10-K 1 lb131201510k.htm ANNUAL REPORT LB 1.31.2015 10K
 
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 31, 2015
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: $14,175,294,460.
Number of shares outstanding of the registrant’s Common Stock as of March 13, 2015: 292,393,970.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Registrant’s 2015 Annual Meeting of Stockholders to be held on May 21, 2015, 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.
 



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 and beauty categories that make customers feel sexy, sophisticated and forever young. We sell our merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada and the United Kingdom ("U.K."), which are primarily mall-based; through websites; and through international franchise, license and wholesale partners (collectively, "partners").
Victoria’s Secret
Victoria’s Secret, including Victoria’s Secret PINK, is the leading specialty retailer of women’s intimate and other apparel with fashion-inspired collections, prestige fragrances, celebrated supermodels and world-famous runway shows. We sell our Victoria’s Secret products at more than 1,100 Victoria’s Secret stores in the U.S., Canada and U.K. and online at www.VictoriasSecret.com. Additionally, Victoria’s Secret has more than 300 stores and various small-format locations 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 home fragrance and personal care products including shower gels, lotions, 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 80 stores in 23 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 140 La Senza stores in Canada and online at www.LaSenza.com. Additionally, La Senza has more than 260 stores in 29 other countries operating under franchise, license and wholesale 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.
Divestiture
On October 31, 2011, we divested 51% of our ownership interest in our third-party apparel sourcing business to affiliates of Sycamore Partners. Throughout 2014, we continued to retain an ownership interest which we accounted for as an equity method investee. Subsequent to January 31, 2015, we divested our remaining ownership interest in the third-party apparel sourcing business. For additional information, see Note 8 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, “2014,” “2013,” “2011” and “2010” refer to the 52-week periods ending January 31, 2015, February 1, 2014January 28, 2012 and January 29, 2011, 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 and U.K. As a result of our strong brand 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 were profitable in 2014.

1


The following table provides the retail businesses and the number of our company-owned retail stores in operation for each business as of January 31, 2015 and February 1, 2014.
 
January 31, 2015
 
February 1, 2014
Victoria’s Secret Stores U.S.
983

 
977

PINK U.S.
115

 
83

Victoria’s Secret Canada
31

 
24

PINK Canada
10

 
10

Bath & Body Works U.S.
1,558

 
1,559

Bath & Body Works Canada
88

 
79

Victoria's Secret U.K.
8

 
5

PINK U.K.
2

 

La Senza Canada
145

 
157

Henri Bendel
29

 
29

Total
2,969
 
2,923


The following table provides the changes in the number of our company-owned retail stores operated for the past five fiscal years:
Fiscal Year
 
Beginning
of Year
 
Opened
 
Closed
 
End of Year
2014
 
2,923

 
81

 
(35
)
 
2,969

2013
 
2,876

 
81

 
(34
)
 
2,923

2012
 
2,941

 
48

 
(113
)
 
2,876

2011
 
2,968

 
40

 
(67
)
 
2,941

2010
 
2,971

 
44

 
(47
)
 
2,968

Franchise, License and Wholesale Arrangements
In addition to our company-owned stores, our products are sold at hundreds of partner locations in over 70 countries. We have arrangements with unaffiliated partners to operate Victoria's Secret, Bath & Body Works and La Senza stores throughout the world. 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 31, 2015 and February 1, 2014.
 
January 31, 2015
 
February 1, 2014
Victoria’s Secret Beauty and Accessories
290

 
198

Victoria’s Secret
13

 
4

PINK
1

 

Bath & Body Works
80

 
55

La Senza
266

 
331

Total
650
 
588



2


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 believe that our two flagship brands, Victoria’s Secret and Bath & Body Works, are highly recognized and others, including PINK and La Senza, exhibit brand recognition which provides us with a competitive advantage. These brands are aspirational at accessible price points and have a loyal customer base. These brands allow us to target markets across the economic spectrum, across demographics and across the world.
At Victoria’s Secret, we market products to the college-aged woman with PINK and then transition her into glamorous and sexy product lines, such as Body by Victoria, Angels and Very Sexy. While bras and panties are the core of what we do, these brands also give our customers choices in loungewear, accessories, fragrances, personal care, swimwear and athletic attire.
Bath & Body Works caters to our customers’ entire well-being, providing shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrance and personal care accessories.
In Canada, La Senza sells young women’s intimate apparel. La Senza offerings include bras, panties, sleepwear, loungewear and 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 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 and 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 Neiman Marcus, The Gap, Inc., The Home Depot, Land's End, Levi Strauss and Yum Brands. We believe that we have one of the most experienced management teams in retail.
Additional Information
Merchandise Suppliers
During 2014, we purchased merchandise from approximately 700 suppliers located throughout the world. No supplier provided 10% or more of our merchandise purchases.

3


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 to 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.
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. We continue to invest in technology to upgrade core systems to continue to improve our efficiency and accuracy in the production and delivery of merchandise to our stores.
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 2014, 2013 and 2012 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 revolving credit facility is 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
In the first quarter of 2014, we announced a change in our reportable segments. Results from company-owned Victoria's Secret and Bath & Body Works stores in Canada were reclassified from Other into the corresponding Victoria's Secret and Bath & Body Works segments. Additionally, a new segment called Victoria's Secret and Bath & Body Works International was created which includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the United States and Canada. Therefore, beginning in 2014, we have three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International. While this reporting change did not impact the Company's consolidated results, the segment data has been recast to be consistent for all periods presented throughout the financial statements and accompanying footnotes. For additional information, including the financial results of our reportable segments, see Note 20 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.

4


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 31, 2015, we employed approximately 80,100 associates; 59,900 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, 77, has been our Chief Executive Officer since our founding in 1963 and Chairman of the Board of Directors since 1975.
Stuart B. Burgdoerfer, 51, has been our Executive Vice President and Chief Financial Officer since April 2007.
Nicholas P. M. Coe, 52, has been our Chief Executive Officer and President of Bath & Body Works since August 2011.
Charles C. McGuigan, 58, has been our Chief Operating Officer since May 2012 and our Chief Executive Officer and President of Mast Global since February 2011.
Sharen J. Turney, 58, has been our Chief Executive Officer and President of Victoria’s Secret since July 2006.
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


5


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 a high volume of 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 into global markets and related risks;
our relationships with independent franchise, license and wholesale partners;
our direct channel businesses;
our failure to protect our reputation and our brand images;
our failure to protect our trade names, trademarks and patents;
the highly competitive nature of the retail industry generally and the segments in which we operate particularly;
consumer acceptance of our products and our ability to 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;
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;
fluctuations in foreign currency exchange rates;
stock price volatility;
our failure 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 employees and manage labor-related costs;
the inability of our manufacturers to deliver products in a timely manner and meet quality standards;
fluctuations in product input costs;
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;

6


our failure to maintain the security of customer, associate, supplier or company information;
our failure to comply with regulatory requirements;
tax matters; and
legal and compliance 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 flow are sensitive to, and may be adversely affected by, general economic conditions, consumer confidence, spending patterns and weather or other market disruptions.
Our net sales, profit, cash flows and future growth may be adversely 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.
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.
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 economic downturns in a particular area, competition from other retail and non-retail attractions and other retail areas where we do not have stores.
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.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.

