NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Basis of Presentation
Description of Business
L Brands, Inc. (the "Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of home fragrance products, body care, soaps and sanitizers, women’s intimate and other apparel, and personal and beauty care products. The Company sells its merchandise through company-owned specialty retail stores in the U.S., Canada, U.K., Ireland and Greater China, and through its websites and other channels. The Company's other international operations are primarily through franchise, license and wholesale partners. The Company currently operates the following retail brands:
On February 20, 2020, the Company and an affiliate of Sycamore Partners Management, L.P. ("Sycamore"), entered into a Transaction Agreement (the "Transaction Agreement") pursuant to which, among other things, the Company would have sold a 55% interest in the Company's Victoria's Secret and PINK businesses (collectively, "Victoria's Secret"). On May 4, 2020, the Company and Sycamore mutually agreed to terminate the Transaction Agreement.
The Company remains committed to establishing Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare Victoria's Secret to operate as a separate standalone company. Management is actively engaged in implementing a comprehensive profit improvement plan that will enable more effective and faster decision making and set each business up independently, allowing for a more efficient future separation.
During the second quarter of 2020, the Company completed its comprehensive review of the home office organizations in order to achieve meaningful reductions in overhead expenses and decentralize significant shared functions and services to support the creation of standalone companies. This resulted in a reduction of the home office headcount by approximately 15%, or about 850 associates. For additional information, see Note 4, “Restructuring."
Impacts of COVID-19
In March 2020, the coronavirus pandemic ("COVID-19") was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place.” The situation and preventative or protective actions that governments around the world have taken to contain the spread of COVID-19 have resulted in a period of disruption, including closure of the Company's stores, limited store operating hours, reduced customer traffic and consumer spending and delays in manufacturing and shipping of products and raw materials. During this period, the Company is focused on protecting the health and safety of its customers, employees, contractors, suppliers, and other business partners. The Company is also working with its suppliers to minimize potential disruptions, while managing the Company's business in response to a changing dynamic.
The Company's business operations and financial performance for 2020 have been materially impacted by the COVID-19 pandemic. All the Company's stores in North America were closed on March 17th and almost all remained closed as of the beginning of the second quarter. Operations for Victoria’s Secret Direct were temporarily suspended for approximately one week in late March, while Bath & Body Works Direct has remained open for the duration of 2020. The Company has re-opened approximately 1,600 Bath & Body Works stores and approximately 690 Victoria’s Secret stores in North America, representing the majority of its stores, as of August 1, 2020. On average, Bath & Body Works stores were closed for about half of the second quarter and Victoria’s Secret stores were closed for about 70% of the second quarter (including the impact of the approximately 250 stores which the Company plans to close). Additionally, the Company has dedicated resources to maximize capacity in its direct fulfillment centers to meet increased customer demand, while focusing on distribution, fulfillment and call center safety.
Since the global COVID-19 crisis began, the Company has taken prudent actions to manage expenses and to maintain its solid cash position and financial flexibility through the pandemic, including:
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•
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Furloughing most store associates as of April 5 during their temporary store closure, while continuing to provide healthcare benefits for eligible associates;
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•
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Suspending associate merit increases;
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•
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Temporarily reducing salaries for senior vice presidents and above by 20%;
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Temporarily suspending cash compensation for all members of the Board of Directors;
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•
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Reducing 2020 forecasted capital expenditures from $550 million to approximately $250 million;
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•
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Reducing Spring (first and second quarter) inventory receipts versus last year by approximately 45% at Victoria's Secret and PINK, and by approximately 20% at Bath & Body Works;
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•
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Suspending the quarterly cash dividend beginning in the second quarter of fiscal 2020;
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•
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Suspending most store and select office rent payments during the temporary closures. The Company is in active discussions with its landlords to negotiate with respect to these rent payments and go-forward occupancy costs;
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•
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Converting the revolving credit facility to an asset-backed loan facility and issuing $1.25 billion in new notes; and
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Extending payment terms to vendors.
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On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which, among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the coronavirus outbreak and options to defer payroll tax payments. Based on the Company's evaluation of the CARES Act, it qualifies for certain employer payroll tax credits, which will offset store operating expenses. Year-to-date the Company has recognized $54 million of qualified payroll tax credits.
