NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Basis of Presentation
Description of Business
Bath & Body Works, Inc. ("Bath & Body Works" or the "Company") is a specialty retailer of home fragrance, body care and soaps and sanitizer products. Through the Bath & Body Works, White Barn and other brand names, the Company sells merchandise through Company-operated specialty retail stores in the United States of America ("U.S.") and Canada, and through its websites and other channels. The Company's international operations are primarily through franchise, license and wholesale partners. The Company operates as and reports a single segment that includes all of its continuing operations.
On August 2, 2021, the Company completed the tax-free spin-off of its Victoria's Secret business, which included the Victoria's Secret and PINK brands, into an independent publicly traded company (the "Separation"). Accordingly, the operating results of, and costs to separate, the Victoria's Secret business are reported in Income from Discontinued Operations, Net of Tax in the Consolidated Statements of Income for all periods presented. In addition, the related assets and liabilities are reported as Assets and Liabilities of Discontinued Operations on the Consolidated Balance Sheets. All amounts and disclosures included in the Notes to Consolidated Financial Statements reflect only the Company's continuing operations unless otherwise noted. For additional information, see Note 2, "Discontinued Operations."
COVID-19
The coronavirus ("COVID-19") pandemic has created significant public health concerns as well as economic disruption, uncertainty and volatility. The Company remains focused on providing a safe store environment for its customers and associates while delivering an engaging shopping experience, and in establishing the necessary protocols to ensure the safe operations of its distribution and fulfillment centers and corporate offices. As expected, the Company has experienced channel and product category shifts as customer mindset and needs have shifted coming out of the pandemic.
The Company continues to monitor the COVID-19 pandemic and the effects on its operations and financial performance. There remains the potential for future COVID-19-related closures or operating restrictions, which could materially impact the Company's operations and financial performance in future periods.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “first quarter of 2022” and “first quarter of 2021” refer to the thirteen-week periods ended April 30, 2022 and May 1, 2021, 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 all unconsolidated entities is included in Other Income (Loss) in the Consolidated Statements of Income. 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.
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended April 30, 2022 and May 1, 2021 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2021 Annual Report on Form 10-K.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
Seasonality of Business
Due to the seasonal variations in the retail industry, the results of operations for the interim period are not necessarily indicative of the results expected for the full fiscal year.
Restricted Cash
During 2020, the Company placed cash on deposit with certain financial institutions as collateral for their lending commitments to certain former Victoria's Secret subsidiaries. These deposits totaled $30 million as of May 1, 2021 and were recorded in Other Current Assets on the May 1, 2021 Consolidated Balance Sheet. During the second quarter of 2021, these lending commitments were terminated which released the restrictions on this cash. Accordingly, the balance was reclassified to Cash and Cash Equivalents during the second quarter of 2021.
The following table summarizes the location of the Company's Cash and Cash Equivalents and restricted cash in the Consolidated Balance Sheets as of April 30, 2022, January 29, 2022 and May 1, 2021:
| | | | | | | | | | | | | | | | | |
| April 30,
2022 | | January 29,
2022 | | May 1,
2021 |
| (in millions) |
| Cash and Cash Equivalents | $ | 651 | | | $ | 1,979 | | | $ | 2,475 | |
| Current Assets of Discontinued Operations | — | | | — | | | 332 | |
| Other Current Assets | — | | | — | | | 30 | |
| Total Cash and Cash Equivalents and Restricted Cash | $ | 651 | | | $ | 1,979 | | | $ | 2,837 | |
Derivative Financial Instruments
The Company's Canadian dollar denominated earnings are subject to exchange rate risk as substantially all the merchandise sold in Canada 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. 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. All designated cash flow hedges are recorded on the Consolidated Balance Sheets at fair value. The fair value of designated cash flow hedges is not significant for any period presented. The Company does not use derivative financial instruments for trading purposes.
Concentration of Credit Risk
The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. 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 recorded to the allowance when it is determined that expected credit losses may occur.
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.
