BATH & BODY WORKS, INC. The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements in this Form 10-Q. Victoria's Secret Spin-Off OnAugust 2, 2021 , we completed the spin-off of ourVictoria's Secret business, which included theVictoria's Secret and PINK brands, into an independent publicly traded company. As a result, the operating results for theVictoria's Secret business through the date of the spin-off are reported in Income (Loss) from Discontinued Operations, Net of Tax in the Consolidated Statements of Income (Loss) for all periods presented. In addition, the related assets and liabilities are reported as Assets and Liabilities of Discontinued Operations on the Consolidated Balance Sheets. Unless otherwise noted, all amounts, percentages and discussion reflect only the results of operations and financial condition from our continuing operations. In connection with the spin-off, we expect future capital and expense related to the implementation of new information technology platforms. Although our work is in the early stages and our estimates are preliminary, we currently estimate that our total expenditures could be$100 million to$150 million over the next several years. Such estimates are subject to change as our work continues.Victoria's Secret & Co. will provide technology services to us under a Transition Services Agreement while we create independent system environments, which we believe will help to minimize dis-synergies. The above estimates are preliminary in nature, are based solely on information available to us as of the date of this quarterly report and are inherently uncertain and subject to change. Executive Overview In the third quarter of 2021, net sales decreased$21 million , or 1%, to$1.681 billion and our operating income decreased$27 million , or 6%, to$409 million . On a two-year basis, net sales increased$582 million , or 53%, compared to$1.099 billion in the third quarter of 2019. Performance was strong throughout the quarter as we saw good customer response to our fall seasonal andHalloween merchandise. Higher supply chain and transportation costs this year, due to market constraints and inflation, negatively impacted gross margin dollars. We were able to offset some of these cost increases through ticket price increases and adjustments to promotional offers. 23 -------------------------------------------------------------------------------- Table of Contents We believe we are well-positioned as we go into the important Holiday season and fourth quarter. We proactively managed production and promotions throughout the third quarter and did not experience significant out-of-stocks, and we expect our assortments to be full and abundant for Holiday. We are partnering closely with our vendors to support production needs in order to continue to meet customer demand. Inflationary pressure in raw materials, wages, supply chain and transportation costs negatively impacted our third quarter results and will put even more pressure on our fourth quarter results. We will continue to proactively manage pricing and promotion with the goal of offsetting this cost pressure where possible. Risks related to COVID-19 persist, and we expect to continue to operate both of our channels in a safe manner for our customers and associates. For additional information related to our third quarter 2021 financial performance, see "Results of Operations." Impacts of COVID-19 The coronavirus pandemic has created significant public health concerns as well as economic disruption, uncertainty and volatility. Our operations and financial performance have been materially impacted by the COVID-19 pandemic. In the first quarter of 2020, all of our company-operated stores were closed onMarch 17, 2020 , but we were able to re-open the majority of our stores as of the end of the second quarter of 2020. Our Direct business remained open for the duration of 2020. During 2020, we took prudent actions to manage expenses and to maintain our cash position and financial flexibility. We adopted new operating models focused on safety. We continue to remain focused on providing a safe store environment for our customers and associates, while also delivering an engaging shopping experience. We also remain focused on the safe operations of our distribution and fulfillment centers while maximizing our direct business. There remains the potential for COVID-related closures or operating restrictions, which could materially impact our operations and financial performance in future periods. Adjusted Financial Information from Continuing Operations In addition to our results provided in accordance with GAAP above and throughout this Form 10-Q, provided below are non-GAAP measurements which present operating income, net income from continuing operations and earnings from continuing operations per share in 2021 and 2020 on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. 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 definitions of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures. Third Quarter Year-to-Date (in millions, except per share amounts) 2021 2020 2021 2020 Reconciliation of Reported Operating Income to Adjusted Operating Income Reported Operating Income $ 409$ 436 $ 1,130 $ 735 Restructuring Charges (a) - - - 30 Adjusted Operating Income $ 409$ 436 $ 1,130 $ 765
