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 the third quarter of 2020, we changed our segment reporting as a result of leadership changes and restructuring actions taken to facilitate the ongoing efforts to separate Bath & Body Works andVictoria's Secret into separate businesses. We now have two reportable segments: Bath & Body Works andVictoria's Secret . Accordingly, we no longer report aVictoria's Secret andBath & Body Works International segment as these businesses are now included with their respective brand. Additionally, the Bath & Body Works andVictoria's Secret segments now include sourcing and production functions (formerly known as Mast) and certain other corporate functions that directly support each brand. These functions were previously included within Other. While this reporting change did not impact our consolidated results, historical segment data has been recast to be consistent for all periods presented. 19 -------------------------------------------------------------------------------- Table of Contents Executive Overview In the first quarter of 2021, our operating income increased to$572 million as compared to a loss of$318 million in 2020, and our operating income (loss) rate increased to 18.9% from (19.2%). These results were driven by increases in sales and margin rates at both Bath & Body Works andVictoria's Secret . Net sales increased$1.370 billion , or 83%, to$3.024 billion . Sales were strong throughout the first quarter of 2021, which benefited from government stimulus payments and the relaxation of pandemic-related restrictions. First 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$710 million , or 93%, to$1.470 billion and operating income increased$304 million , or 402%, to$380 million . We are optimistic about our Spring product assortment and our continued ability to execute against our plans in stores and online. We will continue to focus on maximizing our performance, leveraging the strength of our brand, our close connection to our customers and the speed we have in our supply chain. AtVictoria's Secret , net sales increased$660 million , or 74%, to$1.554 billion and operating income increased to$245 million as compared to a loss of$354 million in the first quarter of 2020. We believe we have the momentum in the business, and we are excited about the work that we are doing to continue to reposition the Victoria's Secret brand. We believe we have opportunities for continued improved performance, driven by the brand repositioning work, improved assortments, more disciplined inventory management and our profit improvement plan. For additional information related to our first quarter 2021 financial performance, see "Results of Operations." Victoria's Secret Spin-Off OnMay 11, 2021 , we announced that our Board of Directors unanimously approved a plan to separateL Brands, Inc. into two independent, public companies: Bath & Body Works andVictoria's Secret , including PINK. We expect to create these companies through a tax-free spin-off ofVictoria's Secret toL Brands' shareholders. The spin-off is expected to be effected through a pro-rata distribution toL Brands, Inc. shareholders of common stock of a newly-formed entity holding certain assets and liabilities comprising theVictoria's Secret business. The spin-off is expected to be completed inAugust 2021 , subject to certain customary market, regulatory and other conditions. In connection with the spin-off ofVictoria's Secret , we expect to incur certain one-time costs related to professional and deal-related fees totaling approximately$70 million . We expect to recognize the majority of these costs upon completion of the spin-off. Additionally, we expect future capital and expense related to the implementation of new information technology platforms. We expect that these costs will be incurred by both Bath & Body Works andVictoria's Secret over a period of time following the spin-off. Although our work is in the early stages and our estimates are preliminary, we expect that expenditures could be in the range of$200 million to$300 million . Such estimates are subject to change as our work continues and such changes could be material. After the spin-off,Victoria's Secret will provide technology services