NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
L Brands, Inc. (the "Company") operates the Bath & Body Works, Victoria's Secret and PINK retail brands in the highly competitive specialty retail business. Founded in 1963 in Columbus, Ohio, the Company has evolved from an apparel-based specialty retailer to a segment leader focused on home fragrance products, body care, soaps and sanitizers, women’s intimate and other apparel, and personal and beauty care products. The Company sells its merchandise through company-operated specialty retail stores in the U.S., Canada and Greater China, through international franchise, license and wholesale partners and through its websites worldwide.
The Company is committed to establishing its Bath & Body Works business as a pure-play public company and is taking the necessary steps to prepare the Victoria's Secret business, including PINK, to operate as a separate standalone company. The Company's Board of Directors is currently evaluating all options, including a potential spin-off of the Victoria’s Secret business into a public company or a private sale of the business.
Segment Reporting
In the third quarter of 2020, the Company changed its segment reporting as a result of leadership changes and restructuring actions taken to facilitate the ongoing efforts to separate Bath & Body Works and Victoria’s Secret into separate businesses. The Company now has two reportable segments: Bath & Body Works and Victoria’s Secret. Accordingly, the Company will no longer report a Victoria’s Secret and Bath & Body Works International segment as these businesses are now included with their respective brand. Additionally, the Bath & Body Works and Victoria’s Secret segments now include sourcing and production functions (formerly known as Mast) and certain other corporate functions that directly support each brand. These functions were previously included within Other.
While this reporting change did not impact the Company's consolidated results, segment data has been recast to be consistent for all periods presented. For additional information, see Note 20, “Segment Information."
Impacts of COVID-19
In March 2020, COVID-19 was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place.” The actions that governments around the world have taken to contain the spread of COVID-19 have resulted in a period of disruption, including closure of the Company's stores, limited store operating hours, reduced customer traffic and consumer spending and delays in manufacturing and shipping of products and raw materials. During this period, the Company is focused on protecting the health and safety of its customers, employees, contractors, suppliers and other business partners. The Company is also working with its suppliers to minimize potential disruptions, while managing the Company's business in response to a changing dynamic.
The Company's business operations and financial performance for 2020 were materially impacted by the COVID-19 pandemic. All of the Company's stores in North America were closed on March 17, 2020 but the Company was able to re-open the majority of its stores as of the beginning of the third quarter. Operations for Victoria’s Secret Direct were temporarily suspended for approximately one week in late March 2020, while Bath & Body Works Direct remained open for the duration of fiscal 2020. Additionally, the Company has dedicated resources to maximize capacity in its direct fulfillment centers to meet increased customer demand, while focusing on distribution, fulfillment and call center safety. There remains a high level of uncertainty around the pandemic and the potential for further restrictions.
In response to the global COVID-19 crisis, the Company took prudent actions to manage expenses and to maintain its solid cash position and financial flexibility. The Company:
•Furloughed most store associates as of April 5, 2020 during the temporary store closures, while continuing to provide healthcare benefits for eligible associates;
•Suspended associate merit increases;
•Temporarily reduced salaries for senior vice presidents and above by 20%;
•Temporarily suspended cash compensation for all members of the Board of Directors;
•Reduced fiscal 2020 capital expenditures from an original forecast of $550 million to $228 million;
•Actively managed inventory to adjust for the impact of channel shifts to meet customer demand;
•Temporarily suspended the quarterly cash dividend beginning in the second quarter of fiscal 2020;
•Suspended many store and select office rent payments during the temporary closures. The Company completed negotiations with the majority of landlords, leading to a combination of rent waivers or abatements relating to closure periods, rent relief relating to the post-reopening “recovery” period given traffic declines, and rent deferrals;
•Converted the revolving credit facility to an asset-backed loan facility, issued $2.25 billion in new notes and extinguished $1.259 billion of notes primarily with near-term maturities; and
•Extended payment terms to vendors.
On March 27, 2020, the U.S. government enacted the CARES Act which, among other things, provided employer payroll tax credits for wages paid to employees who were unable to work during the coronavirus outbreak and options to defer payroll tax payments. During fiscal 2020, the Company recognized $55 million of qualified payroll tax credits.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “2020," "2019," and “2018” refer to the 52-week periods ended January 30, 2021, February 1, 2020 and February 2, 2019, 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 in the Consolidated Statements of Income (Loss). The Company’s share of net income or loss from its investment in the Victoria's Secret U.K. joint venture with Next PLC is included in General, Administrative and Store Operating Expenses in the Consolidated Statements of Income (Loss). See Note 5, "Restructuring Activities" for additional information on the Victoria's Secret U.K. joint venture. The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income (Loss) in the Consolidated Statements of Income (Loss). The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.
Cash and Cash Equivalents
Cash and Cash Equivalents include cash on hand, demand deposits with financial institutions and highly liquid investments with original maturities of less than 90 days. The Company’s outstanding checks, which totaled $9 million as of January 30, 2021 and $15 million as of February 1, 2020, are included in Accounts Payable on the Consolidated Balance Sheets.
Restricted Cash
During 2020, the Company placed cash on deposit with certain financial institutions as collateral for their lending commitments. As of January 30, 2021, the amount of collateral required was dependent upon the aggregate lending commitments. For additional information, see Note 13, "Long-term Debt and Borrowing Facilities."
These deposits, totaling $30 million, are recorded in Other Assets on the January 30, 2021 Consolidated Balance Sheet. The Company's total Cash and Cash Equivalents and restricted cash was $3.933 billion as of January 30, 2021.
Concentration of Credit Risk
The Company maintains cash and cash equivalents, restricted cash 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. 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 determines the required allowance for expected credit losses using information such as customer credit history and financial condition. Amounts are charged against the allowance when it is determined that expected credit losses may occur.
Inventories
Inventories are principally valued at the lower of cost or net realizable value, on an average cost basis.
The Company records valuation adjustments to its inventories if the cost of inventory on hand exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand and market conditions and analysis of historical experience.
The Company also records inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and operating trends.
Advertising Costs
Advertising and marketing costs are expensed at the time the promotion first appears in media, in the store or when the advertising is mailed. Advertising and marketing costs totaled $352 million for 2020, $428 million for 2019 and $476 million for 2018.
Property and Equipment
The Company’s property and equipment are recorded at cost and depreciation is computed on a straight-line basis using the following depreciable life ranges:
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Category of Property and Equipment
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Depreciable Life Range
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Software, including software developed for internal use
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3 - 5 years
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Store related assets
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3 - 10 years
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Leasehold improvements
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Shorter of lease term or 10 years
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Non-store related building and site improvements
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10 - 15 years
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Other property and equipment
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20 years
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Buildings
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30 years
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When a decision has been made to dispose of property and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. The Company’s cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income (loss). Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful lives are capitalized.
Long-lived store assets, which include leasehold improvements, store related assets and operating lease assets (subsequent to the adoption of ASC 842, Leases), are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group. For operating lease assets, the Company determines the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. An individual asset within an asset group is not impaired below its estimated fair value. The fair value of long-lived store assets are determined using Level 3 inputs within the fair value hierarchy.
Leases and Leasehold Improvements
In the first quarter of 2019, the Company adopted ASC 842, Leases, using the modified retrospective approach. Results for 2020 and 2019 are presented under ASC 842, while results for 2018 have not been adjusted and continue to be presented under the accounting standard in effect at that time.
The Company leases retail space, office space, warehouse facilities, storage space, equipment and certain other items under operating leases. A substantial portion of the Company’s leases are operating leases for its stores, which generally have an initial term of 10 years. Annual store rent consists of a fixed minimum amount and/or variable rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally also require additional payments covering certain operating costs such as common area maintenance, utilities, insurance and taxes. Certain leases contain predetermined fixed escalations of minimum rentals or require periodic adjustments of minimum rentals depending on an index or rate. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property.
At lease commencement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of the unpaid fixed lease payments. Operating lease costs are recognized on a straight-line basis as lease expense over the lease term. Variable lease payments associated with the Company's leases are recognized upon occurrence of the event or circumstance on which the payments are assessed. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet, and lease expense is recognized on a straight-line basis over the lease term.
The Company uses its incremental borrowing rate, adjusted for collateral, to determine the present value of its unpaid lease payments.
The Company’s store leases often include options to extend the initial term or to terminate the lease prior to the end of the initial term. The exercise of these options is typically at the sole discretion of the Company. These options are included in determining the initial lease term at lease commencement if the Company is reasonably certain to exercise the option. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term.
The Company also has leasehold improvements which are amortized over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the initial lease term. Leasehold improvements made after the inception of the initial lease term are depreciated over the shorter of their estimated useful lives or the remaining lease term, including renewal periods, if reasonably assured.
Intangible Assets - Goodwill and Trade Names
The Company has certain intangible assets resulting from business combinations and acquisitions that are recorded at cost.
Goodwill is reviewed for impairment at the reporting unit level each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The Company has the option to either first perform a qualitative assessment to determine whether it is more likely than not that each reporting unit's fair value is less than its carrying value (including goodwill), or to proceed directly to the quantitative assessment which requires a comparison of the reporting unit's fair value to its carrying value (including goodwill). If the Company determines that the fair value of a reporting unit is less than its carrying value, it recognizes an impairment charge equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit. The Company's reporting units are determined in accordance with the provisions of ASC 350, Intangibles - Goodwill and Other. As a result of goodwill impairment charges recognized in 2019, only the Bath & Body Works reporting unit has goodwill as of January 30, 2021.