For most stores and select office locations, rent from April through July was not paid, or only partially paid, due to the temporary closures during the COVID-19 pandemic. The Company is in active discussions with its landlords to negotiate with respect to these rent payments and go-forward occupancy costs. The Financial Accounting Standards Board (“FASB”) issued guidance in April, which allows COVID-19-related rent concessions to be treated as variable rent. The Company has not yet finalized negotiations with respect to the majority of its leases.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2020” and “second quarter of 2019” refer to the thirteen-week periods ended August 1, 2020 and August 3, 2019, respectively. “Year-to-Date 2020” and “year-to-date 2019” refer to the twenty-six-week periods ending August 1, 2020 and August 3, 2019, respectively.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income (Loss) in the Consolidated Statements of Income (Loss). The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended August 1, 2020 and August 3, 2019 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2019 Annual Report on Form 10-K.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
Due to the impacts of COVID-19 and seasonal variations in the retail industry, the results of operations for the interim period is not necessarily indicative of the results expected for the full fiscal year.
Restricted Cash
During the second quarter, the Company placed cash on deposit with certain financial institutions as collateral for lending commitments. The amount of collateral required reduces over time as the Company makes certain paydowns. For additional information see Note 10, "Long-term Debt and Borrowing Facilities."
These deposits, totaling $128 million, are recorded in Other Assets on the August 1, 2020 Consolidated Balance Sheet. The Company's total Cash and Cash Equivalents and Restricted Cash was $2.739 billion as of August 1, 2020.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated Balance Sheets at fair value.
The earnings of the Company's wholly owned foreign businesses are subject to exchange rate risk as substantially all the merchandise is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure for its Canadian and U.K. businesses. Amounts are reclassified from accumulated other comprehensive income (loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The fair value of designated cash flow hedges is not significant as of August 1, 2020.
Concentration of Credit Risk
The Company maintains cash and cash equivalents, restricted cash 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, the Company’s investment portfolio is primarily comprised 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 an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.
Use of Estimates in the Preparation of Financial Statements
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.
2. New Accounting Pronouncements
Credit Losses
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses, which requires the use of a forward-looking expected loss impairment model for accounts receivable and certain other financial instruments. The Company adopted the standard in the first quarter of 2020. The adoption of this standard did not have a material impact on the Company's consolidated results of operations, financial position or cash flows.
Guarantor Reporting
In March 2020, the SEC issued a final rule, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, that simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X. The rule replaces the requirement to provide condensed consolidating financial information with a requirement to present summarized financial information of the issuers and guarantors. It also requires qualitative disclosures with respect to information about guarantors, the terms and conditions of guarantees and the factors that may affect payment. These disclosures may be provided outside the footnotes to the Company’s consolidated financial statements. The Company early adopted the reporting requirements of the rule in the first quarter of 2020 and elected to provide these disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3. Revenue Recognition
Accounts receivable, net from revenue-generating activities were $186 million as of August 1, 2020, $152 million as of February 1, 2020 and $174 million as of August 3, 2019. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days. As a result of the COVID-19 pandemic, the Company has extended the payment terms for certain partners.
The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue was $316 million as of August 1, 2020, $342 million as of February 1, 2020 and $276 million as of August 3, 2019. The Company recognized $132 million as revenue year-to-date 2020 from amounts recorded as deferred revenue at the beginning of the year. As of August 1, 2020, the Company recorded deferred revenue of $304 million within Accrued Expenses and Other, and $12 million within Other Long-term Liabilities on the Consolidated Balance Sheet.
The following table provides a disaggregation of Net Sales for the second quarter and year-to-date 2020 and 2019:
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Second Quarter
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Year-to-Date
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2020
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2019
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2020
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2019
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(in millions)
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Bath & Body Works Stores (a)
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$
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678
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$
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883
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$
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1,102
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$
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1,597
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Bath & Body Works Direct
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519
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178
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807
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335
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Total Bath & Body Works
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1,197
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1,061
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1,909
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1,932
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Victoria’s Secret Stores (a)
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364
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1,233
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877
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2,381
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Victoria’s Secret Direct
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614
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373
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922
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735
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Total Victoria’s Secret
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978
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1,606
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1,799
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3,116
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Victoria's Secret and Bath & Body Works International (b)
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80
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155
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146
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289
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Other (c)
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64
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80
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120
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193
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Total Net Sales
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$
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2,319
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$
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2,902
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$
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3,974
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$
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5,530
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_______________
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(a)
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Includes company-owned stores in the U.S. and Canada.
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(b)
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Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
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(c)
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Includes wholesale revenues from the Company's sourcing function.