to Bath & Body Works under a Transition Services Agreement until we can create independent systems environments, which we believe will help to minimize dis-synergies. We expect that on a consolidatedL Brands basis, we will incur approximately$80 million of incremental overhead costs annually related to technology expenses and other additional headcount to support two separate public companies. The combination of these costs, plus the allocation of corporate overhead which is currently reported in Other, we expect will result in approximately$100 million of additional post-separation annual cost for each Bath & Body Works andVictoria's Secret , compared to what is currently reported in their segment results. 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 inNorth America were closed onMarch 17, 2020 and nearly all stores remained closed throughout the remainder of the first quarter of 2020. Additionally, operations for Victoria's Secret Direct were temporarily suspended for approximately one week in lateMarch 2020 , while Bath & Body Works Direct remained open for the duration of the first quarter of 2020. During the first quarter of 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 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. Government stimulus payments and the relaxation of pandemic-related restrictions have positively impacted demand for our products during the first quarter of 2021. 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. 20 -------------------------------------------------------------------------------- Table of Contents 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. First Quarter (in millions, except per share amounts) 2021 2020 Detail of Special Items - Income (Expense) Victoria's Secret Asset Impairment (a) $ -$ (97) Special Items included in Operating Income (Loss) - (97) Loss on Extinguishment of Debt (b) (105) - Special Items included in Other Income (Loss) (105) - Tax Benefit from the Resolution of Certain Tax Matters (c) - 50
Tax Effect of Special Items included in Operating Income (Loss) and Other Income (Loss)
25 25 Special Items included in Net Income (Loss) $
(80)
Reconciliation of Reported Operating Income (Loss) to Adjusted Operating Income (Loss) Reported Operating Income (Loss)
$ 572 $ (318) Special Items included in Operating Income (Loss) - 97 Adjusted Operating Income (Loss) $
572
Reconciliation of Reported Net Income (Loss) to Adjusted Net Income (Loss) Reported Net Income (Loss)
$ 277 $ (297) Special Items included in Net Income (Loss) 80 22 Adjusted Net Income (Loss) $
357
Reconciliation of Reported Earnings (Loss) Per Diluted Share to Adjusted Earnings (Loss) Per Diluted Share Reported Earnings (Loss) Per Diluted Share$ 0.97 $ (1.07) Special Items included in Earnings (Loss) Per Diluted Share 0.28 0.08 Adjusted Earnings (Loss) Per Diluted Share $
1.25
________________
(a)In the first quarter of 2020, we recognized pre-tax impairment charges of$97 million ($72 million after tax) related to certain Victoria's Secret store assets. For additional information see Note 6, "Long-Lived Assets" included in Item 1. Financial Statements. (b)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. (c)In the first quarter of 2020, we recognized a$50 million tax benefit related to the resolution of certain tax matters. For additional information see Note 8, "Income Taxes" included in Item 1. Financial Statements. 21 -------------------------------------------------------------------------------- Table of Contents Company-Operated Store Data The following table compares the first quarter of 2021 company-operated store data to the first quarter of 2020: First
Quarter
2021 2020 % Change Sales per Average Selling Square Foot (a) Bath & Body Works U.S.$ 229 $ 93 146 % Victoria's Secret U.S. 154 71 117 % Sales perAverage Store (in thousands) (a) Bath & Body Works U.S.$ 610 $ 245 149 % Victoria's Secret U.S. 1,064 464 129 % Average Store Size (selling square feet) Bath & Body Works U.S. 2,672 2,633 1 % Victoria's Secret U.S. 6,885 6,587 5 % Total Selling Square Feet (in thousands) Bath & Body Works U.S. 4,406 4,305 2 % Victoria's Secret U.S. 5,790 6,804 (15 %)