7


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 results of operations, financial condition and cash flows.
Our plans for international expansion include risks that could adversely impact our results and reputation.
We intend to further expand into 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, disruptions or delays in shipments, changes in diplomatic and trade relationships, political instability and foreign governmental regulation.
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.
In addition, our results of operations and financial condition may be adversely affected by fluctuations in currency exchange rates.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
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. 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 adverse 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; the maintenance and security of the Internet infrastructure; 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 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.

8


Our failure to protect our reputation could have a material adverse 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 about these types of concerns may reduce demand for our merchandise. 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.
Our failure to adequately protect our trade names, trademarks and patents could have a negative impact on our brand images and limit our 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. 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 material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.

Our inability to compete favorably in our highly competitive segment of the retail industry could negatively 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, 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 as our stores. In addition to competing for sales, we compete for favorable site locations and lease terms in shopping malls.
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 inability to remain current with fashion trends and launch new product lines successfully could negatively impact the image and relevance of our brands.
Our success depends in part on management’s ability to effectively 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 adversely impacted by our inability 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, such as:
political instability;
imposition of duties, taxes and other charges on imports or exports;

9


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, 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 employee strikes and inclement weather, which may impact our transportation providers' ability to provide delivery services that adequately meet our shipping needs.
New initiatives may be proposed impacting the trading status of certain countries and may include retaliatory duties or other trade sanctions which, if enacted, could impact our trading relationships with vendors or other parties in such countries.
In addition, significant health hazards, environmental hazards or natural disasters may occur which could have a negative effect on the economies, financial markets and business activity of international markets.
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.
Fluctuations in foreign currency exchange rates could adversely 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. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies.

Our failure to maintain our credit rating could negatively affect our ability to access capital and could increase our interest expense.
The credit ratings 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 interest costs.
We may be unable to service or refinance our debt.
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.

10


We may be unable 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 and prospects. 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 unable to attract, develop and retain qualified employees 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 employees. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified employees, 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 employee 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.
Our manufacturers may not be able to manufacture and deliver products in a timely manner and meet quality standards.
We purchase products through contract manufacturers and importers and directly 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. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be adversely affected by fluctuations in product input costs.
Product input costs, including manufacturing 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 results may be adversely 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.
We may be adversely 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 adversely 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.

11


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 failures that interrupt our ability to process orders and deliver products to the stores or 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.
We may fail to maintain the security of customer, associate, supplier or company information which could have a negative 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, employees, 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 employees 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 flow.
We may fail 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”). Failure to comply with such laws and regulations could have an adverse effect on our reputation, market price of our common stock, results of operations, financial condition and cash flows.


12


We may be adversely impacted by changes in taxation 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. The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its 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.
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 our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities, anti-corruption and other claims, including purported class action lawsuits. Difficulty can exist in complying with sometimes conflicting regulations in local, national or foreign jurisdictions as well as new or changing regulations that affect how we operate. 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
The following table provides the location, use and size of our distribution, corporate and product development facilities as of January 31, 2015:
 
Location
 
Use
 
Approximate
Square
Footage
Columbus, Ohio area
 
Corporate, distribution and shipping
 
6,388,000

New York, New York
 
Office, sourcing and product development/design
 
645,000

Montreal, Quebec, Canada
 
Office, distribution and shipping
 
160,000

Kettering, Ohio
 
Call center
 
94,000

Hong Kong
 
Office and sourcing
 
60,000

Various international locations
 
Office and sourcing
 
67,000


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 seven buildings located in the Columbus, Ohio area. These buildings, including attached office space, comprise approximately 6.4 million square feet.
As of January 31, 2015, we operate 2,685 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 leases expire at various dates between 2015 and 2030.
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 15 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

13


International
Canada
We lease offices and distribution and shipping facilities in the Montreal, Quebec area.
As of January 31, 2015, we operate 274 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 10 years. The leases expire on various dates between 2015 and 2030.
United Kingdom
As of January 31, 2015, we operate 10 retail stores in leased facilities in the U.K. We have two additional leases in the U.K. related to stores that will open in 2015. These lease commitments consist of store leases with initial terms ranging from 10 to 33 years expiring on various dates between 2021 and 2045.
Other International
As of January 31, 2015, we also have global representation through stores operated by our partners:
266 La Senza stores in 29 countries;
80 Bath & Body Works stores in 23 countries;
14 Victoria's Secret stores in 6 Middle Eastern countries; and
290 Victoria’s Secret Beauty and Accessories stores and various small-format locations in more than 70 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.
In July 2009, a complaint was filed against our Company for patent infringement in the United States District Court for the Eastern District of Texas. The complaint sought monetary damages, costs, attorneys' fees and injunctive relief. In November 2011, a jury found in favor of the plaintiff and awarded damages of $9 million for infringement from 2007 through 2011, and the trial court awarded future royalty payments through 2015. In January 2013, we appealed the judgment in the Court of Appeals for the Federal Circuit. Shortly before our appeal was filed, the Court of Appeals ruled in another proceeding involving a different company that the plaintiff's patents were invalid. On January 14, 2014, the U.S. Supreme Court denied the plaintiff's petition to overturn that ruling.
Subsequent to January 31, 2015, the Court of Appeals for the Federal Circuit issued an opinion on the case discussed above. The Court of Appeals' decision reversed the United States District Court for the Eastern District of Texas finding of infringement. The District Court's award of damages of $9 million for infringement from 2007 through 2011 and future royalty payments through 2015 were overturned. On March 16, 2015, the plaintiff filed a petition for a rehearing with the Court of Appeals for the Federal Circuit.
 
ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

14


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 New York Stock Exchange. As of January 31, 2015, there were approximately 41,000 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 165,000.
The following table provides our quarterly market prices and cash dividends per share for 2014 and 2013:
 
 
Market Price
 
Cash Dividend
per Share
 
 
High
 
Low
 
2014
 
 
 
 
 
 
Fourth quarter
$
87.58

 
$
71.46

 
$
0.34

 
Third quarter
73.24
 
57.93
 
0.34

 
Second quarter
61.95
 
53.03
 
0.34

 
First quarter
59.95
 
50.78
 
1.34

(a)
2013

 

 

 
Fourth quarter
$
67.12

 
$
51.72

 
$
0.30

 
Third quarter
63.05

 
54.73

 
0.30

 
Second quarter
58.69

 
48.76

 
0.30

 
First quarter
51.27

 
42.49

 
0.30

 
________________ 
(a)
In February 2014, our Board of Directors declared an increase in our quarterly common stock dividend from $0.30 to $0.34 per share and a special dividend of $1 per share. Both dividends were distributed on March 7, 2014 to shareholders of record at the close of business on February 21, 2014.

In February 2015, our Board of Directors declared an increase in our first quarter 2015 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.