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4. Restructuring
The Company remains committed to establishing Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare Victoria's Secret to operate as a separate standalone company. Management of the Company is actively engaged in implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. During the second quarter of 2020, the Company completed its comprehensive review of its home office organizations in order to achieve meaningful reductions in overhead expenses and decentralize significant shared functions and services to support the creation of standalone companies. This resulted in a reduction of the home office headcount by approximately 15%, or about 850 associates. Pre-tax severance and related costs associated with these reductions, totaling $81 million, are included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statements of Loss. Costs of $26 million and $5 million are recorded within the Victoria's Secret and Bath & Body Works segments, respectively, while the remaining $50 million is recorded within Other. As of August 1, 2020, a liability of $79 million related to these costs is included in Accrued Expenses and Other on the Consolidated Balance Sheet.
Victoria's Secret U.K.
The Company is actively working to reduce operating losses in the Victoria's Secret U.K. business. The Company entered into "Light Administration" in June to restructure store lease agreements and explore the sale of the business to a joint venture or franchise partner. The Company subsequently signed a non-binding term sheet with a major fashion retailer and is in an exclusive period of negotiation.
5. Earnings (Loss) Per Share and Shareholders’ Equity (Deficit)
Earnings (Loss) Per Share
Earnings (Loss) per basic share is computed based on the weighted-average number of outstanding common shares. Earnings (Loss) per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.
The following table provides shares utilized for the calculation of basic and diluted earnings (loss) per share for the second quarter and year-to-date 2020 and 2019:
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Second Quarter
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Year-to-Date
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2020
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2019
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2020
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2019
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(in millions)
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Weighted-average Common Shares:
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Issued Shares
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286
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284
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285
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284
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Treasury Shares
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(8
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)
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(8
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)
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(8
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)
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(8
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)
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Basic Shares
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278
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276
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277
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276
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Effect of Dilutive Options and Restricted Stock (a)
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—
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2
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—
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2
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Diluted Shares
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278
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278
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277
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278
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Anti-dilutive Options and Awards (a)
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11
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6
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12
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5
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_______________
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(a)
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These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For 2020, the dilutive impact of outstanding options and awards were excluded from dilutive shares as a result of the Company's net loss for the periods.
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Shareholders’ Equity (Deficit)
Common Stock Share Repurchases
In March 2018, the Company's Board of Directors approved a $250 million repurchase program, which had $79 million remaining as of August 1, 2020.
The Company did not repurchase any shares during 2020 or 2019.
Dividends
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during year-to-date 2020 and 2019:
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Ordinary Dividends
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Total Paid
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(per share)
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(in millions)
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2020
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Second Quarter
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$
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—
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$
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—
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First Quarter
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0.30
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83
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Total
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$
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0.30
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$
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83
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2019
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Second Quarter
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$
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0.30
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$
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83
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First Quarter
|
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0.30
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83
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Total
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$
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0.60
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$
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166
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The Board of Directors suspended the quarterly cash dividend beginning in the second quarter of 2020.
6. Inventories
The following table provides details of inventories as of August 1, 2020, February 1, 2020 and August 3, 2019:
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August 1,
2020
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February 1,
2020
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August 3,
2019
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(in millions)
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Finished Goods Merchandise
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$
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1,259
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$
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1,152
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|
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$
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1,132
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Raw Materials and Merchandise Components
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217
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|
|
135
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|
|
197
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Total Inventories
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$
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1,476
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$
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1,287
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|
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$
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1,329
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Inventories are principally valued at the lower of cost, on a weighted-average cost basis, or net realizable value.
7. Long-Lived Assets
The following table provides details of property and equipment, net as of August 1, 2020, February 1, 2020 and August 3, 2019:
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August 1,
2020
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February 1,
2020
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August 3,
2019
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(in millions)
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Property and Equipment, at Cost
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$
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6,276
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|
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$
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6,613
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$
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6,808
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Accumulated Depreciation and Amortization
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(3,984
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)
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(4,127
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)
|
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(4,052
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)
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Property and Equipment, Net
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$
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2,292
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|
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$
|
2,486
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|
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$
|
2,756
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Depreciation expense was $127 million and $150 million for the second quarter of 2020 and 2019, respectively. Depreciation expense was $266 million and $295 million for year-to-date 2020 and 2019, respectively.
Long-lived store assets, which include leasehold improvements, store related assets and operating lease assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group. For operating lease assets, the Company determines the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. An individual asset within an asset group is not impaired below its estimated fair value. The fair value of long-lived store assets are determined using Level 3 inputs within the fair value hierarchy.