________________
(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 and nearly all stores remained closed throughout the remainder of the first quarter of 2020. As a result, comparisons of year-over-year trends are not a meaningful way to discuss our operating results this quarter. The following table represents company-operated store data for the first quarter of 2021: Stores at Stores at January 30, 2021 Opened Closed May 1, 2021 Bath & Body Works U.S. 1,633 21 (5) 1,649 Bath & Body Works Canada 103 - - 103 Total Bath & Body Works 1,736 21 (5) 1,752 Victoria's Secret U.S. 846 - (5) 841 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 (6) 929 Total L Brands Stores 2,669 23 (11) 2,681 The following table represents company-operated store data for the first quarter 2020: Stores at Stores at February 1, 2020 Opened Closed May 2, 2020 Bath & Body Works U.S. 1,637 3 (5) 1,635 Bath & Body Works Canada 102 - - 102 Total Bath & Body Works 1,739 3 (5) 1,737 Victoria's Secret U.S. 1,053 1 (21) 1,033 Victoria's Secret Canada 38 - (1) 37 Victoria's Secret U.K. / Ireland 26 - - 26 Victoria's Secret Beauty and Accessories Greater China 41 - (1) 40 Victoria's Secret Greater China 23 1 - 24 Total Victoria's Secret 1,181 2 (23) 1,160 Total L Brands Stores 2,920 5 (28) 2,897 22
-------------------------------------------------------------------------------- Table of Contents Partner-Operated Store Data The following table represents partner-operated store data for the first quarter of 2021: Stores at Stores at January 30, 2021 Opened Closed May 1, 2021 Bath & Body Works 288 14 (3) 299 Victoria's Secret Beauty & Accessories 338 2 (3) 337 Victoria's Secret 120 1 - 121 Total 746 17 (6) 757 The following table represents partner-operated store data for the first quarter of 2020: Stores at Stores at February 1, 2020 Opened Closed May 2, 2020 Bath & Body Works 278 6 (1) 283 Victoria's Secret Beauty & Accessories 360 - (7) 353 Victoria's Secret 84 2 - 86 Total 722 8 (8) 722 Results of Operations First Quarter of 2021 Compared to First 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 first quarter of 2021 in comparison to the first quarter of 2020: Operating Income (Loss) Rate 2021 2020 2021 2020 First Quarter (in millions) Bath & Body Works$ 380 $ 76 25.9 % 10.0 % Victoria's Secret 245 (354) 15.7 % (39.6 %) Other (a) (53) (40) - % - % Total Operating Income (Loss)$ 572 $ (318)
18.9 % (19.2 %)
_______________
(a)Includes corporate infrastructure and governance functions, and other non-recurring items that are deemed to be corporate in nature. For the first quarter of 2021, operating income increased$890 million , to$572 million , from a loss of$318 million in the first quarter of 2020, and the operating income (loss) rate increased to 18.9% from (19.2%). The drivers of the operating income results are discussed in the following sections. 23 -------------------------------------------------------------------------------- Table of Contents Net Sales The following table provides net sales for the first quarter of 2021 in comparison to the first quarter of 2020: 2021 2020 %
Change
First Quarter (in millions)
Bath & Body Works Stores -
349 289 21 % Bath & Body Works International (a) 70 47 46 % Total Bath & Body Works 1,470 760 93 % Victoria's Secret Stores - U.S. and Canada 933 514 82 % Victoria's Secret Direct 521 308 69 % Victoria's Secret International (b) 100 72 39 % Total Victoria's Secret 1,554 894 74 % Total Net Sales$ 3,024 $ 1,654 83 % _______________ (a)Results include royalties associated with franchised store and wholesale sales. (b)Results include company-operated stores in theU.K. (pre-joint venture) andGreater China , and royalties associated with franchised stores and wholesale sales.
The following table provides a reconciliation of net sales for the first quarter of 2021 to the first quarter of 2020:
Bath & Victoria's Body Works Secret Total (in millions) 2020 Net Sales$ 760 $ 894 $ 1,654 Comparable Store Sales 49 12 61 Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net (a) 577 401 978 Direct Channels 60 212 272 Private Label Credit Card - 3 3 International Wholesale, Royalty and Other 22 29 51 Foreign Currency Translation 2 3 5 2021 Net Sales$ 1,470 $ 1,554 $ 3,024 _______________
(a)Includes the increased sales from period over period due to the 2020 COVID-19-related stores closures.
