Company Quick10K Filing
Quick10K
L Brands
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.48 275 $7,560
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
8-K 2019-02-07 Earnings, Regulation FD, Exhibits
8-K 2019-01-06 Earnings, Regulation FD, Exit Costs, Exhibits
8-K 2018-12-12 Exit Costs, Other Events, Exhibits
8-K 2018-11-19 Earnings, Regulation FD, Other Events, Exhibits
8-K 2018-11-08 Earnings, Regulation FD, Exhibits
8-K 2018-09-13 Other Events, Exhibits
8-K 2018-08-22 Earnings, Regulation FD, Exhibits
8-K 2018-08-09 Earnings, Regulation FD, Exhibits
8-K 2018-06-14 Other Events, Exhibits
8-K 2018-05-31 Other Events, Exhibits
8-K 2018-05-23 Earnings, Regulation FD, Exhibits
8-K 2018-05-17 Shareholder Vote
8-K 2018-05-10 Earnings, Regulation FD, Exhibits
8-K 2018-03-08 Regulation FD, Exhibits
8-K 2018-02-28 Earnings, Regulation FD, Exhibits
8-K 2018-02-08 Earnings, Regulation FD, Exhibits
8-K 2018-01-23 Other Events, Exhibits
8-K 2018-01-04 Earnings, Regulation FD, Exhibits
8-K 2018-01-03 Off-BS Arrangement, Other Events, Exhibits
URBN Urban Outfitters
ANF Abercrombie & Fitch
GCO Genesco
DLTH Duluth Holdings
CHS Chico's FAS
TLRD Tailored Brands
ZUMZ Zumiez
SCVL Shoe Carnival
LE Lands' End
CATO Cato
LB 2018-11-03
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-15 ltd-2018113_ex15.htm
EX-31.1 ltd-2018113_ex311.htm
EX-31.2 ltd-2018113_ex312.htm
EX-32 ltd-2018113_ex32.htm

L Brands Earnings 2018-11-03

LB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ltd-2018113_10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________
FORM 10-Q
 _________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 1-8344
 _________________________________
L BRANDS, INC.
(Exact name of registrant as specified in its charter)
 _________________________________
Delaware
 
31-1029810
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
 
 
Three Limited Parkway
Columbus, Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(614) 415-7000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  o    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.50 Par Value
 
Outstanding at November 30, 2018
 
 
275,124,993 Shares
 



L BRANDS, INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A. Risk Factors
 
 
 
 
 
 
 
 
 
 
Item 6. Exhibits
 
 
 
*
The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “third quarter of 2018” and “third quarter of 2017” refer to the thirteen-week periods ended November 3, 2018 and October 28, 2017, respectively. "Year-to-date 2018" and "year-to-date 2017" refer to the thirty-nine-week periods ending November 3, 2018 and October 28, 2017, respectively.


2


PART I—FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS

L BRANDS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions except per share amounts)
(Unaudited)
 
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Net Sales
$
2,775

 
$
2,618

 
$
8,385

 
$
7,809

Costs of Goods Sold, Buying and Occupancy
(1,847
)
 
(1,629
)
 
(5,454
)
 
(4,890
)
Gross Profit
928

 
989


2,931


2,919

General, Administrative and Store Operating Expenses
(874
)
 
(757
)
 
(2,494
)
 
(2,177
)
Operating Income
54

 
232


437


742

Interest Expense
(96
)
 
(99
)
 
(292
)
 
(300
)
Other Income
1

 
2

 
1

 
28

Income (Loss) Before Income Taxes
(41
)
 
135


146


470

Provision for Income Taxes
2

 
49

 
42

 
151

Net Income (Loss)
$
(43
)
 
$
86


$
104


$
319

Net Income (Loss) Per Basic Share
$
(0.16
)
 
$
0.30

 
$
0.37

 
$
1.12

Net Income (Loss) Per Diluted Share
$
(0.16
)
 
$
0.30

 
$
0.37

 
$
1.11

Dividends Per Share
$
0.60

 
$
0.60

 
$
1.80

 
$
1.80



L BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Net Income (Loss)
$
(43
)
 
$
86

 
$
104

 
$
319

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
   Foreign Currency Translation
(2
)
 
(2
)
 
(24
)
 
8

   Unrealized Gain (Loss) on Cash Flow Hedges
1

 
10

 
10

 
(7
)
   Reclassification of Cash Flow Hedges to Earnings

 
(4
)
 
3

 
1

   Unrealized Gain on Marketable Securities

 

 

 
1

Total Other Comprehensive Income (Loss), Net of Tax
(1
)
 
4


(11
)

3

Total Comprehensive Income (Loss)
$
(44
)
 
$
90

 
$
93

 
$
322



The accompanying Notes are an integral part of these Consolidated Financial Statements.

3


L BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
 
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(Unaudited)
 
 
 
(Unaudited)
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and Cash Equivalents
$
348

 
$
1,515

 
$
735

Accounts Receivable, Net
321

 
310

 
285

Inventories
1,963

 
1,240

 
1,715

Other
301

 
228

 
195

Total Current Assets
2,933

 
3,293

 
2,930

Property and Equipment, Net
2,934

 
2,893

 
2,920

Goodwill
1,348

 
1,348

 
1,348

Trade Names
411

 
411

 
411

Deferred Income Taxes
20

 
14

 
23

Other Assets
183

 
190

 
184

Total Assets
$
7,829

 
$
8,149

 
$
7,816

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Accounts Payable
$
1,060

 
$
717

 
$
1,037

Accrued Expenses and Other
1,018

 
1,029

 
896

Current Debt
56

 
87

 
80

Income Taxes
8

 
198

 
6

Total Current Liabilities
2,142

 
2,031

 
2,019

Deferred Income Taxes
234

 
238

 
367

Long-term Debt
5,814

 
5,707

 
5,705

Other Long-term Liabilities
951

 
924

 
844

Shareholders’ Equity (Deficit):
 