15


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. The plotted points represent the closing price on the last day of the fiscal year indicated.
COMPARISON OF 5 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
_______________
(a)
This table represents $100 invested in stock or in index at the closing price on January 30, 2010 including reinvestment of dividends.
(b)
The January 31, 2015 cumulative total return includes the $1 special dividend in March 2014.
(c)
The February 2, 2013 cumulative total return includes the $1 and $3 special dividends in September 2012 and December 2012, respectively.
(d)
The January 28, 2012 cumulative total return includes the $1 and $2 special dividends in May 2011 and December 2011, respectively.
(e)
The January 29, 2011 cumulative total return includes the $1 and $3 special dividends in March 2010 and December 2010, respectively.

16


The following table provides our repurchases of our common stock during the fourth quarter of 2014:
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
Number of Shares (or
Approximate
Dollar Value) that May
Yet be Purchased
Under the Programs (c)
 
 
(in thousands)
 
 
 
(in thousands)
November 2014
 
32

 
$
76.06

 

 
$
131,193

December 2014
 
2

 
85.39

 

 
131,193

January 2015
 
492

 
81.47

 
491

 
91,194

Total
 
526

 
81.16

 
491

 
 
 ________________
(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 18 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.


17


ITEM 6. SELECTED FINANCIAL DATA.
 
 
 
Fiscal Year Ended
 
 
January 31, 2015
 
February 1, 2014
 
February 2, 2013 (a)
 
January 28, 2012
 
January 29, 2011
 
 
(in millions)
Summary of Operations
 
 
 
 
 
 
 
 
 
 
Net Sales
 
$
11,454

 
$
10,773

 
$
10,459

 
$
10,364

 
$
9,613

Gross Profit
 
4,808

 
4,429

 
4,386

 
4,057

 
3,631

Operating Income (b)
 
1,953

 
1,743

 
1,573

 
1,238

 
1,284

Net Income (c)
 
1,042

 
903

 
753

 
850

 
805

 
 
(as a percentage of net sales)
Gross Profit
 
42.0
%
 
41.1
%
 
41.9
%
 
39.1
%
 
37.8
%
Operating Income
 
17.1
%
 
16.2
%
 
15.0
%
 
11.9
%
 
13.4
%
Net Income
 
9.1
%
 
8.4
%
 
7.2
%
 
8.2
%
 
8.4
%
 
 
 
 
 
 
 
 
 
 
 
Per Share Results
 
 
 

 

 

 

Net Income Per Basic Share
 
$
3.57

 
$
3.12

 
$
2.60

 
$
2.80

 
$
2.49

Net Income Per Diluted Share
 
$
3.50

 
$
3.05

 
$
2.54

 
$
2.70

 
$
2.42

Dividends Per Share
 
$
2.36

 
$
1.20

 
$
5.00

 
$
3.80

 
$
4.60

Weighted Average Diluted Shares Outstanding (in millions)
 
298

 
296

 
297

 
314

 
333

 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
(in millions)
Cash and Cash Equivalents
 
$
1,681

 
$
1,519

 
$
773

 
$
935

 
$
1,130

Total Assets
 
7,544

 
7,198

 
6,019

 
6,108

 
6,451

Working Capital
 
1,553

 
1,324

 
667

 
842

 
1,088

Net Cash Provided by Operating Activities
 
1,786

 
1,248

 
1,351

 
1,266

 
1,284

Capital Expenditures
 
715

 
691

 
588

 
426

 
274

Long-term Debt
 
4,765

 
4,761

 
4,477

 
3,481

 
2,507

Other Long-term Liabilities
 
820

 
770

 
818

 
780

 
761

Shareholders’ Equity (Deficit)
 
18

 
(370
)
 
(1,015
)
 
137

 
1,476

 
 
 
 
 
 
 
 
 
 
 
Comparable Store Sales Increase (d)
 
4
%
 
2
%
 
6
%
 
10
%
 
9
%
Return on Average Assets
 
14
%
 
14
%
 
12
%
 
14
%
 
12
%
Current Ratio
 
1.9

 
1.7

 
1.4

 
1.6

 
1.7

 
 
 
 
 
 
 
 
 
 
 
Stores and Associates at End of Year
 
 
 
 
 
 
 
 
 
 
Number of Stores (e)
 
2,969

 
2,923

 
2,876

 
2,941

 
2,968

Selling Square Feet (in thousands) (e)
 
11,536

 
11,169

 
10,849

 
10,934

 
10,974

Number of Associates
 
80,100

 
94,600

 
99,400

 
97,000

 
96,500

 ________________
(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 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.
(ii)
In 2011, a $232 million impairment charge related to goodwill and other intangible assets for our La Senza business; a $111 million gain related to the divestiture of 51% of our third-party apparel sourcing business;

18


$163 million of expense related to the charitable contribution of our remaining shares of Express to The Limited Brands Foundation; and $24 million of restructuring expenses at La Senza.
For additional information on 2012 items, see the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
(c)
In addition to the items previously discussed in (b), net income includes the effect of the following items:
(i)
In 2012, a $13 million gain related to $13 million in cash distributions from certain of our investments in Easton, a 1,300 acre planned community in Columbus, Ohio that integrates office, hotel, retail, residential and recreational space.
(ii)
In 2011, a $147 million gain related to the charitable contribution of our remaining shares of Express to the Limited Brands Foundation; an $86 million gain related to the sale of Express common stock; and $56 million of favorable income tax benefits related to certain discrete tax matters.
(iii)
In 2010, a $52 million gain related to the initial public offering of Express including the sale of a portion of our shares; a $49 million pre-tax gain related to a $57 million cash distribution from Express; a $45 million pre-tax gain related to the sale of Express stock; a $25 million pre-tax loss associated with the early retirement of portions of our 2012 and 2014 Notes; a $20 million pre-tax gain associated with the sale of our remaining 25% ownership interest in Limited Stores; and a $7 million pre-tax gain related to a dividend payment from Express.
For additional information on 2012 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 $(0.38) in 2012, $0.10 in 2011 and $0.36 in 2010.
(d)
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 store 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 store sales are calculated on a comparable calendar period. Therefore, the percentage change in comparable store sales for 2014, 2013, 2011 and 2010 were calculated on a 52 to 52 week basis and the percentage change in comparable store sales for 2012 was calculated on a 53 to 53 week basis.
(e)
Number of stores and selling square feet excludes independently owned Victoria's Secret Beauty and Accessories, Victoria's Secret International, Bath & Body Works International and La Senza International 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 changes in the U.S. and Canadian economies and, therefore, we monitor the retail environment using, among other things, certain key industry performance indicators such as the University of Michigan Consumer Sentiment Index (which measures consumers’ views on the future course of the U.S. economy), the National Retail Traffic Index (which measures traffic levels in malls nationwide) and National Retail Sales (which reflects sales volumes of 4,900 businesses as measured by the U.S. Census Bureau). These indices 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 store 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.