The Bath & Body Works and Victoria’s Secret trade names are intangible assets with indefinite lives. Intangible assets with indefinite lives are reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The Company has the option to either first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired, or to proceed directly to the quantitative assessment which requires a comparison of the fair value of the intangible asset to its carrying value. To determine if the fair value of the asset is less than its carrying amount, the Company will estimate the fair value, usually determined by the relief from royalty method under the income approach, and compare that value with its carrying amount. If the carrying value of the trade name exceeds its fair value, the Company recognizes an impairment charge equal to the difference.
Foreign Currency Translation
The functional currency of the Company’s foreign operations is generally the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect as of the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period. The Company’s resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Accumulated foreign currency translation adjustments are reclassified to net income (loss) when realized upon sale or upon complete, or substantially complete, liquidation of the investment in the foreign entity.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated Balance Sheets at fair value.
The earnings of the Company's wholly owned foreign operations are subject to exchange rate risk as substantially all the merchandise is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure for its Canadian operations. 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 Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The fair value of designated cash flow hedges is not significant as of January 30, 2021.
Fair Value
The authoritative guidance included in ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This authoritative guidance further 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 Company estimates the fair value of financial instruments, property and equipment and goodwill and trade names in accordance with the provisions of ASC 820.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company’s Consolidated Statement of Income (Loss) in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
In determining the Company’s provision for income taxes, the Company considers permanent differences between book and tax income and statutory income tax rates. The Company’s effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures and the level of earnings.
The Company follows a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and for which actual outcomes may differ from forecasted outcomes. The Company's policy is to include interest and penalties related to uncertain tax positions in income tax expense.
The Company’s income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. A number of years may elapse before a particular matter for which the Company has established an accrual is audited and fully resolved or clarified. The Company adjusts its tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. The Company includes its tax contingencies accrual, including accrued penalties and interest, in Other Long-term Liabilities on the Consolidated Balance Sheets unless the liability is expected to be paid within one year. Changes to the tax contingencies accrual, including accrued penalties and interest, are included in Provision for Income Taxes on the Consolidated Statements of Income (Loss).
Self-Insurance
The Company is self-insured for medical, workers’ compensation, property, general liability and automobile liability up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred but not reported (“IBNR”) claims. IBNR claims are estimated using historical claim information and actuarial estimates.
Noncontrolling Interest
Noncontrolling interest represents the portion of equity interests of consolidated affiliates not owned by the Company.
Share-based Compensation
The Company recognizes all share-based payments to employees and directors as compensation cost over the service period based on their estimated fair value on the date of grant. The Company estimates award forfeitures at the time awards are granted and adjusts, if necessary, in subsequent periods based on historical experience and expected future forfeitures.
Compensation cost is recognized over the service period for the fair value of awards that actually vest. Compensation expense for awards without a performance condition is recognized, net of estimated forfeitures, using a single award approach (each award is valued as one grant, irrespective of the number of vesting tranches). Compensation expense for awards with a performance condition is recognized, net of estimated forfeitures, using a multiple award approach (each vesting tranche is valued as one grant).
Revenue Recognition
The Company recognizes revenue based on the amount it expects to receive when control of the goods or services is transferred to the customer. The Company recognizes sales upon customer receipt of merchandise, which for direct channel revenues reflect an estimate of shipments that have not yet been received by the customer based on shipping terms and historical delivery times. The Company’s shipping and handling revenues are included in Net Sales with the related costs included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The Company also provides a reserve for projected merchandise returns based on historical experience. Net Sales exclude sales and other similar taxes collected from customers.
The Company offers certain loyalty programs that allow customers to earn points based on purchasing activity. As customers accumulate points and reach point thresholds, they can use the points to purchase merchandise in stores or online. The Company allocates revenue to points earned on qualifying purchases and defers recognition until the points are redeemed. The amount of revenue deferred is based on the relative stand-alone selling price method, which includes an estimate for points not expected to be redeemed based on historical experience.
The Company sells gift cards with no expiration dates to customers. The Company does not charge administrative fees on unused gift cards. The Company recognizes revenue from gift cards when they are redeemed by the customer. In addition, the Company recognizes revenue on unredeemed gift cards where the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). Gift card breakage revenue is recognized in proportion, and over the same period, as actual gift card redemptions. The Company determines the gift card breakage rate based on historical redemption patterns. Gift card breakage is included in Net Sales in the Consolidated Statements of Income (Loss).
Revenue earned in connection with Victoria’s Secret's private label credit card arrangement is primarily recognized based on credit card sales and usage, and is included in Net Sales in the Consolidated Statements of Income (Loss).
The Company also recognizes revenues associated with franchise, license, wholesale and sourcing arrangements. Revenue recognized under franchise and license arrangements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers. Revenue is generally recognized under wholesale and sourcing arrangements at the time the title passes to the partner.
Costs of Goods Sold, Buying and Occupancy
The Company’s costs of goods sold include merchandise costs, net of discounts and allowances, freight and inventory shrinkage. The Company’s buying and occupancy expenses primarily include payroll, benefit costs and operating expenses for its buying departments and distribution network; and rent, common area maintenance, real estate taxes, utilities, maintenance, fulfillment expenses and depreciation for the Company’s stores, warehouse facilities and equipment.
General, Administrative and Store Operating Expenses
The Company’s general, administrative and store operating expenses primarily include payroll and benefit costs for its store-selling and administrative departments (including corporate functions), marketing, advertising and other operating expenses not specifically categorized elsewhere in the Consolidated Statements of Income (Loss).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires the use of a forward-looking expected loss impairment model for accounts receivable and certain other financial instruments. The Company adopted the standard in the first quarter of 2020. The adoption of this standard did not have a material impact on the Company's consolidated results of operations, financial position or cash flows.
Guarantor Reporting
In March 2020, the SEC issued a final rule, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, that simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X. The rule replaces the requirement to provide condensed consolidating financial information with a requirement to present summarized financial information of the issuers and guarantors. It also requires qualitative disclosures with respect to information about guarantors, the terms and conditions of guarantees and the factors that may affect payment. These disclosures may be provided outside the footnotes to the Company’s consolidated financial statements. The Company early adopted the reporting requirements of the rule in the first quarter of 2020 and elected to provide these disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3. Revenue Recognition
Accounts receivable, net from revenue-generating activities were $125 million as of January 30, 2021 and $152 million as of February 1, 2020. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days.
The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. The balance of deferred revenue was $371 million as of January 30, 2021 and $342 million as of February 1, 2020. The Company recognized $193 million as revenue in 2020 from amounts recorded as deferred revenue at the beginning of the period. As of January 30, 2021, the Company recorded deferred revenues of $361 million within Accrued Expenses and Other, and $10 million within Other Long-term Liabilities on the Consolidated Balance Sheet.
The following table provides a disaggregation of Net Sales for 2020, 2019 and 2018:
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2020
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2019
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2018
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(in millions)
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Bath & Body Works Stores - U.S. and Canada
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$
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4,207
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$
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4,212
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$
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3,907
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Bath & Body Works Direct
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2,003
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958
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724
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Bath & Body Works International (a)
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224
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185
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145
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Total Bath & Body Works
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6,434
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5,355
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4,776
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Victoria’s Secret Stores - U.S. and Canada
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2,795
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5,112
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5,628
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Victoria’s Secret Direct
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2,223
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1,693
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1,747
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Victoria's Secret International (b)
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395
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704
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728
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Total Victoria’s Secret
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5,413
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7,509
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8,103
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Other (c)
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—
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50
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358
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Total Net Sales
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$
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11,847
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$
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12,914
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$
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13,237
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_______________
(a)Results include royalties associated with franchised store and wholesale sales.
(b)Results include company-operated stores in the U.K. (pre-joint venture) and Greater China, royalties associated with franchised stores and wholesale sales.
(c)Results for 2019 include wholesale revenues to La Senza subsequent to the Company's divestiture of the business in 2018. Results for 2018 include store and direct sales for Henri Bendel and La Senza.
4. Earnings (Loss) Per Share
Earnings (loss) per basic share is computed based on the weighted-average number of common shares. Earnings (loss) per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.
The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings (loss) per share for 2020, 2019 and 2018:
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2020
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2019
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2018
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(in millions)
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Common Shares
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286
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284
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283
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Treasury Shares
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(8)
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(8)
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(7)
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Basic Shares
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278
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|
|
276
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|
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276
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Effect of Dilutive Options and Restricted Stock
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3
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—
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3
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Diluted Shares
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281
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|
|
276
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|
|
279
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|
Anti-dilutive Options and Awards (a)
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5
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|
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9
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5
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________________
(a)These options and awards were excluded from the calculation of diluted earnings (loss) per share because their inclusion would have been anti-dilutive. For 2019, the dilutive impact of outstanding options and awards were excluded from dilutive shares as a result of the Company's net loss for the period.
5. Restructuring Activities
The Company is committed to establishing Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare Victoria's Secret to operate as a separate standalone company. Management of the Company is actively engaged in implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. During the second quarter of 2020, the Company completed its comprehensive review of its home office organizations in order to achieve meaningful reductions in overhead expenses and decentralize significant shared functions and services to support the creation of standalone companies. This resulted in a reduction of the home office headcount by approximately 15%, or about 850 associates. Pre-tax severance and related costs associated with these reductions, totaling $81 million, are included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statement of Income. Costs of $51 million and $12 million are recorded within the Victoria's Secret and Bath & Body Works segments, respectively, while the remaining $18 million is recorded within Other.