 
 
 
 
Preferred Stock - $1.00 par value; 10 shares authorized; none issued

 

 

Common Stock - $0.50 par value; 1,000 shares authorized; 283, 283 and 318 shares issued; 275, 280 and 282 shares outstanding, respectively
142

 
141

 
159

Paid-in Capital
747

 
678

 
732

Accumulated Other Comprehensive Income
11

 
24

 
15

Retained Earnings (Deficit)
(1,856
)
 
(1,434
)
 
8

Less: Treasury Stock, at Average Cost; 8, 3 and 36 shares, respectively
(358
)
 
(162
)
 
(2,035
)
Total L Brands, Inc. Shareholders’ Equity (Deficit)
(1,314
)
 
(753
)
 
(1,121
)
Noncontrolling Interest
2

 
2

 
2

Total Equity (Deficit)
(1,312
)
 
(751
)
 
(1,119
)
Total Liabilities and Equity (Deficit)
$
7,829

 
$
8,149

 
$
7,816


The accompanying Notes are an integral part of these Consolidated Financial Statements.

4


L BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Year-to-Date
 
2018
 
2017
Operating Activities:
 
 
 
Net Income
$
104

 
$
319

Adjustments to Reconcile Net Income to Net Cash Provided by (Used for) Operating Activities:
 
 
 
Depreciation of Long-lived Assets
444

 
426

Amortization of Landlord Allowances
(32
)
 
(35
)
Long-lived Store Asset Impairment Charges
81

 

Share-based Compensation Expense
75

 
74

Deferred Income Taxes
(3
)
 
11

Gains on Distributions from Easton Investments
(7
)
 
(20
)
Unrealized Losses on Marketable Equity Securities
8

 

Changes in Assets and Liabilities:
 
 
 
Accounts Receivable
(8
)
 
9

Inventories
(731
)
 
(616
)
Accounts Payable, Accrued Expenses and Other
300

 
247

Income Taxes Payable
(260
)
 
(307
)
Other Assets and Liabilities
42

 
30

Net Cash Provided by Operating Activities
13

 
138

Investing Activities:
 
 
 
Capital Expenditures
(561
)
 
(599
)
Return of Capital from Easton Investments
15

 
27

Other Investing Activities
8

 
(9
)
Net Cash Used for Investing Activities
(538
)
 
(581
)
Financing Activities:
 
 
 
Payment of Long-term Debt
(52
)
 

Borrowing from Secured Revolving Facility
85

 

Borrowings from Foreign Facilities
110

 
67

Repayments of Foreign Facilities
(71
)
 
(23
)
Dividends Paid
(500
)
 
(516
)
Repurchases of Common Stock
(198
)
 
(283
)
Tax Payments related to Share-based Awards
(13
)
 
(31
)
Proceeds from Exercise of Stock Options
1

 
37

Financing Costs and Other
(5
)
 
(9
)
Net Cash Used for Financing Activities
(643
)
 
(758
)
Effects of Exchange Rate Changes on Cash and Cash Equivalents
1

 
2

Net Decrease in Cash and Cash Equivalents
(1,167
)
 
(1,199
)
Cash and Cash Equivalents, Beginning of Period
1,515

 
1,934

Cash and Cash Equivalents, End of Period
$
348

 
$
735


The accompanying Notes are an integral part of these Consolidated Financial Statements.

5


L BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Description of Business and Basis of Presentation
Description of Business
L Brands, Inc. (“the Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of women’s intimate and other apparel, personal care, beauty and home fragrance products. The Company sells its merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada, United Kingdom (“U.K.”), Ireland and Greater China (China and Hong Kong), which are primarily mall-based, and through its websites and other channels. The Company's other international operations are primarily through franchise, license and wholesale partners. The Company currently operates the following retail brands:
Victoria’s Secret
PINK
Bath & Body Works
La Senza
Henri Bendel
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “third quarter of 2018” and “third quarter of 2017” refer to the thirteen-week periods ended November 3, 2018 and October 28, 2017, respectively. “Year-to-date 2018” and “year-to-date 2017” refer to the thirty-nine-week periods ending November 3, 2018 and October 28, 2017, 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 of all other unconsolidated entities is included in Other Income 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.
Interim Financial Statements
The Consolidated Financial Statements as of and for the periods ended November 3, 2018 and October 28, 2017 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 2017 Annual Report on Form 10-K.
In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.
Seasonality of Business
Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.
Concentration of Credit Risk
The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. Typically, the Company’s investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.

6


The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company records an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.

2. New Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which was further clarified and amended in 2015 and 2016. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted the standard in the first quarter of 2018 under the modified retrospective approach. Under the standard, income from the Victoria's Secret private label credit card arrangement, which was historically presented as a reduction to General, Administrative and Store Operating Expenses, is presented as revenue. Further, historical accounting related to loyalty points earned under the Victoria's Secret customer loyalty program changed as the Company now defers revenue associated with customer loyalty points until the points are redeemed using a relative stand-alone selling price method. The standard also changed accounting for sales returns which requires balance sheet presentation on a gross basis.