Reconciliation of Reported Net Income from Continuing Operations to Adjusted Net Income from Continuing Operations Reported Net Income from Continuing Operations $ 177 $
196$ 483 $ 308 Restructuring Charges (a) - - - 30 Loss on Extinguishment of Debt (b) 89 53 195 53 Tax Benefit from the Resolution of Certain Tax Matters (c) - - - (50) Tax Benefit of Special Items in Operating Income and Other Loss (21) (13) (47) (18)
Adjusted Net Income from Continuing Operations $ 245 $
236
Reconciliation of Reported Earnings from Continuing Operations Per Diluted Share to Adjusted Earnings from Continuing Operations Per Diluted Share Reported Earnings from Continuing Operations Per Diluted Share$ 0.66 $ 0.69 $ 1.74 $ 1.10 Restructuring Charges (a) - - - 0.09 Loss on Extinguishment of Debt (b) 0.25 0.14 0.53 0.14 Tax Benefit from the Resolution of Certain Tax Matters (c) - - - (0.18) Adjusted Earnings from Continuing Operations Per Diluted Share$ 0.92 $ 0.83 $ 2.28 $ 1.14 24
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________________
(a)In the second quarter of 2020, we recognized pre-tax severance charges of$30 million ($24 million after tax) related to headcount reductions as a result of restructuring activities. For additional information, see Note 4, "Restructuring Activities" included in Item 1. Financial Statements. (b)In the third and first quarter of 2021, we recognized pre-tax losses of$89 million and$105 million (after-tax losses of$68 million and$80 million ), respectively, due to the early extinguishment of outstanding notes. In the third quarter of 2020, we recognized a pre-tax loss of$53 million (after-tax loss of$40 million ) due to the early extinguishment of outstanding notes. For additional information, see Note 10, "Long-term Debt and Borrowing Facilities" included in Item 1. Financial Statements. (c)In the first quarter of 2020, we recognized a$50 million tax benefit related to the resolution of certain tax matters. For additional information, see Note 9, "Income Taxes" included in Item 1. Financial Statements. Company-Operated Store Data The following table compares company-operatedU.S. store data for the third quarter of 2021 to the third quarter of 2020, and year-to-date 2021 to year-to-date 2020: Third Quarter Year-to-Date 2021 2020 % Change 2021 2020 % Change Sales perAverage Selling Square Foot (a)$ 257 $ 258 - %$ 751 $ 497 51 % Sales perAverage Store (in thousands) (a)$ 692 $ 683 1 %$ 2,014 $ 1,314 53 % Average Store Size (selling square feet) 2,700 2,654 2 % Total Selling Square Feet (in thousands) 4,514 4,360 4 % ________________ (a)Sales per average selling square foot and sales per average store, 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. As a result of the COVID-19 pandemic, all our stores in theU.S. were closed onMarch 17, 2020 with the majority having been re-opened as of the beginning of the third quarter of 2020. As a result, comparisons of year-to-date trends are not a meaningful way to discuss our operating results in the current year. The following table represents company-operated store data for year-to-date 2021: Stores Stores January 30, 2021 Opened Closed October 30, 2021 United States 1,633 50 (11) 1,672 Canada 103 - - 103 Total 1,736 50 (11) 1,775 The following table represents company-operated store data for year-to-date 2020: Stores Stores February 1, 2020 Opened Closed October 31, 2020 United States 1,637 24 (18) 1,643 Canada 102 1 - 103 Total 1,739 25 (18) 1,746 25
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Partner-Operated Store Data
The following table represents partner-operated store data for year-to-date
2021:
Stores Stores
January 30, 2021 Opened Closed October 30, 2021
International 270 30 (7) 293
International - Travel Retail 18 1 - 19
Total International 288 31 (7) 312
The following table represents partner-operated store data for year-to-date
2020:
Stores Stores
February 1, 2020 Opened Closed October 31, 2020
International 262 10 (3) 269
International - Travel Retail 16 1 - 17
Total International 278 11 (3) 286
Results of Operations
Third Quarter of 2021 Compared to Third Quarter of 2020
For the third quarter of 2021, operating income decreased $27 million , to $409
million , from $436 million in the third quarter of 2020, and the operating
income rate decreased to 24.3% from 25.6%. 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 2021 in
comparison to the third quarter of 2020:
2021 2020 % Change
Third Quarter (in millions)
Stores - U.S. and Canada $ 1,238 $ 1,202 3 %
Direct - U.S. and Canada 369 446 (17 %)
International (a) 74 54 37 %
Total Net Sales $ 1,681 $ 1,702 (1 %)
