) | (1 | ) | | (2 | ) | | (6 | ) |
_______________
| |
(a) | The estimated fair value is based on reported transaction prices. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange. |
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(b) | Hedge arrangements are in a net asset position. |
Concentration of Credit Risk
We maintain cash and cash equivalents and derivative contracts with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Typically, ourOur investment portfolio is primarily comprisedcomposed of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.
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Item 4. | Item 4. CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act.Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SECSecurities and Exchange Commission ("SEC") rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred in the thirdfirst quarter 2017of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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Item 1. | Item 1. LEGAL PROCEEDINGS |
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against our Company from time to time include commercial, tort, intellectual property, tax, customer, employment, wage and hour, data privacy, securities, anti-corruption and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.operations, financial condition and cash flows.
Fair and Accurate Credit Transactions Act Cases
We were named as a defendant in three putative class actions: Smidga, et al. v. Bath & Body Works, LLC in the Allegheny County, Pennsylvania Court of Common Pleas; Dahlin v. Bath & Body Works, LLC in the Santa Barbara County, California Superior Court; and Blanco v. Bath & Body Works, LLC in the Cook County, Illinois Circuit Court. The complaints each allege that we violated the Fair and Accurate Credit Transactions Act by printing more than the last five digits of credit or debit card numbers on customers’ receipts and, among other things, seek statutory damages, attorneys’ fees and costs. We have reached an agreement in principle with the plaintiffs in the Smidga and Dahlin cases that will resolve those matters. The resolution, which is not expected to have a material financial impact and will include no admission of liability or wrongdoing by the Company, is subject to court approval. The Blanco case has been sent to private individual arbitration by court order. We continue to believe that we have strong defenses to the Blanco action and intend to vigorously defend against the allegations in the arbitration proceeding. We do not believe that the resolution of the Blanco action will have a material adverse effect on our results of operations, financial condition or cash flows. | |
Item 1A. | Item 1A. RISK FACTORS |
The risk factors that affect our business and financial results are discussed in “Item 1A:Item 1A. Risk Factors”Factors in the 2016our 2022 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A:Item 1A. Risk Factors”Factors in our 20162022 Annual Report on Form 10-K and those described elsewhere in this report or other SEC filings, could cause actual results to differ materially from those stated in any forward-looking statements.
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Item 2. | Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table provides ourthe repurchases of our common stock during the thirdfirst quarter of 2017:2023:
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Period | Total Number of Shares Purchased (a) | | Average Price Paid per Share (b) | | Total Number of Shares Purchased as Part of Publicly Announced Programs (c) | | Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Programs (c) |
| (in thousands) | | | | (in thousands) |
February 2023 | 4 | | | $ | 46.24 | | | — | | | $ | 187,775 | |
March 2023 | 205 | | | 36.36 | | | — | | | 187,775 | |
April 2023 | 9 | | | 35.08 | | | — | | | 187,775 | |
Total | 218 | | | | | — | | | |
_______________(a)The total number of shares repurchased represent shares in connection with tax payments due upon vesting of associate restricted stock and performance share unit awards and the use of our stock to pay the exercise price on associate stock options.
(b)The average price paid per share includes any broker commissions.
(c)For additional share repurchase program information, see Note 3, “Earnings Per Share and Shareholders' Equity (Deficit)” included in Part I, Item 1. Financial Statements.
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Period | Total Number of Shares Purchased (a) | | Average Price Paid per Share (b) | | Total Number of Shares Purchased as Part of Publicly Announced Programs (c) | | Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Programs (c) |
| (in thousands) | | | | (in thousands) |
August 2017 | 2,206 |
| | $ | 38.36 |
| | 2,199 |
| | $ | 36,433 |
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September 2017 | 1,079 |
| | 38.31 |
| | 1,074 |
| | 235,040 |
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October 2017 | 577 |
| | 42.45 |
| | 558 |
| | 211,352 |
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Total | 3,862 |
| | | | 3,831 |
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_______________
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(a) | The total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options. |
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(b) | The average price paid per share includes any broker commissions. |
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(c) | For additional share repurchase program information, see Note 3, “Earnings Per Share and Shareholders' Equity (Deficit)” included in Item 1. Financial Statements. |
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Item 3. | DEFAULTS UPON SENIOR SECURITIES |
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
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Item 4. | MINE SAFETY DISCLOSURES |
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
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Exhibits | |
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15 | | |
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31.1 | | |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | Inline XBRL Taxonomy Definition Linkbase Document |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| L BRANDS, INC. BATH & BODY WORKS, INC. |
| (Registrant) |
| By: | /s/ STUART B. BURGDOERFERWENDY C. ARLIN |
| | Stuart B. Burgdoerfer
Executive Vice President and Wendy C. Arlin Chief Financial Officer *
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Date: December 1, 2017
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* | Mr. Burgdoerfer is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant. |
June 2, 2023
* Ms. Arlin is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.