UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 _________________________________

FORM 10-Q

 _________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-8344

 _________________________________

L BRANDS, INC.

(Exact name of registrant as specified in its charter)

 _______________________________

Delaware		31-1029810
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
Three Limited Parkway
Columbus,	Ohio	43230
(Address of principal executive offices)		(Zip Code)
(614)	415-7000
(Registrant's Telephone Number, Including Area Code)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒   No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.50 Par Value	LB	The New York Stock Exchange

As of November 27, 2020, the number of outstanding shares of the Registrant’s common stock, was 278,108,563 shares.

L BRANDS, INC.

TABLE OF CONTENTS

	Page No.
Part I. Financial Information
Item 1. Financial Statements *
Consolidated Statements of Income (Loss) for the Thirteen-Weeks and Thirty-Nine-Weeks Ended October 31, 2020 and November 2, 2019 (Unaudited)	3
Consolidated Statements of Comprehensive Income (Loss) for the Thirteen-Weeks and Thirty-Nine-Weeks Ended October 31, 2020 and November 2, 2019 (Unaudited)	3
Consolidated Balance Sheets as of October 31, 2020 (Unaudited), February 1, 2020 and November 2, 2019 (Unaudited)	4
Consolidated Statements of Total Equity (Deficit) for the Thirteen-Weeks and Thirty-Nine-Weeks Ended October 31, 2020 and November 2, 2019 (Unaudited)	5
Consolidated Statements of Cash Flows for the Thirty-Nine-Weeks Ended October 31, 2020 and November 2, 2019 (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	8
Report of Independent Registered Public Accounting Firm	22
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995	23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	43
Item 4. Controls and Procedures	44
Part II. Other Information	45
Item 1. Legal Proceedings	45
Item 1A. Risk Factors	45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3. Defaults Upon Senior Securities	46
Item 4. Mine Safety Disclosures	46
Item 5. Other Information	46
Item 6. Exhibits	47
Signature	48

* The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “third quarter of 2020” and “third quarter of 2019” refer to the thirteen-week periods ended October 31, 2020 and November 2, 2019, respectively. “Year-to-date 2020” and “year-to-date 2019” refer to the thirty-nine-week periods ending October 31, 2020 and November 2, 2019, respectively.

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PART I—FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in millions except per share amounts)

(Unaudited)

	Third Quarter				Year-to-Date
	2020		2019		2020		2019
Net Sales	$	3,055	$	2,677	$	7,029	$	8,207
Costs of Goods Sold, Buying and Occupancy	(1,696)		(1,936)		(4,669)		(5,550)
Gross Profit	1,359		741		2,360		2,657
General, Administrative and Store Operating Expenses	(778)		(892)		(2,053)		(2,480)
Operating Income (Loss)	581		(151)		307		177
Interest Expense	(121)		(92)		(322)		(286)
Other Loss	(50)		(34)		(48)		(66)
Income (Loss) Before Income Taxes	410		(277)		(63)		(175)
Provision (Benefit) for Income Taxes	79		(25)		(47)		(1)
Net Income (Loss)	$	331	$	(252)	$	(16)	$	(174)
Net Income (Loss) Per Basic Share	$	1.19	$	(0.91)	$	(0.06)	$	(0.63)
Net Income (Loss) Per Dilutive Share	$	1.17	$	(0.91)	$	(0.06)	$	(0.63)
Dividends Per Share	$	—	$	0.30	$	0.30	$	0.90

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(Unaudited)

	Third Quarter				Year-to-Date
	2020		2019		2020		2019
Net Income (Loss)	$	331	$	(252)	$	(16)	$	(174)
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	(1)		6		(4)		(5)
Unrealized Gain (Loss) on Cash Flow Hedges	—		(2)		2		2
Reclassification of Cash Flow Hedges to Earnings	—		—		(2)		(3)
Total Other Comprehensive Income (Loss), Net of Tax	(1)		4		(4)		(6)
Total Comprehensive Income (Loss)	$	330	$	(248)	$	(20)	$	(180)

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

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L BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

(in millions except par value amounts)

 