During 2020, the Company made payments of $49 million and, as of January 30, 2021, a liability, after accrual adjustments, of $33 million related to these costs is included in Accrued Expenses and Other on the Consolidated Balance Sheet.
Victoria's Secret U.K.
Due to challenging business results for Victoria's Secret in the U.K., the Company entered into Administration in June 2020 to restructure store lease agreements and reduce operating losses in the Victoria's Secret U.K. business. In October 2020, the Company entered into a joint venture with Next PLC for the Victoria’s Secret business in the United Kingdom and Ireland. Under this agreement, the Company owns 49% of the joint venture, and Next owns 51% and is responsible for operations. The Company accounts for its investment in the joint venture under the equity method of accounting.
The joint venture acquired the majority of the operating assets, primarily inventory, and the restructured leases were transferred to the joint venture. Effective October 19, 2020, the newly formed joint venture began operating all Victoria’s Secret stores in the U.K. and Ireland. The joint venture will begin operating the U.K. direct business starting Spring 2021. The Company recognized non-cash pre-tax gains of $90 million related to the derecognition of operating lease liabilities in excess of operating lease assets for the 24 store leases that were restructured and transferred to the joint venture. In addition, the Company recognized a $25 million non-cash pre-tax impairment charge to fully write-off all remaining long-lived store assets in the U.K. Finally, as a result of the transition to a joint venture business model in the U.K. and the substantially complete liquidation of the Company's investment in the U.K., the Company recognized a $36 million non-cash pre-tax loss related to accumulated foreign currency translation adjustments that were reclassified into earnings which were previously recognized as a component of equity.
The above items relating to Victoria's Secret U.K. are included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statement of Income.
La Senza
In January 2019, in an effort to increase shareholder value and in order to focus on its larger core businesses, the Company divested its ownership interest in La Senza to an affiliate of Regent LP, a global private equity firm. Regent LP assumed La Senza’s operating assets and liabilities in exchange for potential future consideration upon the sale or other monetization of La Senza, as defined in the agreement. In the fourth quarter of 2018, the Company recognized a pre-tax loss on the divestiture of $99 million, primarily related to $45 million of accumulated foreign currency translation adjustments reclassified into earnings that were previously recognized as a component of equity, as well as losses related to the transfer of the net working capital and
long-lived store assets to the buyer. The loss is included in Loss on Divestiture of La Senza in the 2018 Consolidated Statement of Income. The after-tax loss on the divestiture was $55 million, which includes $44 million of tax benefits primarily associated with the recognition of previously unrecognized deferred tax assets.
In conjunction with the transaction, certain of the Company's subsidiaries have remaining contingent obligations related to La Senza lease payments under the terms of existing noncancelable leases. In 2019, the Company's subsidiaries recognized pre-tax, non-cash charges of $37 million to increase the reserves for potential exposure related to the La Senza business. These charges are included in Other Income (Loss) in the 2019 Consolidated Statement of Loss. For additional information, see Note 16, "Commitments and Contingencies."
Henri Bendel
The Company announced the closure of Henri Bendel in the third quarter of 2018. As a result, the Company recognized a pre-tax charge, primarily cash, consisting of lease termination costs, severance and other costs of $20 million in the third quarter of 2018. In the fourth quarter of 2018, the Company recognized an additional pre-tax charge of $3 million, primarily related to contract termination and employee retention costs. Restructuring charges of $14 million and $9 million are included in Costs of Goods Sold, Buying and Occupancy and General, Administrative and Store Operating Expenses, respectively, in the 2018 Consolidated Statement of Income.
6. Inventories
The following table provides details of inventories as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1,
2020
|
|
(in millions)
|
Finished Goods Merchandise
|
$
|
1,073
|
|
|
$
|
1,152
|
|
Raw Materials and Merchandise Components
|
200
|
|
|
135
|
|
Total Inventories
|
$
|
1,273
|
|
|
$
|
1,287
|
|
7. Long-Lived Assets
The following table provides details of property and equipment, net as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1,
2020
|
|
(in millions)
|
Land and Improvements
|
$
|
115
|
|
|
$
|
116
|
|
Buildings and Improvements
|
500
|
|
|
496
|
|
Furniture, Fixtures, Software and Equipment
|
3,771
|
|
|
3,861
|
|
Leasehold Improvements
|
1,780
|
|
|
2,018
|
|
Construction in Progress
|
38
|
|
|
122
|
|
Total
|
6,204
|
|
|
6,613
|
|
Accumulated Depreciation and Amortization
|
(4,109)
|
|
|
(4,127)
|
|
Property and Equipment, Net
|
$
|
2,095
|
|
|
$
|
2,486
|
|
Depreciation expense was $521 million in 2020, $588 million in 2019 and $590 million in 2018.
Long-Lived Store Assets
In 2020, the Company executed a rationalization of the Victoria’s Secret company-operated store footprint. The Company permanently closed 241 stores in North America in 2020. Given the closures in 2020 as well as the negative operating results of certain Victoria's Secret stores in 2020, 2019 and 2018, the Company reviewed the long-lived store assets for potential impairment in all periods presented. The Company determined that the estimated undiscounted future cash flows were less than the carrying values for certain Victoria's Secret asset groups and, as a result, determined the estimated fair values of the store asset groups using estimated discounted future cash flows and estimated market rental rates. Long-lived store asset impairment charges are included within the Victoria's Secret segment, and principally included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss).
As discussed in Note 5, "Restructuring Activities" the Company recorded a $25 million non-cash pre-tax impairment charge to fully write-off all remaining long-lived store assets in the U.K. This charge is included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statement of Income.
The following table provides pre-tax long-lived store asset impairment charges included in the Consolidated Statement of Income (Loss) for 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in millions)
|
Store Asset Impairment
|
$
|
136
|
|
|
$
|
198
|
|
|
$
|
101
|
|
Operating Lease Asset Impairment
|
118
|
|
|
65
|
|
|
—
|
|
Total Impairment
|
$
|
254
|
|
|
$
|
263
|
|
|
$
|
101
|
|
8. Leases
The following table provides the components of lease cost for operating leases for 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
(in millions)
|
Operating Lease Costs (a)
|
$
|
744
|
|
|
$
|
769
|
|
Variable Lease Costs
|
65
|
|
|
100
|
|
Short-term Lease Costs
|
34
|
|
|
30
|
|
Total Lease Cost
|
$
|
843
|
|
|
$
|
899
|
|
_______________
(a)As discussed in Note 7, "Long-Lived Assets," the Company recognized operating lease asset impairment charges of $118 million and $65 million during 2020 and 2019, respectively, which is included as operating lease costs.
For many stores and select office locations, beginning in April, rent was not paid, or was only partially paid, due to the COVID-19 pandemic. Negotiations are complete with nearly all landlords to determine potential rent credits or payment deferrals related to COVID-19. As of January 30, 2021, the Company is fully accrued to the original contractual rent due unless an executed amendment is in place. The FASB issued guidance in April which allows certain COVID-19-related concessions to be recognized as a reduction of lease costs in the period an amendment is executed. As a result, the Company recognized a $111 million reduction to occupancy expenses in the 2020 Consolidated Statement of Income as a result of executed amendments with landlords.
The following table provides future maturities of operating lease liabilities as of January 30, 2021:
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2021
|
$
|
750
|
|
2022
|
630
|
|
2023
|
540
|
|
2024
|
464
|
|
2025
|
404
|
|
Thereafter
|
965
|
|
Total Lease Payments
|
$
|
3,753
|
|
Less: Interest
|
(664)
|
|
Present Value of Operating Lease Liabilities
|
$
|
3,089
|
|
For leases entered into or reassessed after the adoption of the new standard, the Company has elected the practical expedient allowed by the standard to account for all fixed consideration in a lease as a single lease component. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed operating costs such as common area maintenance and utilities.
As of January 30, 2021, the Company had additional operating lease commitments that have not yet commenced of approximately $256 million.
The following table provides the weighted-average remaining lease term and discount rate for operating leases with lease liabilities as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1,
2020
|
Weighted Average Remaining Lease Term (years)
|
6.4
|
|
7.4
|
Weighted Average Discount Rate
|
5.8
|
%
|
|
6.2
|
%
|
During 2020 and 2019, the Company paid $520 million and $708 million, respectively, for operating lease liabilities recorded on the balance sheet. These payments are included within the Operating Activities section of the Consolidated Statement of Cash Flows.
During 2020 and 2019, the Company obtained $172 million and $313 million, respectively, of additional lease assets as a result of new operating lease obligations.
Finance Leases
The Company leases certain fulfillment equipment under finance leases that expire at various dates through 2025. The Company records finance lease assets, net of accumulated amortization, in Property and Equipment, Net on the Consolidated Balance Sheet. Additionally, the Company records finance lease liabilities in Accrued Expenses and Other and Other Long-term Liabilities on the Consolidated Balance Sheet. Finance lease costs are comprised of the straight-line amortization of the lease asset and the accretion of interest expense under the effective interest method.
The Company recorded $33 million and $21 million of finance lease assets, net of accumulated amortization, in Property and Equipment, Net on the January 30, 2021 and February 1, 2020 Consolidated Balance Sheets, respectively. Additionally, the Company recorded finance lease liabilities of $12 million in Accrued Expenses and Other and $21 million in Other Long-term Liabilities on the January 30, 2021 Consolidated Balance Sheet, and $8 million in Accrued Expenses and Other and $13 million in Other Long-term Liabilities on the February 1, 2020 Consolidated Balance Sheet.
