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BATH & BODY WORKS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

09/02/2021 | 04:42pm EST
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.
Executive Overview
In the second quarter of 2021, our operating income increased to $599 million as
compared to $44 million in 2020, and our operating income rate increased to
18.1% from 1.9%. These results were primarily driven by increases in net sales
at both Bath & Body Works and Victoria's Secret, the increase in merchandise
margin rate at Victoria's Secret and $117 million of Victoria's Secret store
asset impairment charges in the prior year. Net sales increased $999 million, or
43%, to $3.318 billion. Sales were strong throughout the second quarter of 2021
as customers responded positively to the merchandise assortments. Second quarter
2020 sales and operating results were negatively impacted by the COVID-19
related store closures for roughly half the quarter.
At Bath & Body Works, net sales increased $451 million, or 36%, to $1.704
billion and operating income increased $94 million, or 28%, to $431 million. We
delivered record sales and profitability in the second quarter as sales trends
remained strong at continued healthy margin rates. Similar to the first quarter,
we were able to be selective on promotional activity. We are optimistic about
our Fall and Holiday product assortments and our continued ability to execute
against our long-term growth strategy in stores and online. Risks related to
COVID-19 persist, and we plan to continue to operate both of our channels in a
safe manner for our customers and associates.
At Victoria's Secret, net sales increased $548 million, or 51%, to
$1.614 billion and operating income increased to $233 million as compared to a
loss of $219 million in the second quarter of 2020. Sales improved as second
quarter of 2020 sales were negatively impacted by the closure of stores for
approximately 70% of the quarter. Margin results improved during the second
quarter of 2021 as we were able to reduce promotional activity, which drove
significant improvement to the merchandise margin rate. Additionally, we
recognized $117 million of store asset impairment charges in the prior year.
For additional information related to our second quarter 2021 financial
performance, see "Results of Operations."
                                       22
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Impacts of Victoria's Secret Spin-Off
The spin-off of the Victoria's Secret business into an independent public
company was completed on August 2, 2021 subsequent to the end of the second
quarter. We believe the spin-off will enable us to maximize management focus and
financial flexibility to thrive in an evolving retail environment and deliver
long-term profitable growth. Beginning in the third quarter of fiscal 2021, the
historical financial results of the Victoria's Secret business for periods prior
to the spin-off will be reflected in our consolidated financial statements as
discontinued operations.
In connection with the Separation, 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.
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 stores in North America were closed on March 17,
2020, but we were able to re-open the majority of our stores as of the end of
the second quarter of 2020. Additionally, operations for Victoria's Secret
Direct were temporarily suspended for approximately one week in late March 2020,
while Bath & Body Works Direct 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 also have adopted new operating models
focused on providing a safe store environment for our customers and associates,
while also delivering an engaging shopping experience. We remain focused on the
safe operations of our distribution, fulfillment and call centers while
maximizing our direct businesses. There remains the potential for COVID-related
risks of closure or operating restrictions, which could materially impact our
operations and financial performance in future periods.
                                       23
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Adjusted Financial Information
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 net
income (loss) and earnings (loss) 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
definition 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.
                                                       Second Quarter                       Year-to-Date
(in millions, except per share amounts)            2021              2020              2021              2020
Detail of Special Items - Income (Expense)
Victoria's Secret Asset Impairment (a)         $       -          $   (117)         $      -          $   (214)
Restructuring Charges (b)                              -               (81)                -               (81)
Hong Kong Store Closure (c)                            -                36                 -                36
Special Items included in Operating Income
(Loss)                                                 -              (162)                -              (258)
Loss on Extinguishment of Debt (d)                     -                 -              (105)                -
Special Items included in Other Income (Loss)          -                 -              (105)                -
Tax Benefit from the Resolution of Certain Tax
Matters (e)                                            -                21                 -                71
Tax Effect of Special Items included in
Operating Income (Loss) and Other Income
(Loss)                                                 -                22                25                47