Recently Issued Accounting Pronouncements
The Company did not adopt any new accounting standards during the first quarter of 2022 that had a material impact on the Company's consolidated results of operations, financial position or cash flows. In addition, as of June 2, 2022, there were no new accounting standards that the Company has not yet adopted that are expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.
2. Discontinued Operations
Victoria's Secret & Co. Spin-Off
On July 9, 2021, the Company announced that its Board of Directors (the "Board") approved the previously announced Separation of the Victoria’s Secret business into an independent, publicly traded company, Victoria's Secret & Co. On August 2, 2021 (the "Distribution Date"), after the New York Stock Exchange ("NYSE") market closing, the Separation was completed. The Separation was achieved through the Company's tax-free distribution (the "Distribution") of 100% of the shares of Victoria's Secret & Co. common stock to holders of L Brands, Inc. common stock as of the close of business on the record date of July 22, 2021. The Company's stockholders of record received one share of Victoria’s Secret & Co. common
stock for every three shares of the Company's common stock. On August 3, 2021, Victoria’s Secret & Co. became an independent, publicly-traded company trading on the NYSE under the stock symbol "VSCO." The Company retained no ownership interest in Victoria’s Secret & Co. following the Separation.
The Company recognized a net reduction to Retained Earnings (Accumulated Deficit) of $175 million as a result of the Separation, primarily related to the transfer of certain assets and liabilities associated with its Victoria's Secret business to Victoria's Secret & Co., net of $976 million of cash payments received from Victoria's Secret & Co. in connection with the Separation. Assets transferred to Victoria's Secret & Co. included Cash and Cash Equivalents of $282 million held by Victoria's Secret subsidiaries on the Distribution Date.
In connection with the Separation, the Company entered into several agreements with Victoria's Secret & Co. that govern the relationship of the parties following the spin-off, including the Separation and Distribution Agreement, the Transition Services Agreements, the Tax Matters Agreement, the Employee Matters Agreement and the Domestic Transportation Services Agreement.
Under the terms of the Transition Services Agreements, the Company provides to Victoria's Secret & Co. various services or functions, including human resources, payroll and certain logistics functions. Additionally, Victoria's Secret & Co. provides to the Company various services or functions, including information technology, certain logistics functions, customer marketing and customer call center services. Generally, these services will be performed for a period of up to two years following the Distribution, except for information technology services, which will be provided for a period of up to three years following the Distribution and may be extended for a maximum of two additional one-year periods subject to increased administrative charges. Consideration and costs for the transition services are determined using several billing methodologies as described in the agreements, including customary billing, pass-through billing, percent of sales billing or fixed fee billing. Consideration for transition services provided to Victoria's Secret & Co. are recorded within the Consolidated Statement of Income based on the nature of the service and as an offset to expenses incurred to provide the services. Costs for transition services provided by Victoria's Secret & Co. are recorded within the Consolidated Statement of Income based on the nature of the service. During the first quarter of 2022, the Company recognized consideration of $19 million and recognized costs of $20 million pursuant to the Transition Service Agreements.
Under the terms of the Domestic Transportation Services Agreement, the Company provides transportation services for Victoria's Secret & Co. merchandise in the U.S. and Canada for an initial term of three years following the Distribution, which term will thereafter continuously renew unless and until Victoria’s Secret & Co. or the Company elects to terminate the arrangement upon 18 or 36 months’ prior written notice, respectively. Consideration for the transportation services is determined using customary billing and fixed billing methodologies, which are described in the agreement, and are subject to an administrative charge. Consideration for logistics services provided to Victoria's Secret & Co. are recorded within Costs of Goods Sold, Buying and Occupancy in the Consolidated Statement of Income and as an offset to expenses incurred to provide the services. During the first quarter of 2022, the Company recognized consideration of $18 million pursuant to the Domestic Transportation Services Agreement.
In conjunction with the Separation, the Company has contingent obligations relating to certain lease payments under the current terms of noncancelable leases. For additional information, see Note 12, "Commitments and Contingencies."