The Company remains committed to taking the necessary steps to prepare the Victoria's Secret business to operate as a separate, standalone company. Management is actively working on implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. A component of the profit improvement plan includes a rationalization of the Victoria’s Secret company-owned store footprint. The Company expects that it will close approximately 250 stores in North America in 2020. Given the closures as well as the negative operating results of certain Victoria's Secret stores, the Company determined that the estimated undiscounted future cash flows were less than the carrying values for certain asset groups and, as a result, determined the estimated fair values of the store asset groups using estimated discounted future cash flows and estimated market rental rates. Long-lived store asset impairment charges are included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Loss.
The following table provides pre-tax long-lived store asset impairment charges included in the 2020 Consolidated Statements of Loss:
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Second Quarter
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Year-to-Date
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Store Asset
Impairment
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Operating Lease Asset Impairment
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Total
Impairment
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Store Asset
Impairment
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Operating Lease Asset Impairment
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Total
Impairment
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(in millions)
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Victoria's Secret (a)
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$
|
14
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|
|
$
|
61
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|
|
$
|
75
|
|
|
$
|
111
|
|
|
$
|
61
|
|
|
$
|
172
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|
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Victoria's Secret and Bath & Body Works International (b)
|
—
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|
|
42
|
|
|
42
|
|
|
—
|
|
|
42
|
|
|
42
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Total
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$
|
14
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|
|
$
|
103
|
|
|
$
|
117
|
|
|
$
|
111
|
|
|
$
|
103
|
|
|
$
|
214
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|
________________
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(a)
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Includes stores in the U.S. and Canada.
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(b)
|
Includes stores in the U.K., Ireland and Greater China.
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Victoria's Secret Hong Kong
During the second quarter of 2020, the Company closed its unprofitable Victoria's Secret flagship store in Hong Kong. As a result of the store closure, the Company recognized a non-cash pre-tax gain of $39 million, primarily due to terminating the store lease and the related write-off of the operating lease liability in excess of the operating lease asset, which was partially impaired in fiscal 2019. This gain is included in Costs of Goods Sold, Buying and Occupancy in the 2020 Consolidated Statements of Loss. The Company also recorded $3 million of severance and related costs, included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statements of Loss.
8. Equity Investments
The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $124 million as of August 1, 2020, $118 million as of February 1, 2020 and $102 million as of August 3, 2019, are recorded in Other Assets on the Consolidated Balance Sheets.
Included in the Company’s Easton investments are equity interests in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and develop commercial entertainment and shopping centers. The Company’s investments in ETC and EG are accounted for using the equity method of accounting. The Company has a majority financial interest in ETC and EG, but another unaffiliated member manages them, and certain significant decisions regarding ETC and EG require the consent of unaffiliated members in addition to the Company.
9. Income Taxes
The Company has historically calculated the provision for income taxes on the current estimate of the annual effective tax rate and adjusted as necessary for quarterly events. Due to the impacts of the COVID-19 pandemic, the income tax expense for the twenty-six-weeks ended August 1, 2020 was computed on a year-to-date effective tax rate.
For the second quarter of 2020, the Company’s effective tax rate was 17.7% compared to 10.1% in the second quarter of 2019. The second quarter of 2020 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to losses related to certain foreign subsidiaries, which generate no tax benefit, partially offset by recent changes in tax legislation included in the CARES Act, which resulted in a $21 million tax benefit. The second quarter of 2019 rate was lower than the Company's combined federal and state statutory rate primarily due to the resolution of certain tax matters.
For year-to-date 2020, the Company's effective tax rate was 26.7% compared to 24.0% year-to-date 2019. The year-to-date 2020 rate was generally consistent with the Company's combined estimated federal and state statutory rate due to the resolution of certain tax matters, which resulted in a $50 million tax benefit and recent changes in tax legislation included in the CARES Act, which resulted in a $21 million tax benefit, offset by losses related to certain foreign subsidiaries, which generate no tax benefit. The year-to-date 2019 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters.
Income taxes paid were $13 million and $169 million for the second quarter of 2020 and 2019, respectively. Income taxes paid were $22 million and $181 million for year-to-date 2020 and 2019, respectively.
