Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 733K
13: 10-Q Complete Submission PDF File -- ltd201742910q PDF 1.42M
2: EX-10.1 Employment Agreement HTML 39K
3: EX-15 Letter Re: Incorporation of Report of Registered HTML 25K
Public Accounting Firm
4: EX-31.1 Section 302 Certification of CEO HTML 29K
5: EX-31.2 Section 302 Certification of CFO HTML 30K
6: EX-32 Section 906 Certification of CEO and CFO HTML 25K
14: R1 Document and Entity Information Document HTML 43K
15: R2 Consolidated Statements Of Income HTML 59K
16: R3 Consolidated Statements Of Comprehensive Income HTML 48K
17: R4 Consolidated Balance Sheets HTML 105K
18: R5 Consolidated Balance Sheets (Parenthetical) HTML 41K
19: R6 Consolidated Statements Of Cash Flows HTML 110K
20: R7 Description Of Business And Basis Of Presentation HTML 39K
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23: R10 Acquisition Acquisition (Notes) HTML 39K
24: R11 Restructuring Activities (Notes) HTML 28K
25: R12 Inventories HTML 36K
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28: R15 Income Taxes HTML 30K
29: R16 Long-term Debt HTML 82K
30: R17 Derivative Instruments HTML 69K
31: R18 Fair Value Measurements HTML 98K
32: R19 Comprehensive Income HTML 94K
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34: R21 Retirement Benefits HTML 30K
35: R22 Segment Information HTML 66K
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37: R24 Supplemental Guarantor Financial Information HTML 587K
Supplemental Guarantor Financial Information
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(Policy)
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49: R36 New Accounting Pronouncement Share-based HTML 34K
Compensation (Details)
50: R37 Earnings Per Share And Shareholders' Equity HTML 40K
(Shares Utilized for the Calculation of Basic and
Diluted Earnings per Share) (Details)
51: R38 Earnings Per Share And Shareholders' Equity HTML 47K
(Schedule of Company's Repurchase Program)
(Details)
52: R39 Earnings Per Share And Shareholders' Equity HTML 30K
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- Cash Flow Hedging Disclosure) (Details)
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated
filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated
filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
If an
emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The
Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2017” and “first quarter of 2016” refer to the thirteen week periods ending April 29, 2017 and April 30, 2016, respectively.
1. Description of Business and Basis of Presentation
Description of Business
L Brands, Inc. (“the Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, personal care, beauty and home fragrance products. The
Company sells its merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada, United Kingdom (“U.K.”) and Greater China (China and Hong Kong), and through its websites and other channels. The Company's other international operations are primarily through franchise, license and wholesale partners. The Company currently operates the following retail brands:
•
Victoria’s Secret
•
PINK
•
Bath &
Body Works
•
La Senza
•
Henri Bendel
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2017” and “first quarter of 2016”
refer to the thirteen week periods ending April 29, 2017 and April 30, 2016, respectively.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated
entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the
Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income. The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income on the Consolidated Statements of Income. The Company’s equity method investments are required to be tested for impairment when it is determined there may be an other-than-temporary loss in value.
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended April 29, 2017 and April 30,
2016 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2016 Annual Report on Form 10-K.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
Seasonality of Business
Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily
indicative of the results expected for the full fiscal year.
Concentration of Credit Risk and Investments
The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. Typically, the Company’s investment portfolio is primarily comprised
of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.
The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company records an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.
2.
New Accounting Pronouncements
Share-Based Compensation
In the first quarter of 2017, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting. On a prospective basis, this standard requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are exercised. These effects were historically recorded in equity on the balance sheet. As a result, the Company recognized $11 million of excess tax benefits related to share-based awards in Provision for Income Taxes in the first quarter 2017 Consolidated
Statement of Income. The standard also requires all tax-related cash flows from share-based awards to be reported as operating activities on the statements of cash flows and any cash payments made to taxing authorities on an employee's behalf from withheld shares as financing activities. For the first quarter of 2016, the retrospective application of these changes resulted in a $71 million increase in operating cash flows and a corresponding decrease to financing cash flows. Further, as allowed by the standard, the Company will continue to estimate award forfeitures at the time awards are granted and adjust, if necessary, in subsequent periods based on historical experience and expected future termination rates.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which was further clarified and amended in 2015 and 2016. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective beginning
in fiscal 2018, with early adoption as of fiscal 2017 permitted. The standard allows for either a full retrospective or a modified retrospective transition method.
The Company continues to evaluate the impacts of this standard. The most significant changes to current accounting relate to the points earned under the Victoria's Secret customer loyalty program and the accounting for sales returns. The new standard will require a deferral of revenue associated with loyalty points using a relative stand-alone selling price method and will also require sales returns to be presented on a gross basis with the sales refund liability presented separately from the return asset. The Company is continuing to evaluate the further
impacts the standard will have on the Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows. The Company will adopt the standard in the first quarter of fiscal 2018 and is currently evaluating the transition method.
Leases
In February 2016, the FASB issued ASC 842, Leases. This guidance requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and
expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal 2019, with early adoption permitted.
The Company is currently evaluating the impacts that this standard will have on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows, including period of adoption. The Company currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Thus, the Company
expects adoption will result in a material increase to the assets and liabilities on the Consolidated Balance Sheet.
3. Earnings Per Share and Shareholders’ Equity (Deficit)
Earnings Per Share
Earnings per basic share is computed based on the weighted-average number of outstanding common shares. Earnings per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.
The
following table provides shares utilized for the calculation of basic and diluted earnings per share for the first quarter of 2017 and 2016:
First Quarter
2017
2016
(in
millions)
Weighted-average Common Shares:
Issued Shares
316
313
Treasury Shares
(30
)
(25
)
Basic
Shares
286
288
Effect of Dilutive Options and Restricted Stock
3
5
Diluted Shares
289
293
Anti-dilutive
Options and Awards (a)
5
2
_______________
(a)
These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Shareholders’ Equity (Deficit)
Common
Stock Share Repurchases
Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs for the first quarter of 2017 and 2016:
Amount
Authorized
Shares
Repurchased
Amount
Repurchased
Average
Stock Price of Shares Repurchased within Program
Repurchase Program
2017
2016
2017
2016
2017
2016
(in millions)
(in
thousands)
(in millions)
February 2017
$
250
1,570
NA
$
80
NA
$
50.92
NA
February
2016
$
500
51
3,125
3
$
260
$
58.95
$
83.26
Total
1,621
3,125
$
83
$
260
In
the first quarter of 2017, the Company's Board of Directors approved a new $250 million share repurchase program, which included the $59 million remaining under the February 2016 repurchase program.
In the first quarter of 2016, the Company's Board of Directors approved a $500 million share repurchase program, which included $17 million remaining under the June 2015 repurchase program.
