10-K 1 lb128201710k.htm ANNUAL REPORT Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________________________________________ 
FORM 10-K
______________________________________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from                  to                 
Commission file number 1-8344
______________________________________________________ 
L BRANDS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________
Delaware
(State or other jurisdiction
of incorporation or organization)
 
31-1029810
(I.R.S. Employer Identification No.)
 
 
 
Three Limited Parkway,
Columbus, Ohio
(Address of principal executive offices)
 
43230
(Zip Code)
Registrant’s telephone number, including area code (614) 415-7000
______________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.50 Par Value
 
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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  ¨
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý    Accelerated filer ¨    Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was: $17,899,799,054.
Number of shares outstanding of the registrant’s Common Stock as of March 10, 2017: 285,048,417.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Registrant’s 2017 Annual Meeting of Stockholders to be held on May 18, 2017, are incorporated by reference into Part II and Part III.
 



Table of Contents
 
 
 
Page No.
Part I
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
 
 
 
Item 15.
Item 16.
 



PART I

ITEM 1. BUSINESS.
General
L Brands, Inc. (“we” or “the Company”) operates in the highly competitive specialty retail business. Founded in 1963 in Columbus, Ohio, we have evolved from an apparel-based specialty retailer to a segment leader focused on women’s intimate and other apparel, personal care, beauty and home fragrance categories. We sell our merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada, United Kingdom ("U.K.") and Greater China (China and Hong Kong), which are primarily mall-based; through websites; and through international franchise, license and wholesale partners (collectively, "partners").
Victoria’s Secret
Victoria’s Secret, including PINK, the iconic women's intimate brand featuring celebrated supermodels and a world-famous fashion show, is a specialty retailer of women's intimate and other apparel with fashion-inspired collections and prestige fragrances. We sell our Victoria’s Secret products at more than 1,200 Victoria’s Secret and PINK stores in the U.S., Canada, U.K. and Greater China, and online at www.VictoriasSecret.com. Additionally, Victoria’s Secret and PINK have more than 410 stores in more than 70 other countries operating under franchise, license and wholesale arrangements.
Bath & Body Works
Bath & Body Works is one of the leading specialty retailers of personal care, home fragrance products, soaps and sanitizers. We sell our Bath & Body Works products at more than 1,600 Bath & Body Works stores in the U.S. and Canada and online at www.BathandBodyWorks.com. Additionally, Bath & Body Works has 159 stores in 30 other countries operating under franchise, license and wholesale arrangements.
Other Brands
La Senza is a specialty retailer of women’s intimate apparel. We sell our La Senza products at more than 120 La Senza stores in Canada, and online at www.LaSenza.com. In 2016, we opened our first 4 La Senza stores in the U.S. Additionally, La Senza has more than 200 stores in 24 other countries operating under franchise and license arrangements.
Henri Bendel sells handbags, jewelry and other accessory products through our New York flagship and 28 other stores, as well as online at www.HenriBendel.com.
Acquisition
In the first quarter of 2016, we reacquired the franchise rights to operate Victoria's Secret Beauty and Accessories stores in Greater China, including 26 stores already open at the time of acquisition. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Divestiture
In the first quarter of 2015, we divested our remaining ownership interest in our third-party apparel sourcing business. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. As used herein, “2016,” “2015,” “2014” and “2013” refer to the 52-week periods ending January 28, 2017, January 30, 2016January 31, 2015 and February 1, 2014, respectively. “2012” refers to the 53-week period ending February 2, 2013.
Real Estate
Company-owned Retail Stores
Our company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the U.S., Canada, U.K. and Greater China. As a result of our strong brands and established retail presence, we have been able to lease high-traffic locations in most retail centers in which we operate. Substantially all of our stores generated positive cash flow in 2016.

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The following table provides the number of our company-owned retail stores in operation for each brand as of January 28, 2017 and January 30, 2016.
 
January 28, 2017
 
January 30, 2016
Victoria’s Secret U.S.
1,131

 
1,118

Victoria’s Secret Canada
46

 
46

Bath & Body Works U.S.
1,591

 
1,574

Bath & Body Works Canada
102

 
98

Victoria's Secret U.K.
18

 
14

Victoria's Secret Beauty and Accessories
31

 

La Senza U.S.
4

 

La Senza Canada
122

 
126

Henri Bendel
29

 
29

Total
3,074
 
3,005


The following table provides the changes in the number of our company-owned retail stores operated for the past five fiscal years:
 
Beginning
of Year
 
Opened
 
Closed
 
Acquired (a)
 
End of Year
2016
3,005

 
72

 
(29
)
 
26

 
3,074

2015
2,969

 
72

 
(36
)
 

  
3,005

2014
2,923

 
81

 
(35
)
 

  
2,969

2013
2,876

 
81

 
(34
)
 

  
2,923

2012
2,941

 
48

 
(113
)
 

 
2,876

_______________
(a)    Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional
information see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and             Supplementary Data.

Franchise, License and Wholesale Arrangements
In addition to our company-owned stores, our products are sold at hundreds of partner locations in over 75 countries. Under these arrangements, third parties operate stores that sell our products under our brand names. 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 arrangements at the time the title passes to the partner. We continue to increase the number of locations under these types of arrangements as part of our international expansion.
The following table provides the number of our international stores operated by our partners for each business as of January 28, 2017 and January 30, 2016.
 
January 28, 2017
 
January 30, 2016
Victoria’s Secret Beauty and Accessories
391

 
373

Victoria’s Secret
28

 
19

Bath & Body Works
159

 
125

La Senza
203

 
221

Total
781
 
738



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Our Strengths
We believe the following competitive strengths contribute to our leading market position, differentiate us from our competitors and will drive future growth:
Industry Leading Brands
We have developed and operate brands that have come to represent an aspirational lifestyle. Our brands allow us to target markets across the economic spectrum, across demographics and across the world. We believe that our three flagship brands, Victoria's Secret, PINK and Bath & Body Works, are highly recognizable which provides us with a competitive advantage.
At Victoria’s Secret, we market glamorous and sexy product lines to our customers. While bras and panties are the core of what we do, this brand also gives our customers choices in beauty products, fragrances, loungewear, athletic attire and personal care accessories.
At PINK, we market products to the college-aged woman. While bras and panties are the core of what we do, this brand also gives our customers choices in apparel, loungewear, athletic attire, personal care accessories and swim.
Bath & Body Works caters to our customers’ entire well-being, providing shower gels and lotions, aromatherapy, home fragrance, soaps and sanitizers and personal care accessories.
In-Store Experience and Store Operations
We view our customers' in-store experience as an important vehicle for communicating the image of each brand. We utilize visual presentation of merchandise, in-store marketing, music and our sales associates to reinforce the image represented by the brands.
Our in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a unique shopping experience. Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure coordinated execution of the company-wide merchandising strategy.
Our sales associates and managers are a central element in creating the atmosphere of the stores by providing a high level of customer service.
Product Development, Sourcing and Logistics
We believe a large part of our success comes from frequent and innovative product launches, which include bra launches at Victoria’s Secret, PINK and La Senza and new fragrance launches at Bath & Body Works. Our merchant, design and sourcing teams have a long history of bringing innovative products to our customers. Additionally, we believe that our sourcing function (Mast Global) has a long and deep presence in the key sourcing markets including those in the U.S. and Asia, which helps us partner with the best manufacturers to get high-quality products quickly.
Experienced and Committed Management Team
We were founded in 1963 and have been led since inception by Leslie H. Wexner. Our senior management team has a wealth of retail and business experience at L Brands, Inc. and other companies such as Nike, Coach, The Gap, The Home Depot, Land's End, Levi Strauss, Boots and Yum Brands. We believe that we have one of the most experienced management teams in retail.
Additional Information
Merchandise Suppliers
During 2016, we purchased merchandise from approximately 360 suppliers located throughout the world. No supplier provided 10% or more of our merchandise purchases.
Distribution and Merchandise Inventory
Most of our merchandise is shipped to our distribution centers in the Columbus, Ohio area. We use a variety of shipping terms that result in the transfer of title of the merchandise at either the point of origin or point of destination.
Our policy is to maintain sufficient quantities of inventories on hand in our retail stores and distribution centers to enable us to offer customers an appropriate selection of current merchandise. We emphasize rapid turnover and take markdowns as required to keep merchandise fresh and current.

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Information Systems
Our management information systems consist of a full range of retail, financial and merchandising systems. The systems include applications related to point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management, data security and support systems including human resources and finance.
Seasonal Business
Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). The fourth quarter, including the holiday season, accounted for approximately one-third of our net sales for 2016, 2015 and 2014 and is typically our most profitable quarter. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, our credit facilities are available for additional working capital needs and investment opportunities.
Regulation
We and our products are subject to regulation by various federal, state, local and foreign regulatory authorities. We are subject to a variety of customs regulations and international trade arrangements.
Trademarks and Patents
Our trademarks and patents, which constitute our primary intellectual property, have been registered or are the subject of pending applications in the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. We believe our products are identified by our intellectual property and, thus, our intellectual property is of significant value. Accordingly, we intend to maintain our intellectual property and related registrations and vigorously protect our intellectual property assets against infringement.
Segment Information
We have three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International. For additional information, including the financial results of our reportable segments, see Note 21 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Other Information
For additional information about our business, including our net sales and profits for the last three years and selling square footage, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Competition
The sale of women's intimate and other apparel, personal care and beauty products and accessories through retail stores is a highly competitive business with numerous competitors, including individual and chain specialty stores, department stores and discount retailers. Brand image, marketing, design, price, service, assortment and quality are the principal competitive factors in retail store sales. Our online businesses compete with numerous online merchandisers. Image presentation, fulfillment and the factors affecting retail store sales discussed above are the principal competitive factors in online sales.
Associate Relations
As of January 28, 2017, we employed approximately 93,600 associates; 69,000 of whom were part-time. In addition, temporary associates are hired during peak periods, such as the holiday season.
Executive Officers of Registrant
Set forth below is certain information regarding our executive officers.
Leslie H. Wexner, 79, has been our Chief Executive Officer since our founding in 1963 and Chairman of the Board of Directors since 1975.
Stuart B. Burgdoerfer, 53, has been our Executive Vice President and Chief Financial Officer since April 2007.