Special Items included in Net Income (Loss) $ - $ (119)

$ (80) $ (140)

Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income (Loss) Reported Operating Income (Loss)

               $     599          $     44          $  1,171          $   (274)
Special Items included in Operating Income
(Loss)                                                 -               162                 -               258
Adjusted Operating Income (Loss)               $     599          $    206  

$ 1,171 $ (15)

Reconciliation of Reported Net Income (Loss) to Adjusted Net Income (Loss) Reported Net Income (Loss)

                     $     374          $    (49)         $    651          $   (346)
Special Items included in Net Income (Loss)            -               119                80               140
Adjusted Net Income (Loss)                     $     374          $     69  

$ 731 $ (206)

Reconciliation of Reported Earnings (Loss) Per Diluted Share to Adjusted Earnings (Loss) Per Diluted Share Reported Earnings (Loss) Per Diluted Share $ 1.34 $ (0.18)

         $   2.31          $  (1.25)
Special Items included in Earnings (Loss) Per
Diluted Share                                          -              0.42              0.28              0.50

Adjusted Earnings (Loss) Per Diluted Share $ 1.34 $ 0.25

$ 2.59 $ (0.74)

________________

(a)We recognized pre-tax impairment charges of $117 million ($99 million after
tax) and $97 million ($72 million after tax) related to certain Victoria's
Secret store and lease assets in the second and first quarter of 2020,
respectively. For additional information see Note 6, "Long-Lived Assets"
included in Item 1. Financial Statements.
(b)In the second quarter of 2020, we recognized pre-tax severance charges of $81
million ($65 million after tax) related to headcount reductions as a result of
restructuring activities. For additional information, see Note 3, "Restructuring
Activities" included in Item 1. Financial Statements.
(c)In the second quarter of 2020, we recognized a net pre-tax gain of $36
million ($25 million after tax) related to the closure of the Victoria's Secret
Hong Kong flagship store. For additional information see Note 6, "Long-Lived
Assets" included in Item 1. Financial Statements.
(d)In the first quarter of 2021, we recognized a pre-tax loss of $105 million
(after-tax loss of $80 million) due to the early extinguishment of outstanding
notes. For additional information see Note 9, "Long-term Debt and Borrowing
Facilities" included in Item 1. Financial Statements.
                                       24
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(e)In the second quarter of 2020, we recognized a $21 million income tax benefit
related to recent changes in tax legislation included in the CARES Act. 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 8,
"Income Taxes" included in Item 1. Financial Statements.
Company-Operated Store Data
The following table compares the second quarter of 2021 company-operated store
data to the second quarter of 2020 and year-to-date 2021 store data to
year-to-date 2020:
                                                    Second Quarter                                           Year-to-Date
                                      2021             2020             % Change              2021            2020             % Change
Sales per Average Selling Square
Foot (a)
Bath & Body Works U.S.             $   265          $   148                   79  %        $   493          $  240                   105  %
Victoria's Secret U.S.                 172               54                  219  %            325             129                   152  %
Sales per Average Store (in
thousands) (a)
Bath & Body Works U.S.             $   709          $   389                   82  %        $ 1,320          $  634                   108  %
Victoria's Secret U.S.               1,183              364                  225  %          2,245             867                   159  %
Average Store Size (selling square
feet)
Bath & Body Works U.S.               2,689            2,638                    2  %
Victoria's Secret U.S.               6,888            6,937                   (1  %)
Total Selling Square Feet (in
thousands)
Bath & Body Works U.S.               4,472            4,308                    4  %
Victoria's Secret U.S.               5,772            5,952                   (3  %)


 ________________
(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 the U.S. were closed on March 17, 2020 and almost
all remained closed as of the beginning of the second quarter of 2020. The
COVID-19 related store closures impacted our store operations for roughly half
of the second quarter of 2020. As a result, comparisons of year-over-year 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 at                                                            Stores at
                                            January 30, 2021              Opened               Closed             July 31, 2021
Bath & Body Works U.S.                            1,633                       41                  (11)                  1,663
Bath & Body Works Canada                            103                        -                    -                     103
Total Bath & Body Works                           1,736                       41                  (11)                  1,766
Victoria's Secret U.S.                              846                        -                   (8)                    838
Victoria's Secret Canada                             25                        1                    -                      26