_______________(a)Results include royalties associated with franchised store and wholesale sales.
The following table provides a reconciliation of net sales for the third quarter of 2021 to the third quarter of 2020:
(in millions)
2020 Net Sales $ 1,702
Comparable Store Sales (22)Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
54
Direct Channels (77)
International Wholesale, Royalty and Other 20
Foreign Currency Translation 4
2021 Net Sales $ 1,681 The following table compares the third quarter of 2021 comparable sales to the third quarter of 2020:
2021 2020
Comparable Sales (Stores and Direct) (a) (7 %) 56 %
Comparable Store Sales (a) (2 %) 38 %
26-------------------------------------------------------------------------------- Table of Contents ________ (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. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Therefore, comparable sales results for 2021 and 2020 exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. Additionally, stores are excluded if total selling square footage in the center changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our Canadian stores are calculated on a constant currency basis. For the third quarter of 2021, net sales decreased$21 million to$1.681 billion . Net sales increased in the stores channel by$36 million , or 3%, primarily due to the 29 net new stores opened subsequent to the third quarter of 2020. Direct net sales decreased$77 million , or 17%, primarily due to declines in digital traffic and conversion given the impact from the store closures last year. International net sales increased by$20 million , or 37%, due to increases in partner-operated stores and websites as well as the COVID-19 related closures in the third quarter of 2020. Performance was strong throughout the quarter as we saw good customer response to our fall seasonal andHalloween merchandise. We experienced growth in fragrant body care, home fragrance, and gifting and accessories. As expected, soaps and sanitizers declined versus last year's significant growth. The decrease in comparable sales was primarily driven by declines in conversion in both channels and digital traffic, partially offset by increased traffic and average unit retail in the stores channel and average order size in the digital channel. Comparable sales trends in both channels were impacted by changing consumer behaviors associated with the COVID-19 pandemic. Gross Profit For the third quarter of 2021, our gross profit decreased$24 million to$839 million , and our gross profit rate (expressed as a percentage of net sales) decreased to 49.9% from 50.7%. Gross profit decreased due to the decrease in merchandise margin dollars related to the decline in net sales and higher supply chain and transportation costs this year, due to market constraints and inflation. The gross profit rate decreased due to the higher supply chain and transportation costs this year, partially offset by a higher average unit retail pricing. General, Administrative and Store Operating Expenses For the third quarter of 2021, our general, administrative and store operating expenses increased$3 million to$430 million , and the rate increased to 25.6% from 25.1%. General, administrative and store operating expenses and rate increased primarily due to an increase in marketing investments. Other Income and Expense Interest Expense The following table provides the average daily borrowings and average borrowing rates for the third quarter of 2021 and 2020: Third Quarter 2021 2020
Average daily borrowings (in millions)
For the third quarter of 2021, our interest expense decreased$28 million to$91 million due to lower average daily borrowings partially offset by a higher average borrowing rate. Other Loss For third quarter of 2021, our other loss was$91 million , primarily due to an$89 million pre-tax loss associated with the early extinguishment of outstanding notes. For third quarter of 2020, our other loss was$52 million , primarily due to a$53 million pre-tax loss associated with the early extinguishment of outstanding notes. Provision for Income Taxes For the third quarter of 2021, our effective tax rate was 22.0% compared to 26.0% in the third quarter of 2020. The third quarter of 2021 rate was lower than our combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The third quarter of 2020 rate was generally consistent with our combined federal and state statutory rate. 27 -------------------------------------------------------------------------------- Table of Contents Results of Operations Year-to-Date 2021 Compared to Year-to-Date 2020 For year-to-date 2021, operating income increased$395 million to$1.130 billion , from$735 million year-to-date 2020, and the operating income rate increased to 23.3% from 19.8%. The drivers of the operating income results are discussed in the following sections.Net Sales The following table provides net sales for year-to-date 2021 in comparison to year-to-date 2020: 2021 2020 % Change Year-to-Date (in millions) Stores - U.S. and Canada$ 3,518 $ 2,304 53 % Direct - U.S. and Canada 1,126 1,254 (10 %) International (a) 210 158 33 % Total Net Sales$ 4,854 $ 3,716 31 % _______________
(a)Results include royalties associated with franchised store and wholesale sales.
The following table provides a reconciliation of net sales for year-to-date 2021
to year-to-date 2020:
(in millions)
2020 Net Sales $ 3,716
Comparable Store Sales (123)Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net (a)
1,327
Direct Channels (128)
International Wholesale, Royalty and Other 52
Foreign Currency Translation 10
2021 Net Sales $ 4,854
_______________
(a)Includes the increased sales from period over period due to the 2020 COVID-19
related stores closures.