	October 31, 2020		February 1, 2020		November 2, 2019
	(Unaudited)				(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	2,622	$	1,499	$	340
Accounts Receivable, Net	297		306		295
Inventories	1,865		1,287		2,032
Other	143		153		259
Total Current Assets	4,927		3,245		2,926
Property and Equipment, Net	2,231		2,486		2,571
Operating Lease Assets	2,558		3,053		3,130
Goodwill	628		628		1,318
Trade Names	411		411		411
Deferred Income Taxes	69		84		63
Other Assets	337		218		211
Total Assets	$	11,161	$	10,125	$	10,630
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable	$	1,101	$	647	$	1,024
Accrued Expenses and Other	1,479		1,052		980
Current Debt	11		61		75
Current Operating Lease Liabilities	625		478		460
Income Taxes	114		134		4
Total Current Liabilities	3,330		2,372		2,543
Deferred Income Taxes	191		219		246
Long-term Debt	6,451		5,487		5,477
Long-term Operating Lease Liabilities	2,566		3,052		3,108
Other Long-term Liabilities	187		490		494
Shareholders’ Equity (Deficit):
Preferred Stock - $1.00 par value; 10 shares authorized; none issued	—		—		—
Common Stock - $0.50 par value; 1,000 shares authorized; 286, 285 and 284 shares issued; 278, 277 and 276 shares outstanding, respectively	143		142		142
Paid-in Capital	879		847		828
Accumulated Other Comprehensive Income	48		52		53
Retained Earnings (Deficit)	(2,280)		(2,182)		(1,907)
Less: Treasury Stock, at Average Cost; 8, 8 and 8 shares, respectively	(358)		(358)		(358)
Total L Brands, Inc. Shareholders’ Equity (Deficit)	(1,568)		(1,499)		(1,242)
Noncontrolling Interest	4		4		4
Total Equity (Accumulated Deficit)	(1,564)		(1,495)		(1,238)
Total Liabilities and Equity (Deficit)	$	11,161	$	10,125	$	10,630

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

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L BRANDS, INC.

CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

(in millions except per share amounts)

(Unaudited)

Third Quarter 2020

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings (Accumulated Deficit)		Treasury Stock, at Average Cost		Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, August 1, 2020	278	$	143	$	869	$	49	$	(2,611)	$	(358)	$	4	$	(1,904)
Net Income	—	—		—		—		331		—		—		331
Other Comprehensive Loss	—	—		—		(1)		—		—		—		(1)
Total Comprehensive Income	—	—		—		(1)		331		—		—		330
Share-based Compensation and Other	—	—		10		—		—		—		—		10
Balance, October 31, 2020	278	$	143	$	879	$	48	$	(2,280)	$	(358)	$	4	$	(1,564)

Third Quarter 2019

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings (Accumulated Deficit)		Treasury Stock, at Average Cost		Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, August 3, 2019	276	$	142	$	806	$	49	$	(1,572)	$	(358)	$	4	$	(929)
Net Loss	—	—		—		—		(252)		—		—		(252)
Other Comprehensive Income	—	—		—		4		—		—		—		4
Total Comprehensive Loss	—	—		—		4		(252)		—		—		(248)
Cash Dividends ($0.30 per share)	—	—		—		—		(83)		—		—		(83)
Share-based Compensation and Other	—	—		22		—		—		—		—		22
Balance, November 2, 2019	276	$	142	$	828	$	53	$	(1,907)	$	(358)	$	4	$	(1,238)

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

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L BRANDS, INC.

CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

(in millions except per share amounts)

(Unaudited)

Year-to-Date 2020

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings (Accumulated Deficit)		Treasury Stock, at Average Cost		Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, February 1, 2020	277	$	142	$	847	$	52	$	(2,182)	$	(358)	$	4	$	(1,495)
Net Loss	—	—		—		—		(16)		—		—		(16)
Other Comprehensive Loss	—	—		—		(4)		—		—		—		(4)
Total Comprehensive Loss	—	—		—		(4)		(16)		—		—		(20)
Cash Dividends ($0.30 per share)	—	—		—		—		(83)		—		—		(83)
Share-based Compensation and Other	1	1		32		—		—		—		—		33
Balance, October 31, 2020	278	$	143	$	879	$	48	$	(2,280)	$	(358)	$	4	$	(1,564)