The February 2017 repurchase program had $170
million remaining as of April 29, 2017. Subsequent to April 29, 2017, the Company repurchased an additional 0.2 million shares of common stock for $11 million under this program.
There were $1 million and $3 million of share repurchases reflected in Accounts Payable on the April 29, 2017 and January 28,
2017 Consolidated Balance Sheets, respectively. There were no share repurchases reflected in Accounts Payable on the April 30, 2016 Consolidated Balance Sheet.
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during the first quarter of 2017 and 2016:
Ordinary
Dividends
Special Dividends
Total Dividends
Total Paid
(per share)
(in millions)
2017
First
Quarter
$
0.60
$
—
$
0.60
$
172
2016
First
Quarter
$
0.60
$
2.00
$
2.60
$
750
4.
Acquisition
On April 18, 2016, the Company completed the acquisition of 100% of the shares of American Beauty Limited for a total purchase price of $44 million. This agreement included the reacquisition of the franchise rights from one of our partners to operate Victoria's Secret Beauty and Accessories stores in Greater China, including 26 stores already open at the time of acquisition. The purchase price included $10 million in forgiveness of liabilities owed to the Company from the pre-existing relationship. As a result of
this acquisition, the Company's financial statements include the financial results of American Beauty Limited, which are reported as part of the Victoria's Secret and Bath & Body Works International segment.
The total purchase price was allocated to the net tangible and intangible assets acquired based on their estimated fair value. Such estimated fair values require management to make estimates and judgments, especially with respect to intangible assets. The allocation of the purchase price to goodwill was complete as of the second quarter of 2016. Goodwill related to the acquisition is not deductible for tax purposes.
The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is as follows:
During the first quarter of 2016, the Company made strategic changes within the Victoria’s Secret segment designed to focus the brand on its core merchandise categories, streamline operations and emphasize brand building and loyalty-enhancing marketing and advertising rather than using traditional catalogues and offers. As a result of these actions, the
Company recorded charges related to cancellations of fabric commitments for non-go forward merchandise and a reserve against paper that was previously intended for future catalogues. These costs, totaling $11 million, including non-cash charges of $10 million, are included in Cost of Goods Sold, Buying and Occupancy on the 2016 Consolidated Statement of Income. These actions also resulted in the elimination of approximately 200 positions primarily in the Company's Ohio and New York home offices. Severance and related costs associated with these eliminations, totaling $24 million, are included in General, Administrative and Store Operating Expenses on the 2016 Consolidated Statement of Income. The
Company recognized a total pre-tax charge of $35 million for these items in the first quarter of 2016. The remaining liability for unpaid severance and related costs was insignificant as of April 29, 2017.
Depreciation
expense was $142 million and $121 million for the first quarter of 2017 and 2016, respectively.
8. Equity Investments and Other
Easton Investments
The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $79 million as of April 29,
2017 and January 28, 2017, and $82 million as of April 30, 2016, and are recorded in Other Assets on the Consolidated Balance Sheets.
Included in the Company’s Easton investments is an equity interest in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and have developed commercial entertainment and shopping centers. The Company’s investments in ETC and EG are accounted for using the equity method of accounting.
The Company has a majority financial interest in ETC and EG, but another unaffiliated member manages them, and certain significant decisions regarding ETC and EG require the consent of unaffiliated members in addition to the Company.
9. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign
subsidiaries.
For the first quarter of 2017, the Company’s effective tax rate was 20.6% compared to 34.6% in the first quarter of 2016. The first quarter 2017 rate was lower than the Company's combined federal and state statutory rate primarily due to the recognition of excess tax benefits recorded through
the income statement on stock options exercised in the quarter. In the first quarter of 2017, the Company adopted the new share-based compensation standard that requires prospective recognition of excess tax benefits in the income statement when awards vests or are exercised. The first quarter 2016 rate was lower than the Company’s combined federal and state statutory rate primarily due to the resolution of certain tax matters.
As of April 29, 2017, any unrecognized deferred income tax liability resulting from the
Company's undistributed foreign earnings from non-U.S. subsidiaries is not expected to reverse in the foreseeable future; furthermore, the undistributed foreign earnings are permanently reinvested. If the Company elects to distribute these foreign earnings in the future, they could be subject to additional income taxes. Determination of the amount of any unrecognized deferred income tax liability on these undistributed foreign earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Income taxes paid were approximately $15 million and $227 million for the first
quarter of 2017 and 2016, respectively.
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
989
$
989
$
989
$1
billion, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
993
992
991
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
993
992
991
$700
million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
692
692
—
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
497
497
496
$500
million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”)(a)
496
496
499
$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
397
397
396
Total
Senior Unsecured Debt with Subsidiary Guarantee
$
5,057
$
5,055
$
4,362
Senior Unsecured Debt
$350
million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348
$
348
$
348
$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
297
297
297
$700
million, 6.90% Fixed Interest Rate Notes due July 2017 (“2017 Notes”)(b)
—
—
706
Foreign Facilities
44
36
13
Total
Senior Unsecured Debt
$
689
$
681
$
1,364
Total
$
5,746
$
5,736
$
5,726
Current
Portion of Long-term Debt
(44
)
(36
)
(8
)
Total Long-term Debt, Net of Current Portion
$
5,702
$
5,700
$
5,718
________________
(a)
The
balances include a fair value interest rate hedge adjustment which increased the debt balance by $2 million as of April 29, 2017, $2 million as of January 28, 2017 and $8 million as of April 30, 2016.
(b)
The balance includes a fair value interest rate hedge adjustment which increased the debt balance by $7
million as of April 30, 2016.
Issuance of Notes
In June 2016, the Company issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's 100% owned subsidiaries (the “Guarantors”). The proceeds from the issuance were $692
million, which were net of issuance costs of $8 million. These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the April 29, 2017 and January 28, 2017 Consolidated Balance Sheets.
Repurchase of Notes
In July 2016, the Company used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. In the second quarter of 2016, the
Company recognized a pre-tax loss on extinguishment of this debt of $36 million (after-tax net loss of $22 million), which is net of gains of $7 million related to terminated interest rate swaps associated with the 2017 Notes.
Revolving Facility
As of April 29, 2017, the Company maintained a secured revolving credit facility (“Revolving Facility”) with aggregate availability of $1 billion. The fees related to committed and unutilized amounts are 0.30% per annum, and
the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings or British pound borrowings is London Interbank Offered Rate (“LIBOR”) plus 1.50% per annum. The interest rate on outstanding Canadian dollar borrowings is Canadian Dollar Offered Rate (“CDOR”) plus 1.50% per annum.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. The Company is required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding
4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such
investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of April 29,
2017, the Company was in compliance with both of its financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of April 29, 2017, there were no borrowings outstanding under the Revolving Facility.
The Revolving Facility supports the Company’s letter of credit program. The Company had $8 million
of outstanding letters of credit as of April 29, 2017 that reduced its remaining availability under the Revolving Facility.