19


Executive Overview
Strategy
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;
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;
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.
The core of Victoria’s Secret is bras and panties. 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 to accommodate the full Lingerie and PINK assortment to all of our stores. In 2015, we plan to increase our square footage at Victoria's Secret North America by about 5% through expansions of existing stores and the opening of approximately 26 net new Victoria's Secret stores (21 in the U.S. and five in Canada). In our direct channel, we have the infrastructure in place to support growth well into the future. 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 home fragrance and personal care product lines including shower gels, lotions, 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. In 2015, we plan to increase our square footage at Bath & Body Works North America by about 3% through expansions of existing stores and the opening of approximately 24 net new Bath & Body Works stores (14 in the U.S. and 10 in Canada). 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 we've continued to expand our presence outside of North America with a small number of experienced partners and a limited number of company-owned stores. In 2014, we accomplished the following:
Victoria's Secret Beauty and Accessories Stores—Our partners opened 92 net new Victoria’s Secret Beauty and Accessories stores, bringing the total to 290. These stores are located in local markets, airports and tourist destinations. These stores are focused on Victoria’s Secret branded beauty and accessory products and are operated by our partners. Our partners plan to open approximately 120 additional Victoria’s Secret Beauty and Accessories stores in 2015.
Victoria’s Secret International Stores—We opened three company-owned Victoria’s Secret full-assortment stores and two Victoria’s Secret PINK stores in the U.K., bringing the total in the U.K. to 10. In 2015, we plan to open four additional Victoria’s Secret full-assortment stores in the U.K. Additionally, a partner opened nine Victoria’s Secret full-assortment stores and one Victoria's Secret PINK store in the Middle East in 2014, bringing the total to 14. Our partners plan to open eight to 10 more stores in 2015, including two PINK stores.
Bath & Body Works International Stores—Our partners opened 25 net new Bath & Body Works stores in 2014 bringing the total in the Middle East, Latin America, Southeast Asia and Eastern Europe to 80. Our partners plan to open approximately 50 additional stores in 2015.

20


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.
2014 Overview
We utilize the retail calendar for reporting. As such, the results for fiscal years 2014 and 2013 represent the 52-week periods ended January 31, 2015 and February 1, 2014, respectively, and fiscal year 2012 represents the 53-week period ended February 2, 2013. The 2014 and 2013 fourth quarters consisted of a 13-week period versus a 14-week period in 2012. The extra week in 2012 accounted for approximately $125 million in incremental sales in the fourth quarter.
We had record performance in 2014. Our net sales increased $681 million to $11.454 billion driven by a comparable store sales increase of 4%. Our operating income increased $210 million to $1.953 billion and our operating income rate improved from 16.2% to 17.1% driven by growth in all segments.
For additional information related to our 2014 financial performance, see “Results of Operations – 2014 Compared to 2013.”
We also accomplished the following in 2014:
Increased earnings per share by 15% to $3.50;
Increased focus on our core categories by exiting most apparel categories at Victoria's Secret Direct and the make-up business at Victoria's Secret Stores;
Our capital expenditures of $715 million included $553 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;
Continued to expand company-owned Victoria's Secret stores in the U.K. and Canada and company-owned Bath & Body Works stores in Canada; and
Continued to expand Bath & Body Works and Victoria’s Secret stores and Victoria’s Secret Beauty and Accessories stores with partners throughout the world.
We also are committed to returning value to our shareholders through a combination of dividends and share repurchase programs. During 2014, we paid $691 million in regular and special dividends and repurchased $84 million of our common stock. Additionally, in February 2015 our Board of Directors announced an increase in our regular annual dividend to $2 per share, from $1.36 per share previously. The Board of Directors also declared a special dividend of $2 per share. We use cash flow generated from operating activities and financing activities to fund our dividends and share repurchase programs. Since 2000, we have returned approximately $16 billion to shareholders through share repurchases and dividends.


21


Adjusted Financial Information
In addition to our results provided in accordance with GAAP above and throughout this Form 10-K, we have provided non-GAAP measurements which present operating income, net income and earnings per share in 2012 on an adjusted basis which removes 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. For additional information regarding the special items, see the footnotes to the table in Item 6. Selected Financial Data.
 
2014
 
2013
 
2012
Detail of Special Items included in Operating Income - Income (Expense)
 
 
 
 
 
La Senza Goodwill and Intangible Asset Impairment Charges
$

 
$

 
$
(93
)
Henri Bendel Long-lived Store Asset Impairment Charges

 

 
(27
)
La Senza Restructuring Charges

 

 
(14
)
Total Special Items included in Operating Income
$

 
$

 
$
(134
)
 
 
 
 
 
 
Detail of Special Items included in Other Income - Income (Expense)
 
 
 
 
 
Gain on Distributions from Easton Investments
$

 
$

 
$
13

Total Special Items included in Other Income
$

 
$

 
$
13

 
 
 
 
 
 
Detail of Special Items included in Provision for Income Taxes - Benefit (Provision)
 
 
 
 
 
Tax effect of Special Items included in Operating Income
$

 
$

 
$
12

Tax effect of Special Items included in Other Income

 

 
(5
)
Total Special Items included in Provision for Income Taxes
$

 
$

 
$
7

 
 
 
 
 
 
Reconciliation of Reported Operating Income to Adjusted Operating Income
 
 
 
 
 
Reported Operating Income
$
1,953

 
$
1,743

 
$
1,573

Special Items included in Operating Income

 

 
134

Adjusted Operating Income
$
1,953

 
$
1,743

 
$
1,707

 
 
 
 
 
 
Reconciliation of Reported Net Income to Adjusted Net Income
 
 
 
 
 
Reported Net Income
$
1,042

 
$
903

 
$
753

Special Items included in Net Income

 

 
114

Adjusted Net Income
$
1,042

 
$
903

 
$
867

 
 
 
 
 
 
Reconciliation of Reported Earnings Per Share to Adjusted Earnings Per Share
 
 
 
 
 
Reported Earnings Per Share
$
3.50

 
$
3.05

 
$
2.54

Special Items included in Earnings Per Share

 

 
0.38

Adjusted Earnings Per Share
$
3.50

 
$
3.05

 
$
2.92

2015 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 in this uncertain environment. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well positioned heading into 2015.

22


Company-Owned Store Data
The following table compares 2014 company-owned store data to the comparable periods for 2013 and 2012:
 
 
 
 
 
 
 
 
% Change
  
2014
 
2013
 
2012
 
2014
 
2013
Sales per Average Selling Square Foot
 
 
 
 
 
 
 
 
 
Victoria’s Secret U.S.
$
836

 
$
824

 
$
817

 
1
%
 
1
%
Bath & Body Works U.S.
774

 
725

 
718

 
7
%
 
1
%
Sales per Average Store (in thousands)

 

 

 

 

Victoria’s Secret U.S.
$
5,061

 
$
4,969

 
$
4,892

 
2
%
 
2
%
Bath & Body Works U.S.
1,828

 
1,714

 
1,701

 
7
%
 
1
%
Average Store Size (selling square feet)

 

 

 

 

Victoria’s Secret U.S.
6,083

 
6,018

 
6,038

 
1
%
 
%
Bath & Body Works U.S.
2,359

 
2,364

 
2,365

 
%
 
%
Total Selling Square Feet (in thousands)

 

 

 

 

Victoria’s Secret U.S.
6,679

 
6,379

 
6,153

 
5
%
 
4
%
Bath & Body Works U.S.
3,675

 
3,685

 
3,716

 
 %
 
(1
)%




23


The following table compares 2014 company-owned store data to the comparable periods for 2013 and 2012:
Number of Stores
 
2014
 
2013
 
2012
Victoria’s Secret U.S.
 
 
 
 
 
 
Beginning of Period
 
1,060

 
1,019

 
1,017

Opened
 
45

 
54

 
22

Closed
 
(7
)
 
(13
)
 
(20
)
End of Period
 
1,098

 
1,060

 
1,019

Victoria’s Secret Canada
 

 

 

Beginning of Period
 
34

 
26

 
19

Opened
 
7

 
8

 
7

Closed
 

 

 

End of Period
 
41

 
34

 
26

Bath & Body Works U.S.
 