In the first quarter of 2018, the Company recorded a cumulative catch-up adjustment resulting in a reduction to opening retained earnings, net of tax, of $28 million. The cumulative adjustment primarily related to the deferral of revenue related to outstanding points, net of estimated forfeitures, under the Victoria's Secret customer loyalty program. In addition, Net Sales and General, Administrative and Store Operating Expenses both increased $46 million and $119 million in the third quarter and year-to-date 2018 Consolidated Statements of Income (Loss), respectively. Further, gross presentation of the Company's sales return reserve resulted in a $5 million increase in Other Current Assets and Accrued Expenses and Other on the November 3, 2018 Consolidated Balance Sheet.
Fair Value of Financial Instruments
In January 2016, the FASB issued ASC 321, Investments - Equity Securities, which addresses certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. The standard requires the recognition of changes in the fair value of marketable equity securities in net income as compared to historical treatment in accumulated other comprehensive income on the balance sheet. The Company adopted the standard in the first quarter of 2018 and recorded an increase to opening retained earnings, net of tax, of $2 million.
Leases
In February 2016, the FASB issued ASC 842, Leases, which requires companies classified as lessees to account for most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. In July 2018, the FASB approved an amendment to the standard that provides companies a transition option that would not require earlier periods to be restated upon adoption. The standard is effective beginning in fiscal 2019, with early adoption permitted.

The Company is currently evaluating the impacts that this standard will have on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows. The Company currently expects that most of its operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption of the standard. Thus, the Company expects adoption will result in a material increase to the assets and liabilities on the Consolidated Balance Sheet. The Company will adopt the standard in the first quarter of 2019 and apply the standard prospectively as of the adoption date.

7


Hedging Activities
In August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12, Targeted Improvements to Accounting for Hedging Activities, which is intended to better align risk management activities and financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements. This guidance will be effective beginning in fiscal 2019, with early adoption permitted. The Company is currently evaluating the impact of this standard on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill. The standard eliminates the second step from the goodwill impairment test, which requires a hypothetical purchase price allocation to determine the implied fair value of goodwill. Under the new standard, the goodwill impairment charge will be the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This guidance will be effective beginning in fiscal 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard.

3. Revenue Recognition
In the first quarter of 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. Results for the third quarter and year-to-date 2018 are presented under ASC 606, while prior period consolidated financial statements have not been adjusted and continue to be presented under the accounting standards in effect for those periods.

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 reflects 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 recognized over the term of the license arrangement and is included in Net Sales in the 2018 Consolidated Statements of Income (Loss).

The Company also recognizes revenues associated with franchise, license and wholesale 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.

Accounts receivable, net from revenue-generating activities were $160 million as of November 3, 2018 and $144 million as of the beginning of the period upon adoption of the new standard. 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 75 days.


8


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 $271 million as of November 3, 2018 and $320 million as of the beginning of the period upon adoption of the new standard. The Company recognized $197 million as revenue year-to-date in 2018 from amounts recorded as deferred revenue at the beginning of the period. The Company's deferred revenue balance would have been $231 million as of November 3, 2018 under accounting standards in effect prior to the adoption of the new standard. As of November 3, 2018, the Company recorded deferred revenues of $255 million within Accrued Expenses and Other, and $16 million within Other Long-term Liabilities on the Consolidated Balance Sheet.

The following table provides a disaggregation of Net Sales for the third quarter and year-to-date 2018 and 2017:
 
Third Quarter
 
Year-to-Date
 
2018
 
2017 (a)
 
2018
 
2017 (a)
 
(in millions)
Victoria’s Secret Stores (b)
$
1,178

 
$
1,243

 
$
3,778

 
$
3,840

Victoria’s Secret Direct
351

 
296

 
1,065

 
878

Total Victoria’s Secret
1,529

 
1,539

 
4,843

 
4,718

Bath & Body Works Stores (b)
808

 
703

 
2,281

 
2,044

Bath & Body Works Direct
148

 
113

 
399

 
310

Total Bath & Body Works
956

 
816

 
2,680

 
2,354

Victoria's Secret and Bath & Body Works International (c)
134

 
115

 
415

 
332

Other (d)
156

 
148

 
447

 
405

Total Net Sales
$
2,775

 
$
2,618

 
$
8,385

 
$
7,809

 _______________
(a)
2017 amounts have not been adjusted under the modified retrospective approach.
(b)
Includes company-owned stores in the U.S. and Canada.
(c)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(d)
Includes wholesale revenues from the Company's sourcing function, and La Senza and Henri Bendel store and direct sales.

4. Earnings Per Share and Shareholders’ Equity (Deficit)
Earnings Per Share
Earnings per basic share is computed based on the weighted-average number of outstanding common shares. Earnings per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.
The following table provides shares utilized for the calculation of basic and diluted earnings per share for the third quarter and year-to-date 2018 and 2017:
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Weighted-average Common Shares:
 
 
 
 
 
 
 
Issued Shares
283

 
318

 
283

 
317

Treasury Shares
(8
)
 
(34
)
 
(6
)
 
(32
)
Basic Shares
275

 
284


277


285

Effect of Dilutive Options and Restricted Stock

 
1

 
2

 
3

Diluted Shares
275

 
285


279


288

Anti-dilutive Options and Awards (a)
NA

 
6

 
5

 
5

 _______________
(a)
These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. In the third quarter of 2018, all options and awards outstanding were excluded from dilutive shares as a result of the Company's net loss in the quarter.