Subsequent to April 29, 2017, the Company entered into an amendment and restatement (“Amendment”) of the Revolving Facility. The Amendment maintains the aggregate availability under the Revolving Facility at $1 billion and extends the termination date from July 18, 2019 to May 11, 2022. The Amendment allows certain of the
Company's non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
In addition, the Amendment reduced the commitment fees payable under the Revolving Facility, which are based on the Company's long-term credit rating, to 0.25% per annum. The Amendment did not modify the Company's quantitative covenant requirements, but did provide an increased limit on restricted payments in the event the Company does not meet the aforementioned criteria to make these payments
without limitation and provides greater flexibility in respect of the Company’s ability to grant liens on assets.
Foreign Facilities
In addition to the Revolving Facility, the Company maintains various revolving and term loan bank facilities with availability totaling $100 million to support its foreign operations (“Foreign Facilities”). Current borrowings on these Foreign Facilities mature between May 8, 2017 and February 28, 2018. The interest rates on outstanding borrowings
are based upon the applicable benchmark rate for the currency of each borrowing.
During the first quarter of 2017, the Company borrowed $9 million and made payments of $1 million under the Foreign Facilities. The maximum daily amount outstanding at any point in time during the first quarter of 2017 was $44 million.
Interest Rate Swap Arrangements
For information related to the Company’s fair value
interest rate swap arrangements, see Note 11, “Derivative Financial Instruments.”
11. Derivative Financial Instruments
Foreign Exchange Derivative Instruments
The Company's Canadian dollar and British pound denominated earnings are subject to exchange rate risk as substantially all of its merchandise sold in Canada and the U.K. is sourced through U.S. dollar transactions. As a result, the Company uses foreign currency forward contracts
designated as cash flow hedges to mitigate this foreign currency exposure. These forward contracts currently have a maximum term of 18 months. Amounts are reclassified from accumulated other comprehensive income (loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Cost of Goods Sold, Buying and Occupancy on the Consolidated Statements of Income.
The Company has a cross-currency swap related to an intercompany loan of approximately CAD$170 million maturing in January 2018 which is designated as a cash flow hedge of foreign currency exchange risk. This cross-currency
swap mitigates the exposure to fluctuations in the U.S. dollar-Canadian dollar exchange rate related to the Company's Canadian operations. The cross-currency swap requires the periodic exchange of fixed-rate Canadian dollar interest payments for fixed-rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. Changes in the U.S. dollar-Canadian dollar exchange rate and the related swap settlements result in reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.
The Company uses foreign currency forward contracts
to manage the impact of fluctuations in foreign currency exchange rates relative to recognized payable balances denominated in non-functional currencies. The fair value of these non-designated foreign currency forward contracts is not significant as of April 29, 2017.
The following table provides the U.S. dollar notional amount of outstanding foreign currency derivative financial instruments as of April 29,
2017, January 28, 2017 and April 30, 2016:
The
following table provides a summary of the fair value and balance sheet classification of outstanding derivative financial instruments designated as foreign currency cash flow hedges as of April 29, 2017, January 28, 2017 and April 30, 2016:
The
following table provides a summary of the pre-tax financial statement effect of the gains and losses on derivative financial instruments designated as foreign currency cash flow hedges for the first quarter 2017 and 2016:
First Quarter
2017
2016
(in
millions)
Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)
$
10
$
(16
)
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Cost of Goods Sold, Buying and Occupancy Expense (a)
(2
)
—
(Gain)
Loss Reclassified from Accumulated Other Comprehensive Income into Other Income (b)
(5
)
14
________________
(a)
Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings when the hedged merchandise is sold to the customer. No ineffectiveness
was associated with these foreign currency cash flow hedges.
(b)
Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan. No ineffectiveness was associated with this foreign currency cash flow hedge.
We estimate that $4 million of gains included in accumulated other comprehensive income (loss) as of April 29, 2017
related to foreign currency forward contracts designated as cash flow hedges will be reclassified into earnings within the following 12 months. Actual amounts ultimately reclassified depend on the exchange rates in effect when derivative contracts that are currently outstanding mature.
Interest Rate Derivative Instruments
The Company has interest rate swap arrangements related to $300 million of the outstanding 2019 Notes that are designated as interest rate fair value hedges. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt
to a variable interest rate based on LIBOR plus a fixed percentage. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
In the past, the Company had entered into interest rate swap arrangements on the 2017 Notes. In the second quarter of 2016, the Company terminated its interest rate designated fair value hedges in conjunction with the repurchase of the 2017 Notes.
The following table provides a summary of the fair value and balance sheet classification of the derivative financial
instruments designated as interest rate fair value hedges as of April 29, 2017, January 28, 2017 and April 30, 2016:
The following table provides a summary of the principal value and estimated fair value of long-term debt, excluding foreign facility borrowings, as of April 29, 2017, January 28, 2017 and April 30, 2016:
The estimated fair value of the
Company’s publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC Topic 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The authoritative guidance included in ASC Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level
1 – Quoted market prices in active markets for identical assets or liabilities.
•
Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices of similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•
Level 3
– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following table provides a summary of assets and liabilities measured in the consolidated financial statements at fair value on a recurring basis as of April 29, 2017, January 28, 2017
and April 30, 2016:
The
Company's Level 1 fair value measurements use unadjusted quoted prices in active markets for identical assets. In the first quarter of 2016, the Company sold a portion of its marketable securities, which are classified as available-for-sale, for $10 million and recognized a pre-tax gain of $4 million (after-tax gain of $3 million). The gain is included within Other Income in the 2016 Consolidated Statement of Income, and the cash proceeds are included in Proceeds from Sale of Marketable Securities within the Investing Activities section of the 2016 Consolidated Statement of Cash Flows. These securities are classified as Level 1 fair value measurements as they are traded with sufficient frequency and
volume to enable the Company to obtain pricing information on an ongoing basis.
The Company’s Level 2 fair value measurements use market approach valuation techniques. The primary inputs to these techniques include benchmark interest rates and foreign currency exchange rates, as applicable to the underlying instruments.
Management believes that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.
The following table provides a summary of the reclassification adjustments out of accumulated other comprehensive income (loss) for the first quarter of 2017 and 2016:
Details About Accumulated Other Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated
Other Comprehensive Income (Loss)
Location on Consolidated Statements of Income
First Quarter
2017
2016
(in
millions)
(Gain) Loss on Cash Flow Hedges
$
(2
)
$
—
Cost of Goods Sold, Buying and Occupancy
(5
)
14
Other
Income
1
—
Provision for Income Taxes
$
(6
)
$
14
Net
Income
Sale of Available-for-Sale Securities
$
—
$
(4
)
Other
Income
—
1
Provision for Income Taxes
$
—
$
(3
)
Net
Income
14. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect
on the Company’s results of operations, financial condition or cash flows.