 

 

Beginning of Period
 
1,559

 
1,571

 
1,587

Opened
 
14

 
8

 
4

Closed
 
(15
)
 
(20
)
 
(20
)
End of Period
 
1,558

 
1,559

 
1,571

Bath & Body Works Canada
 

 

 

Beginning of Period
 
79

 
71

 
69

Opened
 
10

 
8

 
3

Closed
 
(1
)
 

 
(1
)
End of Period
 
88

 
79

 
71

Victoria's Secret U.K.
 
 
 
 
 
 
Beginning of Period
 
5

 
2

 

Opened
 
5

 
3

 
2

Closed
 

 

 

End of Period
 
10

 
5

 
2

La Senza
 

 

 

Beginning of Period
 
157

 
158

 
230

Opened
 

 

 

Closed (a)
 
(12
)
 
(1
)
 
(72
)
End of Period
 
145

 
157

 
158

Henri Bendel
 

 

 

Beginning of Period
 
29

 
29

 
19

Opened
 

 

 
10

Closed
 

 

 

End of Period
 
29

 
29

 
29

Total
 


 


 


Beginning of Period
 
2,923

 
2,876

 
2,941

Opened
 
81

 
81

 
48

Closed
 
(35
)
 
(34
)
 
(113
)
End of Period
 
2,969

 
2,923

 
2,876

 ________________
(a)
In the fourth quarter of 2011 and second quarter of 2012, we initiated restructuring programs designed to resize a portion of La Senza's store fleet. Under these programs, we closed 79 underperforming stores through the first quarter of 2013. Of these stores, 12 were closed in 2011, 66 were closed in 2012, and 1 was closed in 2013. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.


24


Noncompany-Owned Store Data
The following table compares the 2014 noncompany-owned store data to the comparable periods for 2013 and 2012:
Number of Stores
 
2014
 
2013
 
2012
Victoria’s Secret Beauty & Accessories
 
 
 
 
 
 
Beginning of Period
 
198

 
108

 
57

Opened
 
99

 
95

 
53

Closed
 
(7
)
 
(5
)
 
(2
)
End of Period
 
290

 
198

 
108

Victoria's Secret
 

 

 

Beginning of Period
 
4

 
3

 

Opened
 
10

 
1

 
3

Closed
 

 

 

End of Period
 
14

 
4

 
3

Bath & Body Works
 


 


 


Beginning of Period
 
55

 
38

 
18

Opened
 
26

 
17

 
20

Closed
 
(1
)
 

 

End of Period
 
80

 
55

 
38

La Senza
 


 


 


Beginning of Period
 
331

 
339

 
289

Opened
 
6

 
28

 
98

Closed
 
(71
)
 
(36
)
 
(48
)
End of Period
 
266

 
331

 
339

Total
 


 


 


Beginning of Period
 
588

 
488

 
364

Opened
 
141

 
141

 
174

Closed
 
(79
)
 
(41
)
 
(50
)
End of Period
 
650

 
588

 
488


Segment Reporting Change
In the first quarter of 2014, we announced a change in our reportable segments. Results from company-owned Victoria's Secret and Bath & Body Works stores in Canada were reclassified from Other into the corresponding Victoria's Secret and Bath & Body Works segments. Additionally, a new segment called Victoria's Secret and Bath & Body Works International was created which includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the United States and Canada. Therefore, beginning in 2014, we have 3 reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International. While this reporting change did not impact our consolidated results, the segment data has been recast to be consistent for all periods presented throughout the financial statements and accompanying footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations.



25


Results of Operations—2014 Compared to 2013
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2014 in comparison to 2013:
 
 
 
 
 
 
Operating Income Rate
 
2014
 
2013
 
2014
 
2013
 
(in millions)
 
 
 
 
Victoria’s Secret
$
1,271

 
$
1,153

 
17.6
%
 
16.8
%
Bath & Body Works
737

 
648

 
22.0
%
 
20.8
%
Victoria's Secret and Bath & Body Works International
78

 
38

 
23.2
%
 
17.3
%
Other (a)
(133
)
 
(96
)
 
(23.8
)%
 
(17.5
)%
Total
$
1,953

 
$
1,743

 
17.1
%
 
16.2
%
 ________________
(a)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
For 2014, operating income increased $210 million to $1.953 billion, and the operating income rate increased to 17.1% from 16.2%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2014 in comparison to 2013:
 
2014
 
2013
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores (a)
$
5,700

 
$
5,368

 
6
%
Victoria’s Secret Direct
1,507

 
1,516

 
(1
)%
Total Victoria’s Secret
7,207

 
6,884

 
5
%
Bath & Body Works Stores (a)
3,048

 
2,868

 
6
%
Bath & Body Works Direct
302

 
250

 
20
%
Total Bath & Body Works
3,350

 
3,118

 
7
%
Victoria's Secret and Bath & Body Works International (b)
336

 
222

 
51
%
Other (c)
561

 
549

 
2
%
Total Net Sales
$
11,454

 
$
10,773

 
6
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the U.S. and Canada.
(c)
Includes Mast Global, La Senza, Henri Bendel and Corporate.

26


The following table provides a reconciliation of net sales for 2013 to 2014:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
2013 Net Sales
$
6,884

 
$
3,118

 
$
222

 
$
549

 
$
10,773

Comparable Store Sales
146

 
156

 
14

 
9

 
325

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
199

 
37

 
35

 
(10
)
 
261

Foreign Currency Translation
(13
)
 
(13
)
 
2

 
(17
)
 
(41
)
Direct Channels
(9
)
 
52

 

 
6

 
49

International Wholesale, Royalty and Other

 

 
63

 
24

 
87

2014 Net Sales
$
7,207

 
$
3,350

 
$
336

 
$
561

 
$
11,454


The following table compares 2014 comparable store sales to 2013:
 