Year-to-Date 2019

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings (Accumulated Deficit)		Treasury Stock, at Average Cost		Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, February 2, 2019	275	$	141	$	771	$	59	$	(1,482)	$	(358)	$	4	$	(865)
Cumulative Effect of Accounting Change	—	—		—		—		(2)		—		—		(2)
Balance, February 3, 2019	275	141		771		59		(1,484)		(358)		4		(867)
Net Loss	—	—		—		—		(174)		—		—		(174)
Other Comprehensive Loss	—	—		—		(6)		—		—		—		(6)
Total Comprehensive Loss	—	—		—		(6)		(174)		—		—		(180)
Cash Dividends ($0.90 per share)	—	—		—		—		(249)		—		—		(249)
Share-based Compensation and Other	1	1		57		—		—		—		—		58
Balance, November 2, 2019	276	$	142	$	828	$	53	$	(1,907)	$	(358)	$	4	$	(1,238)

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

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L BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Year-to-Date
	2020		2019
Operating Activities:
Net Loss	$	(16)	$	(174)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used for) Operating Activities:
Depreciation of Long-lived Assets	393		443
Victoria's Secret Asset Impairments	214		248
Loss on Extinguishment of Debt	53		40
Share-based Compensation Expense	39		67
Deferred Income Taxes	(14)		19
Gain from Hong Kong Store Closure and Lease Termination	(39)		—
Gain related to formation of Victoria's Secret U.K. Joint Venture	(30)		—
La Senza Charges	—		37
Gains on Distributions from Easton Investments	—		(4)
Changes in Assets and Liabilities:
Accounts Receivable	9		41
Inventories	(590)		(785)
Accounts Payable, Accrued Expenses and Other	591		210
Income Taxes Payable	(29)		(198)
Other Assets and Liabilities	125		(34)
Net Cash Provided by (Used for) Operating Activities	706		(90)
Investing Activities:
Capital Expenditures	(200)		(392)
Other Investing Activities	17		(16)
Net Cash Used for Investing Activities	(183)		(408)
Financing Activities:
Proceeds from Issuance of Long-Term Debt, Net of Issuance Costs	2,219		486
Payments of Long-term Debt	(1,307)		(799)
Borrowing from Credit Agreement	950		—
Repayment of Credit Agreement	(950)		—
Borrowings from Foreign Facilities	34		36
Repayments of Foreign Facilities	(91)		(21)
Dividends Paid	(83)		(249)
Tax Payments related to Share-based Awards	(8)		(12)
Other Financing Activities	(35)		(11)
Net Cash Provided by (Used for) Financing Activities	729		(570)
Effects of Exchange Rate Changes on Cash and Cash Equivalents and Restricted Cash	(1)		(5)
Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash	1,251		(1,073)
Cash and Cash Equivalents and Restricted Cash, Beginning of Period	1,499		1,413
Cash and Cash Equivalents and Restricted Cash, End of Period	$	2,750	$	340

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

7

L BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Basis of Presentation

Description of Business

L Brands, Inc. (the "Company”) operates in the highly competitive specialty retail business. The Company is a specialty retailer of home fragrance products, body care, soaps and sanitizers, women’s intimate and other apparel, and personal and beauty care products. The Company sells its merchandise through company-operated specialty retail stores in the U.S., Canada and Greater China, and through its websites and other channels. The Company's international operations are primarily through franchise, license, wholesale and joint venture partners. The Company currently operates the following retail brands:

•Bath & Body Works

•Victoria’s Secret

•PINK

On February 20, 2020, the Company and an affiliate of Sycamore Partners Management, L.P. ("Sycamore"), entered into a Transaction Agreement (the "Transaction Agreement") pursuant to which, among other things, the Company would have sold a 55% interest in the Company's Victoria's Secret and PINK businesses (collectively, "Victoria's Secret"). On May 4, 2020, the Company and Sycamore mutually agreed to terminate the Transaction Agreement.

The Company remains committed to establishing Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare Victoria's Secret to operate as a separate standalone company. Management is actively engaged in implementing a comprehensive profit improvement plan that will enable more effective and faster decision making and set each business up independently, allowing for a more efficient future separation.

During the second quarter of 2020, the Company completed its comprehensive review of the home office organizations in order to achieve meaningful reductions in overhead expenses and decentralize significant shared functions and services to support the creation of standalone companies. This resulted in a reduction of the home office headcount by approximately 15%, or about 850 associates. For additional information, see Note 4, “Restructuring."