In connection with the disposition of certain businesses, the Company has remaining guarantees of approximately $13 million related to lease payments under the current terms of noncancellable leases expiring at various dates through 2021. These guarantees include minimum
rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the businesses. In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended. The Company has not recorded a liability with respect to these guarantee obligations as of April 29, 2017, January 28, 2017 or April 30, 2016 as it concluded that payments under these guarantees were not probable.
In
connection with the sale and leaseback under noncancellable operating leases of certain assets, the Company provides residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire at various dates through 2021, and the total amount of the guarantees is approximately $133 million. The Company recorded a liability of less than $1 million as of April 29, 2017, a liability of $1 million as of January 28,
2017 and a liability of $3 million as of April 30, 2016 related to these guarantee obligations, which are included in Other Long-term Liabilities on the Consolidated Balance Sheets. Additionally, the Company recorded a liability of $9 million related to the early lease termination of one of these assets, which is included in Accrued Expenses and Other on the April 29, 2017 Consolidated Balance Sheet.
15. Retirement
Benefits
The Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement plan for substantially all of its associates within the U.S. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.
The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of
the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $16 million for the first quarter of 2017 and $17 million for the first quarter of 2016.
The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions up to a maximum percentage of eligible compensation. The
Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a fixed rate determined by the Company and reviewed by the Compensation Committee of the Board of Directors, prior to the beginning of each year. Associate contributions and the related interest vest immediately. Company contributions, along with related interest, are subject to vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component
only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specified period of up to 10 years. Total expense recognized related to the non-qualified plan was $4 million for the first quarter of 2017 and $7 million for the first quarter of 2016.
16. Segment Information
The
Company has three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International.
The Victoria’s Secret segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold through retail stores located in the U.S. and Canada and its website, www.VictoriasSecret.com.
The Bath & Body Works segment sells personal care, home fragrance products, soaps and sanitizers under the Bath &
Body Works, White Barn, C.O. Bigelow and other brand names. Bath & Body Works merchandise is sold at retail stores located in the U.S. and Canada and through its website, www.BathandBodyWorks.com.
The Victoria's Secret and Bath & Body Works International segment includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores located outside of the
U.S. and Canada. These businesses include the following:
•
Victoria's Secret International, comprised of company-owned stores in the U.K. and Greater China, as well as stores operated by partners under franchise, and license and wholesale arrangements; and
•
Victoria's Secret Beauty and Accessories, comprised of company-owned stores in Greater China, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature Victoria's Secret branded beauty and accessories products;
•
Bath
& Body Works International stores operated by partners under franchise, license and wholesale arrangements.
Other consists of the following:
•
Mast Global, a merchandise sourcing and production function serving the Company and its international partners;
•
La Senza, comprised of company-owned stores in the U.S. and Canada, as well as stores operated by partners under franchise and license
arrangements, which feature women's intimate apparel;
•
Henri Bendel, operator of 29 specialty stores, which feature handbags, jewelry and other accessory products; and
•
Corporate functions including non-core real estate, equity investments and other governance functions such as treasury and tax.
The following table provides the Company’s
segment information for the first quarter of 2017 and 2016:
Victoria’s
Secret
Bath &
Body Works
Victoria’s
Secret
and
Bath & Body Works International
Other
Total
(in millions)
2017
First
Quarter:
Net Sales
$
1,533
$
678
$
104
$
122
$
2,437
Operating
Income (Loss)
159
102
(1
)
(51
)
209
2016
First
Quarter:
Net Sales
$
1,741
$
660
$
95
$
118
$
2,614
Operating
Income (Loss)
235
112
13
(37
)
323
The
Company's international net sales include sales from company-owned stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s international net sales across all segments totaled $299 million and $295 million for the first quarter of 2017 and 2016, respectively.
17. Subsequent Events
Subsequent
to April 29, 2017, the Company repurchased an additional 0.2 million shares of common stock for $11 million under the February 2017 repurchase program. For additional information, see Note 3, “Earnings Per Share and Shareholders' Equity (Deficit).”
Subsequent to April 29, 2017, the Company entered into an amendment and restatement of the Revolving Facility. For additional information,
see Note 10, “Long-term Debt.”
18. Supplemental Guarantor Financial Information
The Company’s 2019 Notes, 2020 Notes, 2021 Notes, 2022 Notes, 2023 Notes, 2035 Notes and 2036 Notes are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The Company is a holding company, and its most significant assets are the stock of its subsidiaries. The Guarantors represent: (a) substantially all of the sales of the
Company’s domestic subsidiaries, (b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.
Review Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of L Brands, Inc.:
We have reviewed the consolidated balance sheet of L Brands, Inc. and subsidiaries as of April 29, 2017 and April 30, 2016, and the related consolidated statements of income, comprehensive income and cash flows for
the thirteen week periods ended April 29, 2017 and April 30, 2016. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 28, 2017, and the related
consolidated statements of income, comprehensive income, total equity (deficit), and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 17, 2017. In our opinion, the accompanying consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 28, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
L
Brands, Inc. caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our company or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,”“project,”“plan,”“believe,”“expect,”“anticipate,”“intend,”“planned,”“potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could
cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our company or our management:
•
general economic conditions, consumer confidence, consumer spending patterns and market disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•
the
seasonality of our business;
•
the dependence on mall traffic and the availability of suitable store locations on appropriate terms;
•
our ability to grow through new store openings and existing store remodels and expansions;
•
our ability to successfully expand internationally and related risks;
•
our
independent franchise, license and wholesale partners;
•
our direct channel businesses;
•
our ability to protect our reputation and our brand images;
•
our ability to attract customers with marketing, advertising and promotional programs;
•
our
ability to protect our trade names, trademarks and patents;
•
the highly competitive nature of the retail industry and the segments in which we operate;
•
consumer acceptance of our products and our ability to manage the life cycle of our brands, keep up with fashion trends, develop new merchandise and launch new product lines successfully;
•
our
ability to source, distribute and sell goods and materials on a global basis, including risks related to:
•
political instability, significant health hazards, environmental hazards or natural disasters;
•
duties, taxes and other charges;
•
legal and regulatory matters;
•
volatility
in currency exchange rates;
•
local business practices and political issues;
•
potential delays or disruptions in shipping and transportation and related pricing impacts;
•
disruption due to labor disputes; and
•
changing
expectations regarding product safety due to new legislation;
•
our geographic concentration of supplier and distribution facilities in central Ohio;
•
fluctuations in foreign currency exchange rates;
•
stock price volatility;
•
our
ability to pay dividends and related effects;
•
our ability to maintain our credit rating;
•
our ability to service or refinance our debt;
•
our ability to retain key personnel;
•
our
ability to attract, develop and retain qualified associates and manage labor-related costs;
the ability of our manufacturers to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
•
fluctuations
in product input costs;
•
our ability to adequately protect our assets from loss and theft;
•
fluctuations in energy costs;
•
increases in the costs of mailing, paper and printing;
•
claims
arising from our self-insurance;
•
our ability to implement and maintain information technology systems and to protect associated data;
•
our ability to maintain the security of customer, associate, supplier or company information;
•
our ability to comply with regulatory requirements;
•
legal
and compliance matters; and
•
tax, trade and other regulatory matters.