Victoria's Secret Hong Kong
During the second quarter of 2020, the Company closed its unprofitable Victoria's Secret flagship store in Hong Kong. As a result of the store closure, the Company recognized a non-cash pre-tax gain of $39 million, primarily due to terminating the store lease and the related write-off of the operating lease liability in excess of the operating lease asset, which was partially impaired in fiscal 2019. This gain is included in Costs of Goods Sold, Buying and Occupancy in the 2020 Consolidated Statement of Income. The Company also recorded $3 million of severance and related costs associated with the closure, which are included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statement of Income.
Asset Retirement Obligations
The Company has asset retirement obligations related to certain company-operated international stores that contractually obligate the Company to remove leasehold improvements at the end of a lease. The Company's liabilities for asset retirement obligations totaled $11 million as of January 30, 2021 and $22 million as of February 1, 2020. These liabilities are included in Other Long-term Liabilities on the Consolidated Balance Sheets.
Disclosures for 2018
The following table provides rent expense, as presented under the prior accounting standard, for 2018:
|
|
|
|
|
|
|
|
|
(in millions)
|
Store Rent:
|
|
Fixed Minimum
|
$
|
663
|
|
Contingent
|
72
|
|
Total Store Rent
|
735
|
|
Office, Equipment and Other
|
98
|
|
Gross Rent Expense
|
833
|
|
Sublease Rental Income
|
(2)
|
|
Total Rent Expense
|
$
|
831
|
|
9. Goodwill and Trade Names
Goodwill
Bath & Body Works goodwill was $628 million as of January 30, 2021 and February 1, 2020. As of the end of the fourth quarter of 2020, the Company performed its annual goodwill impairment assessment over the Bath & Body Works reporting unit. The Company performed a qualitative assessment and determined that the Bath & Body Works reporting unit's fair value was greater than its carrying value (including goodwill).
As of the end of the third quarter of 2019, the Company performed a quantitative interim impairment assessment over the Victoria's Secret and Victoria's Secret Greater China reporting units. An interim assessment was performed in consideration of the negative performance of these reporting units and their impact on the sustained decline in the Company's market capitalization. Further, for the Greater China reporting unit, the Company considered the results of the long-lived store asset impairment assessment.
The interim assessment concluded that the fair value of the Victoria's Secret reporting unit, which was based on a weighted average of the income and market approaches, exceeded its carrying value. However, the fair value of the Greater China reporting unit, which was based on the income approach, did not exceed its carrying value. Accordingly, the Company recognized a goodwill impairment charge of $30 million in the third quarter of 2019 related to the Greater China reporting unit. This charge is included in the Victoria's Secret segment and in Impairment of Goodwill in the 2019 Consolidated Statement of Loss.
As of the end of the fourth quarter of 2019, the Company performed its annual goodwill impairment assessment over the Bath & Body Works and Victoria's Secret reporting units. The fair value of the Bath & Body Works reporting unit was estimated using a weighted average of the income and market approaches. As a result of continued fourth quarter declines in business performance and increased risk, volatility and uncertainty related to the Victoria's Secret reporting unit, the Company estimated its fair value using a market approach.
The annual assessment concluded that the fair value of the Victoria's Secret reporting unit did not exceed its carrying value. Accordingly, the Company recognized a goodwill impairment charge of $690 million in the fourth quarter of 2019 related to the Victoria's Secret reporting unit. This charge is included in the Victoria's Secret segment and in Impairment of Goodwill in the 2019 Consolidated Statement of Loss. The 2019 annual assessment also concluded that the fair value of the Bath & Body Works reporting unit exceeded its carrying value.
The market approach is based on earnings multiples of selected guideline public companies, while the income approach is based on estimated discounted future cash flows. The approaches, which are determined using Level 3 inputs within the fair value hierarchy, incorporated a number of significant assumptions and judgments including, but not limited to, estimated future cash flows, multiples of earnings of similar public companies, discount rates, income tax rates, terminal growth rates and an implied control premium relative to the Company's market capitalization.
Trade Names
The Bath & Body Works and Victoria's Secret trade names represent intangible assets with indefinite lives. The following table provides the composition of trade names as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2021
|
|
February 1, 2020
|
|
(in millions)
|
Bath & Body Works
|
$
|
165
|
|
|
$
|
165
|
|
Victoria's Secret
|
246
|
|
|
246
|
|
Trade Names
|
$
|
411
|
|
|
$
|
411
|
|
As of the end of the fourth quarter of 2020 and 2019, the Company performed its annual impairment assessments of the Bath & Body Works and Victoria's Secret trade names. To estimate the fair value of the trade names, the Company used the relief from royalty method under the income approach. The annual assessments concluded that the fair values of the trade names were in excess of their respective carrying values.
In 2019, the Company also performed a quantitative interim impairment assessment of the Victoria's Secret trade name. An interim assessment was performed in consideration of the negative performance of Victoria's Secret. To estimate the fair value of the Victoria's Secret trade name, the Company used the relief from royalty method under the income approach. The interim assessment concluded that the fair value of the Victoria's Secret trade name exceeded its carrying value.
10. Equity Investments
Easton
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 $119 million as of January 30, 2021 and $118 million as of February 1, 2020, are recorded in Other Assets on the Consolidated Balance Sheets.
Included in the Company’s Easton investments are equity interests in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and develop 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.
Victoria's Secret U.K.
As of January 30, 2021, the Company accounts for its investment in Victoria's Secret U.K. under the equity method of accounting. For additional information, see Note 5, "Restructuring Activities."
11. Accrued Expenses and Other
The following table provides additional information about the composition of Accrued Expenses and Other as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1, 2020
|
|
(in millions)
|
Deferred Revenue, Principally from Gift Card Sales
|
$
|
361
|
|
|
$
|
330
|
|
Compensation, Payroll Taxes and Benefits
|
336
|
|
|
216
|
|
Supplemental Retirement Plan
|
166
|
|
|
—
|
|
Interest
|
94
|
|
|
94
|
|
Taxes, Other than Income
|
88
|
|
|
74
|
|
Rent
|
47
|
|
|
35
|
|
Marketing
|
47
|
|
|
32
|
|
Accrued Claims on Self-insured Activities
|
39
|
|
|
40
|
|
Returns Reserve
|
28
|
|
|
23
|
|
Other
|
251
|
|
|
208
|
|
Total Accrued Expenses and Other
|
$
|
1,457
|
|
|
$
|
1,052
|
|
12. Income Taxes
Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.
The following table provides the components of the Company’s provision for income taxes for 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in millions)
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
147
|
|
|
$
|
156
|
|
|
$
|
212
|
|
U.S. State
|
52
|
|
|
35
|
|
|
37
|
|
Non-U.S.
|
16
|
|
|
23
|
|
|
16
|
|
Total
|
215
|
|
|
214
|
|
|
265
|
|
Deferred:
|
|
|
|
|
|
U.S. Federal
|
11
|
|
|
(7)
|
|
|
(4)
|
|
U.S. State
|
(2)
|
|
|
1
|
|
|
2
|
|
Non-U.S.
|
24
|
|
|
(23)
|
|
|
(50)
|
|
Total
|
33
|
|
|
(29)
|
|
|
(52)
|
|
Provision for Income Taxes
|
$
|
248
|
|
|
$
|
185
|
|
|
$
|
213
|
|
The non-U.S. component of pre-tax income, arising principally from overseas operations, was income of $83 million, loss of $226 million and loss of $14 million for 2020, 2019 and 2018, respectively.
The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Federal Income Tax Rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State Income Taxes, Net of Federal Income Tax Effect
|
5.0
|
%
|
|
(23.0
|
%)
|
|
6.0
|
%
|
Impact of Non-U.S. Operations
|
1.9
|
%
|
|
(5.7
|
%)
|
|
2.3
|
%
|
Goodwill Impairment
|
—
|
%
|
|
(80.8
|
%)
|
|
—
|
%
|
Change in Valuation Allowance
|
0.4
|
%
|
|
(18.5
|
%)
|
|
(1.1
|
%)
|
Divestiture of La Senza
|
—
|
%
|
|
—
|
%
|
|
(2.7
|
%)
|
Share-Based Compensation
|
1.0
|
%
|
|
(7.7
|
%)
|
|
1.0
|
%
|
Uncertain Tax Positions
|
(5.0
|
%)
|
|
12.3
|
%
|
|
(0.5
|
%)
|
Restructuring of Foreign Investments
|
(2.0
|
%)
|
|
—
|
%
|
|
—
|
%
|
Other Items, Net
|
0.4
|
%
|
|
0.5
|
%
|
|
(1.1
|
%)
|
Effective Tax Rate
|
22.7
|
%
|
|
(101.9
|
%)
|
|
24.9
|
%
|
Deferred Taxes
The following table provides the effect of temporary differences that cause deferred income taxes as of January 30, 2021 and February 1, 2020. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2021
|
|
February 1, 2020
|
|
Assets
|
|
Liabilities
|
|
Total
|
|
Assets
|
|
Liabilities
|
|
Total
|
|
(in millions)
|
Loss Carryforwards
|
$
|
447
|
|
|
$
|
—
|
|
|
$
|
447
|
|
|
$
|
247
|
|
|
$
|
—
|
|
|
$
|
247
|
|
Non-qualified Retirement Plan
|
38
|
|
|
—
|
|
|
38
|
|
|
62
|
|
|
—
|
|
|
62
|
|
Leases
|
669
|
|
|
(601)
|
|
|
68
|
|
|
746
|
|
|
(712)
|
|
|
34
|
|
Share-based Compensation
|
30
|
|
|
—
|
|
|
30
|
|
|
40
|
|
|
—
|
|
|
40
|
|
Deferred Revenue
|
6
|
|
|
—
|
|
|
6
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Property and Equipment
|
—
|
|
|
(216)
|
|
|
(216)
|
|
|
—
|
|
|
(230)
|
|
|
(230)
|
|
Trade Names and Other Intangibles
|
—
|
|
|
(94)
|
|
|
(94)
|
|
|
—
|
|
|
(94)
|
|
|
(94)
|
|
Other Assets
|
—
|
|
|
(61)
|
|
|
(61)
|
|
|
—
|
|
|
(60)
|
|
|
(60)
|
|
Other, Net
|
62
|
|
|
(19)
|
|
|
43
|
|
|
70
|
|
|
(20)
|
|
|
50
|
|
Valuation Allowance
|
(426)
|
|
|
—
|
|
|
(426)
|
|
|
(204)
|
|
|
—
|
|
|
(204)
|
|
Total Deferred Income Taxes
|
$
|
826
|
|
|
$
|
(991)
|
|
|
$
|
(165)
|
|
|
$
|
981
|
|
|
$
|
(1,116)
|
|
|
$
|
(135)
|
|
As of January 30, 2021, the Company had loss carryforwards of $447 million, of which $248 million has an indefinite carryforward. The remainder of the U.S. and non-U.S. carryforwards, if unused, will expire at various dates from 2021 through 2040 and 2028 through 2040, respectively. For certain jurisdictions where the Company has determined that it is more likely than not that the loss carryforwards will not be realized, a valuation allowance has been provided on those loss carryforwards as well as other net deferred tax assets.