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Nicholas P. M. Coe, 54, has been our Chief Executive Officer and President of Bath & Body Works since August 2011.
Charles C. McGuigan, 60, has been our Chief Operating Officer since May 2012 and our Chief Executive Officer and President of Mast Global since February 2011.
Martin P. Waters, 51, has been our Chief Executive Officer and President of L Brands International since November 2009.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). Copies of these reports, proxy statements and other information can be read and copied at:
SEC Public Reference Room
100 F Street NE
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our website at www.lb.com.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to:
L Brands, Inc.
Investor Relations Department
Three Limited Parkway
Columbus, Ohio 43230


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ITEM 1A. RISK FACTORS.
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, consumer confidence, consumer spending patterns and market disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
the seasonality of our business;
the dependence on mall traffic and the availability of suitable store locations on appropriate terms;
our ability to grow through new store openings and existing store remodels and expansions;
our ability to successfully expand internationally and related risks;
our independent franchise, license and wholesale partners;
our direct channel businesses;
our ability to protect our reputation and our brand images;
our ability to attract customers with marketing, advertising and promotional programs;
our ability to protect our trade names, trademarks and patents;
the highly competitive nature of the retail industry and the segments in which we operate;
consumer acceptance of our products and our ability to manage the life cycle of our brands, keep up with fashion trends, develop new merchandise and launch new product lines successfully;
our ability to source, distribute and sell goods and materials on a global basis, including risks related to:
political instability, significant health hazards, environmental hazards or natural disasters;
duties, taxes and other charges;
legal and regulatory matters;
volatility in currency exchange rates;
local business practices and political issues;
potential delays or disruptions in shipping and transportation and related pricing impacts;
disruption due to labor disputes; and
changing expectations regarding product safety due to new legislation;
our geographic concentration of supplier and distribution facilities in central Ohio;
fluctuations in foreign currency exchange rates;
stock price volatility;
our ability to pay dividends and related effects;
our ability to maintain our credit rating;
our ability to service or refinance our debt;
our ability to retain key personnel;
our ability to attract, develop and retain qualified associates and manage labor-related costs;
the ability of our manufacturers to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
fluctuations in product input costs;

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our ability to adequately protect our assets from loss and theft;
fluctuations in energy costs;
increases in the costs of mailing, paper and printing;
claims arising from our self-insurance;
our ability to implement and maintain information technology systems and to protect associated data;
our ability to maintain the security of customer, associate, supplier or company information;
our ability to comply with regulatory requirements;
legal and compliance matters; and
tax, trade and other regulatory matters.
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.
The following discussion of risk factors contains “forward-looking statements.” These risk factors may be important to understanding any statement in this Form 10-K, other filings or in any other discussions of our business. The following information should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation and Item 8. Financial Statements and Supplementary Data.
In addition to the other information set forth in this report, the reader should carefully consider the following factors which could materially affect our business, financial condition or future results. The risks described below are not our only risks. Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also adversely affect our business, operating results and/or financial condition in a material way.
Our net sales, profit results and cash flows are sensitive to, and may be affected by, general economic conditions, consumer confidence, spending patterns, weather or other market disruptions.
Our net sales, profit, cash flows and future growth may be affected by negative local, regional, national or international political or economic trends or developments that reduce the consumers’ ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof. In addition, market disruptions due to severe weather conditions, natural disasters, health hazards or other major events or the prospect of these events could also impact consumer spending and confidence levels. Purchases of women’s intimate and other apparel, beauty and personal care products and accessories often decline during periods when economic or market conditions are unsettled or weak. In such circumstances, we may increase the number of promotional sales, which could have a material adverse effect on our results of operations, financial condition and cash flows.
The decision by the U.K. to leave the European Union ("Brexit") has increased the uncertainty in the economic and political environment in Europe. In particular, our business in the United Kingdom may be adversely impacted by fluctuations in currency exchange rates, changes in trade policies, or changes in labor, immigration, tax or other laws.
Extreme weather conditions in the areas in which our stores are located, particularly in markets where we have multiple stores, could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability.
Our net sales, operating income, cash and inventory levels fluctuate on a seasonal basis.
We experience major seasonal fluctuations in our net sales and operating income, with a significant portion of our operating income typically realized during the fourth quarter holiday season. Any decrease in sales or margins during this period could have a material adverse effect on our results of operations, financial condition and cash flows.
Seasonal fluctuations also affect our cash and inventory levels, since we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations, financial condition and cash flows.


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Our net sales depend on a volume of traffic to our stores and the availability of suitable lease space.
Most of our stores are located in retail shopping areas including malls and other types of retail centers. Sales at these stores are derived, in part, from the volume of traffic in those retail areas. Our stores benefit from the ability of the retail center and other attractions in an area, including “destination” retail stores, to generate consumer traffic in the vicinity of our stores. Sales volume and retail traffic may be adversely affected by factors that we cannot control, such as economic downturns or changes in consumer demographics in a particular area, competition from internet and other retailers and other retail areas where we do not have stores, the closing or decline in popularity of other stores in the shopping areas where our stores are located and the deterioration in the financial condition of the operators of the shopping areas or developers in which our stores are located.
Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs. Some of our store locations, such as our Victoria's Secret flagship stores, require significant upfront capital investment and have material lease commitments. Additionally, we are dependent upon the suitability of the lease spaces that we currently use. The leases that we enter into are generally noncancellable leases with initial terms of ten years. If we determine that it is no longer economical to operate a store and decide to close it, we may remain obligated under the applicable lease for, among other things, payment of the base rent for the balance of the lease term.
These risks could have a material adverse effect on our ability to grow and our results of operations, financial condition and cash flows.
Our ability to grow depends in part on new store openings and existing store remodels and expansions.
Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to partner with developers and landlords to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel and the integration of new stores into existing operations. There can be no assurance we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new, remodeled and expanded stores profitably. These risks could have a material adverse effect on our ability to grow and results of operations, financial condition and cash flows.
Our plans for international expansion include risks that could impact our results and reputation.
We intend to further expand into international markets, including mainland China and other international markets, through partner arrangements and/or company-owned stores. The risks associated with our expansion into international markets include difficulties in attracting customers due to a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market. Further, entry into other markets may bring us into competition with new competitors or with existing competitors with an established market presence. Other risks include general economic conditions in specific countries or markets, volatility in the geopolitical landscape, restrictions on the repatriation of funds held internationally, disruptions or delays in shipments, changes in diplomatic and trade relationships, political instability and foreign governmental regulation. Such expansions will also have upfront investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance.
We also have risks related to identifying suitable partners. In addition, certain aspects of these arrangements are not directly within our control, such as the ability of these third parties to meet their projections regarding store openings and sales and their compliance with federal and local law. We cannot ensure the profitability or success of our expansion into international markets.
Further, our results of operations and financial condition may be adversely affected by fluctuations in currency exchange rates. See “Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations” below.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.

8


Our licensees, franchisees and wholesalers could take actions that could harm our business or brand images.
We have global representation through independently owned stores operated by our partners. Although we have criteria to evaluate and select prospective partners, the level of control we can exercise over our partners is limited, and the quality and success of their operations may be diminished by any number of factors beyond our control. For example, our partners may not have the business acumen or financial resources necessary to successfully operate stores in a manner consistent with our standards and may not hire and train qualified store managers and other personnel. Our brand image and reputation may suffer materially, and our sales could decline if our partners do not operate successfully. These risks could have an adverse effect on our results of operations, financial condition and cash flows.
Our direct channel businesses include risks that could have an effect on our results.
Our direct operations are subject to numerous risks that could have a material adverse effect on our results. Risks include, but are not limited to, the difficulty in recreating the in-store experience through our direct channels; domestic or international resellers purchasing merchandise and reselling it outside our control; our ability to anticipate and implement innovations in technology and logistics in order to appeal to existing and potential customers who increasingly rely on multiple channels to meet their shopping needs; the failure of and risks related to the systems that operate our web infrastructure, websites and the related support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions; and risks related to the fulfillment of direct-to-consumer orders such as not adequately predicting customer demand.
Our failure to maintain efficient and uninterrupted order-taking and fulfillment operations could also have a material adverse effect on our results. The satisfaction of our online customers depends on their timely receipt of merchandise. If we encounter difficulties with the distribution facilities, or if the facilities were to shut down for any reason, including as a result of fire or other natural disaster or work stoppage, we could face shortages of inventory; incur significantly higher costs and longer lead times associated with distributing our products to our customers; and cause customer dissatisfaction.
Any of these issues could have a material adverse effect on our operations, financial condition and cash flows.
Our ability to protect our reputation could have a material effect on our brand images.
Our ability to maintain our reputation is critical to our brand images. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity, including information publicized through traditional or social media platforms and similar venues such as blogs, websites and other forums, may affect our reputation and brand and, consequently, reduce demand for our merchandise, even if such publicity is unverified or inaccurate.
Failure to comply with ethical, social, product, labor and environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Failure to comply with local laws and regulations, to maintain an effective system of internal controls, to maintain the security of customer, associate, supplier or company information or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.
If our marketing, advertising and promotional programs are unsuccessful, or if our competitors are more effective with their programs than we are, our revenue or results of operations may be adversely affected.
Customer traffic and demand for our merchandise is influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands and the location of and service offered in our stores. Although we use marketing, advertising and promotional programs to attract customers through various media including television, social media, database marketing and print, some of our competitors may expend more for their programs than we do, or use different approaches than we do, which may provide them with a competitive advantage. Our programs may not be effective or could require increased expenditures, which could have a material adverse effect on our revenue and results of operations.
Our ability to adequately protect our trade names, trademarks and patents could have an impact on our brand images and ability to penetrate new markets.
We believe that our trade names, trademarks and patents are important assets and an essential element of our strategy. We have obtained or applied for federal registration of these trade names, trademarks and patents and have applied for or obtained registrations in many foreign countries. There can be no assurance that we will obtain such registrations or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. In particular, the laws of certain foreign countries may not protect proprietary rights to the same extent as the laws of the U.S. If any third party copies our products or our stores in a manner that projects lesser quality or carries a negative connotation, it could have a

9


material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.