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in “Item 1A. Risk Factors” in our 2016 Annual Report on Form
10-K.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 first quarter of 2017, our operating income decreased $114 million, or 35%, to $209 million, and our operating income rate decreased to 8.6% from 12.4%. Net sales decreased $177 million to $2.437 billion, comparable sales and comparable store sales both decreased 9%. At Victoria's Secret, net sales decreased 12%, and operating income decreased 32%. At Bath & Body Works, net sales increased 3%,
and operating income decreased 9%. At Victoria's Secret and Bath & Body Works International, net sales increased 9%, and operating income decreased 104%. For additional information related to our first quarter 2017 financial performance, see “Results of Operations.”
The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to take a conservative stance with respect to the financial management of our business. We will continue to manage our business carefully, and we will focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling
merchandise assortments and store and online experiences to our customers. We will look for, and capitalize on, those opportunities available to us. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well-positioned.
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 and earnings per share in 2016 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.
Year-to-Date
(in
millions, except per share amounts)
2017
2016
Detail of Special Items included in Operating Income - Income (Expense)
Victoria's Secret Restructuring (a)
$
—
$
(35
)
Total
Special Items included in Operating Income
$
—
$
(35
)
Detail of Special Items included in Provision for Income Taxes - Benefit (Provision)
Tax
effect of Special Items
$
—
$
13
Total Special Items included in Provision for Income Taxes
$
—
$
13
Reconciliation
of Reported Operating Income to Adjusted Operating Income
Reported Operating Income
$
209
$
323
Special Items included in Operating Income
—
35
Adjusted
Operating Income
$
209
$
358
Reconciliation of Reported Net Income to Adjusted Net Income
Reported
Net Income
$
94
$
152
Special Items included in Net Income
—
22
Adjusted
Net Income
$
94
$
174
Reconciliation of Reported Earnings Per Diluted Share to Adjusted Earnings Per Diluted Share
Reported
Earnings Per Diluted Share
$
0.33
$
0.52
Special Items included in Earnings Per Diluted Share
—
0.07
Adjusted
Earnings Per Diluted Share
$
0.33
$
0.59
_______________
(a)
In the first quarter of 2016, we made strategic changes within the Victoria’s Secret segment designed to focus the brand on its core merchandise categories and streamline operations. As
a result of these changes, we recorded charges related to severance and related costs, fabric cancellations and catalogue paper write-offs. For additional information see Note 5, “Restructuring Activities” included in Item 1. Financial Statements.
First Quarter of 2017 Compared to First Quarter of 2016
Operating
Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the first quarter of 2017 in comparison to the first quarter of 2016:
Operating Income Rate
2017
2016
2017
2016
First
Quarter
(in millions)
Victoria’s Secret
$
159
$
235
10.4
%
13.5
%
Bath &
Body Works
102
112
15.0
%
16.9
%
Victoria’s Secret and Bath & Body Works International
(1
)
13
(0.5
)%
13.7
%
Other
(a)
(51
)
(37
)
(41.6
)%
(30.6
)%
Total Operating Income
$
209
$
323
8.6
%
12.4
%
_______________
(a)
Includes
Mast Global, La Senza, Henri Bendel and Corporate.
For the first quarter of 2017, operating income decreased $114 million, or 35%, to $209 million, and the operating income rate decreased to 8.6% from 12.4%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the first quarter of 2017 in comparison to the first
quarter of 2016:
2017
2016
% Change
First Quarter
(in millions)
Victoria’s
Secret Stores (a)
$
1,247
$
1,381
(10
)%
Victoria’s Secret Direct
286
360
(20
)%
Total
Victoria’s Secret
1,533
1,741
(12
)%
Bath & Body Works Stores (a)
588
587
—
%
Bath
& Body Works Direct
90
73
22
%
Total Bath & Body Works
678
660
3
%
Victoria’s
Secret and Bath & Body Works International
104
95
9
%
Other (b)
122
118
3
%
Total
Net Sales
$
2,437
$
2,614
(7
)%
_______________
(a)
Includes
company-owned stores in the U.S. and Canada.
(b)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The following table provides a reconciliation of net sales for the first quarter of 2017 to the first quarter of 2016:
Victoria’s
Secret
Bath
&
Body Works
Victoria’s Secret
and
Bath & Body Works International
Other
Total
First Quarter
(in millions)
2016 Net Sales
$
1,741
$
660
$
95
$
118
$
2,614
Comparable
Store Sales
(155
)
(6
)
(3
)
(2
)
(166
)
Sales
Associated with New, Closed and Non-comparable Remodeled Stores, Net
The following table compares the first quarter of 2017 comparable sales to the first quarter of 2016:
First Quarter
2017
2016
Comparable
Sales (Stores and Direct) (a)
Victoria's Secret (b)
(14
)%
2
%
Bath & Body Works (b)
2
%
6
%
Total
Comparable Sales
(9
)%
3
%
Comparable Store Sales (a)
Victoria’s
Secret (b)
(12
)%
1
%
Bath & Body Works (b)
(1
)%
4
%
Total Comparable Store Sales
(9
)%
2
%
________
(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. A store is typically included in the calculation of comparable sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. 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. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores
in the U.S. and Canada.
The results by segment are as follows:
Victoria's Secret
For the first quarter of 2017, net sales decreased $208 million to $1.533 billion, comparable sales decreased 14% and comparable store sales decreased 12%. Net sales decreased primarily due to strategic decisions to exit the swim and apparel categories and decrease direct mail and certain other promotional activities, a decline in core bra sales due to lower average unit retail prices and beauty as we reposition the category. These results were partially offset by increases
in PINK and sport driven by a compelling merchandise assortment that incorporated newness, innovation and fashion.
The decrease in comparable store sales was driven primarily by a decrease in total transactions and traffic, impacted significantly by the exit of certain categories and the promotional changes discussed above.
Bath & Body Works
For the first quarter of 2017, net sales increased $18 million to $678 million, comparable sales increased 2% and comparable store sales decreased 1%. Net sales increased in our home fragrance category which incorporated newness,
innovation and fashion.
The decrease in comparable store sales was driven by a decrease in total transactions.
Victoria's Secret and Bath & Body Works International
For the first quarter of 2017, net sales increased $9 million to $104 million primarily related to company-owned Victoria's Secret stores in Greater China. These results were partially offset by declines in the Victoria's Secret International business and the negative impacts of foreign currency at Victoria's Secret U.K.