2014
 
2013
Victoria’s Secret (a) (b)
3
%
 
2
%
Bath & Body Works (a) (b)
6
%
 
1
%
Total Comparable Store Sales (b) (c)
4
%
 
2
%
 ________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
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 store 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 store sales are calculated on a comparable calendar period.
(c)
Includes Victoria's Secret U.S., Victoria's Secret Canada, Bath & Body Works U.S., Bath & Body Works Canada, Victoria's Secret U.K., La Senza and Henri Bendel.
For 2014, our net sales increased $681 million to $11.454 billion, and comparable store sales increased 4%. The results by segment are as follows:
Victoria’s Secret
For 2014, net sales increased $323 million to $7.207 billion, and comparable store sales increased 3%. The net sales result was primarily driven by:
At Victoria's Secret Stores, net sales increased 6% due to the performance in PINK, core lingerie and sport driven by a compelling merchandise assortment that incorporated newness, innovation and fashion, as well as in-store execution. These results were partially offset by a decrease in beauty driven by the exit of the make-up category.
At Victoria's Secret Direct, net sales were roughly flat due to the decrease in non go-forward apparel offset by increases in PINK, core lingerie, go-forward apparel, sport and beauty. We are shifting our focus to the core categories of the brand including lingerie, PINK and beauty. As a result, net sales in the non go-forward apparel category are declining as we reduce style counts and related inventory.
The increase in comparable store sales was driven by higher average dollar sales.
Bath & Body Works
For 2014, net sales increased $232 million to $3.350 billion, and comparable store sales increased 6%. At both Bath & Body Works Stores and Bath & Body Works Direct, net sales increased across most categories including home fragrance, Signature Collection and soaps and sanitizers, which all incorporated newness and innovation.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.

27


Victoria's Secret and Bath & Body Works International
For 2014, net sales increased $114 million to $336 million primarily related to the opening of new company-owned Victoria's Secret stores in the U.K. and additional stores opened by our partners.
Other
For 2014, net sales increased $12 million to $561 million primarily related to higher revenue from sales of merchandise to our international partners from Mast Global. This increase was partially offset by a decrease in net sales at La Senza.
Gross Profit
For 2014, our gross profit increased $379 million to $4.808 billion, and our gross profit rate (expressed as a percentage of net sales) increased to 42.0% from 41.1% primarily as a result of:
Victoria’s Secret
For 2014, gross profit increased primarily driven by:
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales and less promotional activity. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.
At Victoria's Secret Direct, gross profit decreased due to lower merchandise margin dollars as a result of the decrease in net sales and increased promotional activity in the non go-forward apparel business.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate at Victoria's Secret Stores due to the decreased promotional activity, partially offset by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense at Victoria's Secret Stores mentioned above.
Bath & Body Works
For 2014, gross profit increased primarily driven by:
At Bath & Body Works Stores, gross profit increased due to higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales and other product-related costs.
At Bath & Body Works Direct, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate due to favorable product pricing and a decrease in the buying and occupancy expense rate due to leverage associated with higher net sales.
Victoria's Secret and Bath & Body Works International
For 2014, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales due to the opening of new stores. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses for our company-owned stores due to an increase in occupancy expense driven by the opening of new stores, higher net sales, investments in real estate and store-related activity.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate at Victoria's Secret U.K. The increase in the merchandise margin rate was partially offset by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense as a result of the opening of new stores.
Other
For 2014, gross profit decreased due to lower merchandise margin dollars at La Senza. The gross profit rate decrease was primarily driven by a decrease in the merchandise margin rate at La Senza, partially offset by a decrease in the buying and occupancy expense rate.
General, Administrative and Store Operating Expenses
For 2014, our general, administrative and store operating expenses increased $169 million to $2.855 billion primarily driven by an increase in store selling expenses related to higher sales volumes and an increase in incentive compensation.

28


The general, administrative and store operating expense rate was flat to last year.
Other Income and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2014 and 2013:
 
 
2014
 
2013
Average daily borrowings (in millions)
$
4,910

 
$
4,614

Average borrowing rate (in percentages)
6.6
%
 
6.8
%

For 2014, our interest expense increased $10 million to $324 million primarily due to an increase in average borrowings related to the October 2013 $500 million note issuance, partially offset by a decrease in the average borrowing rate.
Other Income
For 2014, our other income decreased $10 million to $7 million primarily due to a decrease in equity method income from our investment in the third-party apparel sourcing business and certain of our investments in Easton.
Provision for Income Taxes
For 2014, our effective tax rate decreased to 36.3% from 37.5%. The 2014 and 2013 rates were 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.
Results of Operations—Fourth Quarter of 2014 Compared to Fourth Quarter of 2013    
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 2014 in comparison to the fourth quarter of 2013:
 
Fourth Quarter
 
Operating Income Rate
 
2014
 
2013
 
2014
 
2013
 
(in millions)
 
 
 
 
Victoria’s Secret
$
509

 
$
463

 
21.2
%
 
20.1
%
Bath & Body Works
449

 
396

 
32.0
%
 
30.9
%
Victoria's Secret and Bath & Body Works International
29

 
16

 
27.9
%
 
22.2
%
Other (a)
(30
)
 
(12
)
 
(20.1
)%
 
(8.0
)%
Total
$
957

 
$
863

 
23.5
%
 
22.6
%
 ________________
(a)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
For the fourth quarter of 2014, operating income increased $94 million to $957 million, and the operating income rate increased to 23.5% from 22.6%. The drivers of the operating income results are discussed in the following sections.

29


Net Sales
The following table provides net sales for the fourth quarter of 2014 in comparison to the fourth quarter of 2013:
 
Fourth Quarter
 
2014
 
2013
 
% Change
 
 
(in millions)
 
 
Victoria’s Secret Stores (a)
 
$
1,914

 
$
1,798

 
6
%
Victoria’s Secret Direct
 
492

 
504

 
(2
)%
Total Victoria’s Secret
 
2,406

 
2,302

 
5
%
Bath & Body Works Stores (a)
 
1,277

 
1,182

 
8
%
Bath & Body Works Direct
 
127

 
101

 
25
%
Total Bath & Body Works
 
1,404

 
1,283

 
9
%
Victoria's Secret and Bath & Body Works International (b)
 
106

 
75

 
40
%
Other (c)
 
153

 
158

 
(3
)%
Total Net Sales
 
$
4,069

 
$
3,818

 
7
%
 ________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the U.S. and Canada.
(c)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
The following table provides a reconciliation of net sales for the fourth quarter of 2013 to the fourth quarter of 2014: 
Fourth Quarter
 
Victoria’s
Secret
 
Bath & Body
Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
(in millions)
2013 Net Sales
 
$
2,302

 
$
1,283

 
$
75

 
$
158

 
$
3,818

Comparable Store Sales
 
59

 
91

 
4

 
4

 
158

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
 
63

 
10

 
12

 
(6
)
 
79

Foreign Currency Translation
 
(6
)
 
(6
)
 
(2
)
 
(6
)
 
(20
)
Direct Channels
 
(12
)
 
26

 

 
3

 
17

International, Wholesale, Royalty and Other
 

 

 
17

 

 
17

2014 Net Sales
 
$
2,406

 
$
1,404

 
$
106

 
$
153

 
$
4,069


The following table compares fourth quarter of 2014 comparable store sales to fourth quarter of 2013:
 
Fourth Quarter
 
2014
 
2013
Victoria’s Secret (a) (b)
 
4
%
 
2
%
Bath & Body Works (a) (b)
 
8
%
 
(1
)%
Total Comparable Store Sales (b) (c)
 
6
%
 
1
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
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 store 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 store sales are calculated on a comparable calendar period.
(c)
Includes Victoria's Secret U.S., Victoria's Secret Canada, Bath & Body Works U.S., Bath & Body Works Canada, Victoria's Secret U.K., La Senza and Henri Bendel.