9



Shareholders’ Equity (Deficit)
Common Stock Share Repurchases
Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs for year-to-date 2018 and 2017:
 
Amount
Authorized
 
Shares
Repurchased
 
Amount
Repurchased
 
Average Stock Price of Shares Repurchased within Program
Repurchase Program
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in millions)
 
(in thousands)
 
(in millions)
 
 
 
 
March 2018
$
250

 
4,852

 
NA

 
$
171

 
NA

 
$
35.29

 
NA

September 2017
250

 
527

 
935

 
25

 
$
39

 
$
46.98

 
$
41.30

February 2017
250

 
NA

 
5,500

 
NA

 
240

 
NA

 
$
43.57

February 2016
500

 
NA

 
51

 
NA

 
3

 
NA

 
$
58.95

Total
 
 
5,379

 
6,486

 
$
196

 
$
282

 
 
 
 
In March 2018, the Company's Board of Directors approved a new $250 million share repurchase program, which included the $23 million remaining under the September 2017 repurchase program.
In September 2017, the Company's Board of Directors approved a $250 million share repurchase program, which included the $10 million remaining under the February 2017 repurchase program.
In February 2017, the Company's Board of Directors approved a $250 million share repurchase program, which included the $59 million remaining under the February 2016 repurchase program.
In February 2016, the Company's Board of Directors approved a $500 million share repurchase program, which included the $17 million remaining under the June 2015 repurchase program.
The March 2018 repurchase program had $79 million remaining as of November 3, 2018.
There were $2 million of share repurchases reflected in Accounts Payable on the February 3, 2018 and October 28, 2017 Consolidated Balance Sheets, respectively.

Dividends
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during year-to-date 2018 and 2017:
 
 
Ordinary Dividends
 
Total Paid
 
 
(per share)
 
(in millions)
2018
 
 
 
 
Third Quarter
 
$
0.60

 
$
165

Second Quarter
 
0.60

 
167

First Quarter
 
0.60

 
168

2018 Total
 
$
1.80

 
$
500

2017
 
 
 
 
Third Quarter
 
$
0.60

 
$
172

Second Quarter
 
0.60

 
172

First Quarter
 
0.60

 
172

2017 Total
 
$
1.80

 
$
516

5. Restructuring Activities
In the third quarter of 2018, as part of an ongoing effort to drive shareholder value and to focus on the larger core businesses, the Company announced the closing of all 23 Henri Bendel stores and e-commerce website. All stores and the website will remain in operation through January 2019. The Company recognized a pre-tax, primarily cash, charge consisting of lease termination costs, severance and other costs of $20 million in the third quarter of 2018. Restructuring charges of $14 million and $6 million are included in Costs of Goods Sold, Buying and Occupancy and General, Administrative and Store Operating

10


Expenses, respectively, in the 2018 Consolidated Statements of Income (Loss). The Company expects to incur additional costs, primarily related to contract termination costs, in the fourth quarter of 2018 due to these actions.

6. Inventories
The following table provides details of inventories as of November 3, 2018February 3, 2018 and October 28, 2017:
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(in millions)
Finished Goods Merchandise
$
1,774

 
$
1,121

 
$
1,549

Raw Materials and Merchandise Components
189

 
119

 
166

Total Inventories
$
1,963

 
$
1,240

 
$
1,715

Inventories are principally valued at the lower of cost, on a weighted-average cost basis, or net realizable value.

7. Property and Equipment, Net
The following table provides details of property and equipment, net as of November 3, 2018February 3, 2018 and October 28, 2017:
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(in millions)
Property and Equipment, at Cost
$
6,827

 
$
6,687

 
$
6,608

Accumulated Depreciation and Amortization
(3,893
)
 
(3,794
)
 
(3,688
)
Property and Equipment, Net
$
2,934

 
$
2,893

 
$
2,920

Depreciation expense was $148 million and $144 million for the third quarter of 2018 and 2017, respectively. Depreciation expense was $444 million and $426 million for year-to-date 2018 and 2017, respectively.

In the third quarter of 2018, the Company concluded that the negative operating results for certain of its Victoria's Secret stores were an indicator of potential impairment of the related long-lived store assets. The Company determined that the estimated undiscounted future cash flows were less than the carrying values and, as a result, recognized a loss equal to the difference between the carrying values and the estimated fair values, determined by the estimated discounted future cash flows. The Company recognized impairment charges of $81 million, which are included in Costs of Goods Sold, Buying & Occupancy in the 2018 Consolidated Statements of Income (Loss). Impairment charges of $50 million, related to stores in the U.S. and Canada, were recorded within the Victoria's Secret segment. Impairment charges of $31 million, related to stores in the U.K., were recorded within the Victoria's Secret and Bath & Body Works International segment.

8. Equity Investments
Easton Investments
The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $89 million as of November 3, 2018, $81 million as of February 3, 2018, and $78 million as of October 28, 2017, 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.

During 2018, the Company received cash distributions of $15 million from certain of its Easton investments, which are included as return of capital within Investing Activities of the 2018 Consolidated Statement of Cash Flows. As a result of these distributions, the Company recognized pre-tax gains totaling $7 million which are included in Other Income in the 2018 Consolidated Statements of Income (Loss).

During 2017, the Company received cash distributions of $27 million from certain of its Easton investments, which are included as return of capital within Investing Activities of the 2017 Consolidated Statement of Cash Flows. As a result of these

11


distributions, the Company recognized pre-tax gains totaling $20 million which are included in Other Income in the 2017 Consolidated Statements of Income (Loss).

9. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TCJA reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. 
For the third quarter of 2018, the Company’s effective tax rate was (3.9)% compared to 36.1% in the third quarter of 2017. Absent the Victoria's Secret impairment charges in the U.K. and Canada, which generate no tax benefit, the adjusted tax rate would have been 25.1%, which would be generally consistent with the Company's combined federal and state statutory rate. The third quarter 2017 rate was lower than the Company's combined federal and state statutory rate primarily due to the resolution of certain tax matters.
For year-to-date 2018, the Company's effective tax rate was 29.0% compared to 32.2% year-to-date 2017. Absent the Victoria's Secret impairment charges in the U.K. and Canada, which generate no tax benefit, the adjusted tax rate would be 22.6%, which would be lower than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The year-to-date 2017 rate was lower than the Company's combined federal and state statutory rate primarily due to the recognition of tax benefits resulting from stock options exercised.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The ultimate impact may differ from provisional amounts, due to changes in interpretations and assumptions the Company has made regarding application of the TCJA as well as additional regulatory guidance that may be issued. Any adjustments made to the provisional amounts under SAB 118 should be recorded as discrete adjustments in the period identified (not to extend beyond the one-year measurement provided in SAB 118). Through the third quarter of 2018, the Company did not make any adjustments to its provisional amounts included in its consolidated financial statements for the year ended February 3, 2018. The accounting is expected to be completed in the fourth quarter of 2018.
Income taxes paid were $40 million and $141 million for the third quarter of 2018 and 2017, respectively. Income taxes paid were $306 million and $461 million for year-to-date 2018 and 2017, respectively.


12


10. 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 November 3, 2018February 3, 2018 and October 28, 2017:
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(in millions)
Senior Debt with Subsidiary Guarantee
 
 
 
 
 
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
990


$
990


$
990

$956 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
951


994


993

$780 million, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
776


994


994

$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
693


693


692

$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
498


497


497

$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)
495

 
495

 

$500 million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”) (a)




496

$338 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
337


398


398

$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”)
273

 

 

Secured Revolving Facility
85

 

 

Secured Foreign Facilities
94

 
1

 

Total Senior Debt with Subsidiary Guarantee
$
5,192


$
5,062


$
5,060

Senior Debt
 
 
 
 
 
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348


$
348


$
348

$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
297


297


297

Unsecured Foreign Facilities
33


87


80

Total Senior Debt
$
678


$
732


$
725

Total
$
5,870


$
5,794


$
5,785

Current Debt
(56
)

(87
)

(80
)
Total Long-term Debt, Net of Current Portion
$
5,814


$
5,707


$
5,705

 ________________
(a)
The balance includes a fair value interest rate hedge adjustment which increased the debt balance by $1 million as of October 28, 2017.
Exchange of Notes
In June 2018, the Company completed private offers to exchange $62 million, $220 million and $44 million of outstanding 2020 Notes, 2021 Notes and 2022 Notes, respectively, for $297 million of newly issued 6.694% notes due in January 2027 and $52 million in cash consideration, which included a $24 million exchange premium. The exchange was treated as a modification under ASC 470, Debt, and no gain or loss was recognized. The exchange premium will be amortized through the maturity date of January 2027 and is included within Long-term Debt on the November 3, 2018 Consolidated Balance Sheet. The obligation to pay principal and interest on the 2027 Notes is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's 100% owned subsidiaries (the “Guarantors”).
Issuance of Notes
In January 2018, the Company issued $500 million of 5.25% notes due in February 2028. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The proceeds from the issuance were $495 million, which were net of issuance costs of $5 million. These issuance costs are being amortized through the maturity date of February 2028 and are included within Long-term Debt on the November 3, 2018 and February 3, 2018 Consolidated Balance Sheets.
Redemption of Notes
In January 2018, the Company used the proceeds from the 2028 Notes to redeem the $500 million 2019 Notes for $540 million. In the fourth quarter of 2017, the Company recognized a pre-tax loss on extinguishment of this debt of $45 million (after-tax loss of $29 million), which includes write-offs of unamortized issuance costs and discounts and losses related to terminated interest rate swaps associated with the 2019 Notes.

13


Secured Revolving Facility
The Company and the Guarantors guarantee and pledge collateral to secure a revolving credit facility ("Secured Revolving Facility"). The Secured Revolving Facility has aggregate availability of $1 billion and expires in May 2022. The Secured Revolving Facility allows the Company and certain of the Company's non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
The Secured Revolving Facility fees related to committed and unutilized amounts are 0.25% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings is the London Interbank Offered Rate (“LIBOR”) plus 1.50% per annum. The interest rate on outstanding foreign denominated borrowings is the applicable benchmark rate plus 1.50% per annum.
The Secured Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. The Company is required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Secured Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of November 3, 2018, the Company was in compliance with both of its financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.
During the third quarter of 2018, the Company borrowed $85 million under the Secured Revolving Facility. As of November 3, 2018, this borrowing is included within Long-term Debt on the Consolidated Balance Sheet.
The Secured Revolving Facility supports the Company’s letter of credit program. The Company had $9 million of outstanding letters of credit as of November 3, 2018 that reduced its remaining availability under the Secured Revolving Facility.
Secured Foreign Facilities
The Company and the Guarantors guarantee and pledge collateral to secure revolving and term loan bank facilities ("Secured Foreign Facilities") used by certain of the Company's Greater China subsidiaries to support their operations. The Secured Foreign Facilities, which allow borrowings in U.S. dollars and Chinese Yuan, have availability totaling $100 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing. For year-to-date 2018, the Company borrowed $94 million and made payments of $1 million under the Secured Foreign Facilities. The maximum daily amount outstanding at any point in time in 2018 was $94 million. Borrowings on the Secured Foreign Facilities mature between November 2018 and May 2022. As of November 3, 2018, borrowings of $23 million are included within Current Debt on the Consolidated Balance Sheet and the remaining borrowings are included within Long-term Debt.
Unsecured Foreign Facilities
The Company guarantees unsecured revolving and term loan bank facilities ("Unsecured Foreign Facilities") used by certain of the Company's Greater China subsidiaries to support their operations. The Unsecured Foreign Facilities, which allow borrowings in U.S. dollars and Chinese Yuan, have availability totaling $100 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing. For year-to-date 2018, the Company borrowed $16 million and made payments of $70 million under the Unsecured Foreign Facilities. The maximum daily amount outstanding at any point in time in 2018 was $90 million. Borrowings on the Unsecured Foreign Facilities mature between November 2018 and January 2019. As of November 3, 2018, borrowings of $33 million are included within Current Debt on the Consolidated Balance Sheet.