Uncertain Tax Positions
The Company had unrecognized tax benefits of $88 million as of February 1, 2020, of which $81 million, if recognized, would reduce the effective income tax rate. Through August 1, 2020, the Company had a net decrease to gross unrecognized tax benefits of $31 million, primarily due to the resolution of certain tax matters. The changes to the unrecognized tax benefits resulted in a $30 million benefit to the Company’s Provision for Income Taxes year-to-date.
Of the total unrecognized tax benefits as of August 1, 2020, it is reasonably possible that $28 million could change in the next 12 months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.
10. Long-term Debt and Borrowing Facilities
The following table provides the Company’s outstanding debt balance, net of unamortized debt issuance costs and discounts, as of August 1, 2020, February 1, 2020 and August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1,
2020
|
|
February 1,
2020
|
|
August 3,
2019
|
|
|
(in millions)
|
|
Senior Secured Debt with Subsidiary Guarantee
|
|
|
|
|
|
|
$750 million, 6.875% Fixed Interest Rate Secured Notes due July 2025 ("2025 Secured Notes")
|
$
|
739
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Secured Foreign Facilities
|
101
|
|
|
103
|
|
|
95
|
|
|
Total Senior Secured Debt with Subsidiary Guarantee
|
$
|
840
|
|
|
$
|
103
|
|
|
$
|
95
|
|
|
Senior Debt with Subsidiary Guarantee
|
|
|
|
|
|
|
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
|
$
|
991
|
|
|
$
|
991
|
|
|
$
|
990
|
|
|
$860 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
|
858
|
|
|
858
|
|
|
857
|
|
|
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
|
693
|
|
|
693
|
|
|
693
|
|
|
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
|
498
|
|
|
498
|
|
|
498
|
|
|
$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)
|
496
|
|
|
496
|
|
|
496
|
|
|
$500 million, 9.375% Fixed Interest Rate Notes due July 2025 ("2025 Notes")
|
492
|
|
|
—
|
|
|
—
|
|
|
$500 million, 7.50% Fixed Interest Rate Notes due June 2029 ("2029 Notes")
|
488
|
|
|
487
|
|
|
486
|
|
|
$450 million, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
|
450
|
|
|
450
|
|
|
449
|
|
|
$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”)
|
277
|
|
|
276
|
|
|
274
|
|
|
Total Senior Debt with Subsidiary Guarantee
|
$
|
5,243
|
|
|
$
|
4,749
|
|
|
$
|
4,743
|
|
|
Senior 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”)
|
298
|
|
|
298
|
|
|
297
|
|
|
Unsecured Foreign Facilities
|
—
|
|
|
50
|
|
|
67
|
|
|
Total Senior Debt
|
$
|
646
|
|
|
$
|
696
|
|
|
$
|
712
|
|
|
Total
|
$
|
6,729
|
|
|
$
|
5,548
|
|
|
$
|
5,550
|
|
|
Current Debt
|
(460
|
)
|
|
(61
|
)
|
|
(75
|
)
|
|
Total Long-term Debt, Net of Current Portion
|
$
|
6,269
|
|
|
$
|
5,487
|
|
|
$
|
5,475
|
|
Issuance of Notes
In June 2020, the Company issued $750 million of 6.875% senior secured notes due July 2025 (the “2025 Secured Notes”). The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Company and certain of the Company's 100% owned subsidiaries. The 2025 Secured Notes are secured on a first-priority lien basis by substantially all of the assets of the Company and the guarantors, and on a second-priority lien basis by certain collateral securing the asset-backed revolving credit facility (“ABL Facility”), in each case, subject to certain exceptions. The proceeds from the issuance were $739 million, which were net of issuance costs of $11 million. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the August 1, 2020 Consolidated Balance Sheet.
In June 2020, the Company also issued $500 million of 9.375% notes due in July 2025 (the "2025 Notes"). The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Company and certain of the Company's 100% owned subsidiaries. The proceeds from the issuance were $492 million, which were net of issuance costs of $8 million. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the August 1, 2020 Consolidated Balance Sheet.
Repurchases of Notes
In June 2019, the Company completed the early settlement of tender offers to repurchase $212 million of outstanding 2020 Notes, $330 million of outstanding 2021 Notes and $96 million of outstanding 2022 Notes for $669 million. The Company used the proceeds from the 2029 Notes, together with cash on hand, to fund the purchase price for the tender offers. Additionally, in July 2019, the Company redeemed the remaining $126 million of outstanding 2020 Notes for $130 million.