Victoria's Secret Beauty and Accessories
Greater China                                        36                        1                   (1)                     36
Victoria's Secret Greater China                      26                        -                    -                      26
Total Victoria's Secret                             933                        2                   (9)                    926
Total Stores                                      2,669                       43                  (20)                  2,692



                                       25

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The following table represents company-operated store data for year-to-date
2020:
                                               Stores at                                                              Stores at
                                            February 1, 2020              Opened               Closed               August 1, 2020
Bath & Body Works U.S.                            1,637                       10                   (14)                  1,633
Bath & Body Works Canada                            102                        -                     -                     102
Total Bath & Body Works                           1,739                       10                   (14)                  1,735
Victoria's Secret U.S.                            1,053                        3                  (198)                    858
Victoria's Secret Canada                             38                        -                   (12)                     26
Victoria's Secret U.K. / Ireland                     26                        -                     -                      26
Victoria's Secret Beauty and Accessories
Greater China                                        41                        1                    (3)                     39
Victoria's Secret Greater China                      23                        3                    (1)                     25
Total Victoria's Secret                           1,181                        7                  (214)                    974
Total Stores                                      2,920                       17                  (228)                  2,709


Partner-Operated Store Data
The following table represents partner-operated store data for year-to-date
2021:
                                                Stores at                                                            Stores at
                                             January 30, 2021              Opened               Closed             July 31, 2021
Bath & Body Works                                    288                       22                   (5)                    305
Victoria's Secret Beauty & Accessories               338                        7                   (6)                    339
Victoria's Secret                                    120                        3                    -                     123

Total                                                746                       32                  (11)                    767


The following table represents partner-operated store data for year-to-date
2020:
                                                Stores at                                                             Stores at
                                             February 1, 2020              Opened               Closed              August 1, 2020
Bath & Body Works                                    278                        7                   (1)                    284
Victoria's Secret Beauty & Accessories               360                        2                  (13)                    349
Victoria's Secret                                     84                        4                    -                      88
Total                                                722                       13                  (14)                    721



Results of Operations
Second Quarter of 2021 Compared to Second Quarter of 2020
Operating Income (Loss)
The following table provides our segment operating income (loss) and operating
income (loss) rates (expressed as a percentage of net sales) for the second
quarter of 2021 in comparison to the second quarter of 2020:
                                                                Operating Income (Loss) Rate
                                   2021        2020                  2021                   2020
Second Quarter                      (in millions)
Bath & Body Works               $    431      $ 337                           25.3  %      26.9  %
Victoria's Secret                    233       (219)                          14.4  %     (20.5  %)
Other (a)                            (65)       (74)                             -  %         -  %
Total Operating Income (Loss)   $    599      $  44                         

18.1 % 1.9 %

_______________

(a)Includes corporate infrastructure and governance functions, and other
non-recurring items that are deemed to be corporate in nature.
For the second quarter of 2021, operating income increased $555 million, to $599
million, from $44 million in the second quarter of 2020, and the operating
income rate increased to 18.1% from 1.9%. The drivers of the operating income
results are discussed in the following sections.
                                       26
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Net Sales
The following table provides net sales for the second quarter of 2021 in
comparison to the second quarter of 2020:
                                               2021         2020        % 

Change

Second Quarter                                   (in millions)

Bath & Body Works Stores - U.S. and Canada $ 1,230 $ 678 81 % Bath & Body Works Direct

                         407          519         (22  %)
Bath & Body Works International (a)               67           56          19  %
Total Bath & Body Works                        1,704        1,253          36  %
Victoria's Secret Stores - U.S. and Canada     1,037          364         185  %
Victoria's Secret Direct                         469          614         (24  %)
Victoria's Secret International (b)              108           88          22  %
Total Victoria's Secret                        1,614        1,066          51  %

Total Net Sales                              $ 3,318      $ 2,319          43  %


 _______________
(a)Results include royalties associated with franchised store and wholesale
sales.
(b)Results include company-operated stores in the U.K. (pre-joint venture) and
Greater China, and royalties associated with franchised stores and wholesale
sales.