Income tax payments were $200 million for 2020, $228 million for 2019 and $324 million for 2018.
Uncertain Tax Positions
The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal, state & non-U.S. tax jurisdictions for 2020, 2019 and 2018, without interest and penalties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in millions)
|
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year
|
$
|
88
|
|
|
$
|
114
|
|
|
$
|
67
|
|
Increases to Unrecognized Tax Benefits for Prior Years
|
7
|
|
|
15
|
|
|
35
|
|
Decreases to Unrecognized Tax Benefits for Prior Years
|
(50)
|
|
|
(22)
|
|
|
(25)
|
|
Increases to Unrecognized Tax Benefits as a Result of Current Year Activity
|
113
|
|
|
3
|
|
|
44
|
|
Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities
|
—
|
|
|
(16)
|
|
|
—
|
|
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations
|
(6)
|
|
|
(6)
|
|
|
(7)
|
|
Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year
|
$
|
152
|
|
|
$
|
88
|
|
|
$
|
114
|
|
Of the total gross unrecognized tax benefits, approximately $142 million, $81 million and $104 million, at January 30, 2021, February 1, 2020, and February 2, 2019, respectively, represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. These amounts are net of the offsetting tax effects from other tax jurisdictions.
Of the total unrecognized tax benefits, it is reasonably possible that $122 million could change in the next 12 months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.
The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. The Company recognized an income tax benefit from interest and penalties of approximately $3 million, $1 million and $5 million in 2020, 2019 and 2018, respectively. The Company has accrued $10 million and $12 million for the payment of interest and
penalties as of January 30, 2021 and February 1, 2020, respectively. Accrued interest and penalties are included within Other Long-term Liabilities on the Consolidated Balance Sheets.
The Company files U.S. federal income tax return as well as income tax returns in various states and in non-U.S. jurisdictions. The Company is a participant in the Compliance Assurance Process ("CAP"), which is a program made available by the Internal Revenue Service ("IRS") to certain qualifying large taxpayers, under which participants work collaboratively with the IRS to identify and resolve potential tax issues through open, cooperative and transparent interaction prior to the annual filing of their federal income tax return. The IRS is currently examining the Company's 2019 consolidated U.S. federal income tax return.
The Company is also subject to various state and local income tax examinations for the years 2015 to 2019. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2008 to 2019. In some situations, the Company determines that it does not have a filing requirement in a particular tax jurisdiction. Where no return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, additional years may be reviewed by the tax authority. The Company believes it has appropriately accounted for uncertainties related to this issue.
13. Long-term Debt and Borrowing Facilities
The following table provides the Company’s outstanding debt balance, net of unamortized debt issuance costs and discounts, as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1,
2020
|
|
(in millions)
|
Senior Secured Debt with Subsidiary Guarantee
|
|
|
|
$750 million, 6.875% Fixed Interest Rate Secured Notes due July 2025 ("2025 Secured Notes")
|
$
|
740
|
|
|
$
|
—
|
|
Secured Foreign Facilities
|
—
|
|
|
103
|
|
Total Senior Secured Debt with Subsidiary Guarantee
|
$
|
740
|
|
|
$
|
103
|
|
Senior Debt with Subsidiary Guarantee
|
|
|
|
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
|
$
|
—
|
|
|
$
|
450
|
|
$285 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
|
284
|
|
|
858
|
|
$320 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
|
319
|
|
|
498
|
|
$500 million, 9.375% Fixed Interest Rate Notes due July 2025 ("2025 Notes")
|
493
|
|
|
—
|
|
$297 million, 6.694% Fixed Interest Rate Notes due January 2027 ("2027 Notes")
|
278
|
|
|
276
|
|
$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)
|
497
|
|
|
496
|
|
$500 million, 7.50% Fixed Interest Rate Notes due June 2029 ("2029 Notes")
|
488
|
|
|
487
|
|
$1 billion, 6.625% Fixed Interest Rate Notes due October 2030 ("2030 Notes")
|
988
|
|
|
—
|
|
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
|
991
|
|
|
991
|
|
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
|
694
|
|
|
693
|
|
Total Senior Debt with Subsidiary Guarantee
|
$
|
5,032
|
|
|
$
|
4,749
|
|
Senior Debt
|
|
|
|
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
|
$
|
348
|
|
|
$
|
348
|
|
$247 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
|
246
|
|
|
298
|
|
Unsecured Foreign Facilities
|
—
|
|
|
50
|
|
Total Senior Debt
|
$
|
594
|
|
|
$
|
696
|
|
Total
|
$
|
6,366
|
|
|
$
|
5,548
|
|
Current Debt
|
—
|
|
|
(61)
|
|
Total Long-term Debt, Net of Current Portion
|
$
|
6,366
|
|
|
$
|
5,487
|
|
The following table provides principal payments due on outstanding debt in the next five fiscal years and the remaining years thereafter:
|
|
|
|
|
|
Fiscal Year (in millions)
|
|
2021
|
$
|
—
|
|
2022
|
285
|
|
2023
|
320
|
|
2024
|
—
|
|
2025
|
1,250
|
|
Thereafter
|
$
|
4,594
|
|
Cash paid for interest was $418 million in 2020, $363 million in 2019 and $380 million in 2018.
Issuance of Notes
In September 2020, the Company issued $1 billion of 6.625% senior notes due October 2030. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Company and certain of the Company's 100% owned subsidiaries. The proceeds from the issuance were $988 million, which were net of issuance costs of $12 million. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the January 30, 2021 Consolidated Balance Sheet.
In June 2020, the Company issued $750 million of 6.875% senior secured notes due July 2025. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Company and certain of
the Company's 100% owned subsidiaries. The 2025 Secured Notes are secured on a first-priority lien basis by substantially all of the assets of the Company and the guarantors, and on a second-priority lien basis by certain collateral securing the asset-backed revolving credit facility, in each case, subject to certain exceptions. The proceeds from the issuance were $738 million, which were net of issuance costs of $12 million. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the January 30, 2021 Consolidated Balance Sheet.
In June 2020, the Company also issued $500 million of 9.375% notes due in July 2025. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Company and certain of the Company's 100% owned subsidiaries. The proceeds from the issuance were $492 million, which were net of issuance costs of $8 million. The issuance costs are being amortized through the maturity date and are included within Long-term Debt on the January 30, 2021 Consolidated Balance Sheet.
In June 2019, the Company issued $500 million of 7.50% notes due in June 2029. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Company and certain of the Company's 100% owned subsidiaries. The proceeds from the issuance were $486 million, which were net of discounts and issuance costs of $14 million. The discounts and issuance costs are being amortized through the maturity date and are included within Long-term Debt on the Consolidated Balance Sheets.
Repurchases of Notes
In October 2020, the Company settled tender offers to repurchase $576 million of outstanding 2022 Notes, $180 million of outstanding 2023 Notes and $53 million of outstanding 2037 Notes for $844 million. The Company used the proceeds from the 2030 Notes to fund the purchase price of the tender offers. Additionally, utilizing cash on hand, the Company redeemed the remaining $450 million of outstanding 2021 Notes for $463 million. The Company recognized a pre-tax loss related to this extinguishment of debt of $53 million (after-tax loss of $40 million), which includes redemption fees and the write-offs of unamortized issuance costs. This loss is included in Other Income (Loss) in the 2020 Consolidated Statement of Income.
In June 2019, the Company completed the early settlement of tender offers to repurchase $212 million of outstanding 2020 Notes, $330 million of outstanding 2021 Notes and $96 million of outstanding 2022 Notes for $669 million. The Company used the proceeds from the 2029 Notes, together with cash on hand, to fund the purchase price for the tender offers. Additionally, in July 2019, the Company redeemed the remaining $126 million of outstanding 2020 Notes for $130 million. The Company recognized a pre-tax loss on extinguishment of debt of $40 million (after-tax loss of $30 million), which includes redemption fees and the write-off of unamortized issuance costs. This loss is included in Other Income (Loss) in the 2019 Consolidated Statement of Loss.
