Bath & Body Works(BBWI) - 2023 Q3 - Quarterly Report

Part I. Financial Information Financial Statements This section presents unaudited consolidated financial statements, reflecting performance and key financial changes after the spin-off Consolidated Statements of Income The company reported declines in net sales, operating income, and diluted EPS for Q3 and YTD 2022 versus 2021 Consolidated Statements of Income (in millions, except per share amounts) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,604 | $1,681 | $4,672 | $4,854 | | Gross Profit | $678 | $839 | $2,006 | $2,409 | | Operating Income | $202 | $409 | $724 | $1,130 | | Net Income from Continuing Operations | $91 | $177 | $366 | $483 | | Diluted EPS from Continuing Operations | $0.40 | $0.66 | $1.56 | $1.74 | Consolidated Balance Sheets The balance sheet as of October 29, 2022, reflects decreased total assets and cash, increased inventories, and a larger equity deficit Key Balance Sheet Items (in millions) | Account | Oct 29, 2022 (Unaudited) | Jan 29, 2022 | Oct 30, 2021 (Unaudited) | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | $295 | $1,979 | $1,441 | | Inventories | $1,269 | $709 | $1,149 | | Total Assets | $5,133 | $6,026 | $6,031 | | Long-term Debt | $4,860 | $4,854 | $4,852 | | Total Equity (Deficit) | $(2,608) | $(1,517) | $(1,675) | Consolidated Statements of Cash Flows Net cash from operations significantly decreased, and financing activities, mainly share repurchases and dividends, caused a substantial net cash decrease Year-to-Date Cash Flow Summary (in millions) | Activity | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $67 | $447 | | Net Cash Used for Investing Activities | $(252) | $(228) | | Net Cash Used for Financing Activities | $(1,499) | $(2,713) | | Net Decrease in Cash | $(1,684) | $(2,492) | - Financing activities in YTD 2022 were dominated by repurchases of common stock ($1.312 billion) and dividend payments ($140 million)[24] Notes to Consolidated Financial Statements Notes detail the Victoria's Secret spin-off, revenue disaggregation, capital returns, stable debt, and new CEO appointment - The company completed the tax-free spin-off of its Victoria's Secret business on August 2, 2021, now reported as discontinued operations for all periods presented[28] Net Sales Disaggregation (in millions) | Channel | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | | Stores - U.S. and Canada | $3,398 | $3,518 | | Direct - U.S. and Canada | $1,030 | $1,126 | | International | $244 | $210 | | Total Net Sales | $4,672 | $4,854 | - In February 2022, the Board authorized a new $1.5 billion share repurchase program, with 26.7 million shares repurchased year-to-date for $1.312 billion, including $1 billion via ASR[57][58] - In November 2022, the Board appointed Gina R. Boswell as the new Chief Executive Officer, effective December 1, 2022[71] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2022 sales and income declines from lower traffic and inflation, outlining profit improvement and liquidity management Executive Overview and Key Challenges Q3 2022 saw declines in net sales and operating income due to lower transactions, inflation, supply chain volatility, and increased IT/CEO costs - Q3 2022 net sales decreased 5% to $1.604 billion, and operating income decreased 51% to $202 million compared to Q3 2021[81] - The company estimates the full-year 2022 incremental inflation impact to be between $220 million and $230 million, affecting raw materials, transportation, and wages[82] - Profit improvement initiatives in Q3, including optimizing corporate overhead and store expenses, resulted in the elimination of about 130 roles and a benefit of approximately $15 million[84] Results of Operations Q3 2022 net sales decreased, gross profit rate declined due to inflation and promotions, and operating expenses rose from IT investments Q3 2022 vs Q3 2021 Net Sales Change by Channel | Channel | % Change | | :--- | :--- | | Stores - U.S. and Canada | (5%) | | Direct - U.S. and Canada | (6%) | | International | 10% | | Total Net Sales | (5%) | - The Q3 2022 gross profit rate decreased to 42.2% from 49.9% in Q3 2021, driven by lower merchandise margin and buying/occupancy expense deleverage[100] - YTD 2022 operating income decreased by $406 million to $724 million, with the operating margin falling to 15.5% from 23.3% in YTD 2021[103] Financial Condition, Liquidity and Capital Resources Liquidity is primarily from operations, with cash significantly reduced by share repurchases and dividends, but a substantial ABL facility remains available - The company believes its current cash position, cash flow from operations, and ABL Facility borrowing capacity are sufficient for at least the next twelve months[111] - Net cash used for financing activities in YTD 2022 was $1.499 billion, primarily consisting of $1.312 billion for share repurchases and $140 million for dividends[119] - The February 2022 share repurchase program had $188 million of remaining authority as of October 29, 2022[125] - As of October 29, 2022, the company had $734 million available under its $750 million ABL Facility[131] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange rate fluctuations, especially with the Canadian dollar, and interest rate changes, mitigated by fixed-rate debt - The company's primary market risks arise from foreign currency exchange rates, specifically the Canadian dollar, and interest rates[138] - Interest rate risk is mitigated because all long-term debt as of October 29, 2022, has fixed interest rates[140] - The company uses foreign currency forward contracts to partially offset risks associated with its Canadian operations[138] Controls and Procedures Management concluded disclosure controls and procedures were effective as of October 29, 2022, with no material changes to internal control over financial reporting - Management, including the Interim CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[143] - No changes in internal control over financial reporting occurred in Q3 2022 that materially affected, or are reasonably likely to materially affect, internal controls[143] Part II. Other Information Legal Proceedings The company is involved in various lawsuits, but management does not expect a material adverse effect on financial results or position - The company is a defendant in various lawsuits but does not expect them to have a material adverse effect on its financial condition or results of operations[145] Risk Factors This section refers to risk factors affecting the business as detailed in the company's 2021 Annual Report on Form 10-K - The report refers to the risk factors detailed in the company's 2021 Annual Report on Form 10-K for a comprehensive understanding of potential risks[146] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, the company repurchased a small number of shares, primarily for tax payments upon vesting of employee stock awards Q3 2022 Share Repurchases | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | August 2022 | 13 | $38.36 | | September 2022 | 6 | $37.90 | | October 2022 | 9 | $34.92 | | Total | 28 | | - The repurchased shares primarily relate to tax payments due upon vesting of associate restricted stock and performance share unit awards[148] Exhibits This section lists all exhibits filed with the Form 10-Q, including the cash incentive plan, guarantor subsidiaries, and CEO/CFO certifications - Key exhibits filed include the company's amended cash incentive plan, a list of guarantor subsidiaries, and CEO/CFO certifications under Sections 302 and 906[151]