11. Derivative Financial Instruments
Foreign Exchange Derivative Instruments
The earnings of the Company's wholly owned foreign businesses are subject to exchange rate risk as substantially all their 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 and U.K. businesses. These forward contracts currently have a maximum term of 18 months. Amounts are reclassified from accumulated other comprehensive income 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 Company had a cross-currency swap related to an intercompany loan of approximately CAD$170 million that matured in January 2018 which was designated as a cash flow hedge of foreign currency exchange risk. This cross-currency swap mitigated the exposures to fluctuations in the U.S. dollar-Canadian dollar exchange rate related to the Company's Canadian operations. Changes in the U.S. dollar-Canadian dollar exchange rate and the related swap settlements resulted in

14


reclassification of amounts from accumulated other comprehensive income to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.

The Company uses foreign currency forward contracts to mitigate the impact of fluctuations in foreign currency exchange rates relative to recognized payable balances denominated in non-functional currencies. The fair value of these non-designated foreign currency forward contracts is not significant as of November 3, 2018.

The following table provides the U.S. dollar notional amount of outstanding foreign currency derivative financial instruments as of November 3, 2018, February 3, 2018 and October 28, 2017:
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(in millions)
Notional Amount
$
198

 
$
217

 
$
379


The following table provides a summary of the fair value and balance sheet classification of outstanding derivative financial instruments designated as foreign currency cash flow hedges as of November 3, 2018, February 3, 2018 and October 28, 2017:
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(in millions)
Other Current Assets
$
3

 
$

 
$
14

Other Long-term Assets

 

 
1

Accrued Expenses and Other

 
8

 
4

Other Long-term Liabilities

 
1

 


The following table provides a summary of the pre-tax financial statement effect of the gains and losses on derivative financial instruments designated as foreign currency cash flow hedges for the third quarter and year-to-date 2018 and 2017:
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Gain (Loss) Recognized in Accumulated Other Comprehensive Income
$
1

 
$
11

 
$
11

 
$
(8
)
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Costs of Goods Sold, Buying and Occupancy Expense (a)

 

 
3

 
(3
)
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Other Income (b)

 
(4
)
 

 
3

 ________________
(a)
Represents reclassification of amounts from accumulated other comprehensive income to earnings when the hedged merchandise is sold to the customer. No ineffectiveness was associated with these foreign currency cash flow hedges.
(b)
Represents reclassification of amounts from accumulated other comprehensive income to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.

The Company estimates that $3 million of net gains included in accumulated other comprehensive income as of November 3, 2018 related to foreign currency forward contracts designated as cash flow hedges will be reclassified into earnings within the following 12 months. Actual amounts ultimately reclassified depend on the exchange rates in effect when derivative contracts that are currently outstanding mature.


15


12. Fair Value Measurements
The authoritative guidance included in ASC 820, Fair Value Measurement, establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices of similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following table provides a summary of assets and liabilities measured in the consolidated financial statements at fair value on a recurring basis as of November 3, 2018, February 3, 2018 and October 28, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
As of November 3, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
348

 
$

 
$

 
$
348

Marketable Equity Securities
9

 

 

 
9

Foreign Currency Cash Flow Hedges

 
3

 

 
3

As of February 3, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,515

 
$

 
$

 
$
1,515

Marketable Equity Securities
17

 

 

 
17

Liabilities:
 
 
 
 
 
 
 
Foreign Currency Cash Flow Hedges

 
9

 

 
9

As of October 28, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
735

 
$

 
$

 
$
735

Marketable Equity Securities
6

 

 

 
6

Interest Rate Fair Value Hedges

 
1

 

 
1

Foreign Currency Cash Flow Hedges

 
15

 

 
15

Liabilities:
 
 
 
 
 
 
 
Foreign Currency Cash Flow Hedges

 
4

 

 
4


The Company's Level 1 fair value measurements use unadjusted quoted prices in active markets for identical assets. The Company's marketable equity securities are classified as Level 1 fair value measurements as they are traded with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.

In January 2016, the FASB issued ASC 321, Investments - Equity Securities. The standard requires the recognition of changes in the fair value of the Company's marketable equity securities in net income as compared to historical treatment in accumulated other comprehensive income. The Company adopted the standard in the first quarter of 2018. The Company recognized unrealized losses of $2 million for the third quarter of 2018, and $8 million for year-to-date 2018, related to its marketable equity securities in Other Income in the 2018 Consolidated Statements of Income (Loss).
The Company’s Level 2 fair value measurements use market approach valuation techniques. The primary inputs to these techniques include benchmark interest rates and foreign currency exchange rates, as applicable to the underlying instruments.

16


The following table provides a summary of the principal value and estimated fair value of outstanding publicly traded debt as of November 3, 2018February 3, 2018 and October 28, 2017:
 
November 3,
2018
 
February 3,
2018
 
October 28,
2017
 
(in millions)
Principal Value
$
5,722

 
$
5,750

 
$
5,750

Fair Value (a)
5,301

 
5,943

 
6,033

  _______________
(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. 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, accrued expenses and current debt approximate fair value because of their short maturity.