In March 2021, the Company's Board of Directors authorized a reduction in the Company's debt that will be effected by a make whole call to repurchase the remaining $285 million of outstanding 2022 Notes and the $750 million of outstanding 2025 Secured Notes. This make whole call was issued on March 12, 2021 and the Company anticipates using approximately $1.1 billion in cash to complete the debt repurchase.
Revolving Credit Facility
The Company and certain of the Company's 100% owned subsidiaries guarantee and pledge collateral to secure a revolving credit facility. In April 2020, the Company entered into an amendment and restatement of the Credit Agreement to convert the Company’s credit facility into an asset-backed revolving credit facility. The Amendment maintains the aggregate commitments at $1 billion, and maintains the expiration date in August of 2024. The ABL Facility allows borrowings and letters of credit in U.S. dollars or Canadian dollars.
Availability under the ABL Facility is the lesser of (i) the borrowing base, determined primarily based on the Company's eligible U.S. and Canadian credit card receivables, accounts receivable, inventory and eligible real property, or (ii) the aggregate commitment. If at any time, the outstanding amount under the ABL Facility exceeds the lesser of (i) the borrowing base and (ii) the aggregate commitment, the Company will be required to prepay the outstanding amounts under the ABL Facility to the extent of such excess. In addition, at any time that the Company's consolidated cash balance exceeds $350 million, it will be required to prepay outstanding amounts under the ABL Facility to the extent of such excess. As of January 30, 2021, the Company's borrowing base was $853 million but it was unable to draw upon the ABL Facility as its consolidated cash balance exceeded $350 million.
The ABL Facility supports the Company’s letter of credit program. The Company had $63 million of outstanding letters of credit as of January 30, 2021 that reduced its availability under the ABL Facility.
As of January 30, 2021, the ABL Facility fees related to committed and unutilized amounts were 0.30% per annum, and the fees related to outstanding letters of credit were 1.75% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings was LIBOR plus 1.75% per annum. The interest rate on outstanding Canadian dollar-denominated borrowings was CDOR plus 1.75% per annum.
The ABL Facility requires the Company to maintain a fixed charge coverage ratio of not less than 1.00 to 1.00 during an event of default or any period commencing on any day when specified excess availability is less than the greater of (1) $100 million or (2) 15% of the maximum borrowing amount. As of January 30, 2021, the Company was not required to maintain this ratio.
In March 2020, in an abundance of caution and as a proactive measure in response to the COVID-19 pandemic, the Company elected to borrow $950 million from its revolving facility, which was repaid upon the completion of the Amendment. As of January 30, 2021, there were no borrowings outstanding under the ABL Facility.
Foreign Facilities
Certain of the Company's China subsidiaries utilize revolving and term loan bank facilities to support their operations. The Foreign Facilities allow borrowings in U.S. dollars and Chinese Yuan, and interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing. Certain of these facilities are guaranteed by the Company and certain of the Company's 100% owned subsidiaries.
As of January 30, 2021, the Secured Foreign Facilities allow for borrowings and letters of credit up to $30 million. During 2020, the Company borrowed $21 million and made payments of $126 million under the Secured Foreign Facilities. As of January 30, 2021, there were no borrowings outstanding under the Secured Foreign Facilities.
During 2020, the Company placed cash on deposit with certain financial institutions as collateral for their lending commitments under the Secured Foreign Facilities. As of January 30, 2021, the amount of collateral required was dependent upon the aggregate lending commitments. These deposits, totaling $30 million, are recorded in Other Assets on the January 30, 2021 Consolidated Balance Sheet.
During 2020, the Company borrowed $13 million and made payments of $63 million under the unsecured Foreign Facilities. During the second quarter of 2020, with no borrowings outstanding, the Company terminated the unsecured Foreign Facilities.
14. Fair Value Measurements
Cash and Cash Equivalents and restricted cash include cash on hand, deposits with financial institutions and highly liquid investments with original maturities of less than 90 days. The Company's Cash and Cash Equivalents and restricted cash are considered Level 1 fair value measurements as they are valued using unadjusted quoted prices in active markets for identical assets.
The following table provides a summary of the principal value and estimated fair value of outstanding publicly traded debt as of January 30, 2021 and February 1, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1,
2020
|
|
(in millions)
|
Principal Value
|
$
|
6,449
|
|
|
$
|
5,458
|
|
Fair Value, Estimated (a)
|
7,243
|
|
|
5,555
|
|
________________
(a)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 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Management believes that the carrying values of accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturity.
15. Comprehensive Income
Comprehensive Income includes gains and losses on foreign currency translation and on derivative instruments. The cumulative gains and losses on these items are included in Accumulated Other Comprehensive Income on the Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity (Deficit).
The following table provides the rollforward of accumulated other comprehensive income for 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
|
|
Accumulated Other Comprehensive Income
|
|
(in millions)
|
Balance as of February 1, 2020
|
$
|
52
|
|
|
$
|
—
|
|
|
|
|
$
|
52
|
|
Other Comprehensive Income (Loss) Before Reclassifications
|
(3)
|
|
|
(2)
|
|
|
|
|
(5)
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
36
|
|
|
—
|
|
|
|
|
36
|
|
Tax Effect
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Current-period Other Comprehensive Income (Loss)
|
33
|
|
|
(2)
|
|
|
|
|
31
|
|
Balance as of January 30, 2021
|
$
|
85
|
|
|
$
|
(2)
|
|
|
|
|
$
|
83
|
|
As a result of the transition to a joint venture business model in the U.K. and the substantially complete liquidation of the Company's investment in the U.K., the Company reclassified $36 million of accumulated foreign-currency translation adjustments out of accumulated other comprehensive income and into earnings. For additional information, see Note 5, "Restructuring Activities."
The following table provides the rollforward of accumulated other comprehensive income for 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Cash Flow Hedges
|
|
Accumulated Other Comprehensive Income
|
|
(in millions)
|
Balance as of February 2, 2019
|
57
|
|
|
2
|
|
|
59
|
|
Other Comprehensive Income (Loss) Before Reclassifications
|
(5)
|
|
|
2
|
|
|
(3)
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income
|
—
|
|
|
(5)
|
|
|
(5)
|
|
Tax Effect
|
—
|
|
|
1
|
|
|
1
|
|
Current-period Other Comprehensive Income (Loss)
|
(5)
|
|
|
(2)
|
|
|
(7)
|
|
Balance as of February 1, 2020
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
52
|
|
16. 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.
On February 19, 2020, a plaintiff shareholder filed a complaint in the U.S. District Court for the Southern District of Ohio alleging derivative claims on behalf of the Company against certain of its current and former directors and officers. The Company was named as nominal defendant. The lawsuit asserts claims for breach of fiduciary duty, corporate waste and unjust enrichment in connection with alleged misstatements about the Company's quarterly dividend prior to the announced reduction of the dividend in November 2018. On July 21, 2020, the court so-ordered a stipulation staying all proceedings in this lawsuit, pending resolution of the motion to dismiss that the Company filed on February 18, 2020 in the putative class action lawsuit described above. Following the dismissal of the putative class action lawsuit described above, the parties filed a joint stipulation to dismiss the derivative claims without prejudice on November 5, 2020.
On May 19, 2020, a purported shareholder filed a derivative lawsuit on behalf of L Brands, Inc. in the Court of Common Pleas for Franklin County, Ohio. The complaint names as defendants certain current and former directors and officers of L Brands, Inc. and alleges, among other things, that these defendants breached their fiduciary duties by violating law and/or company policies relating to workplace conduct. The Company was named as nominal defendant only, and there are no claims asserted against it. On June 16, 2020, the lawsuit was removed to the United States District Court for the Southern District of Ohio. On July 6, 2020, the court so-ordered a stipulation staying the lawsuit until December 29, 2020. That stay has since been extended until March 29, 2021.
On January 12, 2021, another purported shareholder filed a derivative lawsuit on behalf of L Brands, Inc. in the Delaware Court of Chancery. The complaint names as defendants certain current and former directors and officers of L Brands, Inc. and
alleges, among other things, breaches of fiduciary duty through asserted violations of law and failures to monitor workplace conduct. The Company was named as a nominal defendant, and there are no claims asserted against it.
La Senza
In connection with the sale of La Senza in the fourth quarter of 2018, certain of the Company's subsidiaries have remaining contingent obligations of $32 million related to lease payments under the current terms of noncancelable leases expiring at various dates through 2028. These obligations 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 business. As of January 30, 2021, the Company recorded reserves of $35 million, primarily included within Other Long-term Liabilities on the Consolidated Balance Sheet, related to these lease-related obligations and certain other obligations related to the La Senza business.
17. Retirement Benefits
The Company sponsors a tax-qualified defined contribution retirement plan for substantially all of its associates within the U.S. Participation is available to associates who meet certain age and service 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 $75 million for 2020, $79 million for 2019 and $76 million for 2018.
The Company sponsors a non-qualified supplemental retirement plan. The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. On June 27, 2020 (the “Termination Date”), the Human Capital and Compensation Committee of the Board authorized the termination of the non-qualified plan. Subsequent to the Termination Date, no additional employee contributions may be made to the non-qualified plan. The remaining benefits and obligations are expected to be paid out in full approximately one year following the Termination Date. Accordingly, the liability of $166 million related to the non-qualified plan is included within Accrued Expenses and Other on the January 30, 2021 Consolidated Balance Sheet.