The Company is actively working to reduce operating losses in the Victoria's Secret U.K. business. The Company entered into "Light Administration" in June 2020 to restructure store lease agreements. During the third quarter of 2020, the Company entered into a joint venture with Next PLC for the Victoria’s Secret business in the United Kingdom and Ireland (“Victoria’s Secret U.K.”). Under this agreement, the Company will own 49% of the joint venture, and Next will own 51% and assume responsibility for operations. Subsequent to closing, the Company will account for its investment in the joint venture of the Victoria's Secret U.K. business under the equity method of accounting. For additional information, see Note 4, “Restructuring."

Segment Reporting

In the third quarter of 2020, the Company changed its segment reporting as a result of leadership changes, actions taken and the ongoing efforts to separate Bath & Body Works and Victoria’s Secret into separate businesses. The Company now has two reportable segments: Bath & Body Works and Victoria’s Secret. Accordingly, the Company will no longer report a Victoria’s Secret and Bath & Body Works International segment as these businesses are now included with their respective brand. Additionally, the Bath & Body Works and Victoria’s Secret segments now include sourcing and production functions (formerly known as Mast) and certain other corporate functions that directly support each brand. These functions were previously included within Other.

While this reporting change did not impact the Company's consolidated results, segment data has been recast to be consistent for all periods presented. For additional information, see Note 15, “Segment Information."

Impacts of COVID-19

In March 2020, the coronavirus pandemic ("COVID-19") was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place.” The situation and preventative or protective actions that governments around the world have taken to contain the spread of COVID-19 have resulted in a period of disruption, including closure of the Company's stores, limited store operating hours, reduced customer traffic and consumer spending and delays in manufacturing and shipping of products and raw materials. During this period, the Company is focused on protecting the health and safety of its customers, employees, contractors, suppliers, and other business partners. The Company is also working with its suppliers to minimize potential disruptions, while managing the Company's business in response to a changing dynamic.

8

The Company's business operations and financial performance for 2020 have been materially impacted by the COVID-19 pandemic. All the Company's stores in North America were closed on March 17th, but the Company was able to re-open the majority of its stores as of the beginning of the third quarter. Operations for Victoria’s Secret Direct were temporarily suspended for approximately one week in late March, while Bath & Body Works Direct has remained open for the duration of 2020. Additionally, the Company has dedicated resources to maximize capacity in its direct fulfillment centers to meet increased customer demand, while focusing on distribution, fulfillment and call center safety. There remains a high level of uncertainty around the pandemic and the potential for further restrictions.

In response to the global COVID-19 crisis, the Company took prudent actions to manage expenses and to maintain its solid cash position and financial flexibility through the pandemic, including:

•Furloughed most store associates as of April 5 during the temporary store closures, while continuing to provide healthcare benefits for eligible associates;

•Suspended associate merit increases;

•Temporarily reduced salaries for senior vice presidents and above by 20%;

•Temporarily suspended cash compensation for all members of the Board of Directors;

•Reduced 2020 forecasted capital expenditures from $550 million to approximately $250 million;

•Actively managed inventory to adjust for the impact of channel shifts to meet customer demand;

•Suspended the quarterly cash dividend beginning in the second quarter of fiscal 2020;

•Suspended many store and select office rent payments during the temporary closures. The Company has made progress on negotiations with nearly all landlords, the result being a combination of rent waivers or abatements relating to closure periods, rent relief relating to the post-reopening “recovery” period given traffic declines, and rent deferrals;

•Converted the revolving credit facility to an asset-backed loan facility, issued $2.25 billion in new notes and extinguished $1.259 billion of notes primarily with near-term maturities; and

•Extended payment terms to vendors.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which, among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the coronavirus outbreak and options to defer payroll tax payments. Year-to-date the Company has recognized $55 million of qualified payroll tax credits.

For many stores and select office locations, beginning in April, rent was not paid, or was only partially paid, due to the COVID-19 pandemic. Negotiations are ongoing with landlords to determine any potential rent credits or payment deferrals related to COVID-19. As of October 31, 2020, the Company fully accrued to the original contractual rent due to landlords under the leases unless an executed lease amendment was in place. For leases with executed lease amendments, the rent expense and rent accruals have been recognized according to the terms of the executed deal. The Financial Accounting Standards Board (“FASB”) issued guidance in April, which allows COVID-19-related rent concessions to be treated as variable rent.