The following table provides a reconciliation of net sales for the second quarter of 2021 to the second quarter of 2020:

                                                         Bath &             Victoria's
                                                       Body Works             Secret                    Total
                                                                    (in millions)
2020 Net Sales                                       $     1,253          $     1,066                $   2,319
Comparable Store Sales                                      (150)                  58                      (92)
Sales Associated with New, Closed and Non-comparable
Remodeled Stores, Net (a)                                    698                  593                    1,291
Direct Channels                                             (112)                (142)                    (254)
Private Label Credit Card                                      -                    3                        3
International Wholesale, Royalty and Other                    11                   31                       42
Foreign Currency Translation                                   4                    5                        9
2021 Net Sales                                       $     1,704          $     1,614                $   3,318


 _______________

(a)Includes the increased sales from period over period due to the 2020 COVID-19 related stores closures.

The following table compares the second quarter of 2021 comparable sales to the second quarter of 2020:

                                                            2021        2020
             Comparable Sales (Stores and Direct) (a)
             Bath & Body Works (b)                         (22  %)     123  %
             Victoria's Secret (c)                          (9  %)      24  %
             Total Comparable Sales                        (16  %)      63  %

             Comparable Store Sales (a)
             Bath & Body Works (b)                         (23  %)      87  %
             Victoria's Secret (c)                          16  %      (12  %)
             Total Comparable Store Sales                   (9  %)      33  %


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________
(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 the second quarter of 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 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. The percentage change in comparable sales is calculated on a
comparable calendar period as opposed to a fiscal basis. Comparable sales
attributable to our international stores are calculated on a constant currency
basis.
(b)Includes company-operated stores in the U.S. and Canada.
(c)Includes company-operated stores in the U.S., Canada, the U.K. (pre-joint
venture) and Greater China.
The results by segment are as follows:
Bath & Body Works
For the second quarter of 2021, net sales increased $451 million to $1.704
billion. Net sales increased in the stores channel by $552 million, or 81%,
primarily due to the COVID-19 related store closures in the second quarter of
2020. Direct net sales decreased $112 million, or 22%, 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.
Performance was strong throughout the quarter as we saw positive customer
response to our merchandise. We experienced significant growth in fragrant body
care, home fragrance and gifting. As expected, soaps and sanitizers declined
versus last year's significant growth.
The decrease in comparable sales was driven by a decrease in average dollar
sales in the stores channel and a decline in direct traffic, given the impact
from the store closures last year.
Victoria's Secret
For the second quarter of 2021, net sales increased $548 million to $1.614
billion. Net sales increased in U.S. and Canada stores by $673 million, or 185%,
primarily due to the COVID-19 related store closures in the second quarter of
2020, partially offset by the impact of the permanent closure of 241 stores in
North America in 2020. Direct net sales decreased $145 million, or 24%,
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.
The decrease in comparable sales was driven by a decline in direct traffic,
given the impact from the store closures last year, partially offset by an
increase in store traffic and average unit retail.
Gross Profit
For the second quarter of 2021, our gross profit increased $787 million to
$1.498 billion, and our gross profit rate (expressed as a percentage of net
sales) increased to 45.2% from 30.7%, primarily driven by the following:
Bath & Body Works
For the second quarter of 2021, the gross profit increase was due to the
increase in merchandise margin dollars related to the increase in net sales,
partially offset by a decrease in the merchandise margin rate in the direct
business as we returned to a normalized semi-annual sale in June, and higher
occupancy expenses due to the increase in net sales.
The gross profit rate increase was driven by buying and occupancy leverage on
higher net sales partially offset by a decrease in the merchandise margin rate,
reflecting a return to a normalized semi-annual sale and higher supply chain
costs due to market constraints and inflation.
Victoria's Secret
For the second quarter of 2021, the gross profit increase was due to the
increase in merchandise margin dollars related to the increase in net sales and
an increase in the merchandise margin rate driven by improved response to our
merchandise assortments, disciplined management of inventory, as well as strong
selling execution in stores and online, all of which enabled us to reduce
promotional activity during the quarter. Occupancy expenses were lower, driven
by store asset impairment charges of $117 million in the prior year and
permanent store closures, partially offset by a $39 million gain related to the
closure of our Hong Kong flagship store in the prior year.
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The gross profit rate increase was driven by buying and occupancy leverage on
higher net sales, an increase in the merchandise margin rate reflecting a
meaningful pullback in promotional activity and the store asset impairment
charges in the prior year.
General, Administrative and Store Operating Expenses
For the second quarter of 2021, our general, administrative and store operating
expenses increased $232 million to $899 million due to an increase in store
selling expenses as a result of the increase in net sales, an increase in
marketing investments due to brand repositioning at Victoria's Secret and the
store closures in the prior year, and costs related to legal and separation
fees. These increases were partially offset by severance and related costs
associated with headcount reductions totaling $81 million in the prior year and
savings realized as a result of cost reductions and the impact of the permanent
store closures.
The general, administrative and store operating expense rate decreased to 27.1%
from 28.8% due to leverage on the increase in net sales.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing
rates for the second quarter of 2021 and 2020:
Second Quarter                               2021          2020