Other
For the first quarter of 2017,
net sales increased $4 million to $122 million primarily due to an increase at La Senza driven by new stores and direct channel growth.
For the first quarter of 2017, our gross profit decreased $140 million to $903 million, and our gross profit rate (expressed as a percentage of net sales) decreased to 37.1%
from 39.9%, primarily driven by the following:
Victoria's Secret
For the first quarter of 2017, the gross profit decrease was primarily driven by lower merchandise margin dollars related to the decrease in net sales. Buying and occupancy expenses decreased primarily due to a decrease in catalogue costs and other cost reductions from strategic actions taken in the first quarter of 2016, but were partially offset by an increase in occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven by deleverage of buying and occupancy expenses on lower sales and lower merchandise margin due to lower average unit retail prices in core bras, partially offset by lower overall
buying and occupancy expenses due to decreased catalogue costs and other cost reductions.
Bath & Body Works
For the first quarter of 2017, the gross profit decrease was primarily driven by an increase in occupancy expenses due to investments in store real estate, partially offset by higher merchandise margin dollars related to the increase in net sales.
The gross profit rate decrease was primarily driven by an increase in occupancy expenses due to investments in store real estate.
Victoria's Secret and Bath & Body Works International
For the first quarter of 2017,
the gross profit decrease was primarily driven by higher occupancy expenses due to investments in store real estate in Greater China and lower merchandise margin dollars related to a decrease in net sales in our Victoria's Secret International business. These decreases were partially offset by increased merchandise margin dollars generated from higher net sales from company-owned stores in Greater China.
The gross profit rate decrease was driven by an increase in occupancy expenses due to investments in store real estate in Greater China and buying and occupancy deleverage on lower sales in our Victoria's Secret International business.
General, Administrative and Store Operating Expenses
For the first quarter of 2017, our general, administrative
and store operating expenses decreased $26 million to $694 million primarily driven by severance charges recorded in the first quarter of 2016 related to the Victoria's Secret restructuring and lower selling expenses related to lower sales volumes at Victoria's Secret, partially offset by increased corporate expenses in Greater China.
The general, administrative and store operating expense rate increased to 28.5% from 27.5% due to deleverage from lower sales, partially offset by Victoria's Secret restructuring charges recorded in the first quarter of 2016.
Other Income and Expense
Interest Expense
The following table
provides the average daily borrowings and average borrowing rates for the first quarter of 2017 and 2016:
First Quarter
2017
2016
Average daily borrowings (in millions)
$
5,790
$
5,759
Average
borrowing rate (in percentages)
6.97
%
6.72
%
For the first quarter of 2017, our interest expense increased $4 million to $101 million primarily due to a higher average borrowing rate.
Other Income
For the first quarter of 2017,
our other income increased $3 million to $10 million primarily driven by a gain on distribution received from our Easton investments partially offset by a gain on sale of marketable securities in the first quarter of 2016.
Provision for Income Taxes
For the first quarter of 2017, our effective tax rate was 20.6% compared to 34.6% in the first quarter of 2016. The first quarter of 2017 rate was lower than our combined federal and
state statutory rate primarily due to the recognition of tax benefits resulting from stock options exercised in the first quarter of 2017. In the first quarter of 2017, the Company adopted the new share-based compensation standard that requires the recognition of the income tax effects of share-based compensation awards in the income statement when the awards vest or are settled. The first quarter of 2016 rate was lower than the Company’s combined federal and state statutory rate primarily due to the favorable resolution of certain tax matters.
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 and working capital changes. Our net income 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.
We believe in returning value to our shareholders through a combination of dividends and share repurchase programs. During 2017, we have paid $172 million in regular dividends and repurchased $83 million of our common stock. We use cash flow generated from operating activities and financing activities to fund our dividends and share repurchase programs.
Our total cash and cash equivalents held by foreign subsidiaries were $346 million as of April 29,
2017. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional income taxes.
$1
billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
989
$
989
$
989
$1 billion, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
993
992
991
$1
billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
993
992
991
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
692
692
—
$500
million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
497
497
496
$500 million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”) (a)
496
496
499
$400
million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
397
397
396
Total Senior Unsecured Debt with Subsidiary Guarantee
$
5,057
$
5,055
$
4,362
Senior
Unsecured Debt
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348
$
348
$
348
$300
million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
297
297
297
$700 million, 6.90% Fixed Interest Rate Notes due July 2017 (“2017 Notes”) (b)
—
—
706
Foreign
Facilities
44
36
13
Total Senior Unsecured Debt
$
689
$
681
$
1,364
Total
$
5,746
$
5,736
$
5,726
Current
Portion of Long-term Debt
(44
)
(36
)
(8
)
Total Long-term Debt, Net of Current Portion
$
5,702
$
5,700
$
5,718
_______________
(a)
The
balances include a fair value interest rate hedge adjustment which increased the debt balance by $2 million as of April 29, 2017, $2 million as of January 28, 2017 and $8 million as of April 30, 2016.
(b)
The balance includes a fair value interest rate hedge adjustment which increased the debt balance by $7
million as of April 30, 2016.
In June 2016, we issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by our Guarantors. The proceeds from the issuance were $692 million, which were net of issuance
costs of $8 million. These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the April 29, 2017 and January 28, 2017 Consolidated Balance Sheets.
Repurchase of Notes
In July 2016, we used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. In the second quarter of 2016, we recognized a pre-tax loss on extinguishment of this debt of $36 million (after-tax net loss of $22 million), which is net of gains of
$7 million related to terminated interest rate swaps associated with the 2017 Notes.
Revolving Facility
As of April 29, 2017, we maintained a secured revolving credit facility with aggregate availability of $1 billion. The fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings or British pound borrowings is LIBOR plus 1.50% per annum. The interest rate on outstanding Canadian dollar borrowings is CDOR plus
1.50% per annum.
The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. We are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00
and (b) no default or event of default exists. As of April 29, 2017, we were in compliance with both of our financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
As of April 29, 2017, there were no borrowings outstanding under the Revolving Facility.
The Revolving Facility supports our letter of credit program. We had $8 million of outstanding letters of credit as of April 29, 2017
that reduced our remaining availability under our Revolving Facility.
Subsequent to April 29, 2017, we entered into an amendment and restatement of the Revolving Facility. The Amendment maintains the aggregate availability under the Revolving Facility at $1 billion and extends the termination date from July 18, 2019 to May 11, 2022. The Amendment allows certain of our non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
In addition, the Amendment reduced the commitment fees payable under the Revolving Facility,
which are based on our long-term credit rating, to 0.25% per annum. The Amendment did not modify our quantitative covenant requirements, but did provide an increased limit on restricted payments in the event we do not meet the aforementioned criteria to make these payments without limitation and provides greater flexibility in respect of our ability to grant liens on assets.