13. Comprehensive Income
The following table provides the rollforward of accumulated other comprehensive income for year-to-date 2018:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Marketable Equity Securities
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of February 3, 2018
$
32

 
$
(10
)
 
$
2

 
$
24

Amount reclassified to Retained Earnings upon adoption of ASC 321

 

 
(2
)
 
(2
)
Balance as of February 4, 2018
32

 
(10
)
 

 
22

Other Comprehensive Income (Loss) Before Reclassifications
(24
)
 
11

 

 
(13
)
Amounts Reclassified from Accumulated Other Comprehensive Income

 
3

 

 
3

Tax Effect

 
(1
)
 

 
(1
)
Current-period Other Comprehensive Income (Loss)
(24
)
 
13

 

 
(11
)
Balance as of November 3, 2018
$
8

 
$
3

 
$

 
$
11


The following table provides the rollforward of accumulated other comprehensive income for year-to-date 2017:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Marketable Equity Securities
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of January 28, 2017
$
9

 
$
3

 
$

 
$
12

Other Comprehensive Income (Loss) Before Reclassifications
8

 
(8
)
 
1

 
1

Amounts Reclassified from Accumulated Other Comprehensive Income

 
1

 

 
1

Tax Effect

 
1

 

 
1

Current-period Other Comprehensive Income (Loss)
8

 
(6
)
 
1

 
3

Balance as of October 28, 2017
$
17

 
$
(3
)
 
$
1

 
$
15



17


The following table provides a summary of the reclassification adjustments out of accumulated other comprehensive income related to derivative financial instruments designated as foreign currency cash flow hedges for the third quarter and year-to-date 2018 and 2017:
Location on Consolidated Statements of Income (Loss)
 
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income
 
 
Third Quarter
 
Year-to-Date
 
 
2018
 
2017
 
2018
 
2017
 
 
(in millions)
Costs of Goods Sold, Buying and Occupancy
 
$

 
$

 
$
3

 
$
(3
)
Other Income
 

 
(4
)
 

 
3

Provision for Income Taxes
 

 

 

 
1

Net Income (Loss)
 
$

 
$
(4
)
 
$
3

 
$
1


14. Commitments and Contingencies
The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Guarantees
In connection with the disposition of a certain business, the Company has remaining guarantees of $7 million related to lease payments under the current terms of noncancelable leases expiring at various dates through 2021. These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the business. In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended. The Company has not recorded a liability with respect to these guarantee obligations as of November 3, 2018, February 3, 2018 or October 28, 2017 as it concluded that payments under these guarantees were not probable.
In connection with noncancelable operating leases of certain assets, the Company provided residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire at various dates through 2021, and the total amount of the guarantees is $94 million. The Company recorded a liability of $3 million as of November 3, 2018 and February 3, 2018, and a liability of less than $1 million as of October 28, 2017 related to these guarantee obligations, which are included in Other Long-term Liabilities on the Consolidated Balance Sheets.

15. Retirement Benefits
The Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement plan for substantially all its associates within the U.S. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.
The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $18 million for the third quarter of 2018 and $17 million for the third quarter of 2017. Total expense recognized related to the qualified plan was $56 million for year-to-date 2018 and $49 million for year-to-date 2017.
The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions up to a maximum percentage of eligible compensation. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a fixed rate determined by the Company and reviewed by the Compensation Committee of the Board of Directors, prior to the beginning of each year. Associate contributions and the related

18


interest vest immediately. Company contributions, along with related interest, are subject to vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specified period of up to 10 years. Total expense recognized related to the non-qualified plan was $7 million for the third quarter of 2018 and $6 million for the third quarter of 2017. Total expense recognized related to the non-qualified plan was $18 million for year-to-date 2018 and $15 million for year-to-date 2017.

16. Segment Information
The Company has three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International.
The Victoria’s Secret segment sells women’s intimate and other apparel, personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold online and through retail stores located in the U.S. and Canada.
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.
The Victoria's Secret and Bath & Body Works International segment includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores located outside of the U.S. and Canada, as well as the online business in Greater China. This segment includes the following:
Victoria's Secret International, comprised of company-owned stores in the U.K., Ireland and Greater China, as well as stores operated by partners under franchise and license arrangements;
Victoria's Secret Beauty and Accessories, comprised of company-owned stores in Greater China, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature Victoria's Secret branded beauty and accessories products in travel retail and other locations; and
Bath & Body Works International stores operated by partners under franchise, license and wholesale arrangements.
Other consists of the following:
Mast Global, a merchandise sourcing and production function serving the Company and its international partners;
La Senza, which sells women's intimate apparel online and through company-owned stores located in Canada and the U.S., as well as stores operated by partners under franchise and license arrangements;
Henri Bendel, which sells handbags, jewelry and other accessory products online and through company-owned stores; and
Corporate functions including non-core real estate, equity investments and other governance functions such as treasury and tax.

19


The following table provides the Company’s segment information for the third quarter and year-to-date 2018 and 2017:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body Works International
 
Other
 
Total
 
(in millions)
2018
 
 
 
 
 
 
 
 
 
Third Quarter:
 
 
 
 
 
 
 
 
 
Net Sales
$
1,529

 
$
956

 
$
134

 
$
156

 
$
2,775

Operating Income (Loss) (a)
(36
)
 
178

 
(42
)
 
(46
)
 
54

Year-to-Date:
 
 
 
 
 
 
 
 
 
Net Sales
$
4,843

 
$
2,680

 
$
415

 
$
447

 
$
8,385

Operating Income (Loss) (a)
162

 
470

 
(56
)
 
(139
)
 
437

2017
 
 
 
 
 
 
 
 
 
Third Quarter:
 
 
 
 
 
 
 
 
 
Net Sales
$
1,539

 
$
816

 
$
115

 
$
148

 
$
2,618

Operating Income (Loss)
134

 
138

 

 
(40
)
 
232

Year-to-Date:
 
 
 
 
 
 
 
 


Net Sales
$
4,718

 
$
2,354

 
$
332

 
$
405

 
$
7,809

Operating Income (Loss)
476

 
396

 
1

 
(131
)
 
742

_______________
(a)
Victoria's Secret and Victoria's Secret and Bath & Body Works International includes long-lived store asset impairment charges of $50 million and $31 million, respectively, and Other includes Henri Bendel closures costs of $20 million. For additional information see Note 7, “Property and Equipment, Net" and Note 5, “Restructuring Activities."
The Company's international net sales include sales from company-owned stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s international net sales across all segments totaled $387 million and $365 million for the third quarter of 2018 and 2017, respectively. The Company's international net sales across all segments totaled $1.146 billion and $1.014 billion for year-to-date 2018 and 2017, respectively.