Average daily borrowings (in millions) $ 5,528 $ 6,173 Average borrowing rate (in percentages) 7.2 % 6.8 %



For the second quarter of 2021, our interest expense decreased $5 million to $99
million due to lower average daily borrowings partially offset by a higher
average borrowing rate.
Provision (Benefit) for Income Taxes
For the second quarter of 2021, our effective tax rate was 25.1% compared to
17.7% in the second quarter of 2020. The second quarter of 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
Statement of Income on share-based awards that vested in the quarter. In the
second quarter of 2020, we recognized a benefit for income taxes of $11 million
on a loss before income taxes of $60 million. The second quarter of 2020 rate
was lower than our combined estimated federal and state statutory rate primarily
due to losses related to certain foreign subsidiaries, which generated no tax
benefit, offset by changes in tax legislation included in the CARES Act, which
resulted in a $21 million tax benefit.
Results of Operations
Year-to-Date 2021 Compared to Year-to-Date 2020
Operating Income (Loss)
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
2021 in comparison to year-to-date 2020:
                                                                Operating Income (Loss) Rate
                                  2021         2020                  2021                   2020
Year-to-Date                        (in millions)
Bath & Body Works               $   811      $  413                           25.6  %      20.5  %
Victoria's Secret                   477        (573)                          15.1  %     (29.2  %)
Other (a)                          (117)       (114)                             -  %         -  %
Total Operating Income (Loss)   $ 1,171      $ (274)                          18.5  %      (6.9  %)


 _______________
(a)Includes corporate infrastructure and governance functions, and other
non-recurring items that are deemed to be corporate in nature.
For year-to-date 2021, operating income increased $1.445 billion to operating
income of $1.171 billion, and the operating income rate increased to 18.5% from
(6.9%). The drivers of the operating income results are discussed in the
following sections.
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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)

Bath & Body Works Stores - U.S. and Canada $ 2,280 $ 1,102 107 % Bath & Body Works Direct

                         756          807          (6  %)
Bath & Body Works International (a)              137          105          31  %
Total Bath & Body Works                        3,173        2,014          58  %
Victoria's Secret Stores - U.S. and Canada     1,970          877         124  %
Victoria's Secret Direct                         990          922           7  %
Victoria's Secret International (b)              208          161          30  %
Total Victoria's Secret                        3,168        1,960          62  %

Total Net Sales                              $ 6,341      $ 3,974          60  %


 _______________
(a)Results include royalties associated with franchised store and wholesale
sales.
(b)Results include company-operated stores in the U.K. (pre-joint venture) and
Greater China, and royalties associated with franchised stores and wholesale
sales.