In the second quarter of 2019, the Company recognized a pre-tax loss on extinguishment of debt of $40 million (after-tax loss of $30 million), which includes redemption fees and the write-offs of unamortized issuance costs. This loss is included in Other Income (Loss) in the 2019 Consolidated Statements of Income.
Revolving Credit Facility
The Company and certain of the Company's 100% owned subsidiaries guarantee and pledge collateral to secure a revolving credit facility ("Credit Agreement"). In April 2020, the Company entered into an amendment and restatement (“Amendment”) of the Credit Agreement to convert the Company’s credit facility into an asset-backed revolving credit facility. The Amendment maintains the aggregate commitments at $1 billion, and maintains the expiration date in August of 2024. The ABL Facility allows borrowings and letters of credit in U.S. dollars or Canadian dollars.
Availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on the Company's eligible U.S. and Canadian 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, the Company will be required to prepay the outstanding amounts under the ABL Facility to the extent of such excess. In addition, at any time that the Company's consolidated cash balance exceeds $350 million, it will be required to prepay outstanding amounts under the ABL Facility to the extent of such excess. As of August 1, 2020, the Company's borrowing base was $844 million but it was unable to draw upon the ABL Facility as its consolidated cash balance exceeded $350 million.
As of August 1, 2020, the ABL Facility fees related to committed and unutilized amounts were 0.30% per annum, and the fees related to outstanding letters of credit were 1.75% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings was the London Interbank Offered Rate plus 1.75% per annum. The interest rate on outstanding Canadian dollar-denominated borrowings was the Canadian Dollar Offered Rate plus 1.75% per annum.
The ABL Facility requires the Company 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 (1) $100 million or (2) 15% of the maximum borrowing amount. As of August 1, 2020, the Company was not required to maintain this ratio.
In March 2020, in an abundance of caution and as a proactive measure in response to the COVID-19 pandemic, the Company elected to borrow $950 million from its revolving facility, which was prepaid upon the completion of the Amendment. As of August 1, 2020, there were no borrowings outstanding under the ABL Facility.
The ABL Facility supports the Company’s letter of credit program. The Company had $61 million of outstanding letters of credit as of August 1, 2020 that reduced its availability under the ABL Facility.
Foreign Facilities
Certain of the Company's China subsidiaries utilize revolving and term loan bank facilities to support their operations ("Foreign Facilities"). The Foreign Facilities allow borrowings in U.S. dollars and Chinese Yuan, and interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing. Certain of these facilities are guaranteed by the Company and certain of the Company's 100% owned subsidiaries ("Secured Foreign Facilities"), and certain of these facilities were guaranteed by the Company only ("Unsecured Foreign Facilities").
The Secured Foreign Facilities have availability totaling $128 million. During 2020, the Company borrowed $20 million and made payments of $22 million under the Secured Foreign Facilities. As of August 1, 2020, there were borrowings of $101 million outstanding under the Secured Foreign Facilities, of which $10 million is included within Current Debt on the Consolidated Balance Sheet. Borrowings on the Secured Foreign Facilities mature between September 2020 and August 2024.
During the second quarter, the Company placed cash on deposit with certain financial institutions as collateral for their lending commitments under the Secured Foreign Facilities. The amount of collateral required reduces over time as the Company makes certain paydowns. These deposits, totaling $128 million, are recorded in Other Assets on the August 1, 2020 Consolidated Balance Sheet.
During 2020, the Company borrowed $13 million and made payments of $63 million under the Unsecured Foreign Facilities. During the second quarter of 2020, with no borrowings outstanding, the Company terminated the Unsecured Foreign Facilities.
11. Fair Value Measurements
Cash and Cash Equivalents and Restricted Cash include cash on hand, deposits with financial institutions and highly liquid investments with original maturities of less than 90 days. The Company's Cash and Cash Equivalents and Restricted Cash are considered Level 1 fair value measurements as they are valued using unadjusted quoted prices in active markets for identical assets.
The following table provides a summary of the principal value and estimated fair value of outstanding publicly traded debt as of August 1, 2020, February 1, 2020 and August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1,
2020
|
|
February 1,
2020
|
|
August 3,
2019
|
|
|
(in millions)
|
|
Principal Value
|
$
|
6,708
|
|
|
$
|
5,458
|
|
|
$
|
5,458
|
|
|
Fair Value, Estimated (a)
|
6,692
|
|
|
5,555
|
|
|
5,215
|
|
_______________
|
|
|
|
(a)
|
The estimated fair value of the Company’s publicly traded debt is based on reported transaction prices, which are considered Level 2 inputs in accordance with ASC 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
|
Management believes that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity.