Financial Information of Discontinued Operations
Income from Discontinued Operations, Net of Tax in the Consolidated Statements of Income reflects the after-tax results of the Victoria's Secret business and Separation-related fees, and does not include any allocation of general corporate overhead expense or interest expense of the Company. The Company did not report any results from discontinued operations in the first quarter of 2022.
The following table summarizes the significant line items included in Income from Discontinued Operations, Net of Tax in the first quarter of 2021 Consolidated Statement of Income: | | | | | | | | | |
| (in millions) |
| Net Sales | $ | 1,554 | | | | | |
| Costs of Goods Sold, Buying and Occupancy | (882) | | | | | |
| General, Administrative and Store Operating Expenses (a) | (438) | | | | | |
| | | | | |
| | | | | |
| Income from Discontinued Operations Before Income Taxes | 234 | | | | | |
| Provision for Income Taxes | 48 | | | | | |
| Income from Discontinued Operations, Net of Tax | $ | 186 | | | | | |
_______________
(a)Includes Separation-related expenses of $10 million. Prior to the Separation, these costs were reported in the Other category under the Company's previous segment reporting.
The information presented as discontinued operations on the Consolidated Balance Sheets includes certain assets and liabilities that were transferred to Victoria’s Secret & Co. pursuant to the Separation agreements, and excludes certain liabilities that were retained by the Company in connection with the Separation. There were no assets or liabilities classified as discontinued operations as of April 30, 2022 or January 29, 2022.
The following table summarizes the carrying value of the significant classes of assets and liabilities classified as discontinued operations as of May 1, 2021:
| | | | | |
| | (in millions) |
| Cash and Cash Equivalents | $ | 332 | |
| Accounts Receivable, Net | 111 | |
| Inventories | 761 | |
| Other | 93 | |
| Current Assets of Discontinued Operations | 1,297 | |
| |
| Property and Equipment, Net | 1,036 | |
| Operating Lease Assets | 1,602 | |
| Trade Names | 246 | |
| Deferred Income Taxes | 11 | |
| Other Assets | 52 | |
| Other Assets of Discontinued Operations | $ | 2,947 | |
| |
| Accounts Payable | $ | 366 | |
| Accrued Expenses and Other | 613 | |
| |
| Current Operating Lease Liabilities | 356 | |
| Income Taxes | 9 | |
| Current Liabilities of Discontinued Operations | 1,344 | |
| |
| Deferred Income Taxes | 100 | |
| |
| Long-term Operating Lease Liabilities | 1,541 | |
| Other Long-term Liabilities | 22 | |
| Other Long-term Liabilities of Discontinued Operations | $ | 1,663 | |
The cash flows related to discontinued operations have not been segregated. Accordingly, the 2021 Consolidated Statement of Cash Flows includes the results of continuing and discontinued operations. The Company did not report any cash flows from discontinued operations in the first quarter of 2022.
The following table summarizes Depreciation, Share-based Compensation Expense and Capital Expenditures of discontinued operations for the first quarter of 2021:
| | | | | |
| (in millions) |
| Depreciation of Long-Lived Assets | $ | 80 | |
| Share-based Compensation Expense | 7 | |
| Capital Expenditures | (19) | |
3. Revenue Recognition
Accounts receivable, net from revenue-generating activities were $77 million as of April 30, 2022, $64 million as of January 29, 2022 and $62 million as of May 1, 2021. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 45 to 75 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 points and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue, which is recorded within Accrued Expenses and Other on the
Consolidated Balance Sheets, was $133 million as of April 30, 2022, $148 million as of January 29, 2022 and $108 million as of May 1, 2021. The Company recognized $56 million as revenue during the first quarter of 2022 from amounts recorded as deferred revenue at the beginning of the year.
The following table provides a disaggregation of Net Sales for the first quarters of 2022 and 2021:
| | | | | | | | | | | | | | | |
| First Quarter | | |
| 2022 | | 2021 | | | | |
| (in millions) |
| Stores - U.S. and Canada | $ | 1,059 | | | $ | 1,051 | | | | | |
| Direct - U.S. and Canada | 318 | | | 349 | | | | | |
| International (a) | 73 | | | 70 | | | | | |
| Total Net Sales | $ | 1,450 | | | $ | 1,470 | | | | | |
_______________
(a)Results include royalties associated with franchised stores and wholesale sales.