24 -------------------------------------------------------------------------------- Table of Contents The following table compares the first quarter of 2021 comparable sales to the first quarter of 2020: 2021 2020 Comparable Sales (Stores and Direct) (a) Bath & Body Works (b) 16 % 41 % Victoria's Secret (c) 25 % (15 %) Total Comparable Sales 21 % 4 % Comparable Store Sales (a) Bath & Body Works (b) 12 % 20 % Victoria's Secret (c) 3 % (18 %) Total Comparable Store Sales 7 % (5 %) ________ (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 first 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 theU.S. andCanada . (c)Includes company-operated stores in theU.S. ,Canada , theU.K. (pre-joint venture) andGreater China . The results by segment are as follows: Bath & Body Works For the first quarter of 2021, net sales increased$710 million to$1.470 billion , comparable sales increased 16% and comparable store sales increased 12%. Net sales increased in the stores channel by$627 million , or 148%, primarily due to comparisons to the COVID-19-related store closures in the first quarter of 2020. Direct net sales increased$60 million , or 21%, due to continued strength in the channel and as a result of experiencing longer delivery times in the prior year due to the unexpected high demand in the first quarter of 2020. We achieved balanced growth in all merchandise categories. Fragrant body care, home fragrance and soaps and sanitizers experienced growth versus last year. Performance was strong across all months as we saw good customer response to our Spring merchandise. The increase in comparable sales was driven by increases in average dollar sales for both the stores and direct channels and store conversion, partially offset by declines in traffic in our stores due to capacity restrictions in 2021, and a decline in direct traffic driven by the unexpected high demand in 2020.Victoria's Secret For the first quarter of 2021, net sales increased$660 million to$1.554 billion , comparable sales increased 25% and comparable store sales increased 3%. Net sales increased inU.S. andCanada stores by$419 million , or 82%, primarily due to comparisons to the COVID-19-related store closures in the first quarter of 2020, partially offset by the impact of the permanent closure of 241 stores inNorth America in 2020. Direct net sales increased$213 million , or 69%, due to improved customer response to our merchandise assortment as well as the temporary suspension of operations for approximately one week inMarch 2020 . Sales increased in all major categories within Lingerie, PINK and Beauty as customers responded positively to our improved merchandise assortment and brand repositioning. The increase in comparable sales was driven by increases in direct traffic and average dollar sales, and increased conversion and average dollar sales in our stores, partially offset by a decline in stores traffic due to capacity restrictions in 2021. Gross Profit For the first quarter of 2021, our gross profit increased$1.126 billion to$1.414 billion , and our gross profit rate (expressed as a percentage of net sales) increased to 46.8% from 17.4%, primarily driven by the following: 25 -------------------------------------------------------------------------------- Table of Contents Bath & Body Works For the first 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 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, reflecting a meaningful pullback in promotional activity.Victoria's Secret For the first 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, the 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$97 million in the prior year and permanent store closures. 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 first quarter of 2021, our general, administrative and store operating expenses increased$236 million to$842 million due to an increase in Bath & Body Works store selling expenses as a result of the increase in net sales and to support COVID-19 guidelines, an increase in marketing investments primarily due to the store closures in the prior year, a$35 million charitable contribution to support philanthropic funds and an increase in incentive compensation given company performance. These increases were partially offset by savings realized atVictoria's Secret as a result of cost reductions and the impact of the permanent store closures. The general, administrative and store operating expense rate decreased to 27.8% from 36.7% 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 first quarter of 2021 and 2020: First Quarter 2021 2020
Average daily borrowings (in millions)
For the first quarter of 2021, our interest expense increased$17 million to$114 million due to both a higher average borrowing rate and higher average daily borrowings. Other Income (Loss) For the first quarter of 2021, our other loss of$105 million was primarily related to a$105 million pre-tax loss associated with the early extinguishment of outstanding notes. Provision (Benefit) for Income Taxes For the first quarter of 2021, our effective tax rate was 21.6% compared to 28.0% in the first quarter of 2020. The first 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 first quarter of 2020, we recognized a benefit for income taxes of$115 million on a loss before income taxes of$412 million . The first quarter of 2020 rate was higher 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, offset by losses related to certain foreign subsidiaries, which generated no tax benefit. 26 -------------------------------------------------------------------------------- Table of Contents 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$317 million as ofMay 1, 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 ofMay 1, 2021 ,January 30, 2021 andMay 2, 2020 : May 1, January 30, May 2, 2021 2021 2020
(in millions) Net Cash Provided by (Used for) Operating Activities (a)
$ 249 $ 2,039 $ (342) Capital Expenditures (a) 65 228 55 Working Capital 1,932 2,753 166 Capitalization: Long-term Debt 5,344 6,366 5,034 Shareholders' Equity (Deficit) (534) (662) (1,861) Total Capitalization$ 4,810 $ 5,704 $ 3,173 Amounts Available Under the ABL Facility (b) $ -
$ - $ -
_______________
(a)TheJanuary 30, 2021 amounts represent a fifty-two-week period, and theMay 1, 2021 andMay 2, 2020 amounts represent thirteen-week periods. (b)As ofMay 1, 2021 , our borrowing base was$1.025 billion and 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$63 million as ofMay 1, 2021 andJanuary 30, 2021 , and$28 million as ofMay 2, 2020 .
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