12. Comprehensive Income
The following table provides the rollforward of accumulated other comprehensive income for year-to-date 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income
|
|
|
(in millions)
|
|
Balance as of February 1, 2020
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
|
Other Comprehensive Income (Loss) Before Reclassifications
|
(4
|
)
|
|
2
|
|
|
(2
|
)
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Tax Effect
|
—
|
|
|
—
|
|
|
—
|
|
|
Current-period Other Comprehensive Income (Loss)
|
(4
|
)
|
|
1
|
|
|
(3
|
)
|
|
Balance as of August 1, 2020
|
$
|
48
|
|
|
$
|
1
|
|
|
$
|
49
|
|
The following table provides the rollforward of accumulated other comprehensive income for year-to-date 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income
|
|
|
(in millions)
|
|
Balance as of February 2, 2019
|
$
|
57
|
|
|
$
|
2
|
|
|
$
|
59
|
|
|
Other Comprehensive Income (Loss) Before Reclassifications
|
(11
|
)
|
|
4
|
|
|
(7
|
)
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Tax Effect
|
—
|
|
|
—
|
|
|
—
|
|
|
Current-period Other Comprehensive Income (Loss)
|
(11
|
)
|
|
1
|
|
|
(10
|
)
|
|
Balance as of August 3, 2019
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
49
|
|
13. 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.
In July 2019, a plaintiff shareholder filed a putative class action complaint in the U.S. District Court for the Southern District of Ohio alleging that the Company made false and/or misleading statements relating to the November 2018 announcement that the Company was reducing its quarterly dividend. In September 2019, a different plaintiff shareholder filed a second putative class action complaint in the U.S. District Court for the Southern District of Ohio containing substantially the same allegations and seeking substantially the same relief. In October 2019, the Court issued an order consolidating the two putative class actions, appointing a lead plaintiff, and approving that lead plaintiff’s selection of lead counsel. The lead plaintiff filed a consolidated
amended complaint on December 20, 2019 that asserted substantially the same allegations and sought substantially the same relief as the initial complaint. The Company filed a motion to dismiss the consolidated amended complaint on February 18, 2020, the lead plaintiff filed an opposition to the Company's motion to dismiss on May 4, 2020, and the Company filed a reply brief in further support of its motion to dismiss on June 3, 2020. The Company's motion to dismiss the consolidated amended complaint is now fully briefed and pending before the court. The court will hear oral argument on the motion to dismiss on September 23, 2020. The Company views this lawsuit as meritless and intends to defend against this lawsuit vigorously.
On February 19, 2020, a plaintiff shareholder filed a complaint in the U.S. District Court for the Southern District of Ohio alleging derivative claims on behalf of the Company against certain of its current and former directors and officers. The Company was named as nominal defendant. The lawsuit asserts claims for breach of fiduciary duty, corporate waste and unjust enrichment in connection with alleged misstatements about the Company's quarterly dividend prior to the announced reduction of the dividend in November 2018. On July 21, 2020, the court so-ordered a stipulation staying all proceedings in this lawsuit, pending resolution of the motion to dismiss that the Company filed on February 18, 2020 in the putative class action lawsuit described above. The Company intends to seek dismissal of the lawsuit at the appropriate time.
On May 19, 2020, a purported shareholder filed a derivative lawsuit on behalf of L Brands, Inc. in the Court of Common Pleas for Franklin County, Ohio. The complaint names as defendants certain current and former directors and officers of L Brands, Inc. and alleges, among other things, that these defendants breached their fiduciary duties by violating law and/or company policies relating to workplace conduct. The Company was named as nominal defendant only, and there are no claims asserted against it. On June 16, 2020, the lawsuit was removed to the United States District Court for the Southern District of Ohio. On July 6, 2020, the court so-ordered a stipulation staying the lawsuit until December 29, 2020. The Company is currently evaluating potential options for responding to the lawsuit.
La Senza
In connection with the sale of La Senza in the fourth quarter of 2018, certain of the Company's subsidiaries have remaining contingent obligations of $36 million related to lease payments under the current terms of noncancelable leases expiring at various dates through 2028. These obligations 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 the business. As of August 1, 2020, the Company has recorded reserves of $37 million related to these lease-related obligations and certain other obligations related to the La Senza business. As of August 1, 2020, reserves of $6 million are included within Accrued Expenses and Other on the Consolidated Balance Sheet and the remaining reserves are included within Other Long-term Liabilities.