The Company’s net sales outside of the U.S. include sales from Company-operated stores and its e-commerce site in Canada, royalties associated with franchised stores and wholesale sales. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s net sales outside of the U.S. totaled $137 million and $117 million for the first quarters of 2022 and 2021, respectively.
4. Earnings Per Share and Shareholders’ Equity (Deficit)
Earnings Per Share
Earnings per basic share is computed based on the weighted-average number of common shares outstanding. Earnings per diluted share include the weighted-average effect of dilutive restricted stock units, performance share units and stock options (collectively, "Dilutive Awards") on the weighted-average common shares outstanding.
The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings per share for the first quarters of 2022 and 2021:
| | | | | | | | | | | | | | | |
| | First Quarter | | |
| 2022 | | 2021 | | | | |
| (in millions) |
| | | | | | | |
| Common Shares | 255 | | | 288 | | | | | |
| Treasury Shares | (15) | | | (9) | | | | | |
| Basic Shares | 240 | | | 279 | | | | | |
| Effect of Dilutive Awards | 3 | | | 5 | | | | | |
| Diluted Shares | 243 | | | 284 | | | | | |
| Anti-dilutive Awards (a) | — | | | 1 | | | | | |
_______________
(a)The awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Common Stock Share Repurchases
March 2021 Repurchase Program
In March 2021, the Company's Board authorized a $500 million share repurchase plan (the "March 2021 Program"), which replaced the $79 million remaining under a March 2018 repurchase program.
The Company repurchased the following shares of its common stock during the first quarter of 2021 under the March 2021 Program:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase Program | Amount Authorized | | Shares
Repurchased | | Amount
Repurchased | | Average Stock Price | | | | |
| (in millions) | | (in thousands) | | (in millions) | | | | | | |
| March 2021 (a) | $ | 500 | | | 2,608 | | | $ | 165 | | | $ | 63.31 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | |
_______________(a)Reflects repurchases of L Brands, Inc. common stock prior to the August 2, 2021 spin-off of Victoria's Secret & Co.
There were share repurchases of $10 million reflected in Accounts Payable on the May 1, 2021 Consolidated Balance Sheet.
February 2022 Repurchase Program
In February 2022, the Company's Board authorized a new $1.5 billion share repurchase program (the "February 2022 Program"). As part of the February 2022 Program, the Company entered into an accelerated share repurchase program ("ASR") under which the Company repurchased $1 billion of its own outstanding common stock. Pursuant to the Board's authorization, the Company made other open market share repurchases under the February 2022 Program during the first quarter of 2022.
On February 4, 2022, the Company delivered $1 billion to the ASR bank, and the bank delivered 13.6 million shares of common stock to the Company (the "Initial Shares"). Pursuant to the terms of the ASR, the Initial Shares represented 80% of the number of shares determined by dividing the $1 billion Company payment by the closing price of its common stock on February 2, 2022. At final settlement in May 2022, the Company received an additional 6.7 million shares of its common stock from the ASR bank, which were retired upon receipt. The final number of shares of common stock delivered under the ASR was based generally upon a discount to the average daily Rule 10b-18 volume-weighted average price at which the shares of common stock traded during the regular trading sessions on the NYSE during the term of the repurchase period.
As of April 30, 2022, the $1 billion payment to the ASR bank was recognized as a reduction to Shareholder's Equity (Deficit), consisting of an $800 million increase in Treasury Stock, which reflected the value of the Initial Shares, and a $200 million decrease in Paid-in Capital, which reflected the value of the common stock pending the final settlement of the ASR. The delivery of the Initial Shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income per share for the first quarter of 2022. The $200 million recorded in Paid-in Capital as of April 30, 2022 will be reclassified in the second quarter of 2022 in connection with the final settlement of the ASR.