Fiscal Year

The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “third quarter of 2020” and “third quarter of 2019” refer to the thirteen-week periods ended October 31, 2020 and November 2, 2019, respectively. “Year-to-Date 2020” and “year-to-date 2019” refer to the thirty-nine-week periods ending October 31, 2020 and November 2, 2019, respectively.

Basis of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The Company’s share of net income or loss from its investment in the Victoria's Secret U.K. joint venture with Next PLC will be included in General, Administrative and Store Operating Expenses in the Consolidated Statements of Income

9

(Loss). The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income (Loss) in the Consolidated Statements of Income (Loss). The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.

Interim Financial Statements

The Consolidated Financial Statements as of and for the periods ended October 31, 2020 and November 2, 2019 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2019 Annual Report on Form 10-K.

In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.

Due to the impacts of COVID-19 and seasonal variations in the retail industry, the results of operations for the interim period is not necessarily indicative of the results expected for the full fiscal year.

Goodwill

Goodwill is reviewed for impairment at the reporting unit level each year in the fourth quarter, and may be reviewed more frequently if certain events occur or circumstances change. The Company has the option to either first perform a qualitative assessment to determine whether it is more likely than not that each reporting unit's fair value is less than its carrying value (including goodwill), or to proceed directly to the quantitative assessment which requires a comparison of the reporting unit's fair value to its carrying value (including goodwill). If the Company determines that the fair value of a reporting unit is less than its carrying value, the Company recognizes an impairment charge equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit. The Company's reporting units are determined in accordance with the provisions of ASC 350, Intangibles - Goodwill and Other.

As of November 2, 2019, the Company performed a quantitative interim impairment assessment and concluded that the fair value of the Greater China reporting unit did not exceed its carrying value. Accordingly, the Company recognized a goodwill impairment charge of $30 million in the third quarter of 2019 related to the Greater China reporting unit, due to its estimated future cash flows. This charge is included in General, Administrative and Store Operating Expenses in the 2019 Consolidated Statements of Loss.

Restricted Cash

During 2020, the Company placed cash on deposit with certain financial institutions as collateral for lending commitments. The amount of collateral required reduces over time as the Company makes certain paydowns. For additional information, see Note 10, "Long-term Debt and Borrowing Facilities."

These deposits, totaling $128 million, are recorded in Other Assets on the October 31, 2020 Consolidated Balance Sheet. The Company's total Cash and Cash Equivalents and Restricted Cash was $2.750 billion as of October 31, 2020.

Derivative Financial Instruments

The Company uses derivative financial instruments to manage exposure to foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated Balance Sheets at fair value.

The earnings of the Company's wholly owned foreign operations are subject to exchange rate risk as substantially all the merchandise is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure for its Canadian operations. Amounts are reclassified from accumulated other comprehensive income (loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The fair value of designated cash flow hedges is not significant as of October 31, 2020.

Concentration of Credit Risk

The Company maintains cash and cash equivalents, restricted cash and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. The Company’s investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.

The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company records an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.

10

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates, and the Company revises its estimates and assumptions as new information becomes available.

2. New Accounting Pronouncements

Credit Losses

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses, which requires the use of a forward-looking expected loss impairment model for accounts receivable and certain other financial instruments. The Company adopted the standard in the first quarter of 2020. The adoption of this standard did not have a material impact on the Company's consolidated results of operations, financial position or cash flows.

Guarantor Reporting

In March 2020, the SEC issued a final rule, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, that simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X. The rule replaces the requirement to provide condensed consolidating financial information with a requirement to present summarized financial information of the issuers and guarantors. It also requires qualitative disclosures with respect to information about guarantors, the terms and conditions of guarantees and the factors that may affect payment. These disclosures may be provided outside the footnotes to the Company’s consolidated financial statements. The Company early adopted the reporting requirements of the rule in the first quarter of 2020 and elected to provide these disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

3. Revenue Recognition

Accounts receivable, net from revenue-generating activities were $176 million as of October 31, 2020, $152 million as of February 1, 2020 and $147 million as of November 2, 2019. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days. As a result of the COVID-19 pandemic, the Company has extended the payment terms for certain partners.