Other
In connection with the noncancelable operating lease of an operating asset, the Company provides a residual value guarantee to the lessor if the leased asset cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The lease expires in 2021, and the total amount of the guarantee is $28 million. The Company did not record a liability as of August 1, 2020.
14. Retirement Benefits
The Company sponsors a tax-qualified defined contribution retirement plan for substantially all its associates within the U.S. Participation is available to associates who meet certain age and service 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 $18 million for the second quarter of 2020 and $20 million for the second quarter of 2019. Total expense recognized related to the qualified plan was $39 million for both year-to-date 2020 and 2019.
The Company sponsors a non-qualified supplemental retirement plan. The non-qualified plan is an unfunded plan, which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. On June 27, 2020 (the “Termination Date”), the Human Capital and Compensation Committee of the Board of Directors authorized the termination of the non-qualified plan. Subsequent to the Termination Date, no additional employee contributions may be made to the non-qualified plan. The remaining benefits and obligations are expected to be paid out in full approximately one year following the Termination Date. Accordingly, the liability of $258 million related to the non-qualified plan is included within Accrued Expenses and Other on the August 1, 2020 Consolidated Balance Sheet. Total expense recognized related to the non-qualified plan was $3 million for the second quarter of 2020 and $6 million for the second quarter of 2019. Total expense recognized related to the non-qualified plan was $9 million for year-to-date 2020 and $12 million for year-to-date 2019.
15. Segment Information
The Company has three reportable segments: Bath & Body Works, Victoria's Secret and Victoria's Secret and Bath & Body Works International.
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 online and at retail stores located in the U.S. and Canada.
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 online and through retail stores located in the U.S. and Canada.
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 the online business in Greater China. This segment includes the following:
|
|
|
|
•
|
Victoria's Secret International, comprised of company-owned stores in the U.K., Ireland 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, comprised of stores operated by partners under franchise, license and wholesale arrangements.
|
Other includes Mast Global, a merchandise sourcing and production function serving the Company and its international partners, and Corporate 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 second quarter and year-to-date 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bath & Body
Works
|
|
Victoria’s
Secret
|
|
Victoria’s Secret
and
Bath &
Body Works
International
|
|
Other
|
|
Total
|
|
|
(in millions)
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Second Quarter:
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,197
|
|
|
$
|
978
|
|
|
$
|
80
|
|
|
$
|
64
|
|
|
$
|
2,319
|
|
|
Operating Income (Loss) (a)
|
326
|
|
|
(140
|
)
|
|
(19
|
)
|
|
(123
|
)
|
|
44
|
|
|
Year-to-Date:
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,909
|
|
|
$
|
1,799
|
|
|
$
|
146
|
|
|
$
|
120
|
|
|
$
|
3,974
|
|
|
Operating Income (Loss) (a)
|
395
|
|
|
(440
|
)
|
|
(54
|
)
|
|
(175
|
)
|
|
(274
|
)
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Second Quarter:
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,061
|
|
|
$
|
1,606
|
|
|
$
|
155
|
|
|
$
|
80
|
|
|
$
|
2,902
|
|
|
Operating Income (Loss)
|
180
|
|
|
17
|
|
|
(1
|
)
|
|
(21
|
)
|
|
175
|
|
|
Year-to-Date:
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,932
|
|
|
$
|
3,116
|
|
|
$
|
289
|
|
|
$
|
193
|
|
|
$
|
5,530
|
|
|
Operating Income (Loss)
|
335
|
|
|
49
|
|
|
(5
|
)
|
|
(51
|
)
|
|
328
|
|
_______________
|
|
|
|
(a)
|
Victoria's Secret includes store and lease asset impairment charges of $75 million and $172 million for the second quarter and year-to-date 2020, respectively. Victoria's Secret and Bath & Body Works International includes lease asset impairment charges of $42 million. Additionally, Victoria's Secret and Bath & Body Works International includes a $36 million net gain related to the closure and lease termination of the Hong Kong flagship store. For additional information, see Note 7, “Long-Lived Assets." Bath & Body Works, Victoria's Secret and Other includes severance and related charges of $5 million, $26 million and $50 million, respectively. For additional information, see Note 4, “Restructuring."
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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 totaled $238 million and $357 million for the second quarter of 2020 and 2019, respectively. The Company's international net sales across all segments totaled $418 million and $706 million for year-to-date 2020 and 2019, respectively.