The Company repurchased the following shares of its common stock during the first quarter of 2022 under the February 2022 Program:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase Program | Amount Authorized | | Shares
Repurchased | | Amount
Repurchased | | Average Stock Price | | | | |
| (in millions) | | (in thousands) | | (in millions) | | | | | | |
| February 2022 | $ | 1,500 | | | 4,721 | | | $ | 235 | | | $ | 49.81 | | | | | |
| February 2022 - Accelerated Share Repurchase Program (a) | | 13,624 | | | 800 | | | 58.72 | | | | | |
| Total | | | 18,345 | | | $ | 1,035 | | | | | | | |
_______________(a)Repurchased amounts exclude the shares received at final settlement subsequent to April 30, 2022, as well as the $200 million paid during the first quarter related to those shares.
The February 2022 Program had $265 million of remaining authority as of April 30, 2022. There were share repurchases of $8 million reflected in Accounts Payable on the April 30, 2022 Consolidated Balance Sheet.
Subsequent to April 30, 2022, the Company repurchased an additional 1.3 million shares of its common stock for $62 million under the February 2022 Program.
Common Stock Retirement
In accordance with the Company's Board of Directors' resolution, shares of common stock repurchased under the February 2022 Program were to be retired and cancelled upon repurchase, including the Initial Shares. As a result, the Company retired 18 million shares repurchased under the February 2022 Program during the first quarter of 2022, which resulted in reductions of $9 million in the par value of Common Stock, $61 million in Paid-in Capital and $965 million in Retained Earnings (Accumulated Deficit).
Dividends
The Company's Board suspended the Company's quarterly cash dividend beginning in the second quarter of 2020. In March 2021, the Company's Board reinstated the annual dividend at $0.60 per share, beginning with the quarterly dividend paid in June 2021. In February 2022, the Company's Board increased the annual dividend to $0.80 per share, beginning with the quarterly dividend paid in March 2022.
Under the authority and declaration of the Board, the Company paid the following dividend during the first quarter of 2022:
| | | | | | | | | | | | | | | | | | |
| | Ordinary Dividends | | | | | | Total Paid |
| | (per share) | | (in millions) |
| 2022 | | | | | | | | |
| First Quarter | | $ | 0.20 | | | | | | | $ | 48 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
In May 2022, the Company's Board declared the second quarter 2022 ordinary dividend of $0.20 per share payable on June 17, 2022 to shareholders of record at the close of business on June 3, 2022.
5. Inventories
The following table provides details of Inventories as of April 30, 2022, January 29, 2022 and May 1, 2021:
| | | | | | | | | | | | | | | | | |
| April 30,
2022 | | January 29,
2022 | | May 1,
2021 |
| (in millions) |
| Finished Goods Merchandise | $ | 627 | | | $ | 521 | | | $ | 503 | |
| Raw Materials and Merchandise Components | 193 | | | 188 | | | 133 | |
| Total Inventories | $ | 820 | | | $ | 709 | | | $ | 636 | |
Inventories are principally valued at the lower of cost or net realizable value, on an average cost basis.
6. Long-Lived Assets
The following table provides details of Property and Equipment, Net as of April 30, 2022, January 29, 2022 and May 1, 2021:
| | | | | | | | | | | | | | | | | |
| April 30,
2022 | | January 29,
2022 | | May 1,
2021 |
| (in millions) |
| Property and Equipment, at Cost | $ | 2,669 | | | $ | 2,583 | | | $ | 2,415 | |
| Accumulated Depreciation and Amortization | (1,610) | | | (1,574) | | | (1,421) | |
| Property and Equipment, Net | $ | 1,059 | | | $ | 1,009 | | | $ | 994 | |
Depreciation expense from continuing operations was $53 million and $49 million for the first quarters of 2022 and 2021, respectively.
7. 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 $126 million as of April 30, 2022, $126 million as of January 29, 2022 and $120 million as of May 1, 2021, 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 majority financial interests 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.
8. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events.
For the first quarter of 2022, the Company’s effective tax rate was 19.4% compared to 23.7% in the first quarter of 2021. The 2022 and 2021 first quarter rates were lower than the Company's combined estimated federal and state statutory rates primarily due to the recognition of excess tax benefits recorded through the Consolidated Statements of Income on share-based awards that vested.