Our ability to compete favorably in our highly competitive segment of the retail industry could impact our results.
The sale of women’s intimate and other apparel, personal care products and accessories is highly competitive. We compete for sales with a broad range of other retailers, including individual and chain specialty stores, department stores and discount retailers. In addition to the traditional store-based retailers, we also compete with direct marketers or retailers that sell similar lines of merchandise and who target customers through online channels. Brand image, marketing, design, price, service, assortment, quality, image presentation and fulfillment are all competitive factors in both the store-based and online channels.
Some of our competitors may have greater financial, marketing and other resources available. In many cases, our competitors sell their products in stores that are located in the same shopping malls and centers as our stores. In addition to competing for sales, we compete for favorable site locations and lease terms in shopping malls and centers.
Increased competition could result in price reductions, increased marketing expenditures and loss of market share, any of which could have a material adverse effect on our results of operations, financial condition and cash flows.
Our ability to manage the life cycle of our brands and to remain current with fashion trends and launch new product lines successfully could impact the image and relevance of our brands.
Our success depends in part on management’s ability to effectively manage the life cycle of our brands and to anticipate and respond to changing fashion preferences and consumer demands and to translate market trends into appropriate, saleable product offerings in advance of the actual time of sale to the customer. Customer demands and fashion trends change rapidly. If we are unable to successfully anticipate, identify or react to changing styles or trends or we misjudge the market for our products or any new product lines, our sales will be lower, potentially resulting in significant amounts of unsold finished goods inventory. In response, we may be forced to increase our marketing promotions or price markdowns. These risks could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
We may be impacted by our ability to adequately source, distribute and sell merchandise and other materials on a global basis.
We source merchandise and other materials directly in international markets and in our domestic market. We distribute merchandise and other materials globally to our partners in international locations and to our stores. Many of our imports and exports are subject to a variety of customs regulations and international trade arrangements, including existing or potential duties, tariffs or safeguard quotas. We compete with other companies for production facilities.
We also face a variety of other risks generally associated with doing business on a global basis. For example:
political instability, significant health hazards, environmental hazards or natural disasters which could negatively affect international economies, financial markets and business activity;
imposition of new or retaliatory trade duties, sanctions or taxes and other charges on imports or exports;
evolving, new or complex legal and regulatory matters;
volatility in currency exchange rates;
local business practice and political issues (including issues relating to compliance with domestic or international labor standards) which may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts;
potential delays or disruptions in shipping and transportation and related pricing impacts;
disruption due to labor disputes; and
changing expectations regarding product safety due to new legislation or other factors.
We also rely upon third-party transportation providers for substantially all of our product shipments, including shipments to and from our distribution centers, to our stores and to our customers. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and associate strikes and inclement weather, which may impact our transportation providers' ability to provide delivery services that adequately meet our shipping needs.

10


Our future performance will depend upon these and the other factors listed above which are beyond our control and could have a material adverse effect on our results of operations, financial condition and cash flows.
We rely on a number of supplier and distribution facilities located in the same vicinity, making our business susceptible to local and regional disruptions or adverse conditions.
To achieve the necessary speed and agility in producing our beauty, personal care and home fragrance products, we rely heavily on supplier and distribution facilities in close proximity to our headquarters in central Ohio. As a result of geographic concentration of the supplier and distribution facilities that we rely upon, our operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, natural disasters, demographic and population changes, and other unforeseen events and circumstances. Any significant interruption in the operations of these facilities could lead to inventory issues or increased costs, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Fluctuations in foreign currency exchange rates could impact our financial condition and results of operations.
We are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. In addition, our royalty arrangements are calculated based on sales in local currency and, as such, we are exposed to foreign currency exchange rate fluctuations. Although we use foreign currency forward contracts to hedge certain foreign currency risks, these measures may not succeed in offsetting all of the short-term negative impact of foreign currency rate movements on our business and results of operations. Hedging would generally not be effective in offsetting the long-term impact of sustained shifts in foreign exchange rates on our business results. As a result, the fluctuation in the value of the U.S. dollar against other currencies could have a material adverse effect on our results of operations, financial condition and cash flows.
Our stock price may be volatile.
Our stock price may fluctuate substantially as a result of variations in our actual or projected performance or the financial performance of other companies in the retail industry. Any guidance that we provide is based on goals that we believe are reasonably attainable at the time guidance is given. If, or when, we announce actual results that differ from those that have been predicted by us, outside investment analysts or others, our stock price could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk.
In addition, the stock market may experience price and volume fluctuations that are unrelated or disproportionate to operating performance.
If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed.
Our dividend program requires the use of a portion of our cash flow. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Our Board of Directors may, at its discretion, decrease the level of dividends or entirely discontinue the payment of dividends at any time. Any failure to pay dividends after we have announced our intention to do so may negatively impact our reputation, investor confidence in us and our stock price.

Our ability to maintain our credit rating could affect our ability to access capital and could increase our interest expense.
The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. A deterioration in our capital structure or the quality and stability of our earnings could result in a downgrade of our credit rating. Any negative ratings actions could constrain the capital available to our company or our industry and could limit our access to funding for our operations. We are dependent upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest costs will likely increase, which could have a material adverse effect on our results of operations, financial condition and cash flows. Additionally, changes to our credit rating could affect our future interest costs.
We may be impacted by our ability to service or refinance our debt.
We currently have substantial indebtedness. Some of our debt agreements contain covenants which require maintenance of certain financial ratios and also, under certain conditions, restrict our ability to pay dividends, repurchase common shares and make other restricted payments as defined in those agreements. Our cash flow from operations provides the primary source of funds for our debt service payments. If our cash flow from operations declines, we may be unable to service or refinance our current debt.

11


We may be impacted by our ability to recruit, train and retain key personnel.
We believe we have benefited substantially from the leadership and experience of our senior executives, including Leslie H. Wexner, Chairman of the Board of Directors and Chief Executive Officer. The loss of the services of any of these individuals could have a material adverse effect on our business. Competition for key personnel in the retail industry is intense, and our future success will also depend on our ability to recruit, train and retain other qualified key personnel.
We may be impacted by our ability to attract, develop and retain qualified associates and manage labor-related costs.
We believe our competitive advantage is providing a positive, engaging and satisfying experience for each individual customer, which requires us to have highly trained and engaged associates. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified associates, including store personnel and talented merchants. The turnover rate in the retail industry is generally high, and qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas. Competition for such qualified individuals or changes in labor and healthcare laws could require us to incur higher labor costs. Our inability to recruit a sufficient number of qualified individuals in the future may delay planned openings of new stores or affect the speed with which we expand. Delayed store openings, significant increases in associate turnover rates or significant increases in labor-related costs could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be impacted by our manufacturers' ability to manufacture and deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations.
We purchase products from third-party manufacturers. Factors outside our control, such as manufacturing or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns.
In addition, quality problems could result in a product liability judgment or a widespread product recall that may negatively impact our sales and profitability for a period of time depending on product availability, competition reaction and consumer attitudes. Even if the product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions could adversely impact our reputation with existing and potential customers and our brand image.
Our business could also suffer if our third-party manufacturers fail to comply with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices and our associates periodically visit and monitor the operations of our third-party manufacturers, we do not control these manufacturers or their practices. The violation of labor, environmental or other laws by a third-party manufacturer used by us, or the divergence of a third-party manufacturer’s or partner’s labor or environmental practices from those generally accepted as ethical or appropriate, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be affected by fluctuations in product input costs.
Product input costs, including manufacturing, freight, labor and raw materials, fluctuate. These fluctuations may result in an increase in our production costs. We may not be able to, or may elect not to, pass these increases on to our customers which may adversely impact our profit margins. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our ability to adequately protect our assets from loss and theft.
Our assets are subject to loss, including those caused by illegal or unethical conduct by associates, customers, vendors or unaffiliated third parties.  We have experienced events such as inventory shrinkage in the past, and we cannot assure that incidences of loss and theft will decrease in the future or that the measures we are taking will effectively reduce these losses.  Higher rates of loss or increased security costs to combat theft could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be affected by fluctuations in energy costs.
Energy costs have fluctuated dramatically in the past. These fluctuations may result in an increase in our transportation costs for distribution, utility costs for our retail stores and costs to purchase products from our manufacturers. A continual rise in energy costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could have a material adverse effect on our results of operations, financial condition and cash flows.


