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    LB   US5017971046

L BRANDS

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

12/03/2021 | 05:09pm 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 in this Form 10-Q.
Victoria's Secret Spin-Off
On August 2, 2021, we completed the spin-off of our Victoria's Secret business,
which included the Victoria's Secret and PINK brands, into an independent
publicly traded company. As a result, the operating results for the Victoria'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 and Halloween
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.
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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 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. 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 $ 631$ 323


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-operated U.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 per Average Selling Square
Foot (a)                           $   257$   258                     -  %       $   751$   497                    51  %
Sales per Average 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 the U.S. were closed on March 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  %


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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 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 and Halloween 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) $ 5,116$ 6,922 Average borrowing rate (in percentages) 7.2 % 7.0 %



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
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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
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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) $ 5,577$ 6,391 Average borrowing rate (in percentages) 7.2 % 6.7 %



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 of October 30, 2021.
We believe that our available short-term and long-term capital resources are
sufficient to fund foreseeable requirements.
                                       29
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  Table of     Contents
Working Capital and Capitalization
The following table provides a summary of our working capital position and
capitalization as of October 30, 2021, January 30, 2021 and October 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 of January 30, 2021 and October 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 of October 30, 2021. As of January 30, 2021 and
October 31, 2020, we were unable to draw upon the ABL Facility as our
consolidated cash balance exceeded $350 million.

© Edgar Online, source Glimpses

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