Income taxes paid were $8 million and $10 million for the first quarters of 2022 and 2021, respectively.
9. Long-term Debt and Borrowing Facilities
The following table provides the Company’s outstanding long-term debt balance, net of unamortized debt issuance costs and discounts, as of April 30, 2022, January 29, 2022 and May 1, 2021:
| | | | | | | | | | | | | | | | | |
| April 30,
2022 | | January 29,
2022 | | May 1,
2021 |
| (in millions) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Senior Debt with Subsidiary Guarantee | | | | | |
| | | | | |
| | | | | |
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”) | $ | — | | | $ | — | | | $ | 319 | |
$320 million, 9.375% Fixed Interest Rate Notes due July 2025 ("2025 Notes") | 317 | | | 316 | | | 493 | |
$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”) | 281 | | | 281 | | | 279 | |
$500 million, 5.250% Fixed Interest Rate Notes due February 2028 (“2028 Notes”) | 497 | | | 497 | | | 497 | |
$500 million, 7.500% Fixed Interest Rate Notes due June 2029 ("2029 Notes") | 490 | | | 489 | | | 488 | |
$1 billion, 6.625% Fixed Interest Rate Notes due October 2030 ("2030 Notes") | 990 | | | 990 | | | 989 | |
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”) | 992 | | | 992 | | | 991 | |
$700 million, 6.750% Fixed Interest Rate Notes due July 2036 (“2036 Notes”) | 694 | | | 694 | | | 694 | |
| Total Senior Debt with Subsidiary Guarantee | $ | 4,261 | | | $ | 4,259 | | | $ | 4,750 | |
| Senior Debt | | | | | |
$350 million, 6.950% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”) | $ | 349 | | | $ | 349 | | | $ | 348 | |
$247 million, 7.600% Fixed Interest Rate Notes due July 2037 (“2037 Notes”) | 246 | | | 246 | | | 246 | |
| Total Senior Debt | 595 | | | 595 | | | 594 | |
| Total Long-term Debt | $ | 4,856 | | | $ | 4,854 | | | $ | 5,344 | |
| | | | | |
| | | | | |
Repurchases of Notes
In September 2021, the Company completed the tender offers to purchase $270 million of its outstanding 2023 Notes and $180 million of its outstanding 2025 Notes for an aggregate purchase price of $532 million. Additionally, in October 2021, the Company redeemed the remaining $50 million of its outstanding 2023 Notes for $54 million. The Company recognized a pre-tax loss related to this extinguishment of debt of $89 million (after-tax loss of $68 million), which includes the write-offs of unamortized issuance costs, in the third quarter of 2021.
In April 2021, the Company redeemed the remaining $285 million of its outstanding 5.625% senior notes due February 2022 and $750 million of its outstanding 6.875% senior secured notes due July 2025. The Company recognized a pre-tax loss related to this extinguishment of debt of $105 million (after-tax loss of $80 million), which includes the write-offs of unamortized issuance costs. This loss is included in Other Income (Loss) in the first quarter of 2021 Consolidated Statement of Income.
Asset-backed Revolving Credit Facility
The Company and certain of the Company's 100% owned subsidiaries guarantee and pledge collateral to secure an asset-backed revolving credit facility (“ABL Facility”). The ABL Facility, which allows borrowings and letters of credit in U.S. dollars or Canadian dollars, has aggregate commitments of $750 million and an expiration date in August 2026.
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 is required to repay the outstanding amounts under the ABL Facility to the extent of such excess. As of April 30, 2022, the Company's borrowing base was $620 million, and it had no borrowings outstanding under the ABL Facility.
The ABL Facility supports the Company’s letter of credit program. The Company had $16 million of outstanding letters of credit as of April 30, 2022 that reduced its availability under the ABL Facility. As of April 30, 2022, the Company's availability under the ABL Facility was $604 million.