12


We may be impacted by increases in costs of mailing, paper and printing.
Postal rate increases and paper and printing costs will affect the cost of our order fulfillment and promotional mailings. We rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting. Future paper and postal rate increases could adversely impact our earnings if we are unable to recover these costs or if we are unable to implement more efficient printing, mailing, delivery and order fulfillment systems. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
We self-insure certain risks and may be impacted by unfavorable claims experience.
We are self-insured for various types of insurable risks including associate medical benefits, workers’ compensation, property, general liability and automobile up to certain stop-loss limits. Claims are difficult to predict and may be volatile. Any adverse claims experience could have a material adverse effect on our results of operations, financial condition and cash flows.
We significantly rely on our ability to implement and sustain information technology systems and to protect associated data.
Our success depends, in part, on the secure and uninterrupted performance of our information technology systems. Our information technology systems, as well as those of our service providers, are vulnerable to damage from a variety of sources, including telecommunication failures, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers and those of our service providers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Additionally, these types of problems could result in a breach of confidential customer, merchandise, financial or other important information which could result in damage to our reputation and/or litigation. The increased use of smartphones, tablets and other mobile devices may also heighten these and other operational risks. Despite the precautions we have taken, unanticipated problems may nevertheless cause failures in our information technology systems. Sustained or repeated system disruptions that interrupt our ability to process orders and deliver products to the stores, impact our consumers' ability to access our websites in a timely manner or expose confidential customer, merchandise, financial or other important information could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition, from time to time, we make modifications and upgrades to the information technology systems for point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management and support systems including human resources and finance. Modifications involve replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including not accurately capturing data and system disruptions. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations, financial condition and cash flows.
Our ability to maintain the security of customer, associate, supplier or company information could have an impact on our reputation and our results.
Information systems are susceptible to an increasing threat of continually evolving cybersecurity risks. Any significant compromise or breach of our data security could significantly damage our reputation with our customers, associates, investors and other third parties; cause the disclosure of confidential customer, associate, supplier or company information; cause our customers to stop shopping with us; and result in significant legal, regulatory and financial liabilities and lost revenues. While we have implemented systems and processes to protect against unauthorized access to our information systems and prevent data loss, there is no guarantee that these procedures are adequate to safeguard against all data security breaches. In addition to our own networks and databases, we use third-party service providers to store, process and transmit certain of this information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in their systems. We have confidential security measures in place to protect our physical facilities and information technology systems from attacks. Despite these measures, we may be vulnerable to targeted or random security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or similar events.
The regulatory environment related to information security, data collection and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs, such as costs related to organizational changes, implementing additional protection technologies, training associates and engaging consultants. Additionally, we could incur lost revenues and face increased litigation as a result of any potential cybersecurity breach.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.

13


We may be impacted by our ability to comply with regulatory requirements.
We are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable foreign and domestic laws and regulations, including those required by the Sarbanes-Oxley Act of 2002, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, the SEC and the New York Stock Exchange (the “NYSE”), among others. Although we have put in place policies and procedures aimed at ensuring legal and regulatory compliance, our associates, subcontractors, vendors, licensees, franchisees and suppliers could take actions that violate these laws and regulations. Any violations of such laws or regulations could have an adverse effect on our reputation, market price of our common stock, results of operations, financial condition and cash flows.
It can be difficult to comply with sometimes conflicting regulations in local, national or foreign jurisdictions as well as new or changing regulations. Also, changes in such laws could make operating our business more expensive or require us to change the way we do business. For example, changes in product safety or other consumer protection laws could lead to increased costs for certain merchandise, or additional labor costs associated with readying merchandise for sale. It may be difficult for us to oversee regulatory changes impacting our business and our responses to changes in the law could be costly and may negatively impact our operations.
We may be adversely impacted by certain compliance or legal matters.
We, along with third parties we do business with, are subject to complex compliance and litigation risks. Actions filed against us from time to time include commercial, tort, intellectual property, customer, employment, wage and hour, data privacy, securities, anti-corruption and other claims, including purported class action lawsuits. The cost of defending against these types of claims against us or the ultimate resolution of such claims, whether by settlement or adverse court decision, may harm our business. Further, potential claimants may be encouraged to bring suits based on a settlement from us or adverse court decisions against us. We cannot currently assess the likely outcome of such suits, but if the outcome were negative, it could have a material adverse effect on our reputation, results of operations, financial condition and cash flows.
In addition, we may be impacted by litigation trends, including class action lawsuits involving consumers and shareholders, that could have a material adverse effect on our reputation, market price of our common stock, results of operations, financial condition and cash flows.
We may be impacted by changes in taxation, trade and other regulatory requirements.
We are subject to income tax in local, national and international jurisdictions. In addition, our products are subject to import and excise duties and/or sales or value-added taxes in many jurisdictions. We are also subject to the examination of our tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of these examinations. Fluctuations in tax rates and duties, changes in tax legislation or regulation or adverse outcomes of these examinations could have a material adverse effect on our results of operations, financial condition and cash flows.
There is increased uncertainty with respect to tax policy and trade relations between the U.S. and other countries. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our results of operations, financial condition and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.


14


ITEM 2. PROPERTIES.
The following table provides the location, use and size of our distribution, corporate and product development facilities as of January 28, 2017:
Location
 
Use
 
Approximate
Square
Footage
Columbus, Ohio area
 
Corporate, distribution and shipping
 
6,938,000

New York
 
Office, sourcing and product development/design
 
580,000

Kettering, Ohio
 
Call center
 
94,000

Montreal, Quebec, Canada
 
Office
 
60,000

Hong Kong
 
Office and sourcing
 
60,000

Mainland China
 
Office
 
27,000

Various international locations
 
Office and sourcing
 
128,000


United States
Our business for the Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International segments is principally conducted from office, distribution and shipping facilities located in the Columbus, Ohio area. Additional facilities are located in New York, New York and Kettering, Ohio.
Our distribution and shipping facilities consist of eight buildings located in the Columbus, Ohio area. These buildings, including attached office space, comprise approximately 6.9 million square feet.
As of January 28, 2017, we operate 2,755 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the U.S. A substantial portion of these lease commitments consists of store leases generally with an initial term of 10 years. The store leases expire at various dates between 2017 and 2031.
Typically, when space is leased for a retail store in a mall or shopping center, we supply all improvements, including interior walls, floors, ceilings, fixtures and decorations. The cost of improvements varies widely, depending on the design, size and location of the store. In certain cases, the landlord of the property may provide an allowance to fund all or a portion of the cost of improvements, serving as a lease incentive. Rental terms for new locations usually include a fixed minimum rent plus a percentage of sales in excess of a specified amount. We usually pay certain operating costs such as common area maintenance, utilities, insurance and taxes. For additional information, see Note 16 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
International
Canada
We lease an office in the Montreal, Quebec area.
As of January 28, 2017, we operate 270 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the Canadian provinces. A substantial portion of these lease commitments consists of store leases generally with an initial term of 5 years. The store leases expire on various dates between 2017 and 2030.
United Kingdom
As of January 28, 2017, we operate 18 retail stores in leased facilities in the U.K. These lease commitments consist of store leases with initial terms ranging from 10 to 35 years expiring on various dates between 2021 and 2045.
Greater China
We lease offices in Shanghai, Shenzhen and Hong Kong within Greater China.
As of January 28, 2017, we operate 31 retail stores in leased facilities in the Greater China area. These lease commitments consist of store leases with initial terms ranging from 3 to 5 years expiring on various dates between 2017 and 2021.

15


Other International
As of January 28, 2017, we also have global representation through stores operated by our partners:
391 Victoria’s Secret Beauty and Accessories stores in more than 70 countries;
203 La Senza stores in 24 countries;
159 Bath & Body Works stores in 30 countries;
23 Victoria's Secret stores in 12 countries; and
5 PINK stores in 3 countries.
We also operate sourcing-related office facilities in various international locations.

ITEM 3. LEGAL PROCEEDINGS.
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our results of operations, financial condition and cash flows.
 
ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

16


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock (“LB”) is traded on the NYSE. As of January 28, 2017, there were approximately 36,000 shareholders of record. However, including active associates who participate in our stock purchase plan, associates who own shares through our sponsored retirement plans and others holding shares in broker accounts under street names, we estimate the shareholder base to be approximately 198,000.
The following table provides our quarterly market prices and cash dividends per share for 2016 and 2015:
 
 
Market Price
 
Cash Dividend
per Share
 
 
High
 
Low
 
2016
 
 
 
 
 
 
Fourth quarter
$
75.50

 
$
58.75

 
$
0.60

 
Third quarter
79.67
 
69.33
 
0.60

 
Second quarter
80.20
 
60.00
 
0.60

 
First quarter
97.35
 
75.91
 
2.60

(a)
2015

 

 

 
Fourth quarter
$
101.11

 
$
88.66

 
$
0.50

 
Third quarter
97.93

 
75.11

 
0.50

 
Second quarter
92.13

 
80.42

 
0.50

 
First quarter
95.78

 
82.38

 
2.50

(b)
________________ 
(a)
In February 2016, our Board of Directors declared an increase in our quarterly common stock dividend from $0.50 to $0.60 per share and a special dividend of $2 per share. Both dividends were distributed on March 4, 2016 to shareholders of record at the close of business on February 19, 2016.
(b)
In February 2015, our Board of Directors declared an increase in our quarterly common stock dividend from $0.34 to $0.50 per share and a special dividend of $2 per share. Both dividends were distributed on March 6, 2015 to shareholders of record at the close of business on February 20, 2015.

In February 2017, our Board of Directors declared our first quarter of 2017 common stock dividend of $0.60 per share. This dividend was distributed on March 3, 2017 to shareholders of record at the close of business on February 17, 2017.



17


The following graph shows the changes, over the past five-year period, in the value of $100 invested in our common stock, the Standard & Poor’s 500 Composite Stock Price Index and the Standard & Poor’s 500 Retail Composite Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN (a) (b) (c) (d) (e)
AMONG L BRANDS, INC., THE S&P 500 INDEX AND THE S&P RETAIL COMPOSITE INDEX
a2016totalreturntable.jpg
_______________
(a)
This table represents $100 invested in stock or in index at the closing price on January 28, 2012, including reinvestment of dividends.
(b)
The January 28, 2017 cumulative total return includes the $2 special dividend in March 2016.
(c)
The January 30, 2016 cumulative total return includes the $2 special dividend in March 2015.
(d)
The January 31, 2015 cumulative total return includes the $1 special dividend in March 2014.
(e)
The February 2, 2013 cumulative total return includes the $1 and $3 special dividends in September 2012 and December 2012, respectively.