The following table compares year-to-date 2021 comparable sales to year-to-date
2020:
2021 2020
Comparable Sales (Stores and Direct) (a) (8 %) 70 % Comparable Store Sales (a)
(6 %) 45 %
________
(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. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Closed stores are excluded from the comparable sales calculation if they have been closed for four consecutive days or more. Upon re-opening, the stores are included in the calculation. Therefore, comparable sales results for 2021 and 2020 exclude the closure period of stores that were closed for four consecutive days or more as a result of the COVID-19 pandemic. Additionally, stores are excluded if total selling square footage in the center changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Comparable sales attributable to our Canadian stores are calculated on a constant currency basis. For year-to-date 2021, net sales increased$1.138 billion to$4.854 billion . Net sales increased in the stores channel by$1.214 billion , or 53%, primarily due to the COVID-19 related store closures in 2020. Direct net sales decreased$128 million , or 10%, primarily due to the reopening of stores this year, as compared to the prior year when stores were closed which drove an increase in sales in the direct channel. International net sales increased by$52 million , or 33%, due to increases in partner-operated stores and websites as well as the COVID-19 related closures in 2020. Performance was strong throughout the period as we saw positive customer response to our merchandise. We experienced significant growth in fragrant body care, home fragrance and gifting and accessories. As expected, soaps and sanitizers declined versus last year's significant growth. 28 -------------------------------------------------------------------------------- Table of Contents Gross Profit For year-to-date 2021, our gross profit increased$720 million to$2.409 billion , and our gross profit rate (expressed as a percentage of net sales) increased to 49.6% from 45.5%. Gross profit increased due to the increase in merchandise margin dollars related to the increase in net sales, partially offset by higher occupancy expenses due to the increase in net sales. The gross profit rate increased due to buying and occupancy leverage on higher net sales. General, Administrative and Store Operating Expenses For year-to-date 2021, our general, administrative and store operating expenses increased$325 million to$1.279 billion , and the rate increased to 26.3% from 25.7%. General, administrative and store operating expenses increased due to an increase in store selling expenses as a result of the increase in net sales, an increase in marketing investments and an increase in charitable contributions to support philanthropic funds. These increases were partially offset by severance and related costs associated with headcount reductions totaling$30 million in the prior year. The general, administrative and store operating expense rate increased primarily due to the increase in marketing investments. Other Income and Expense Interest Expense The following table provides the average daily borrowings and average borrowing rates for year-to-date 2021 and 2020: Year-to-Date 2021 2020
Average daily borrowings (in millions)
For year-to-date 2021, our interest expense decreased$16 million to$301 million due to lower average daily borrowings partially offset by a higher average borrowing rate. Other Loss For year-to-date 2021, our other loss was$196 million , primarily due to$195 million pre-tax losses associated with the early extinguishment of outstanding notes. For year-to-date 2020, our other loss was$47 million , primarily due to a$53 million pre-tax loss associated with the early extinguishment of outstanding notes. Provision for Income Taxes For year-to-date 2021, our effective tax rate was 23.7% compared to 16.9% year-to-date 2020. The year-to-date 2021 rate was lower than our combined estimated federal and state statutory rate primarily due to the recognition of excess tax benefits recorded through the Consolidated Statements of Income (Loss) on share-based awards that vested year-to-date. The year-to-date 2020 rate was lower than our combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters, which resulted in a$50 million tax benefit.
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 and capital expenditures. Our cash provided from operations is impacted by our net income (loss) and working capital changes. Our net income (loss) is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins and income taxes. Historically, 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. Our cash and cash equivalents held by foreign subsidiaries were$150 million as ofOctober 30, 2021 . We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements. 29 -------------------------------------------------------------------------------- Table of Contents Working Capital and Capitalization The following table provides a summary of our working capital position and capitalization as ofOctober 30, 2021 ,January 30, 2021 andOctober 31, 2020 : October 30, January 30, October 31, 2021 2021 2020 (in millions) Working Capital, Net of Assets and Liabilities from Discontinued Operations (a)$ 1,550 $ 3,012 $ 1,831 Capitalization: Long-term Debt 4,852 6,366 6,364 Shareholders' Equity (Deficit) (1,676) (662) (1,568) Total Capitalization$ 3,176 $ 5,704 $ 4,796 Amounts Available Under the ABL Facility (b)$ 734
$ - $ -
_______________
(a)The balances as ofJanuary 30, 2021 andOctober 31, 2020 exclude the carrying value of assets and liabilities reported as discontinued operations on the Consolidated Balance Sheets. (b)We had outstanding letters of credit, which reduce our availability under the ABL Facility, of$16 million as ofOctober 30, 2021 . As ofJanuary 30, 2021 andOctober 31, 2020 , we were unable to draw upon the ABL Facility as our consolidated cash balance exceeded$350 million .
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