Foreign Facilities
In addition to the Revolving Facility, we maintain various revolving and term loan bank facilities with availability totaling $100 million to support our foreign operations. Current borrowings on these Foreign Facilities mature between May 8, 2017 and February 28, 2018.
The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing.
During the first quarter of 2017, we borrowed $9 million and made payments of $1 million under the Foreign Facilities. The maximum daily amount outstanding at any point in time during the first quarter of 2017 was $44 million.
Interest Rate Swap Arrangements
We have interest rate swap arrangements related to $300 million of the outstanding 2019 Notes that are designated as interest rate fair value
hedges as of April 29, 2017. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.
As further discussed in Note 2 included in Item 1. Financial Statements, prior year amounts have been recast to reflect the retrospective application of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.
(c)
Letters
of credit issued reduce our remaining availability under the Revolving Facility. We have outstanding letters of credit that reduce our remaining availability under the Revolving Facility of $8 million as of April 29, 2017, January 28, 2017 and April 30, 2016.
Credit Ratings
The following table provides our credit ratings as of April 29, 2017:
Moody’s
S&P
Fitch
Corporate
Ba1
BB+
BB+
Senior
Unsecured Debt with Subsidiary Guarantee
Ba1
BB+
BB+
Senior Unsecured Debt
Ba2
BB-
BB
Outlook
Stable
Stable
Stable
Our
borrowing costs under our Revolving Facility are linked to our credit ratings at Moody’s, S&P and Fitch. If we receive an upgrade or downgrade to our corporate credit ratings by Moody’s, S&P or Fitch, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Revolving Facility by the Guarantors and the security interests granted in our, and the Guarantors’, collateral securing such obligations are released if our credit ratings are higher than a certain level. Additionally, the restrictions imposed under the Revolving Facility on our ability to make investments and to make restricted payments cease to apply if our credit ratings are higher than certain levels. Credit rating downgrades by any of the agencies do not accelerate the repayment of any of our debt.
Common Stock Share Repurchases
Our Board of Directors will determine
share repurchase authorizations giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating and financing activities to fund our share repurchase programs. The timing and amount of any repurchases will be made at our discretion, taking into account a number of factors, including market conditions.
Under the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase programs for the
first quarter of 2017 and 2016:
Amount
Authorized
Shares
Repurchased
Amount
Repurchased
Average
Stock Price of Shares Repurchased within Program
Repurchase Program
2017
2016
2017
2016
2017
2016
(in millions)
(in
thousands)
(in millions)
February 2017
$
250
1,570
NA
$
80
NA
$
50.92
NA
February
2016
$
500
51
3,125
3
$
260
$
58.95
$
83.26
Total
1,621
3,125
$
83
$
260
In
the first quarter of 2017, our Board of Directors approved a new $250 million share repurchase program, which included the $59 million remaining under the February 2016 repurchase program.
In the first quarter of 2016, our Board of Directors approved a $500 million share repurchase program, which included $17 million remaining under the June 2015 repurchase program.
The February 2017 repurchase program had $170 million remaining as of April 29, 2017. Subsequent to April 29,
2017, we repurchased an additional 0.2 million shares of common stock for $11 million under this program.
There were $1 million and $3 million of share repurchases reflected in Accounts Payable on the April 29, 2017 and January 28, 2017 Consolidated Balance Sheets, respectively. There were no share repurchases reflected in Accounts Payable on the April 30, 2016 Consolidated Balance Sheet.
Dividend
Policy and Procedures
Our Board of Directors will determine future dividends after giving consideration to our levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from operating activities to fund our ordinary dividends and a combination of cash flow generated from operating activities and financing activities to fund our special dividends.
Under the authority and declaration of our Board of Directors, we paid the following dividends during the first quarter of 2017 and 2016:
Ordinary
Dividends
Special Dividends
Total Dividends
Total Paid
(per share)
(in millions)
2017
First
Quarter
$
0.60
$
—
$
0.60
$
172
2016
First
Quarter
$
0.60
$
2.00
$
2.60
$
750
Cash
Flow
The following table provides a summary of our cash flow activity for year-to-date 2017 and 2016:
Year-to-Date
2017
2016
(in
millions)
Cash and Cash Equivalents, Beginning of Period
$
1,934
$
2,548
Net Cash Flows Provided by (Used for) Operating Activities
7
(43
)
Net
Cash Flows Used for Investing Activities
(155
)
(205
)
Net Cash Flows Used for Financing Activities
(230
)
(1,035
)
Effects of Exchange Rate Changes on Cash
and Cash Equivalents
Net cash provided by operating activities in 2017 was $7 million, including net income of $94 million. Net income included depreciation and amortization of $142 million and share-based compensation expense of $25 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Accounts Payable, Accrued Expenses and Other and Inventories, and the change in Accounts Receivable.
Net cash used for operating
activities in 2016 was $43 million, including net income of $152 million. Net income included depreciation and amortization of $121 million and share-based compensation expense of $21 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Accounts Payable, Accrued Expenses and Other and Inventories, and the change in Income Taxes Payable.
Investing Activities
Net cash used for investing activities in 2017 was $155 million consisting primarily of capital expenditures of $165
million partially offset by a $10 million return of capital from our Easton Investments. The capital expenditures included $150 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Net cash used for investing activities in 2016 was $205 million consisting primarily of capital expenditures of $187 million and$31 million related to the acquisition of our Victoria's Secret Beauty and Accessories franchise partner's operations and stores in Greater China, partially offset by proceeds from the sale of marketable securities of $10
million. The capital expenditures included $146 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
Financing Activities
Net cash used for financing activities in 2017 was $230 million consisting primarily of quarterly dividend payments of $0.60 per share, or $172 million, payments for repurchases of common stock of $85 million, and tax payments related to share-based awards of $17 million, partially offset by proceeds from the exercise of stock
options of $36 million.
Net cash used for financing activities in 2016 was $1.035 billion consisting primarily of quarterly and special dividend payments aggregating to $2.60 per share, or $750 million, payments for repurchases of common stock of $260 million, and tax payments related to share-based awards of $40 million, partially offset by proceeds from the exercise of stock options of $10 million.
Contingent Liabilities and Contractual Obligations
In connection with the disposition of certain businesses, we have remaining guarantees of approximately $13 million related to lease payments under the current terms of noncancellable leases expiring at various
dates through 2021. These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the businesses. In certain instances, our guarantee may remain in effect if the term of a lease is extended. We have not recorded a liability with respect to these guarantee obligations as of April 29, 2017, January 28, 2017 or April 30, 2016 as we concluded that payments under these guarantees were not probable.