18


The following table provides our repurchases of our common stock during the fourth quarter of 2016:
Period
 
Total
Number of
Shares
Purchased (a)
 
Average Price
Paid per
Share (b)
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs (c)
 
Maximum
Dollar Value of Shares
that May
Yet be Purchased
Under the Programs (c)
 
 
(in thousands)
 
 
 
(in thousands)
November 2016
 
178

 
$
66.67

 
165

 
$
79,139

December 2016
 
21

 
69.90

 
14

 
78,146

January 2017
 
273

 
61.16

 
270

 
61,636

Total
 
472

 
63.63

 
449

 
 
 ________________
(a)
The total number of shares repurchased includes shares repurchased as part of publicly announced programs, with the remainder relating to shares repurchased in connection with tax payments due upon vesting of employee restricted stock awards and the use of our stock to pay the exercise price on employee stock options.
(b)
The average price paid per share includes any broker commissions.
(c)
For additional share repurchase program information, see Note 19 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.


19


ITEM 6. SELECTED FINANCIAL DATA.
 
 
Fiscal Year Ended
 
 
January 28, 2017
 
January 30, 2016
 
January 31, 2015
 
February 1, 2014
 
February 2, 2013(a)
 
 
(in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
Net Sales
 
$
12,574

 
$
12,154

 
$
11,454

 
$
10,773

 
$
10,459

Gross Profit
 
5,125

 
5,204

 
4,808

 
4,429

 
4,386

Operating Income (b)
 
2,003

 
2,192

 
1,953

 
1,743

 
1,573

Net Income (c)
 
1,158

 
1,253

 
1,042

 
903

 
753

 
 
(as a percentage of net sales)
Gross Profit
 
40.8
%
 
42.8
%
 
42.0
%
 
41.1
%
 
41.9
%
Operating Income
 
15.9
%
 
18.0
%
 
17.1
%
 
16.2
%
 
15.0
%
Net Income
 
9.2
%
 
10.3
%
 
9.1
%
 
8.4
%
 
7.2
%
 
 
 
 
 
 
 
 
 
 
 
Per Share Results
 
 
 

 

 

 

Net Income Per Basic Share
 
$
4.04

 
$
4.30

 
$
3.57

 
$
3.12

 
$
2.60

Net Income Per Diluted Share
 
$
3.98

 
$
4.22

 
$
3.50

 
$
3.05

 
$
2.54

Dividends Per Share
 
$
4.40

 
$
4.00

 
$
2.36

 
$
1.20

 
$
5.00

Weighted Average Diluted Shares Outstanding (in millions)
 
291

 
297

 
298

 
296

 
297

 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
(in millions)
Cash and Cash Equivalents
 
$
1,934

 
$
2,548

 
$
1,681

 
$
1,519

 
$
773

Total Assets
 
8,170

 
8,493

 
7,476

 
7,127

 
5,946

Working Capital
 
1,451

 
2,281

 
1,520

 
1,296

 
638

Net Cash Provided by Operating Activities
 
1,890

 
1,869

 
1,786

 
1,248

 
1,351

Capital Expenditures
 
990

 
727

 
715

 
691

 
588

Long-term Debt
 
5,700

 
5,715

 
4,722

 
4,711

 
4,425

Other Long-term Liabilities
 
831

 
904

 
820

 
770

 
818

Shareholders’ Equity (Deficit)
 
(729
)
 
(259
)
 
18

 
(370
)
 
(1,015
)
 
 
 
 
 
 
 
 
 
 
 
Comparable Sales Increase (d)
 
2
%
 
5
%
 
4
%
 
1
%
 
6
%
Comparable Store Sales Increase (d)
 
1
%
 
5
%
 
4
%
 
2
%
 
6
%
Return on Average Assets
 
14
%
 
16
%
 
14
%
 
14
%
 
13
%
Current Ratio
 
1.7

 
2.2

 
1.9

 
1.7

 
1.4

 
 
 
 
 
 
 
 
 
 
 
Stores and Associates at End of Year
 
 
 
 
 
 
 
 
 
 
Number of Stores (e)
 
3,074

 
3,005

 
2,969

 
2,923

 
2,876

Selling Square Feet (in thousands) (e)
 
12,395

 
11,902

 
11,536

 
11,169

 
10,849

Number of Associates
 
93,600

 
87,900

 
80,100

 
94,600

 
99,400

 ________________
(a)
The fiscal year ended February 2, 2013 ("2012") represents a 53-week fiscal year.
(b)
Operating income includes the effect of the following items:
(i)
In 2016, a $35 million charge related to announced actions at Victoria's Secret, including severance charges, fabric cancellations and the write-off of catalogue paper.

20


(ii)
In 2012, a $93 million impairment charge related to goodwill and other intangible assets for our La Senza business; a $27 million impairment charge related to long-lived stores assets for our Henri Bendel business; and $14 million of expense associated with a store closure initiative at La Senza.
(c)
In addition to the items previously discussed in (b), net income includes the effect of the following items:
(i)
In 2016, a $70 million gain related to a $124 million cash distribution from Easton Town Center, LLC, a $42 million tax benefit related to the favorable resolution of a discrete income tax matter, partially offset by a $22 million loss associated with the early extinguishment of our 2017 Notes.
(ii)
In 2015, a $69 million gain related to the divestiture of our remaining ownership interest in our third-party apparel sourcing business.
(iii)
In 2012, a $13 million gain related to $13 million in cash distributions from certain of our investments in Easton, an approximately 1,300 acre planned community in Columbus, Ohio that integrates office, hotel, retail, residential and recreational space.
For additional information on 2016 items, see the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
The effect of the items described in (b) and (c) above increased (decreased) earnings per share by $0.23 in 2016, $0.23 in 2015 and $(0.38) in 2012.
(d)
The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales are calculated on a comparable calendar period. Therefore, the percentage change in comparable sales for 2016, 2015, 2014 and 2013 were calculated on a 52 to 52 week basis and the percentage change in comparable sales for 2012 was calculated on a 53 to 53 week basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.

(e)
Number of stores and selling square feet excludes independently owned Victoria's Secret Beauty and Accessories, Victoria's Secret, PINK, Bath & Body Works and La Senza stores operated by our partners.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as codified in the Accounting Standards Codification ("ASC"). The following information should be read in conjunction with our financial statements and the related notes included in Item 8. Financial Statements and Supplementary Data.
Our operating results are generally impacted by economic changes and, therefore, we monitor the retail environment using, among other things, certain key industry performance indicators including competitor performance and mall traffic data. These can provide insight into consumer spending patterns and shopping behavior in the current retail environment and assist us in assessing our performance as well as the potential impact of industry trends on our future operating results. Additionally, we evaluate a number of key performance indicators including comparable sales, gross profit, operating income and other performance metrics such as sales per average selling square foot and inventory per selling square foot in assessing our performance.
Executive Overview
We have a multi-year goal to grow our business and increase operating margins for our brands by focusing on these key business priorities:
Grow our business in North America;
Extend our core brands internationally; and
Focus on the fundamentals of our business including managing inventory, expenses and capital with discipline.
We also continue to focus on:
Attracting and retaining top talent;

21


Maintaining a strong cash and liquidity position while optimizing our capital structure; and
Returning value to our shareholders.
The following is a discussion of certain of our key business priorities:
Grow our business in North America
Our first focus is on the substantial growth opportunity in North America.
In 2016, we announced strategic decisions within Victoria's Secret to evolve the business with the changing retail environment. To better focus our resources on core merchandise categories, we decided to eliminate non-core categories including swim in our lingerie business, and apparel items that were offered in our direct channel but not in stores. The elimination of these categories will more closely align the stores and direct channels, and will enable us to increase our focus on our core categories where we have bigger growth opportunities. Additionally, we substantially reduced direct mail couponing and eliminated our catalogue circulation, instead focusing on brand building and loyalty-enhancing marketing. In 2017, we plan to increase our square footage at Victoria's Secret North America by about 1% through remodels of existing stores and the opening of approximately 3 net new Victoria's Secret stores. In our direct channel, we have the infrastructure in place to support growth. We believe our direct channel is an important form of brand advertising given the ubiquitous nature of the internet and our large customer file.
The core of Bath & Body Works is its personal care, home fragrance products, soaps and sanitizers which together make up the majority of sales and profits for the business. We see clear opportunities for substantial growth in these categories by focusing on product newness and innovation and expanding into under-penetrated market and price segments. We also have an opportunity to expand by creating a Bath & Body Works and White Barn shop-in-shop at many of our store locations. In 2017, we plan to increase our square footage at Bath & Body Works North America by about 4% through remodels of existing stores and the opening of approximately 25 net new Bath & Body Works stores. Additionally, www.BathandBodyWorks.com continues to exhibit significant year-over-year growth.
Extend our core brands internationally
We believe there is substantial opportunity for international growth. We have separate, dedicated teams that have taken a methodical, "test and learn" approach to expansion. We began our international expansion with the acquisition of La Senza at the beginning of 2007, and in 2016 we've continued to expand our presence outside of North America by opening company-owned stores, as well as increasing the number of stores operated by our international partners.
In 2016, we accomplished the following:
Victoria’s Secret International Stores — We have made significant progress in expanding Victoria's Secret internationally, in particular in Greater China. We have established a regional office with a management team with experience in growing global brands in the region. In fiscal 2017, we plan to open six Victoria's Secret full-assortment stores in Greater China, with two of them having opened in February 2017. In the U.K., we opened three company-owned Victoria’s Secret full-assortment stores and one PINK store, bringing the total to 18. In 2017, we plan to open two additional Victoria’s Secret full-assortment stores and one PINK store in the U.K. We also plan to open our first Victoria's Secret full-assortment store in Ireland in 2017. Finally, our partners opened seven Victoria’s Secret full-assortment stores and two PINK stores in 2016 with notable openings in Russia, Mexico and Singapore, bringing the total to 28. Our partners plan to open an additional 10 to 15 Victoria's Secret full-assortment stores and one PINK store in 2017.
Victoria's Secret Beauty and Accessories Stores — We acquired 26 Victoria's Secret Beauty and Accessories stores from our partner in Greater China, while opening five net new stores in the region during the year. Our partners opened 44 net new Victoria’s Secret Beauty and Accessories stores, bringing the total to 391. These stores are located in local markets, airports and tourist destinations, and are focused on Victoria’s Secret branded beauty and accessory products. Our partners plan to open an additional 45 to 60 Victoria’s Secret Beauty and Accessories stores in 2017.
Bath & Body Works International Stores — Our partners opened 34 net new Bath & Body Works stores in 2016, bringing the total in the Middle East, Latin America, Southeast Asia and Europe to 159. Our partners plan to open 45 to 55 additional stores in 2017.