The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue was $313 million as of October 31, 2020, $342 million as of February 1, 2020 and $280 million as of November 2, 2019. The Company recognized $163 million as revenue year-to-date 2020 from amounts recorded as deferred revenue at the beginning of the year. As of October 31, 2020, the Company recorded deferred revenue of $302 million within Accrued Expenses and Other, and $11 million within Other Long-term Liabilities on the Consolidated Balance Sheet.

The following table provides a disaggregation of Net Sales for the third quarter and year-to-date 2020 and 2019:

	Third Quarter				Year-to-Date
	2020		2019		2020		2019
	(in millions)
Bath & Body Works Stores - U.S. and Canada	$	1,202	$	872	$	2,304	$	2,468
Bath & Body Works Direct	446		192		1,254		527
Bath & Body Works International (a)	54		35		158		129
Total Bath & Body Works	1,702		1,099		3,716		3,124
Victoria’s Secret Stores - U.S. and Canada	755		1,081		1,633		3,462
Victoria’s Secret Direct	470		331		1,391		1,067
Victoria’s Secret International (b)	128		166		289		504
Total Victoria’s Secret	1,353		1,578		3,313		5,033
Other (c)	—		—		—		50
Total Net Sales	$	3,055	$	2,677	$	7,029	$	8,207

 _______________

(a)Results include royalties associated with franchised stores and wholesale sales.

(b)Results include company-operated stores in the U.K. (pre-joint venture) and Greater China, royalties associated with franchised stores and wholesale sales.

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(c)Results include wholesale revenues to La Senza subsequent to the Company's divestiture of the business in 2018.

4. Restructuring

The Company remains committed to establishing Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare Victoria's Secret to operate as a separate standalone company. Management of the Company is actively engaged in implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. During the second quarter of 2020, the Company completed its comprehensive review of its home office organizations in order to achieve meaningful reductions in overhead expenses and decentralize significant shared functions and services to support the creation of standalone companies. This resulted in a reduction of the home office headcount by approximately 15%, or about 850 associates. Pre-tax severance and related costs associated with these reductions, totaling $81 million, are included in General, Administrative and Store Operating Expenses in the year-to-date 2020 Consolidated Statement of Loss. Costs of $51 million and $12 million are recorded within the Victoria's Secret and Bath & Body Works segments, respectively, while the remaining $18 million is recorded within Other.

During the third quarter, the Company made payments of $33 million and, as of October 31, 2020, a liability, after accrual adjustments, of $56 million related to these costs, is included in Accrued Expenses and Other on the Consolidated Balance Sheet.

Victoria's Secret U.K.

On October 18, 2020, the Company and Next PLC formed a joint venture for Victoria's Secret U.K. with Next PLC owning 51% and the Company owning 49%. The joint venture acquired the majority of the operating assets, primarily inventory, of Victoria’s Secret U.K. Effective October 19, 2020, the newly formed joint venture began operating all Victoria’s Secret stores in the U.K. and Ireland. As of October 31, 2020, the leases for twelve stores in the U.K. were restructured and transferred to the joint venture. Negotiations with landlords to restructure the remaining store leases in the U.K. are in process as part of the ongoing Administration proceedings. The joint venture will begin operating the U.K. direct business starting Spring 2021.

The Company recognized a pre-tax gain of $30 million as a result of the transaction, primarily related to the derecognition of operating lease liabilities in excess of operating lease assets for the twelve store leases that were restructured and transferred to the joint venture. This gain is included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statements of Income (Loss).

La Senza

In fiscal 2018, the Company divested its ownership interest in La Senza to an affiliate of Regent LP, a global private equity firm. In conjunction with the transaction, certain of the Company's subsidiaries have remaining contingent obligations related to La Senza lease payments under the terms of existing noncancelable leases. In the third quarter of 2019, the Company recognized pre-tax non-cash charges of $37 million to increase the reserves for potential exposure related to the La Senza business. These charges are included in Other Loss in the 2019 Consolidated Statements of Loss. For additional information, see Note 13, "Commitments and Contingencies."

5. Earnings (Loss) Per Share and Shareholders’ Equity (Deficit)

Earnings (Loss) Per Share

Earnings (Loss) per basic share is computed based on the weighted-average number of outstanding common shares. Earnings (Loss) per diluted share include the weighted-average effect of dilutive options and restricted stock on the weighted-average shares outstanding.