In connection with the sale and leaseback under noncancellable operating leases of certain assets, we provided residual value guarantees
to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire at various dates through 2021, and the total amount of the guarantees is approximately $133 million. We recorded a liability of less than $1 million as of April 29, 2017, a liability of $1 million as of January 28, 2017, and a liability of $3 million as of April 30, 2016 related to these guarantee obligations, which are included in Other Long-term Liabilities on the Consolidated Balance Sheets. Additionally,
we recorded a liability of $9 million related to the early lease termination of one of these assets, which is included in Accrued Expenses and Other on the April 29, 2017 Consolidated Balance Sheet.
Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since January 28, 2017, as discussed in “Contingent Liabilities and Contractual Obligations” in our 2016 Annual Report on Form 10-K. Certain of our contractual obligations may
fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations which fluctuate throughout the year as a result of the seasonal nature of our operations).
In the first quarter of 2017, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. On
a prospective basis, this standard requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are exercised. These effects were historically recorded in equity on the balance sheet. As a result, we recognized $11 million of excess tax benefits related to share-based awards in Provision for Income Taxes in the first quarter 2017 Consolidated Statement of Income. The standard also requires all tax-related cash flows from share-based awards to be reported as operating activities on the statements of cash flows and any cash payments made to taxing authorities on an employee's behalf from withheld shares as financing activities. For the first quarter of 2016, the retrospective application of these changes resulted in a $71 million increase in operating cash flows and a corresponding decrease to financing cash flows. Further, as allowed by the standard, we will continue to estimate award forfeitures at the time
awards are granted and adjust, if necessary, in subsequent periods based on historical experience and expected future termination rates.
In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers, which was further clarified and amended in 2015 and 2016. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced
disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective beginning in fiscal 2018, with early adoption as of fiscal 2017 permitted. The standard allows for either a full retrospective or a modified retrospective transition method.
We continue to evaluate the impacts of this standard. Our most significant changes to current accounting relate to the points earned under the Victoria's Secret customer loyalty program and our accounting for sales returns. The new standard will require a deferral of revenue associated with loyalty points using a relative stand-alone selling price method and will also require sales returns to be presented on a gross basis with the sales refund liability presented
separately from the return asset. We are continuing to evaluate the further impacts the standard will have on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows. We will adopt the standard in the first quarter of fiscal 2018 and are currently evaluating the transition method.
Leases
In February 2016, the FASB issued ASC 842, Leases. This guidance requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized
and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal 2019, with early adoption permitted.
We are currently evaluating the impacts that this standard will have on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows, including period of adoption. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Thus, we expect adoption will result in a material increase to the assets and liabilities on our Consolidated Balance Sheet.
IMPACT OF INFLATION
While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on the results of operations and financial condition have been minor.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and
contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
There have been no material changes to the critical accounting policies and estimates disclosed in our 2016 Annual Report on Form 10-K, other than the adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.
Item 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We use derivative financial instruments like cross-currency swaps, foreign currency forward contracts and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.
Foreign Exchange Rate Risk
We have operations in foreign countries which expose us to market risk associated with foreign currency exchange
rate fluctuations. To mitigate the translation risk to our earnings and the fair value of our Canadian operations associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate, we entered into a cross-currency swap related to a Canadian dollar denominated intercompany loan. This cross-currency swap requires the periodic exchange of fixed rate Canadian dollar interest payments for fixed rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. The swap arrangement matures in January 2018 at the same time as the related loan. As a result of the Canadian dollar denominated intercompany loan and the related cross-currency swap, we do not believe there is any material translation risk to our Canadian net earnings associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate.
In addition, our Canadian dollar, British pound, Chinese yuan
and Hong Kong dollar denominated earnings are subject to exchange rate risk as substantially all of our merchandise sold in Canada, the U.K. and Greater China is sourced through U.S. dollar transactions. Although we utilize foreign currency forward contracts to partially offset risks associated with Canadian dollar and British pound denominated earnings, these measures may not succeed in offsetting all of the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.
Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to
foreign currency exchange rate fluctuations.
Interest Rate Risk
Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities are the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Typically, our investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not
believe there is any material risk to principal associated with increases or decreases in interest rates.
The majority of our long-term debt as of April 29, 2017, has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into interest rate swap arrangements. As of April 29, 2017, we have interest rate swap arrangements with notional amounts of $300 million related to a portion of our 2019 Notes.
The effect of the interest rate swap arrangements is to convert the respective amount of debt from a fixed interest rate to a variable interest rate. The variable interest rate associated with these swap
arrangements fluctuates based on changes in three-month LIBOR.
For the balance of our long-term debt that is not subject to interest rate swap arrangements, our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.
Fair Value of Financial Instruments
As of April 29, 2017, we believe that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.
The following table provides a summary of the principal value and fair value of long-term debt, excluding foreign facility borrowings, and swap arrangements as of April 29, 2017, January 28, 2017 and April 30, 2016:
The
estimated fair value is based on reported transaction prices. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.
(b)
Hedge arrangements are in a net asset position.
Concentration of Credit Risk
We maintain cash and cash equivalents and derivative contracts with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Typically, our investment portfolio
is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.
Evaluation
of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred in the first quarter 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our financial position or results of operations.
Item 1A.
RISK
FACTORS
The risk factors that affect our business and financial results are discussed in “Item 1A: Risk Factors” in the 2016 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A: Risk Factors” in our 2016 Annual Report on Form 10-K and those described elsewhere in this report or other SEC filings, could cause actual results to differ materially from those stated in any forward-looking statements.
Item 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides our repurchases of our common stock during the first quarter of 2017:
Period
Total
Number of
Shares
Purchased (a)
Average Price
Paid
per
Share (b)
Total Number of Shares Purchased as Part of Publicly Announced Programs (c)
Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Programs (c)
(in thousands)
(in thousands)
February
2017
518
$
55.23
508
$
224,958
March 2017
848
49.94
797
185,084
April
2017
610
47.67
316
170,013
Total
1,976
1,621
_______________
(a)
The
total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options.
(b)
The average price paid per share includes any broker commissions.
(c)
For additional share repurchase program information, see Note 3, “Earnings Per Share
and Shareholders' Equity (Deficit)” included in Item 1. Financial Statements.
Amendment
and Restatement Agreement dated May 11, 2017 among L Brands, Inc., a Delaware corporation, the Borrowing Subsidiaries party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (the “Administrative Agent”), in respect of the Amended and Restated Five-Year Revolving Credit Agreement dated as of July 18, 2014 among the Company, the lenders from time to time party thereto and the Administrative Agent, incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K dated May
17, 2017.
10.1
Employment Agreement dated as of June 2, 2017 among L Brands, Inc., L Brands Service Company, LLC and Martin Waters.
15
Letter
re: Unaudited Interim Financial Information re: Incorporation of Report of Independent Registered Public Accounting Firm.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Mr. Burgdoerfer is the principal financial officer
and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.
46
Dates Referenced Herein and Documents Incorporated by Reference