30


For the fourth quarter of 2014, our net sales increased $251 million to $4.069 billion, and comparable store sales increased 6%. The results by segment are as follows:
Victoria’s Secret
For the fourth quarter of 2014, net sales increased $104 million to $2.406 billion, and comparable store sales increased 4%. The net sales result was primarily driven by:
At Victoria’s Secret Stores, net sales increased 6% due to the performance in PINK, core lingerie and sport driven by a compelling merchandise assortment that incorporated newness, innovation and fashion, as well as in-store execution. These results were partially offset by a decrease in beauty driven by the exit of the make-up category.
At Victoria’s Secret Direct, net sales decreased 2% due to the decrease in non go-forward apparel partially offset by increases in PINK, core lingerie, go-forward apparel, sport and beauty. We are shifting our focus to the core categories of the brand including lingerie, PINK and beauty. As a result, net sales in the non go-forward apparel category are declining as we reduce style counts and related inventory.
The increase in comparable store sales was driven by higher average dollar sales.
Bath & Body Works
For the fourth quarter of 2014, net sales increased $121 million to $1.404 billion, and comparable store sales increased 8%. The net sales result was primarily driven by:
At Bath & Body Works Stores, net sales increased 8% related to increases across most categories including home fragrance, soaps and sanitizers, Signature Collection and giftsets.
At Bath & Body Works Direct, net sales increased 25% related to increases across all categories including Signature Collection, home fragrance and soaps and sanitizers.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2014, net sales increased $31 million to $106 million primarily related to the opening of new company-owned Victoria's Secret stores in the U.K. and additional stores opened in other parts of the world by our partners.
Other
For the fourth quarter of 2014, net sales decreased $5 million to $153 million primarily related to a decrease in net sales at La Senza.
Gross Profit
For the fourth quarter of 2014, our gross profit increased $193 million to $1.835 billion, and our gross profit rate (expressed as a percentage of net sales) increased to 45.1% from 43.0% primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2014, gross profit increased primarily driven by:
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales and less promotional activity. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.
At Victoria's Secret Direct, gross profit was roughly flat to last year. An increase in gross profit, due to higher merchandise margin dollars primarily due to increases in net sales in the core categories of PINK, core lingerie, go-forward apparel and sport, was offset by a decrease in net sales in the non go-forward apparel business.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate at Victoria's Secret Stores due to the decreased promotional activity, partially offset by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense at Victoria's Secret Stores mentioned above.

31


Bath & Body Works
For the fourth quarter of 2014, gross profit increased primarily driven by:
At Bath & Body Works Stores, gross profit increased due to higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales and store-related activity.
At Bath & Body Works Direct, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate due to favorable product pricing and a decrease in the buying and occupancy expense rate due to leverage associated with higher net sales.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2014, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales due to the opening of new stores. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses for our company-owned stores due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate at Victoria's Secret U.K. The increase in the merchandise margin rate was partially offset by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense as a result of the opening of new stores.
Other
For the fourth quarter of 2014, the gross profit increase was primarily driven by an increase in merchandise margin dollars at La Senza due to less promotional activity, favorable product pricing and improved inventory management. The gross profit rate increase was driven by an increase in the merchandise margin rate at La Senza primarily due to less promotional activity, favorable product pricing and improved inventory management.
General, Administrative and Store Operating Expenses
For the fourth quarter of 2014, our general, administrative and store operating expenses increased $99 million to $878 million primarily driven by an increase in incentive compensation and increases in store selling expenses related to higher sales volumes.
The general, administrative and store operating expense rate increased to 21.6% from 20.4% due to the factors cited above.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the fourth quarter of 2014 and 2013:
Fourth Quarter
 
2014
 
2013
Average daily borrowings (in millions)
 
$
4,750

 
$
4,963

Average borrowing rate (in percentages)
 
6.6
%
 
6.7
%

For the fourth quarter of 2014, our interest expense decreased $4 million to $78 million primarily driven by a decrease in the average borrowings related to the $213 million repayment of the November 2014 Notes as well as a decrease in the average borrowing rate.
Other Income
For the fourth quarter of 2014, our other income decreased $5 million primarily due to a decrease in equity method income from our investment in the third-party apparel sourcing business.
Provision for Income Taxes
For the fourth quarter of 2014, our effective tax rate decreased to 35.8% from 37.8%. The 2014 and 2013 rates were 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.

32


Results of Operations—2013 Compared to 2012
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2013 in comparison to 2012:
 
 
 
 
 
 
Operating Income Rate
 
2013
 
2012
 
2013
 
2012
 
(in millions)
 
 
 
 
Victoria’s Secret
$
1,153

 
$
1,207

 
16.8
%
 
17.9
%
Bath & Body Works
648

 
629

 
20.8
%
 
20.5
%
Victoria's Secret and Bath & Body Works International
38

 
4

 
17.3
%
 
2.8
%
Other (a) (b) (c) (d)
(96
)
 
(267
)
 
(17.5
)%
 
(52.1
)%
Total
$
1,743

 
$
1,573

 
16.2
%
 
15.0
%
 ________________
(a)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
(b)
2012 includes $93 million impairments of goodwill, trade name and other intangible assets at La Senza. For additional information, see Note 7 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(c)
2012 includes a $27 million impairment of long-lived store assets at Henri Bendel. For additional information, see Note 6 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
(d)
2012 includes $14 million of expense associated with restructuring activities at La Senza. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
For 2013, operating income increased $170 million to $1.743 billion and the operating income rate increased to 16.2% from 15.0%. Our 2012 operating income includes the impact of $134 million in special items. For additional information, see "Adjusted Financial Information." Excluding these special items, our adjusted operating income increased $36 million, and our adjusted operating income rate was about flat to last year. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for 2013 in comparison to 2012:
 
2013
 
2012 (d)
 
% Change
 
(in millions)
 
 
Victoria's Secret Stores (a)
$
5,368

 
$
5,147

 
4
%
Victoria's Secret Direct
1,516

 
1,593

 
(5
)%
Total Victoria's Secret
6,884

 
6,740

 
2
%
Bath & Body Works Stores (a)
2,868

 
2,858

 
%
Bath & Body Works Direct
250

 
216

 
16
%
Total Bath & Body Works
3,118

 
3,074

 
1
%
Victoria's Secret and Bath & Body Works International (b)
222

 
132

 
68
%
Other (c)
549

 
513

 
7
%
Total Net Sales
$
10,773

 
$
10,459

 
3
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes Victoria's Secret and Bath & Body Works company-owned and partner-operated stores outside of the U.S. and Canada.
(c)
Includes Mast Global, La Senza, Henri Bendel and Corporate.
(d)
We utilize the retail calendar for reporting. As such, the results for fiscal year 2013 represent the 52-week period ended February 1, 2014, and the results for 2012 represent the 53-week period ended February 2, 2013. The extra week in 2012 accounted for approximately $125 million in incremental net sales.