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The following table provides the weighted-average shares utilized for the calculation of basic and diluted earnings (loss) per share for the third quarter and year-to-date 2020 and 2019:

	Third Quarter		Year-to-Date
	2020	2019	2020	2019
	(in millions)
Common Shares	287	284	286	284
Treasury Shares	(8)	(8)	(8)	(8)
Basic Shares	279	276	278	276
Effect of Dilutive Options and Restricted Stock	4	—	—	—
Diluted Shares	283	276	278	276
Anti-dilutive Options and Awards (a)	4	14	11	14

 _______________

(a)These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For 2019 and year-to-date 2020, the dilutive impact of outstanding options and awards were excluded from dilutive shares as a result of the Company's net loss for the periods.

Shareholders’ Equity (Deficit)

Common Stock Share Repurchases

In March 2018, the Company's Board of Directors approved a $250 million repurchase program, which had $79 million remaining as of October 31, 2020. The Company did not repurchase any shares during 2020 or 2019.

Dividends

Under the authority and declaration of the Board of Directors, the Company paid the following dividends during year-to-date 2020 and 2019:

	Ordinary Dividends		Total Paid
	(per share)		(in millions)
2020
Third Quarter	$	—	$	—
Second Quarter	—		—
First Quarter	0.30		83
Total	$	0.30	$	83
2019
Third Quarter	$	0.30	$	83
Second Quarter	0.30		83
First Quarter	0.30		83
Total	$	0.90	$	249

The Board of Directors suspended the quarterly cash dividend beginning in the second quarter of 2020.

6. Inventories

The following table provides details of inventories as of October 31, 2020, February 1, 2020 and November 2, 2019:

	October 31, 2020		February 1, 2020		November 2, 2019
	(in millions)
Finished Goods Merchandise	$	1,632	$	1,152	$	1,854
Raw Materials and Merchandise Components	233		135		178
Total Inventories	$	1,865	$	1,287	$	2,032

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

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7. Long-Lived Assets

The following table provides details of property and equipment, net as of October 31, 2020, February 1, 2020 and November 2, 2019:

	October 31, 2020		February 1, 2020		November 2, 2019
	(in millions)
Property and Equipment, at Cost	$	6,312	$	6,613	$	6,449
Accumulated Depreciation and Amortization	(4,081)		(4,127)		(3,878)
Property and Equipment, Net	$	2,231	$	2,486	$	2,571

Depreciation expense was $127 million and $148 million for the third quarter of 2020 and 2019, respectively. Depreciation expense was $393 million and $443 million for year-to-date 2020 and 2019, respectively.

Long-lived store assets, which include leasehold improvements, store related assets and operating lease assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group. For operating lease assets, the Company determines the fair value of the assets by comparing the contractual rent payments to estimated market rental rates.  An individual asset within an asset group is not impaired below its estimated fair value. The fair value of long-lived store assets are determined using Level 3 inputs within the fair value hierarchy.

The Company remains committed to taking the necessary steps to prepare the Victoria's Secret business to operate as a separate, standalone company. Management is actively working on implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. A component of the profit improvement plan includes a rationalization of the Victoria’s Secret company-operated store footprint. The Company expects that it will close approximately 240 stores in North America in 2020. Given the closures as well as the negative operating results of certain Victoria's Secret stores in 2020 and 2019, the Company determined that the estimated undiscounted future cash flows were less than the carrying values for certain Victoria's Secret asset groups and, as a result, determined the estimated fair values of the store asset groups using estimated discounted future cash flows and estimated market rental rates. Long-lived store asset impairment charges are included within the Victoria's Secret segment, in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss).