22


Focus on the fundamentals of our business
We are focused on the fundamentals of our business which include our customers, core merchandise categories, inventory management, speed and agility, and store selling and execution. In terms of speed and agility, we are focused on inventory discipline through lead-time reductions and in-season agility to increase sales and reduce promotional activity. Finally, we continue to optimize our store selling and execution by concentrating on a better store experience and developing and retaining talented, trained and productive store associates.
2016 Overview
Our net sales increased $420 million to $12.574 billion driven by a comparable sales increase of 2%. Our operating income decreased $189 million to $2.003 billion and our operating income rate decreased to 15.9% from 18.0% driven by a decline in all segments.
For additional information related to our 2016 financial performance, see “Results of Operations – 2016 Compared to 2015.”
We accomplished the following in 2016:
Continued to expand company-owned Victoria's Secret and PINK stores in the U.S., Canada, and U.K. and company-owned Bath & Body Works stores in the U.S. and Canada;
Continued to grow our direct businesses, increasing sales by 6%;
Continued to expand Bath & Body Works and Victoria’s Secret stores and Victoria’s Secret Beauty and Accessories stores with partners throughout the world;
Made a number of important changes to our Victoria’s Secret business to simplify the business and accelerate growth. Notably, we reorganized the business and integrated the direct channel into three separate business units (Lingerie, PINK and Beauty), eliminated the non-core merchandise categories of swim and apparel in order to increase focus and accelerate growth in our core categories, and we evolved how the business connects with customers through more focus on brand-building and loyalty-enhancing marketing rather than traditional catalogues and offers;
Moved from a franchise operating model to a wholly-owned model in Greater China by reacquiring franchise rights from one of our partners which included 26 existing Victoria's Secret Beauty and Accessories stores, launched our online business in Greater China on Tmall Global, and built the capability and infrastructure to support future growth; and
Our capital expenditures of $990 million included $772 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and infrastructure to support growth.
We also are committed to returning value to our shareholders through a combination of dividends and share repurchase programs. During 2016, we paid $1.268 billion in regular and special dividends and repurchased $438 million of our common stock. We use cash flow generated from operating and financing activities to fund our dividends and share repurchase programs. Since 2000, we have returned approximately $19 billion to shareholders through share repurchases and dividends.
Adjusted Financial Information

In addition to our results provided in accordance with GAAP above and throughout this Form 10-K, provided below are non-GAAP measurements which present operating income, net income and earnings per share in 2016 and 2015 on an adjusted basis, which remove certain special items. We believe that these special items are not indicative of our ongoing operations due to their size and nature. We use adjusted financial information as key performance measures of results of operations for the purpose of evaluating performance internally. These non-GAAP measurements are not intended to replace the presentation of our financial results in accordance with GAAP. Instead, we believe that the presentation of adjusted financial information provides additional information to investors to facilitate the comparison of past and present operations. Further, our definition of adjusted financial information may differ from similarly titled measures used by other companies. The table below reconciles the GAAP financial measures to the non-GAAP financial measures.

23


(in millions, except per share amounts)
2016
 
2015
 
2014
Detail of Special Items included in Operating Income - Income (Expense)
 
 
 
 
 
Victoria's Secret Restructuring (a)
$
(35
)
 
$

 
$

Total Special Items included in Operating Income
$
(35
)
 
$

 
$

 
 
 
 
 
 
Detail of Special Items included in Other Income - Income (Loss)
 
 
 
 
 
Loss on Extinguishment of Debt (b)
$
(36
)
 
$

 
$

Gain on Distribution from Easton Town Center, LLC (c)
108

 

 

Gain on Divestiture of Third-party Apparel Sourcing Business (d)

 
78

 

Total Special Items included in Other Income
$
72

 
$
78

 
$

 
 
 
 
 
 
Detail of Special Items included in Provision for Income Taxes - Benefit (Provision)
 
 
 
 
 
Tax Benefit from the Settlement of a Discrete Tax Matter (e)
$
42

 
$

 
$

Tax Effect of Special Items included in Operating Income and Other Income
(11
)
 
(9
)
 

Total Special Items included in Provision for Income Taxes
$
30

 
$
(9
)
 
$

 
 
 
 
 
 
Reconciliation of Reported Operating Income to Adjusted Operating Income
 
 
 
 
 
Reported Operating Income
$
2,003

 
$
2,192

 
$
1,953

Special Items included in Operating Income
35

 

 

Adjusted Operating Income
$
2,037

 
$
2,192

 
$
1,953

 
 
 
 
 
 
Reconciliation of Reported Net Income to Adjusted Net Income
 
 
 
 
 
Reported Net Income
$
1,158

 
$
1,253

 
$
1,042

Special Items included in Net Income
(68
)
 
(69
)
 

Adjusted Net Income
$
1,090

 
$
1,184

 
$
1,042

 
 
 
 
 
 
Reconciliation of Reported Earnings Per Diluted Share to Adjusted Earnings Per Diluted Share
 
 
 
 
 
Reported Earnings Per Diluted Share
$
3.98

 
$
4.22

 
$
3.50

Special Items included in Earnings Per Diluted Share
(0.23
)
 
(0.23
)
 

Adjusted Earnings Per Diluted Share
$
3.74

 
$
3.99

 
$
3.50

 ________________
(a)
In the first quarter of 2016, strategic actions within the Victoria’s Secret segment were taken, designed to focus the brand on its core merchandise categories and streamline operations. As a result of these actions, we recorded charges related to severance and related costs, fabric cancellations and catalogue paper write-offs. For additional information see Note 5, "Restructuring Activities" included in Item 8. Financial Statements and Supplementary Data.
(b)
In the second quarter of 2016, we repurchased our $700 million 6.90% Senior Unsecured Notes due July 2017 resulting in a pre-tax loss on extinguishment of $36 million (after-tax loss of $22 million). For additional information see Note 12, "Long-term Debt" included in Item 8. Financial Statements and Supplementary Data.
(c)
In the second quarter of 2016, we received a $124 million cash distribution from Easton Town Center, LLC resulting in a pre-tax gain of $108 million (after-tax gain of $70 million). For additional information see Note 9, "Equity Investments and Other" included in Item 8. Financial Statements and Supplementary Data.
(d)
In the first quarter of 2015, we divested our remaining ownership interest in our third-party apparel sourcing business. We received cash proceeds of $85 million and recognized a pre-tax gain of $78 million (after-tax gain of $69 million). For additional information see Note 9, "Equity Investments and Other" included in Item 8. Financial Statements and Supplementary Data.
(e)
In the fourth quarter of 2016, we recorded a $42 million tax benefit related to the favorable resolution of a discrete income tax matter. For additional information see Note 11, "Income Taxes" included in Item 8. Financial Statements and Supplementary Data.

24


2017 Outlook
The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to take a conservative stance with respect to the financial management of our business. We will continue to manage our business carefully, and we will focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments and marketing, store and online experiences to our customers. We will look for, and capitalize on, those opportunities available to us. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well positioned heading into 2017.
Company-Owned Store Data
The following table compares 2016 company-owned store data to the comparable periods for 2015 and 2014:
 
 
 
 
 
 
 
 
% Change
  
2016
 
2015
 
2014
 
2016
 
2015
Sales per Average Selling Square Foot
 
 
 
 
 
 
 
 
 
Victoria’s Secret U.S.
$
844

 
$
864

 
$
836

 
(2
%)
 
3
%
Bath & Body Works U.S.
831

 
815

 
774

 
2
%
 
5
%
Sales per Average Store (in thousands)

 

 

 

 

Victoria’s Secret U.S.
$
5,288

 
$
5,300

 
$
5,061

 
%
 
5
%
Bath & Body Works U.S.
2,010

 
1,933

 
1,828

 
4
%
 
6
%
Average Store Size (selling square feet)

 

 

 

 

Victoria’s Secret U.S.
6,349

 
6,187

 
6,083

 
3
%
 
2
%
Bath & Body Works U.S.
2,459

 
2,382

 
2,359

 
3
%
 
1
%
Total Selling Square Feet (in thousands)

 

 

 

 

Victoria’s Secret U.S.
7,181

 
6,917

 
6,679

 
4
%
 
4
%
Bath & Body Works U.S.
3,912

 
3,749

 
3,675

 
4
 %
 
2
%

The following table compares 2016 company-owned store data to the comparable periods for 2015 and 2014:
Number of Stores
 
2016
 
2015
 
2014
Victoria’s Secret U.S.
 
 
 
 
 
 
Beginning of Period
 
1,118

 
1,098

 
1,060

Opened
 
23

 
28

 
45

Closed
 
(10
)
 
(8
)
 
(7
)
End of Period
 
1,131

 
1,118

 
1,098

Victoria’s Secret Canada
 
 
 
 
 
 
Beginning of Period
 
46

 
41

 
34

Opened
 

 
6

 
7

Closed
 

 
(1
)
 

End of Period
 
46

 
46

 
41

Bath & Body Works U.S.
 