17. Supplemental Guarantor Financial Information
The Company’s 2020 Notes, 2021 Notes, 2022 Notes, 2023 Notes, 2027 Notes, 2028 Notes, 2035 Notes, 2036 Notes, Secured Revolving Facility and Secured Foreign Facilities are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The Company is a holding company, and its most significant assets are the stock of its subsidiaries. The Guarantors represent: (a) substantially all of the sales of the Company’s domestic subsidiaries, (b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.
The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries: the Condensed Consolidating Balance Sheets as of November 3, 2018, February 3, 2018 and October 28, 2017 and the Condensed Consolidating Statements of Income (Loss), Comprehensive Income (Loss) and Cash Flows for the periods ended November 3, 2018 and October 28, 2017.

20


L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
(Unaudited)
 
 
November 3, 2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$

 
$
167

 
$
181

 
$

 
$
348

Accounts Receivable, Net

 
212

 
109

 

 
321

Inventories

 
1,700

 
263

 

 
1,963

Other
15

 
165

 
121

 

 
301

Total Current Assets
15

 
2,244

 
674

 

 
2,933

Property and Equipment, Net

 
2,019

 
915

 

 
2,934

Goodwill

 
1,318

 
30

 

 
1,348

Trade Names

 
411

 

 

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,396

 
19,442

 
2,386

 
(26,224
)
 

Deferred Income Taxes

 
9

 
11

 

 
20

Other Assets
127

 
14

 
683

 
(641
)
 
183

Total Assets
$
4,538

 
$
25,457

 
$
4,699

 
$
(26,865
)
 
$
7,829

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$

 
$
585

 
$
475

 
$

 
$
1,060

Accrued Expenses and Other
62

 
583

 
373

 

 
1,018

Current Debt

 

 
56

 

 
56

Income Taxes

 

 
8

 

 
8

Total Current Liabilities
62

 
1,168

 
912

 

 
2,142

Deferred Income Taxes
(2
)
 
(43
)
 
279

 

 
234

Long-term Debt
5,743

 
627

 
71

 
(627
)
 
5,814

Other Long-term Liabilities
58

 
810

 
97

 
(14
)
 
951

Total Equity (Deficit)
(1,323
)
 
22,895

 
3,340

 
(26,224
)
 
(1,312
)
Total Liabilities and Equity (Deficit)
$
4,538

 
$
25,457

 
$
4,699

 
$
(26,865
)
 
$
7,829


















21


L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)

 
February 3, 2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$

 
$
1,164

 
$
351

 
$

 
$
1,515

Accounts Receivable, Net

 
186

 
124

 

 
310

Inventories

 
1,095

 
145

 

 
1,240

Other

 
132

 
96

 

 
228

Total Current Assets

 
2,577

 
716

 

 
3,293

Property and Equipment, Net

 
1,984

 
909

 

 
2,893

Goodwill

 
1,318

 
30

 

 
1,348

Trade Names

 
411

 

 

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,973

 
18,298

 
2,106

 
(25,377
)
 

Deferred Income Taxes

 
10

 
4

 

 
14

Other Assets
129

 
18

 
654

 
(611
)
 
190

Total Assets
$
5,102

 
$
24,616

 
$
4,419

 
$
(25,988
)
 
$
8,149

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
2

 
$
349

 
$
366

 
$

 
$
717

Accrued Expenses and Other
101

 
529

 
399

 

 
1,029

Current Debt

 

 
87

 

 
87

Income Taxes
6

 
174

 
18

 

 
198

Total Current Liabilities
109

 
1,052

 
870

 

 
2,031

Deferred Income Taxes
(2
)
 
(46
)
 
286

 

 
238

Long-term Debt
5,706

 
597

 
1

 
(597
)
 
5,707

Other Long-term Liabilities
64

 
774

 
100

 
(14
)
 
924

Total Equity (Deficit)
(775
)
 
22,239

 
3,162

 
(25,377
)
 
(751
)
Total Liabilities and Equity (Deficit)
$
5,102

 
$
24,616

 
$
4,419

 
$
(25,988
)
 
$
8,149



22


L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
(Unaudited)
 
 
October 28, 2017
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$

 
$
377

 
$
358

 
$

 
$
735

Accounts Receivable, Net
1

 
181

 
103

 

 
285

Inventories

 
1,519

 
196

 

 
1,715

Other
(1
)
 
74

 
122

 

 
195

Total Current Assets

 
2,151

 
779

 

 
2,930

Property and Equipment, Net

 
2,056

 
864

 

 
2,920

Goodwill

 
1,318

 
30

 

 
1,348

Trade Names

 
411

 

 

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,552

 
18,111

 
1,687

 
(24,350
)
 

Deferred Income Taxes

 
10

 
13

 

 
23

Other Assets
130

 
26

 
640

 
(612
)
 
184

Total Assets
$
4,682

 
$
24,083

 
$
4,013

 
$
(24,962
)
 
$
7,816

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
2

 
$
567

 
$
468

 
$

 
$
1,037

Accrued Expenses and Other
108

 
485

 
303

 

 
896

Current Debt

 

 
80