The following table provides the Company’s annual activity for this plan and year-end liability as of January 30, 2021, which is included in Accrued Expenses and Other, and February 1, 2020, which is included in Other Long-term Liabilities, on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
2021
|
|
February 1,
2020
|
|
(in millions)
|
Balance at Beginning of Year
|
$
|
280
|
|
|
$
|
278
|
|
Contributions:
|
|
|
|
Associate
|
3
|
|
|
8
|
|
Company
|
4
|
|
|
12
|
|
Interest
|
10
|
|
|
14
|
|
Distributions
|
(131)
|
|
|
(32)
|
|
Balance at End of Year
|
$
|
166
|
|
|
$
|
280
|
|
Total expense recognized related to the non-qualified plan was $14 million for 2020, $26 million for 2019 and $24 million for 2018.
18. Shareholders’ Equity (Deficit)
Common Stock Share Repurchases
In March 2018, the Company's Board of Directors approved a $250 million share repurchase program, which included the $23 million remaining under the September 2017 repurchase program. The March 2018 repurchase program had $79 million remaining as of January 30, 2021. The Company did not repurchase any shares during 2020 or 2019.
In March 2021, the Company's Board of Directors authorized a new $500 million share repurchase plan, which replaces the $79 million remaining under the March 2018 repurchase program. Pursuant to the Board's authorization, the Company entered into a Rule 10b5-1 purchase plan to effectuate share repurchases up to $250 million.
Dividends
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during fiscal 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Dividends
|
|
|
|
|
|
Total Paid
|
|
(per share)
|
|
(in millions)
|
2020
|
|
|
|
|
|
|
|
Fourth Quarter
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
Third Quarter
|
—
|
|
|
|
|
|
|
—
|
|
Second Quarter
|
—
|
|
|
|
|
|
|
—
|
|
First Quarter
|
0.30
|
|
|
|
|
|
|
83
|
|
2020 Total
|
$
|
0.30
|
|
|
|
|
|
|
$
|
83
|
|
2019
|
|
|
|
|
|
|
|
Fourth Quarter
|
$
|
0.30
|
|
|
|
|
|
|
$
|
83
|
|
Third Quarter
|
0.30
|
|
|
|
|
|
|
83
|
|
Second Quarter
|
0.30
|
|
|
|
|
|
|
83
|
|
First Quarter
|
0.30
|
|
|
|
|
|
|
83
|
|
2019 Total
|
$
|
1.20
|
|
|
|
|
|
|
$
|
332
|
|
2018
|
|
|
|
|
|
|
|
Fourth Quarter
|
$
|
0.60
|
|
|
|
|
|
|
$
|
166
|
|
Third Quarter
|
0.60
|
|
|
|
|
|
|
165
|
|
Second Quarter
|
0.60
|
|
|
|
|
|
|
167
|
|
First Quarter
|
0.60
|
|
|
|
|
|
|
168
|
|
2018 Total
|
$
|
2.40
|
|
|
|
|
|
|
$
|
666
|
|
The Board of Directors temporarily suspended the quarterly cash dividend beginning in the second quarter of 2020.
In March 2021, the Company's Board of Directors reinstated the annual dividend at $0.60 per share, beginning with the quarterly dividend to be paid in June 2021.
19. Share-based Compensation
Plan Summary
In 2020, the Company's shareholders approved the 2020 Stock Option and Performance Incentive Plan ("2020 Plan"). The 2020 Plan replaced the 2015 Stock Option and Performance Incentive Plan (together with the 2020 Plan, the "Plans"). The Plans provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance-based restricted stock, performance units and unrestricted shares. The Company grants stock options at a price equal to the fair market value of the stock on the date of grant. Stock options have a maximum term of 10 years. Stock options generally vest ratably over three to five years. Restricted stock generally vests (the restrictions lapse) at the end of a three-year period or on a graded basis over a five-year period.
Under the Company’s Plans, 166 million options, restricted and unrestricted shares have been authorized to be granted to employees and directors. There were 12 million options and shares available for grant as of January 30, 2021. The Company suspended its annual grant in 2020 as a result of the COVID-19 pandemic.
Income Statement Impact
The following table provides share-based compensation expense included in the Consolidated Statements of Income (Loss) for 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
(in millions)
|
Costs of Goods Sold, Buying and Occupancy
|
$
|
18
|
|
|
$
|
29
|
|
|
$
|
29
|
|
General, Administrative and Store Operating Expenses
|
32
|
|
|
58
|
|
|
68
|
|
Total Share-based Compensation Expense
|
$
|
50
|
|
|
$
|
87
|
|
|
$
|
97
|
|
The tax benefit associated with recognized share-based compensation expense was $10 million for 2020, $18 million for 2019 and $20 million for 2018.
Restricted Stock
The following table provides the Company’s restricted stock activity for the fiscal year ended January 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
(in thousands)
|
|
|
Unvested as of February 1, 2020
|
8,662
|
|
|
$
|
32.00
|
|
Granted
|
1,480
|
|
|
17.05
|
|
Vested
|
(2,040)
|
|
|
43.38
|
|
Cancelled
|
(1,455)
|
|
|
28.34
|
|
|
|
|
|
Unvested as of January 30, 2021
|
6,647
|
|
|
$
|
25.68
|
|
During 2020, the Company granted a performance-based restricted stock award that includes a specified market condition which can adjust the number of shares which vest under the award. The market condition compares total shareholder return to that of a designated peer group over the performance period. The award was valued using a Monte Carlo simulation model, which requires certain assumptions, including the risk-free interest rate, expected volatility and the estimated dividend yield.
The weighted-average estimated fair value of restricted stock granted was $17.05 per share for 2020, $23.34 per share for 2019 and $30.43 per share for 2018. The fair value of restricted stock awards is generally based on the market value of an unrestricted share on the grant date adjusted for anticipated dividend yields.
The Company’s total intrinsic value of restricted stock vested was $33 million for 2020, $39 million for 2019 and $44 million for 2018.
The Company’s total fair value at grant date of awards vested was $89 million for 2020, $104 million for 2019 and $86 million for 2018.
As of January 30, 2021, there was $45 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.8 years.
Tax benefits realized from tax deductions associated with restricted stock vested were $8 million for 2020 and $10 million for 2019 and 2018.
Stock Options
The following table provides the Company’s stock option activity for the fiscal year ended January 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Option
Price Per
Share
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
(in thousands)
|
|
|
|
(in years)
|
|
(in thousands)
|
Outstanding as of February 1, 2020
|
5,280
|
|
|
$
|
51.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
(237)
|
|
|
33.13
|
|
|
|
|
|
Cancelled
|
(880)
|
|
|
45.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 30, 2021
|
4,163
|
|
|
$
|
54.39
|
|
|
5.0
|
|
$
|
5,356
|
|
Vested and Expected to Vest as of January 30, 2021 (a)
|
4,144
|
|
|
54.46
|
|
|
5.0
|
|
5,257
|
|
Options Exercisable as of January 30, 2021
|
3,631
|
|
|
56.57
|
|
|
4.7
|
|
3,048
|
|
________________
(a)The number of options expected to vest includes an estimate of expected forfeitures.
Intrinsic value for stock options is the difference between the current market value of the Company’s stock and the option strike price. The total intrinsic value of options exercised was $2 million for 2020, $3 million for 2019 and $2 million for 2018.
The total fair value at grant date of option awards vested was $6 million for 2020 and $9 million for 2019 and 2018.
The Company’s total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options was $1 million as of January 30, 2021. This cost is expected to be recognized over a weighted-average period of 1.1 years.
The weighted-average estimated fair value of stock options granted was $6.05 per share for 2019 and $6.76 per share for 2018.
Cash received from stock options exercised was $8 million for 2020 and $1 million for 2019 and 2018. Tax benefits realized from tax deductions associated with stock options exercised was less than $1 million for 2020, 2019 and 2018.
The Company uses the Black-Scholes option-pricing model for valuation of options granted to employees and directors. The Company’s determination of the fair value of options is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors.
The following table contains the weighted-average assumptions used during 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Expected Volatility
|
|
|
40
|
%
|
|
36
|
%
|
Risk-free Interest Rate
|
|
|
2.2
|
%
|
|
2.5
|
%
|
Dividend Yield
|
|
|
4.4
|
%
|
|
5.8
|
%
|
Expected Life (in years)
|
|
|
3.2
|
|
2.9
|
The majority of the Company’s stock-based compensation awards are granted on an annual basis in the first quarter of each year. The expected volatility assumption is based on the Company’s analysis of historical volatility. The risk-free interest rate assumption is based upon the average daily closing rates during the period for U.S. treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts in relation to the stock price at the grant date. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.
20. Segment Information
In the third quarter of 2020, the Company changed its segment reporting as a result of leadership changes and restructuring actions taken to facilitate the ongoing efforts to separate Bath & Body Works and Victoria’s Secret into separate businesses. The Company has two reportable segments: Bath & Body Works and Victoria's Secret. While this reporting change did not impact the Company's consolidated results, segment data has been recast to be consistent for all periods presented.
The Bath & Body Works segment sells body 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 online and at retail stores located in the U.S. and Canada, and international stores operated by partners under franchise, license and wholesale arrangements. Additionally, this segment includes the Bath & Body Works merchandise sourcing and production function serving the Company and its international partners.
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 and PINK merchandise is sold online and through retail stores located in the U.S., Canada and Greater China, and international stores operated by partners under franchise, license, wholesale and joint venture arrangements. Additionally, this segment includes the Victoria's Secret and PINK merchandise sourcing and production function serving the Company and its international partners.
Other includes corporate infrastructure and governance functions and other non-recurring items that are deemed to be corporate in nature.