 
 
 
 
 
Beginning of Period
 
1,574

 
1,558

 
1,559

Opened
 
30

 
23

 
14

Closed
 
(13
)
 
(7
)
 
(15
)
End of Period
 
1,591

 
1,574

 
1,558

Bath & Body Works Canada
 
 
 
 
 
 
Beginning of Period
 
98

 
88

 
79

Opened
 
5

 
10

 
10

Closed
 
(1
)
 

 
(1
)
End of Period
 
102

 
98

 
88

 
 
 
 
 
 
 

25


Number of Stores (continued)
 
2016
 
2015
 
2014
Victoria's Secret U.K.
 
 
 
 
 
 
Beginning of Period
 
14

 
10

 
5

Opened
 
4

 
4

 
5

Closed
 

 

 

End of Period
 
18

 
14

 
10

Victoria's Secret Beauty and Accessories
 
 
 
 
 
 
Beginning of Period
 

 

 

Acquired (a)
 
26

 

 

Opened
 
6

 

 

Closed
 
(1
)
 

 

End of Period
 
31

 

 

La Senza U.S.
 
 
 
 
 
 
Beginning of Period
 

 

 

Opened
 
4

 

 

Closed
 

 

 

End of Period
 
4

 

 

La Senza Canada
 
 
 
 
 
 
Beginning of Period
 
126

 
145

 
157

Opened
 

 
1

 

Closed
 
(4
)
 
(20
)
 
(12
)
End of Period
 
122

 
126

 
145

Henri Bendel
 
 
 
 
 
 
Beginning of Period
 
29

 
29

 
29

Opened
 

 

 

Closed
 

 

 

End of Period
 
29

 
29

 
29

Total
 
 
 
 
 
 
Beginning of Period
 
3,005

 
2,969

 
2,923

Acquired (a)
 
26

 

 

Opened
 
72

 
72

 
81

Closed
 
(29
)
 
(36
)
 
(35
)
End of Period
 
3,074

 
3,005

 
2,969

_______________
(a)    Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional
information see Note 4, "Acquisition" included in Item 8. Financial Statements and Supplementary Data.

26


Noncompany-Owned Store Data
The following table compares the 2016 noncompany-owned store data to the comparable periods for 2015 and 2014:
Number of Stores
 
2016
 
2015
 
2014
Victoria’s Secret Beauty & Accessories
 
 
 
 
 
 
Beginning of Period
 
373

 
290

 
198

Opened
 
56

 
88

 
99

Closed
 
(12
)
 
(5
)
 
(7
)
Transferred (a)
 
(26
)
 

 

End of Period
 
391

 
373

 
290

Victoria's Secret
 
 
 
 
 
 
Beginning of Period
 
19

 
14

 
4

Opened
 
9

 
5

 
10

Closed
 

 

 

End of Period
 
28

 
19

 
14

Bath & Body Works
 
 
 
 
 
 
Beginning of Period
 
125

 
80

 
55

Opened
 
36

 
47

 
26

Closed
 
(2
)
 
(2
)
 
(1
)
End of Period
 
159

 
125

 
80

La Senza
 
 
 
 
 
 
Beginning of Period
 
221

 
266

 
331

Opened
 
6

 
5

 
6

Closed
 
(24
)
 
(50
)
 
(71
)
End of Period
 
203

 
221

 
266

Total
 
 
 
 
 
 
Beginning of Period
 
738

 
650

 
588

Opened
 
107

 
145

 
141

Closed
 
(38
)
 
(57
)
 
(79
)
Transferred (a)
 
(26
)
 

 

End of Period
 
781

 
738

 
650

_______________
(a)    Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional
information see Note 4, "Acquisition" included in Item 8. Financial Statements and Supplementary Data.





27


Results of Operations—2016 Compared to 2015
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2016 in comparison to 2015:
 
 
 
 
 
Operating Income Rate
 
2016

2015
 
2016
 
2015
 
(in millions)
 
 
 
 
Victoria’s Secret
$
1,173

 
$
1,391

 
15.1
%
 
18.1
%
Bath & Body Works
907

 
858

 
23.6
%
 
23.9
%
Victoria's Secret and Bath & Body Works International
40

 
88

 
9.4
%
 
22.8
%
Other (a)
(117
)
 
(145
)
 
(22.6
)%
 
(28.5
)%
Total Operating Income
$
2,003

 
$
2,192

 
15.9
%
 
18.0
%
 ________________
(a)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
For 2016, operating income decreased $189 million to $2.003 billion, and the operating income rate decreased to 15.9% from 18.0%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2016 in comparison to 2015:
 
2016
 
2015
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores (a)
$
6,199

 
$
6,112

 
1
%
Victoria’s Secret Direct
1,582

 
1,560

 
1
%
Total Victoria’s Secret
7,781

 
7,672

 
1
%
Bath & Body Works Stores (a)
3,400

 
3,225

 
5
%
Bath & Body Works Direct
452

 
362

 
25
%
Total Bath & Body Works
3,852

 
3,587

 
7
%
Victoria's Secret and Bath & Body Works International
423

 
385

 
10
%
Other (b)
518

 
510

 
2
%
Total Net Sales
$
12,574

 
$
12,154

 
3
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The following table provides a reconciliation of net sales for 2015 to 2016:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
2015 Net Sales
$
7,672

 
$
3,587

 
$
385

 
$
510

 
$
12,154

Comparable Store Sales
(46
)
 
95

 
2

 
3

 
54

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
136

 
82

 
65

 
(5
)
 
278

Foreign Currency Translation
(3
)
 
(2
)
 
(21
)
 
(3
)
 
(29
)
Direct Channels
22

 
90

 

 
11

 
123

International Wholesale, Royalty and Other

 

 
(8
)
 
2

 
(6
)
2016 Net Sales
$
7,781

 
$
3,852

 
$
423

 
$
518

 
$
12,574



28


The following table compares 2016 comparable sales to 2015:
 
2016
 
2015
Comparable Sales (Stores and Direct) (a)
 
 
 
Victoria's Secret (b)
 %
 
5
%
Bath & Body Works (b)
6
 %
 
7
%
Total Comparable Sales
2
 %
 
5
%
 
 
 
 
Comparable Store Sales (a)
 
 
 
Victoria’s Secret (b)
(1
)%
 
5
%
Bath & Body Works (b)
3
 %
 
5
%
Total Comparable Store Sales
1
 %
 
5
%
 ________________
(a)
The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria’s Secret
For 2016, net sales increased $109 million to $7.781 billion, comparable sales remained flat and comparable store sales decreased 1%.  Net sales increased primarily due to increases in PINK and sport, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion. These results were partially offset by decreases in swim and apparel due to a strategic decision to exit these categories, core bras due to lower average unit retail prices, and beauty as we reposition the category.
The decrease in comparable store sales was driven by a lower average unit retail and the impact of exited categories.
Bath & Body Works
For 2016, net sales increased $265 million to $3.852 billion, comparable sales increased 6% and comparable store sales increased 3%. Net sales increased in most categories, including home fragrance and Signature Collection, which incorporated newness, innovation, and fashion.
The increase in comparable store sales was primarily driven by a higher average unit retail.
Victoria's Secret and Bath & Body Works International
For 2016, net sales increased $38 million to $423 million primarily related to newly acquired Victoria's Secret Beauty and Accessories stores in Greater China, company-owned Victoria's Secret stores in the U.K., and additional stores opened by our partners. These results were partially offset by softness in the Victoria's Secret Beauty and Accessories business and the negative impacts of foreign currency.
Other
For 2016, net sales increased $8 million to $518 million primarily due to increases in our La Senza and Henri Bendel direct channels, partially offset by store closures and the negative impacts of foreign currency at La Senza.
Gross Profit
For 2016, our gross profit decreased $79 million to $5.125 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 40.8% from 42.8% primarily as a result of:

29


Victoria’s Secret
For 2016, the gross profit decrease was primarily driven by a decline in merchandise margin due to clearance activity on non-go forward merchandise categories, promotions and pricing to drive trial in beauty and other key categories and fabric cancellations related to restructuring activities. Offsetting the merchandise margin decline, buying and occupancy expenses decreased primarily driven by a decrease in catalogue costs and other cost reductions from strategic actions taken in the first quarter, partially offset by an increase in occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven primarily by increases in the promotional and clearance activity described above, the expenses related to the restructuring activities and investments in store real estate, partially offset by lower buying and occupancy expenses due to decreased catalogue costs.
Bath & Body Works
For 2016, the gross profit increase was primarily driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin was partially offset by higher occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven by an increase in occupancy expenses primarily due to investments in store real estate.
Victoria's Secret and Bath & Body Works International
For 2016, the gross profit decrease was primarily due to higher occupancy expenses driven by investments in store real estate in Greater China and the U.K., lower merchandise margin dollars at Victoria's Secret Beauty and Accessories due to business performance, and the negative impacts of foreign currency. These decreases were partially offset by increased merchandise margin dollars generated from higher net sales.
The gross profit rate decrease was driven by higher occupancy expenses due to investments in store real estate, a decrease in merchandise margin rate at Victoria's Secret Beauty and Accessories and the negative impacts of foreign currency.
General, Administrative and Store Operating Expenses
For 2016, our general, administrative and store operating expenses increased $110 million to $3.122 billion primarily driven by increased store selling expenses related to higher sales volume and investments in selling to improve the customer experience, increased marketing to drive traffic, severance charges related to the Victoria's Secret restructuring activities, and corporate expenses in Greater China, partially offset by lower incentive compensation expense.
Other Income and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2016 and 2015:
 
2016
 
2015
Average daily borrowings (in millions)
$
5,827

 
$
5,005

Average borrowing rate (in percentages)
6.8
%
 
6.7
%

For 2016, our interest expense increased $60 million to $394 million primarily due to an increase in average borrowings related to the October 2015 $1 billion issuance of our 2035 Notes, as well as an increase in the average borrowing rate.
Other Income
For 2016, our other income increased $11 million to $87 million primarily driven by a distribution received from Easton Town Center, LLC resulting in a gain of $108 million, partially offset by a $36 million loss on extinguishment of the 2017 Notes. In 2015, we recognized a gain of $78 million due to the divestiture of our remaining ownership interest in the third-party apparel sourcing business.
Provision for Income Taxes
For 2016, our effective tax rate decreased to 31.7% from 35.2%. The 2016 rate was lower than our combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The 2015 rate was lower than our combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined estimated federal and state statutory rate.