33


The following table provides a reconciliation of net sales for 2012 to 2013:
 
Victoria's
Secret
 
Bath &
Body Works
 
Victoria's Secret
and
Bath & Body Works International
 
Other
 
Total
 
(in millions)
2012 Net Sales
$
6,740

 
$
3,074

 
$
132

 
$
513

 
$
10,459

Comparable Store Sales
107

 
37

 
7

 
3

 
154

Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
123

 
(18
)
 
49

 
(22
)
 
132

Foreign Currency Translation
(9
)
 
(9
)
 
(1
)
 
(11
)
 
(30
)
Direct Channels
(77
)
 
34

 

 
3

 
(40
)
International Wholesale, Royalty and Other

 

 
35

 
63

 
98

2013 Net Sales
$
6,884

 
$
3,118

 
$
222

 
$
549

 
$
10,773


The following table compares 2013 comparable store sales to 2012:
 
2013
 
2012
Victoria's Secret (a) (b)
2
%
 
7
%
Bath & Body Works (a) (b)
1
%
 
7
%
Total Comparable Store Sales (b) (c)
2
%
 
6
%
 ________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
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 store 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 store sales are calculated on a comparable calendar period. Therefore, the percentage change in comparable store sales for 2013 and 2012 were calculated on a 52 to 52-week basis and 53 to 53-week basis, respectively.
(c)
Includes Victoria's Secret U.S., Victoria's Secret Canada, Bath & Body Works U.S., Bath & Body Works Canada, Victoria's Secret U.K., La Senza and Henri Bendel.
For 2013, our net sales increased $314 million to $10.773 billion, and comparable store sales increased 2%. The results by segment are as follows:
Victoria’s Secret
For 2013, net sales increased $144 million to $6.884 billion, and comparable store sales increased 2%. The net sales result was primarily driven by:
At Victoria's Secret Stores, net sales increased 4% related to increases across most categories including PINK, sport, core lingerie and swimwear, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion, as well as in-store execution.
At Victoria's Secret Direct, net sales decreased 5% related to a decrease in apparel partially offset by increases in sport, PINK, core lingerie, sleepwear and beauty. We are shifting our focus to the core categories of the brand including lingerie, PINK and beauty. As a result, net sales in the apparel category are declining as we reduce style counts and related inventory. Additionally, a fashion assortment that did not resonate with our customers contributed to the decline in apparel.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Bath & Body Works
For 2013, net sales increased $44 million to $3.118 billion, and comparable store sales increased 1%. The net sales result was primarily driven by:
At Bath & Body Works Stores, net sales were roughly flat.

34


At Bath & Body Works Direct, net sales increased 16% with increases across all categories including Signature Collection, home fragrance and soaps and sanitizers.
The increase in comparable store sales was driven by an increase in total transactions and higher average dollar sales.
Victoria's Secret and Bath & Body Works International
For 2013, net sales increased $90 million to $222 million primarily related to the opening of new company-owned Victoria's Secret stores in the U.K. and additional stores opened in other parts of the world by our partners.
Other
For 2013, net sales increased $36 million to $549 million primarily related to higher revenue from sales of merchandise to our international partners from Mast Global. This increase was partially offset by a decrease in net sales at La Senza primarily due to store closures.
Gross Profit
For 2013, our gross profit increased $43 million to $4.429 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 41.1% from 41.9% primarily as a result of:
Victoria’s Secret
For 2013, gross profit decreased primarily driven by:
At Victoria's Secret Stores, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.
At Victoria's Secret Direct, gross profit decreased due to lower merchandise margin dollars as a result of increased promotional activity and the decrease in net sales.
The gross profit rate decrease was primarily driven by a decrease in the merchandise margin rate driven by increased promotional activity. The gross profit rate decrease was also driven by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense at Victoria's Secret Stores mentioned above.
Bath & Body Works
For 2013, gross profit was roughly flat primarily driven by:
At Bath & Body Works Stores, gross profit decreased due to lower merchandise margin dollars related primarily to increased promotional activity. The gross profit decrease was also driven by higher buying and occupancy expenses primarily driven by an increase in occupancy expense driven by investments in real estate and store-related activity.
At Bath & Body Works Direct, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses due to higher fulfillment costs associated with the increase in net sales.
The gross profit rate decrease was primarily driven by a decrease in the merchandise margin rate due to increased promotional activity in the fourth quarter. The gross profit rate decrease was also driven by a slight increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense at Bath & Body Works Stores mentioned above.
Victoria's Secret and Bath & Body Works International
For 2013, gross profit increased due to higher merchandise margin dollars as a result of the increase in net sales due to the opening of new stores. The increase in merchandise margin dollars was partially offset by higher buying and occupancy expenses for our company-owned stores due to an increase in occupancy expense driven by higher net sales, investments in real estate and store-related activity.
The gross profit rate increase was primarily driven by an increase in the merchandise margin rate at Victoria's Secret U.K. The increase in the merchandise margin rate was partially offset by an increase in the buying and occupancy expense rate due to deleverage associated with the increase in occupancy expense as a result of the opening of new stores.

35


Other
For 2013, the gross profit increase was primarily driven by lower buying and occupancy expenses driven by the $27 million long-lived store asset impairment charge at Henri Bendel and the $13 million in store closure restructuring charges related to our La Senza business that both occurred in 2012. The gross profit increase was also driven by higher merchandise margin dollars related to the increase in net sales at Mast Global. The gross profit rate increased significantly driven by a significant decrease in the buying and occupancy expense rate due to the factors mentioned above and leverage associated with higher sales. The gross profit rate increase was partially offset by a significant decrease in the merchandise margin rate primarily due to increased promotional activity at La Senza.
General, Administrative and Store Operating Expenses
For 2013, our general, administrative and store operating expenses decreased $34 million to $2.686 billion primarily driven by a decrease in incentive compensation and other home office costs partially offset by an increase in store selling expenses associated with higher sales volumes and increased international expansion.
The general, administrative and store operating expense rate decreased to 24.9% from 26.0% due to the factors mentioned above and leverage associated with higher sales.
Impairment of Goodwill and Other Intangible Assets
In the fourth quarter of 2012, we recognized charges totaling $93 million related to the impairment of goodwill, trade name and a lease-related intangible asset at La Senza. These impairment charges are included in Impairment of Goodwill and Other Intangible Assets on the 2012 Consolidated Statement of Income. For additional information, see Critical Accounting Policies and Estimates and Note 7 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplemental Data.
Other Income and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2013 and 2012:
 
 
2013
 
2012
Average daily borrowings (in millions)
$
4,614

 
$
4,495

Average borrowing rate (in percentages)
6.8
%
 
7.1
%

For 2013, our interest expense decreased $2 million to $314 million driven by a decrease in the average borrowing rate partially offset by an increase in average borrowings related to the October 2013 $500 million note issuance.