The following table provides the Company’s segment information as of and for the fiscal years ended January 30, 2021, February 1, 2020 and February 2, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bath & Body
Works
|
|
Victoria’s
Secret
|
|
Other
|
|
Total
|
|
(in millions)
|
2020
|
|
|
|
|
|
|
|
Net Sales
|
$
|
6,434
|
|
|
$
|
5,413
|
|
|
$
|
—
|
|
|
$
|
11,847
|
|
Depreciation and Amortization
|
202
|
|
|
314
|
|
|
5
|
|
|
521
|
|
Operating Income (Loss) (b)
|
1,821
|
|
|
(25)
|
|
|
(216)
|
|
|
1,580
|
|
Total Assets (a)
|
3,548
|
|
|
4,220
|
|
|
3,803
|
|
|
11,571
|
|
Capital Expenditures
|
103
|
|
|
115
|
|
|
10
|
|
|
228
|
|
2019
|
|
|
|
|
|
|
|
Net Sales
|
$
|
5,355
|
|
|
$
|
7,509
|
|
|
$
|
50
|
|
|
$
|
12,914
|
|
Depreciation and Amortization
|
191
|
|
|
394
|
|
|
3
|
|
|
588
|
|
Operating Income (Loss) (c)
|
1,224
|
|
|
(782)
|
|
|
(184)
|
|
|
258
|
|
Total Assets (a)
|
3,376
|
|
|
5,271
|
|
|
1,478
|
|
|
10,125
|
|
Capital Expenditures
|
245
|
|
|
212
|
|
|
1
|
|
|
458
|
|
2018
|
|
|
|
|
|
|
|
Net Sales
|
$
|
4,776
|
|
|
$
|
8,103
|
|
|
$
|
358
|
|
|
$
|
13,237
|
|
Depreciation and Amortization
|
164
|
|
|
376
|
|
|
7
|
|
|
547
|
|
Operating Income (Loss) (d)
|
1,103
|
|
|
518
|
|
|
(384)
|
|
|
1,237
|
|
Total Assets (a)
|
2,393
|
|
|
4,443
|
|
|
1,254
|
|
|
8,090
|
|
Capital Expenditures
|
287
|
|
|
331
|
|
|
11
|
|
|
629
|
|
________________
(a)Assets are allocated to the operating segments based on decision making authority relevant to the applicable assets. The 2020 and 2019 amounts reflect the Company's adoption of ASC 842, Leases, in the first quarter of 2019.
(b)Victoria's Secret includes store and lease asset impairment charges of $254 million, severance and related charges of $51 million, a $36 million net pre-tax gain related to the closure and lease termination of the Hong Kong flagship store and a $54 million net pre-tax gain related to the establishment of a joint venture for the Victoria’s Secret U.K. business with Next PLC. Bath & Body Works and Other includes severance and related charges of $12 million and $18 million, respectively. For additional information, see Note 5, “Restructuring Activities," Note 7, "Long-Lived Assets" and Note 8, "Leases."
(c)Victoria's Secret includes goodwill impairment charges of $720 million and store and lease asset impairment charges of $263 million. For additional information see Note 7, “Long-Lived Assets" and Note 9, "Goodwill and Trade Names."
(d)Victoria's Secret includes store asset impairment charges of $101 million, and Other includes a loss on the sale of La Senza of $99 million and Henri Bendel closures costs of $23 million. For additional information see Note 5, “Restructuring Activities" and Note 7, “Long-Lived Assets."
The Company’s international net sales include sales from company-operated 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 $1.111 billion in 2020, $1.496 billion in 2019 and $1.683 billion in 2018. The Company’s internationally based long-lived assets were $382 million as of January 30, 2021 and $713 million as of February 1, 2020.
21. Quarterly Financial Data (Unaudited)
The following table provides summarized quarterly financial data for 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
May 2, 2020 (a)(b)
|
|
August 1, 2020 (c)(d)(e)
|
|
October 31, 2020 (f)(g)
|
|
January 30, 2021
|
|
(in millions except per share data)
|
Net Sales
|
$
|
1,654
|
|
|
$
|
2,319
|
|
|
$
|
3,055
|
|
|
$
|
4,819
|
|
Gross Profit
|
288
|
|
|
711
|
|
|
1,359
|
|
|
2,309
|
|
Operating Income (Loss)
|
(318)
|
|
|
44
|
|
|
581
|
|
|
1,273
|
|
Income (Loss) Before Income Taxes
|
(412)
|
|
|
(60)
|
|
|
410
|
|
|
1,154
|
|
Net Income (Loss)
|
(297)
|
|
|
(49)
|
|
|
331
|
|
|
859
|
|
Net Income (Loss) Per Basic Share (h)
|
$
|
(1.07)
|
|
|
$
|
(0.18)
|
|
|
$
|
1.19
|
|
|
$
|
3.08
|
|
Net Income (Loss) Per Diluted Share (h)(i)
|
$
|
(1.07)
|
|
|
$
|
(0.18)
|
|
|
$
|
1.17
|
|
|
$
|
3.03
|
|
________________
(a)Gross profit includes the effect of a $97 million pre-tax impairment charge ($72 million after-tax) related to certain Victoria's Secret store and lease assets.
(b)Net Loss includes the effect of a $50 million income tax benefit related to the resolution of certain tax matters.
(c)Gross profit includes the effect of a $117 million pre-tax impairment charge ($99 million after-tax) related to certain Victoria's Secret store and lease assets and a net pre-tax gain of $36 million ($25 million after-tax) related to the closure and lease termination for the Victoria’s Secret Hong Kong flagship store.
(d)Operating Income includes the effect of pre-tax severance and related charges of $81 million ($65 million after-tax).
(e)Net Loss includes the effect of a $21 million income tax benefit related to recent changes in tax legislation included in the CARES Act.
(f)Operating Income includes the effect of a $30 million pre-tax gain ($27 million after-tax) related to the establishment of a joint venture for the Victoria’s Secret U.K. and Ireland business with Next PLC.
(g)Net Income includes the effect of $53 million pre-tax loss ($40 million after-tax) associated with the early extinguishment of outstanding notes, and a $23 million net income tax benefit related to tax matters associated with foreign investments and recent changes in tax legislation.
(h)Due to changes in stock prices during the year and timing of issuances of shares, the cumulative total of quarterly net income (loss) per share amounts may not equal the net income (loss) per share for the year.
(i)The cumulative total of quarterly net income (loss) per dilutive share amounts does not equal the net income (loss) per dilutive share for the year due to net losses in certain periods.
The following table provides summarized quarterly financial data for 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
May 4,
2019
|
|
August 3,
2019 (a)
|
|
November 2,
2019 (b)(c)(d)
|
|
February 1,
2020 (e)(f)
|
|
(in millions except per share data)
|
Net Sales
|
$
|
2,629
|
|
|
$
|
2,902
|
|
|
$
|
2,677
|
|
|
$
|
4,707
|
|
Gross Profit
|
934
|
|
|
983
|
|
|
741
|
|
|
1,794
|
|
Operating Income (Loss)
|
153
|
|
|
175
|
|
|
(151)
|
|
|
82
|
|
Income (Loss) Before Income Taxes
|
60
|
|
|
42
|
|
|
(277)
|
|
|
(7)
|
|
Net Income (Loss)
|
40
|
|
|
38
|
|
|
(252)
|
|
|
(192)
|
|
Net Income (Loss) Per Basic Share (g)
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
(0.91)
|
|
|
$
|
(0.70)
|
|
Net Income (Loss) Per Diluted Share (g)(h)
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
(0.91)
|
|
|
$
|
(0.70)
|
|
________________
(a)Net Income includes the effect of a $40 million pre-tax loss ($30 million after-tax) associated with the early extinguishment of outstanding notes.
(b)Gross Profit includes the effect of a $218 million pre-tax impairment charge ($200 million after-tax) related to certain Victoria's Secret store and lease assets.
(c)Operating Loss includes the effect of a $30 million (no tax impact) goodwill impairment charge related to the Victoria's Secret Greater China reporting unit.
(d)Net Loss includes the effect of a $37 million pre-tax charge ($28 million after-tax) to increase reserves related to ongoing contingent obligations for the La Senza business.
(e)Gross Profit includes the effect of a $35 million pre-tax impairment charge ($30 million after-tax) related to certain Victoria's Secret lease assets.
(f)Operating Income includes the effect of a $690 million pre-tax goodwill impairment charge ($687 million after-tax) related to the Victoria's Secret reporting unit.
(g)Due to changes in stock prices during the year and timing of issuances of shares, the cumulative total of quarterly net income (loss) per share amounts may not equal the net income (loss) per share for the year.
(h)The cumulative total of quarterly net income (loss) per dilutive share amounts does not equal the net income (loss) per dilutive share for the year due to net losses in certain periods.
22. Subsequent Events
On March 12, 2021 the Company announced that its Board of Directors had authorized the following:
•A reduction in the Company's debt that will be effected by a make whole call to repurchase the remaining $285 million of outstanding 2022 Notes and the $750 million of outstanding 2025 Secured Notes. This make whole call was issued on March 12, 2021 and the Company anticipates using approximately $1.1 billion in cash to complete the debt repurchase;
•A new $500 million share repurchase plan, which replaces the $79 million remaining under the March 2018 repurchase program. Pursuant to the Board's authorization, the Company entered into a Rule 10b5-1 purchase plan to effectuate share repurchases up to $250 million; and
•A reinstatement of the Company’s annual dividend at $0.60 per share, beginning with the quarterly dividend to be paid in June 2021.