30


Results of Operations—Fourth Quarter of 2016 Compared to Fourth Quarter of 2015    
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the fourth quarter of 2016 in comparison to the fourth quarter of 2015:
 
Fourth Quarter
 
Operating Income Rate
 
2016

2015
 
2016
 
2015
 
(in millions)
 
 
 
 
Victoria’s Secret
$
494

 
$
594

 
19.1
%
 
22.7
%
Bath & Body Works
502

 
487

 
31.0
%
 
32.1
%
Victoria's Secret and Bath & Body Works International
10

 
28

 
8.3
%
 
25.0
%
Other (a)
(18
)
 
(31
)
 
(11.7
)%
 
(20.7
)%
Total Operating Income
$
988

 
$
1,078

 
22.0
%
 
24.5
%
 ________________
(a)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
For the fourth quarter of 2016, operating income decreased $90 million to $988 million, and the operating income rate decreased to 22.0% from 24.5%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the fourth quarter of 2016 in comparison to the fourth quarter of 2015:
Fourth Quarter
 
2016
 
2015
 
% Change
 
 
(in millions)
 
 
Victoria’s Secret Stores (a)
 
$
2,063

 
$
2,047

 
1
%
Victoria’s Secret Direct
 
526

 
567

 
(7
%)
Total Victoria’s Secret
 
2,589

 
2,614

 
(1
%)
Bath & Body Works Stores (a)
 
1,422

 
1,362

 
4
%
Bath & Body Works Direct
 
198

 
158

 
25
%
Total Bath & Body Works
 
1,620

 
1,520

 
7
%
Victoria's Secret and Bath & Body Works International
 
124

 
112

 
10
%
Other (b)
 
156

 
149

 
5
 %
Total Net Sales
 
$
4,489

 
$
4,395

 
2
%
 ________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The following table provides a reconciliation of net sales for the fourth quarter of 2016 to the fourth quarter of 2015: 
Fourth Quarter
 
Victoria’s
Secret
 
Bath & Body
Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
(in millions)
2015 Net Sales
 
$
2,614

 
$
1,520

 
$
112

 
$
149

 
$
4,395

Comparable Store Sales
 
(38
)
 
25

 

 
(1
)
 
(14
)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
 
52

 
33

 
25

 

 
110

Foreign Currency Translation
 
2

 
2

 
(9
)
 
1

 
(4
)
Direct Channels
 
(41
)
 
40

 

 
4

 
3

International, Wholesale, Royalty and Other
 

 

 
(4
)
 
3

 
(1
)
2016 Net Sales
 
$
2,589

 
$
1,620

 
$
124

 
$
156

 
$
4,489




31


The following table compares fourth quarter of 2016 comparable sales to fourth quarter of 2015:
Fourth Quarter
 
2016
 
2015
Comparable Sales (Stores and Direct) (a)
 
 
 
 
Victoria's Secret (b)
 
(3
)%
 
7
%
Bath & Body Works (b)
 
5
 %
 
7
%
Total Comparable Sales
 
 %
 
8
%
 
 
 
 
 
Comparable Store Sales (a)
 
 
 
 
Victoria’s Secret (b)
 
(2
)%
 
5
%
Bath & Body Works (b)
 
2
 %
 
6
%
Total Comparable Store Sales
 
 %
 
6
%
 ________________
(a)
The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable sales when it has been open or owned 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria’s Secret
For the fourth quarter of 2016, net sales decreased $25 million to $2.589 billion, comparable sales decreased 3% and comparable store sales decreased 2%. Net sales decreased primarily driven by a decline in total core bra sales due to lower average unit retail prices and decreases in swim and apparel due to a strategic decision to exit these categories. These results were partially offset by increases in PINK, sport and beauty driven by compelling merchandise assortment that incorporated newness, innovation and fashion.
The decrease in comparable store sales was driven by a lower average unit retail and the impact of exited categories.
Bath & Body Works
For the fourth quarter of 2016, net sales increased $100 million to $1.620 billion, comparable sales increased 5% and comparable store sales increased 2%. Net sales increased in most categories, including home fragrance and Signature Collection, which incorporated newness, innovation, and fashion.
The increase in comparable store sales was primarily driven by a higher average unit retail.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2016, net sales increased $12 million to $124 million, primarily related to newly acquired Victoria's Secret Beauty and Accessories stores in Greater China, company-owned Victoria's Secret stores in the U.K., and additional stores opened by our partners. These results were partially offset by softness in the Victoria's Secret Beauty and Accessories business and the negative impacts of foreign currency at Victoria's Secret U.K.
Other
For the fourth quarter of 2016, net sales increased $7 million to $156 million primarily due to increases in our La Senza and Henri Bendel direct channels, partially offset by store closures at La Senza.
Gross Profit
For the fourth quarter of 2016, our gross profit decreased $58 million to $1.944 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 43.3% from 45.6% primarily as a result of:

32


Victoria’s Secret
For the fourth quarter of 2016, the gross profit decrease was driven by a decline in merchandise margin primarily due to promotional events to drive traffic and proactively manage inventory, and a decline in beauty as we reposition the category. Buying and occupancy expenses decreased primarily driven by a decrease in catalogue costs and other cost reductions from strategic actions taken in the first quarter, partially offset by an increase in occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven primarily by increases in the promotional and clearance activity described above, partially offset by lower buying and occupancy expenses due to decreased catalogue costs.
Bath & Body Works
For the fourth quarter of 2016, the gross profit increase was driven by higher merchandise margin dollars primarily related to the increase in net sales. The increase in merchandise margin was partially offset by an increase in occupancy expenses due to investments in store real estate.
The gross profit rate decrease was driven by an increase in occupancy expenses primarily due to investments in store real estate.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2016, the gross profit decrease was driven by higher occupancy expenses due to investments in store real estate in Greater China and the U.K., softness in the Victoria's Secret Beauty and Accessories business, and the negative impacts of foreign currency on merchandise margin at Victoria's Secret U.K. These decreases were partially offset by increased merchandise margin dollars generated from higher net sales.
The gross profit rate decrease was driven by an increase in occupancy expenses due to investments in store real estate, a decrease in the merchandise margin rate at Victoria's Secret Beauty and Accessories and the negative impacts of foreign currency at Victoria's Secret U.K.
General, Administrative and Store Operating Expenses
For the fourth quarter of 2016, our general, administrative and store operating expenses increased $32 million to $956 million primarily driven by increased store selling expenses related to higher sales volume and investments in selling to improve the customer experience, increased marketing to drive traffic and corporate expenses in Greater China, partially offset by lower incentive compensation expense.
The general, administrative and store operating expense rate increased to 21.3% from 21.0% due to store selling, marketing and our investment in China, partially offset by a reduction in incentive compensation expense.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the fourth quarter of 2016 and 2015:
Fourth Quarter
 
2016
 
2015
Average daily borrowings (in millions)
 
$
5,779

 
$
5,756

Average borrowing rate (in percentages)
 
6.9
%
 
6.8
%

For the fourth quarter of 2016, our interest expense increased $1 million to $98 million primarily due to an increase in the average borrowing rate.
Provision for Income Taxes
For the fourth quarter of 2016, our effective tax rate decreased to 29.2% from 35.2%. The 2016 rate was lower than our combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The 2015 rate was lower than our combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined estimated federal and state statutory rate.

33


Results of Operations—2015 Compared to 2014
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2015 in comparison to 2014:
 
 
 
 
 
Operating Income Rate
 
2015
 
2014
 
2015
 
2014
 
(in millions)
 
 
 
 
Victoria’s Secret
$
1,391

 
$
1,271

 
18.1
%
 
17.6
%
Bath & Body Works
858

 
737

 
23.9
%
 
22.0
%
Victoria's Secret and Bath & Body Works International
88

 
78

 
22.8
%
 
23.2
%
Other (a)
(145
)
 
(133
)
 
(28.5
)%
 
(23.8
)%
Total Operating Income
$
2,192

 
$
1,953

 
18.0
%
 
17.1
%
 ________________
(a)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
For 2015, operating income increased $239 million to $2.192 billion, and the operating income rate increased to 18.0% from 17.1%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2015 in comparison to 2014:
 
2015
 
2014
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores (a)
$
6,112

 
$
5,700

 
7
%
Victoria’s Secret Direct
1,560

 
1,507

 
3
%
Total Victoria’s Secret
7,672

 
7,207

 
6
%
Bath & Body Works Stores (a)
3,225

 
3,048

 
6
%
Bath & Body Works Direct
362

 
302

 
20
%
Total Bath & Body Works
3,587

 
3,350

 
7
%
Victoria's Secret and Bath & Body Works International
385

 
336

 
15
%
Other (b)
510

 
561

 
(9
%)
Total Net Sales
$
12,154

 
$
11,454

 
6
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The following table provides a reconciliation of net sales for 2014 to 2015:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
2014 Net Sales
$
7,207