As of April 30, 2022, the ABL Facility fees related to committed and unutilized amounts were 0.25% per annum, and the fees related to outstanding letters of credit were 1.25% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings was the London Interbank Offered Rate plus 1.25% per annum. The interest rate on outstanding Canadian dollar-denominated borrowings was the Canadian Dollar Offered Rate plus 1.25% 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) $70 million or (2) 10% of the maximum borrowing amount. As of April 30, 2022, the Company was not required to maintain this ratio.
10. Fair Value Measurements
Cash and Cash Equivalents 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 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 April 30, 2022, January 29, 2022 and May 1, 2021:
| | | | | | | | | | | | | | | | | |
| April 30,
2022 | | January 29,
2022 | | May 1,
2021 |
| (in millions) |
| Principal Value | $ | 4,915 | | | $ | 4,915 | | | $ | 5,414 | |
| Fair Value, Estimated (a) | 4,866 | | | 5,493 | | | 6,389 | |
_______________
(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.
11. Accumulated Other Comprehensive Income
The following tables provide the rollforward of Accumulated Other Comprehensive Income for the first quarters of 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Cash Flow Hedges | | Accumulated Other Comprehensive Income |
| (in millions) |
Balance as of January 29, 2022 | $ | 79 | | | $ | 1 | | | $ | 80 | |
| Other Comprehensive Income Before Reclassifications | — | | | — | | | — | |
Amounts Reclassified from Accumulated Other Comprehensive Income | — | | | — | | | — | |
Tax Effect | — | | | — | | | — | |
| Current-period Other Comprehensive Income | — | | | — | | | — | |
| | | | | |
Balance as of April 30, 2022 | $ | 79 | | | $ | 1 | | | $ | 80 | |
| | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Cash Flow Hedges | | Accumulated Other Comprehensive Income |
| (in millions) |
Balance as of January 30, 2021 | $ | 85 | | | $ | (2) | | | $ | 83 | |
Other Comprehensive Income (Loss) Before Reclassifications | 5 | | | (4) | | | 1 | |
| Amounts Reclassified from Accumulated Other Comprehensive Income | — | | | 1 | | | 1 | |
Tax Effect | — | | | 1 | | | 1 | |
| Current-period Other Comprehensive Income (Loss) | 5 | | | (2) | | | 3 | |
Balance as of May 1, 2021 | $ | 90 | | | $ | (4) | | | $ | 86 | |
12. 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 May 19, 2020 and January 12, 2021, certain of the Company's stockholders filed derivative lawsuits in the Court of Common Pleas for Franklin County, Ohio (subsequently removed to the United States District Court for the Southern District of Ohio) and the Delaware Court of Chancery, respectively, naming as defendants certain current and former directors and officers of the Company and alleging, among other things, breaches of fiduciary duty through asserted violations of law and failures to monitor workplace conduct (the "Lawsuits"). In addition, the Company also received litigation and books-and-records demands from certain other stockholders related to the same matters (together with the Lawsuits, the "Actions").
In July 2021, the Company announced the global settlement resolving the Actions. The settlement resolves all derivative claims that have been or could have been asserted in the Actions or that involve in any way the allegations referred to in the Actions and releases all such claims against the Company and its past and present employees, officers and directors, among others. As part of the settlement, the Company has agreed to implement certain management and governance measures, including the maintenance of a Diversity, Equity, and Inclusion Council. Following the August 2, 2021 spin-off of Victoria’s Secret & Co., the settlement terms apply to both the Company and Victoria’s Secret & Co. Each company has committed to invest $45 million over at least five years to fund the management and governance measures.
In May 2022, the U.S. District Court of the Southern District of Ohio granted final approval of the settlement.
Lease Guarantees
In connection with the spin-off of Victoria's Secret & Co. and the sale of the La Senza business, the Company had remaining contingent obligations of $277 million as of April 30, 2022 related to lease payments under the current terms of noncancelable leases, primarily related to office space, expiring at various dates through 2037. 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 these businesses. The Company's reserves related to these obligations were not significant as of April 30, 2022.
13. Subsequent Events
Leadership Change
As previously announced, on May 12, 2022, Andrew M. Meslow stepped down as Chief Executive Officer ("CEO") of the Company and as a member of the Company’s Board, and Sarah E. Nash, Executive Chair of the Company, was appointed to also serve as Interim CEO of the Company.