The following table provides a reconciliation of net sales for year-to-date 2021
to year-to-date 2020:
                                                        Bath &             Victoria's
                                                      Body Works             Secret                     Total
                                                                  (in millions)
2020 Net Sales                                      $     2,014          $     1,960                $    3,974
Comparable Store Sales                                     (102)                  70                       (32)
Sales Associated with New, Closed and
Non-comparable Remodeled Stores, Net (a)                  1,274                  994                     2,268
Direct Channels                                             (52)                  70                        18
Private Label Credit Card                                     -                    6                         6
International Wholesale, Royalty and Other                   33                   60                        93
Foreign Currency Translation                                  6                    8                        14
2021 Net Sales                                      $     3,173          $     3,168                $    6,341


 _______________

(a)Includes the increased sales from period over period due to the 2020 COVID-19 related stores closures.

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The following table compares year-to-date 2021 comparable sales to year-to-date
2020:
                                               2021        2020
Comparable Sales (Stores and Direct) (a)
Bath & Body Works (b)                          (8  %)      84  %
Victoria's Secret (c)                           6  %        3  %
Total Comparable Sales                         (1  %)      32  %

Comparable Store Sales (a)
Bath & Body Works (b)                         (10  %)      54  %
Victoria's Secret (c)                           9  %      (16  %)
Total Comparable Store Sales                   (2  %)      12  %


________
(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 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. The percentage
change in comparable sales is calculated on a comparable calendar period as
opposed to a fiscal basis. Comparable sales attributable to our international
stores are calculated on a constant currency basis.
(b)Includes company-operated stores in the U.S. and Canada.
(c)Includes company-operated stores in the U.S., Canada, the U.K. (pre-joint
venture) and Greater China.
The results by segment are as follows:
Bath & Body Works
For year-to-date 2021, net sales increased $1.159 billion to $3.173 billion. Net
sales increased in the stores channel by $1.178 billion, or 107%, primarily due
to the COVID-19 related store closures in 2020. Direct net sales decreased $51
million, or 6%, 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.
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. As expected, soaps and sanitizers declined
versus last year's significant growth.
The decrease in comparable sales was driven by a decline in store traffic and
direct traffic, given the impact from store closures last year, partially offset
by a higher average unit retail in the stores channel.
Victoria's Secret
For year-to-date 2021, net sales increased $1.208 billion to $3.168 billion. Net
sales increased in U.S. and Canada stores by $1.093 billion, or 124%, primarily
due to the COVID-19 related store closures in 2020, partially offset by the
impact of the permanent closure of 241 stores in North America in 2020. Direct
net sales increased $68 million, or 7%, due to improved customer response to our
merchandise assortment as well as the temporary suspension of operations for
approximately one week in March 2020. Direct sales last year were positively
impacted by the COVID-19 related store closures.
The increase in comparable sales was driven by an increase in average unit
retail and store conversion, partially offset by a decline in store and direct
traffic.
Gross Profit
For year-to-date 2021, our gross profit increased $1.912 billion to $2.912
billion, and our gross profit rate (expressed as a percentage of net sales)
increased to 45.9% from 25.2%, primarily driven by the following:
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Bath & Body Works
For year-to-date 2021, the gross profit increase was due to the increase in
merchandise margin dollars related to the increase in net sales and an increase
in the merchandise margin rate driven by strong customer response to our
merchandise assortment which allowed us to reduce our promotional activity. This
was partially offset by higher occupancy expenses due to the increase in net
sales.
The gross profit rate increase was driven by buying and occupancy leverage on
higher net sales and an increase in the merchandise margin rate.
Victoria's Secret
For year-to-date 2021, the gross profit increase was due to the increase in
merchandise margin dollars related to the increase in net sales and an increase
in the merchandise margin rate driven by improved response to our merchandise
assortments, disciplined management of inventory, as well as strong selling
execution in stores and online, all of which enabled us to reduce promotional
activity during the period. Occupancy expenses were lower, driven by store asset
impairment charges of $214 million in the prior year and permanent store
closures, partially offset by a $39 million gain related to the closure of our
Hong Kong flagship store in the prior year.
The gross profit rate increase was driven by buying and occupancy leverage on
higher net sales, an increase in the merchandise margin rate reflecting a
meaningful pullback in promotional activity and the store asset impairment
charges in the prior year.
General, Administrative and Store Operating Expenses
For year-to-date 2021, our general, administrative and store operating expenses
increased $467 million to $1.741 billion due to an increase in store selling
expenses as a result of the increase in net sales, an increase in marketing
investments, costs related to legal and separation fees, a $35 million
charitable contribution to support philanthropic funds and an increase in
incentive compensation given company performance. These increases were partially
offset by severance and related costs associated with headcount reductions
totaling $81 million in the prior year, and savings realized as a result of cost
reductions and the impact of the permanent store closures.
The general, administrative and store operating expense rate decreased to 27.4%
from 32.1% due to leverage on the increase in net sales.
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) $ 5,859 $ 6,125 Average borrowing rate (in percentages) 7.2 % 6.5 %