The following table provides pre-tax long-lived store asset impairment charges included in the Consolidated Statement of Income (Loss) for 2020 and 2019:

Store Asset Impairment								Operating Lease Asset Impairment								Total Impairments
Third Quarter				Year-to-Date				Third Quarter				Year-to-Date				Third Quarter				Year-to-Date
2020		2019		2020		2019		2020		2019		2020		2019		2020		2019		2020		2019
(in millions)
$	—	$	188	$	111	$	188	$	—	$	30	$	103	$	30	$	—	$	218	$	214	$	218

Victoria's Secret Hong Kong

During the second quarter of 2020, the Company closed its unprofitable Victoria's Secret flagship store in Hong Kong. As a result of the store closure, the Company recognized a non-cash pre-tax gain of $39 million, primarily due to terminating the store lease and the related write-off of the operating lease liability in excess of the operating lease asset, which was partially impaired in fiscal 2019. This gain is included in Costs of Goods Sold, Buying and Occupancy in the year-to-date 2020 Consolidated Statement of Loss. The Company also recorded $3 million of severance and related costs, included in General, Administrative and Store Operating Expenses in the year-to-date 2020 Consolidated Statement of Loss.

8. Equity Investments

The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $125 million as of October 31, 2020, $118 million as of February 1, 2020 and $112 million as of November 2, 2019, are recorded in Other Assets on the Consolidated Balance Sheets.

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Included in the Company’s Easton investments are equity interests in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and develop commercial entertainment and shopping centers. The Company’s investments in ETC and EG are accounted for using the equity method of accounting. The Company has a majority financial interest in ETC and EG, but another unaffiliated member manages them, and certain significant decisions regarding ETC and EG require the consent of unaffiliated members in addition to the Company.

9. Income Taxes

The Company has historically calculated the provision for income taxes on the current estimate of the annual effective tax rate and adjusted as necessary for quarterly events. Due to the impacts of the COVID-19 pandemic, the income tax expense for the thirty-nine-weeks ended October 31, 2020 was computed on a year-to-date basis.

For the third quarter of 2020, the Company’s effective tax rate was 19.3% compared to 9.1% in the third quarter of 2019. The third quarter of 2020 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to tax matters associated with foreign investments and recent changes in tax legislation, which resulted in a $23 million net tax benefit. The third quarter of 2019 rate was lower than the Company's combined federal and state statutory rate primarily due to the Victoria's Secret impairment charges, which generated no tax benefit for certain foreign subsidiaries.

For year-to-date 2020, the Company's effective tax rate was 74.8% compared to 0.4% year-to-date 2019. The year-to-date 2020 rate was higher than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters partially offset by foreign losses with no tax benefit. The impact of these items has a greater impact on the effective tax rate at lower levels of pre-tax loss. The year-to-date 2019 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the Victoria's Secret impairment charges, which generated no tax benefit for certain foreign subsidiaries.

Income taxes paid were $9 million and $27 million for the third quarter of 2020 and 2019, respectively. Income taxes paid were $31 million and $208 million for year-to-date 2020 and 2019, respectively.

Uncertain Tax Positions

The Company had unrecognized tax benefits of $88 million as of February 1, 2020, of which $81 million, if recognized, would reduce the effective income tax rate. Through October 31, 2020, the Company had a net decrease to gross unrecognized tax benefits of $29 million, primarily due to the resolution of certain tax matters. The changes to the unrecognized tax benefits resulted in a $28 million benefit to the Company’s year-to-date Provision for Income Taxes.

Of the total unrecognized tax benefits as of October 31, 2020, it is reasonably possible that $28 million could change in the next 12 months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.

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10. Long-term Debt and Borrowing Facilities

The following table provides the Company’s outstanding debt balance, net of unamortized debt issuance costs and discounts, as of October 31, 2020, February 1, 2020 and November 2, 2019:

	October 31, 2020		February 1, 2020		November 2, 2019
	(in millions)
Senior Secured Debt with Subsidiary Guarantee
$750 million, 6.875% Fixed Interest Rate Secured Notes due July 2025 ("2025 Secured Notes")	$	740	$	—	$	—
Secured Foreign Facilities	98		103		95
Total Senior Secured Debt with Subsidiary Guarantee	$	838	$	103	$	95
Senior Debt with Subsidiary Guarantee
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)	$	—	$	450	$	449
$285 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)	284		858		857
$320 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)	319		498		498
$500 million, 9.375% Fixed Interest Rate Notes due July 2025 ("2025 Notes")	493		—		—
$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”)	277		276		275
$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)	496		496		496
$500 million, 7.50% Fixed Interest Rate Notes due June 2029 ("2029 Notes")	488		487		487
$1 billion, 6.625% Fixed Interest Rate Notes due October 2030 ("2030 Notes")	988