Accelerated Share Repurchase Program
The final settlement under the ASR occurred in May 2022. At final settlement, the Company received an additional 6.7 million shares of its common stock from the ASR bank. These shares were retired upon receipt.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Bath & Body Works, Inc.
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheets of Bath & Body Works, Inc. (the Company) as of April 30, 2022, and May 1, 2021, and the related consolidated statements of income, comprehensive income, total equity (deficit) and cash flows for the thirteen-week periods ended April 30, 2022 and May 1, 2021, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of January 29, 2022, and the related consolidated statements of income, comprehensive income, total equity (deficit), and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated March 18, 2022, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 29, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Grandview Heights, Ohio
June 2, 2022
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION ACT OF 1995
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our Company or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “planned,” “potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our Company or our management:
•general economic conditions, inflation, consumer confidence, consumer spending patterns and market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•the COVID-19 pandemic has had and may continue to have an adverse effect on our business and results of operations;
•the seasonality of our business;
•the anticipated benefits from the Victoria's Secret & Co. spin-off may not be realized;
•the spin-off of Victoria’s Secret & Co. may not be tax-free for U.S. federal income tax purposes;
•our dependence on Victoria's Secret & Co. for information technology services;
•difficulties arising from turnover in Company leadership or other key positions;
•our ability to attract, develop and retain qualified associates and manage labor-related costs;
•the dependence on store traffic and the availability of suitable store locations on appropriate terms;
•our continued growth in part through new store openings and existing store remodels and expansions;
•our ability to successfully operate and expand internationally and related risks;
•our independent franchise, license and wholesale partners;
•our direct channel business;
•our ability to protect our reputation and our brand image;
•our ability to successfully complete environmental, social and governance initiatives, and associated costs thereof;
•our ability to attract customers with marketing, advertising and promotional programs;
•our ability to maintain, enforce and protect our trade names, trademarks and patents;
•the highly competitive nature of the retail industry and the segments in which we operate;
•consumer acceptance of our products and our ability to manage the life cycle of our brand, develop new merchandise and launch new product lines successfully;
•our ability to source, distribute and sell goods and materials on a global basis, including risks related to:
• political instability, wars and other armed conflicts, environmental hazards or natural disasters;
•significant health hazards or pandemics, which could result in closed factories and/or stores, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in impacted areas;
•duties, taxes and other charges;
•legal and regulatory matters;
•volatility in currency exchange rates;
•local business practices and political issues;
•delays or disruptions in shipping and transportation and related pricing impacts;
•disruption due to labor disputes; and
•changing expectations regarding product safety due to new legislation;
•our geographic concentration of vendor and distribution facilities in central Ohio;
•our reliance on a limited number of suppliers to support a substantial portion of our inventory purchasing needs;
•the ability of our vendors to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
•fluctuations in foreign currency exchange rates;
•fluctuations in product input costs;
•fluctuations in energy costs;
•our ability to adequately protect our assets from loss and theft;
•increases in the costs of mailing, paper, printing or other order fulfillment logistics;
•claims arising from our self-insurance;
•our and our third-party service providers', including Victoria's Secret & Co. during the term of the Transition Services Agreement between Victoria's Secret & Co. and us, ability to implement and maintain information technology systems and to protect associated data;
•our ability to maintain the security of customer, associate, third-party and Company information;
•stock price volatility;
•our ability to pay dividends and make share repurchases under share repurchase authorizations;
•shareholder activism matters;
•our ability to maintain our credit ratings;
•our ability to service or refinance our debt and maintain compliance with our restrictive covenants;
•the impact of the transition from London Interbank Offered Rate and our ability to adequately manage such transition;
•our ability to comply with laws, regulations and technology platform rules or other obligations related to data privacy and security;
•our ability to comply with regulatory requirements;
•legal and compliance matters; and
•tax, trade and other regulatory matters.
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Additional information regarding these and other factors can be found in Item 1A. Risk Factors and in our 2021 Annual Report on Form 10-K.