For year-to-date 2021, our interest expense increased $11 million to $212
million due to a higher average borrowing rate partially offset by lower average
daily borrowings.
Other Loss
For year-to-date 2021, our other loss was $106 million primarily due to a $105
million pre-tax loss associated with the early extinguishment of outstanding
notes recognized in the first quarter of 2021.
Provision (Benefit) for Income Taxes
For year-to-date 2021, our effective tax rate was 23.6% compared to 26.7%
year-to-date 2020. The year-to-date 2021 rate was lower than the Company's
combined estimated federal and state statutory rate primarily due to the
recognition of excess tax benefits recorded through the Consolidated Statements
of Income on share-based awards that vested year-to-date. The second quarter of
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 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.

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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
$286 million as of July 31, 2021.
We believe that our available short-term and long-term capital resources are
sufficient to fund foreseeable requirements.
Working Capital and Capitalization
The following table provides a summary of our working capital position and
capitalization as of July 31, 2021, January 30, 2021 and August 1, 2020:
                                                 July 31,      January 30,       August 1,
                                                   2021            2021             2020
                                                               (in millions)

Net Cash Provided by Operating Activities (a) $ 573 $ 2,039

    $      286
Capital Expenditures (a)                             178               228             124
Working Capital (b)                                1,889             2,753           1,072
Capitalization:
Long-term Debt (b)                                 5,938             6,366           6,269
Shareholders' Equity (Deficit)                    (1,189)             (662) 

(1,908)

Total Capitalization                            $  4,749      $      5,704      $    4,361
Amounts Available Under the ABL Facility (c)    $      -      $          -  

$ -

_______________

(a)The January 30, 2021 amounts represent a fifty-two-week period, and the
July 31, 2021 and August 1, 2020 amounts represent twenty-six-week periods.
(b)As of July 31, 2021, our Working Capital included $600 million associated
with Cash in Escrow related to the Victoria's Secret & Co. Spin-off and our
Long-term Debt included $592 million related to the Victoria's Secret & Co.
Notes.
(c)As of July 31, 2021, our borrowing base was $1.045 billion but we were unable
to draw upon the ABL Facility as our consolidated cash balance exceeded $350
million. We had outstanding letters of credit, which reduce our availability
under the ABL Facility, of $58 million as of July 31, 2021, $63 million as of
January 30, 2021, and $61 million as of August 1, 2020.

© Edgar Online, source Glimpses

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