UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 _________________________________

FORM 10-Q

 _________________________________

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

For the quarterly period ended August 1, 2020

OR

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

For the transition period from              to             

Commission file number 1-8344

 _________________________________

L BRANDS, INC.

(Exact name of registrant as specified in its charter)

 _______________________________

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

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

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

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

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

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

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

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

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

As of August 28, 2020, the number of outstanding shares of the Registrant’s common stock, was 277,889,018 shares.

L BRANDS, INC.

TABLE OF CONTENTS

	Page No.
Part I. Financial Information
Item 1. Financial Statements *
Consolidated Statements of Income (Loss) for the Thirteen-Weeks and Twenty-Six-Weeks Ended August 1, 2020 and August 3, 2019 (Unaudited)	3
Consolidated Statements of Comprehensive Income (Loss) for the Thirteen-Weeks and Twenty-Six-Weeks Ended August 1, 2020 and August 3, 2019 (Unaudited)	3
Consolidated Balance Sheets as of August 1, 2020 (Unaudited), February 1, 2020 and August 3, 2019 (Unaudited)	4
Consolidated Statements of Total Equity (Deficit) for the Thirteen-Weeks and Twenty-Six-Weeks Ended August 1, 2020 and August 3, 2019 (Unaudited)	5
Consolidated Statements of Cash Flows for the Twenty-Six-Weeks Ended August 1, 2020 and August 3, 2019 (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	8
Report of Independent Registered Public Accounting Firm	21
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995	22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	43
Part II. Other Information	44
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3. Defaults Upon Senior Securities	45
Item 4. Mine Safety Disclosures	45
Item 5. Other Information	45
Item 6. Exhibits	46
Signature	47

* The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2020” and “second quarter of 2019” refer to the thirteen-week periods ended August 1, 2020 and August 3, 2019, respectively. “Year-to-date 2020” and “year-to-date 2019” refer to the twenty-six-week periods ending August 1, 2020 and August 3, 2019, respectively.

2

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in millions except per share amounts)

(Unaudited)

	Second Quarter						Year-to-Date
	2020			2019			2020			2019
Net Sales	$	2,319		$	2,902		$	3,974		$	5,530
Costs of Goods Sold, Buying and Occupancy	(1,608		)	(1,919		)	(2,974		)	(3,614		)
Gross Profit	711			983			1,000			1,916
General, Administrative and Store Operating Expenses	(667		)	(808		)	(1,274		)	(1,588		)
Operating Income (Loss)	44			175			(274		)	328
Interest Expense	(104		)	(95		)	(201		)	(194		)
Other Income (Loss)	—			(38		)	3			(31		)
Income (Loss) Before Income Taxes	(60		)	42			(472		)	103
Provision (Benefit) for Income Taxes	(11		)	4			(126		)	25
Net Income (Loss)	$	(49	)	$	38		$	(346	)	$	78
Net Income (Loss) Per Basic Share	$	(0.18	)	$	0.14		$	(1.25	)	$	0.28
Net Income (Loss) Per Dilutive Share	$	(0.18	)	$	0.14		$	(1.25	)	$	0.28
Dividends Per Share	$	—		$	0.30		$	0.30		$	0.60

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(Unaudited)

	Second Quarter						Year-to-Date
	2020			2019			2020			2019
Net Income (Loss)	$	(49	)	$	38		$	(346	)	$	78
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	2			(7		)	(4		)	(11		)
Unrealized Gain (Loss) on Cash Flow Hedges	(3		)	2			2			4
Reclassification of Cash Flow Hedges to Earnings	(1		)	(1		)	(1		)	(3		)
Total Other Comprehensive Loss, Net of Tax	(2		)	(6		)	(3		)	(10		)
Total Comprehensive Income (Loss)	$	(51	)	$	32		$	(349	)	$	68

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

3

L BRANDS, INC.

CONSOLIDATED BALANCE SHEETS

(in millions except par value amounts)

 

	August 1, 2020			February 1, 2020			August 3, 2019
	(Unaudited)						(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	2,611		$	1,499		$	853
Accounts Receivable, Net	268			306			283
Inventories	1,476			1,287			1,329
Other	150			153			188
Total Current Assets	4,505			3,245			2,653
Property and Equipment, Net	2,292			2,486			2,756
Operating Lease Assets	2,635			3,053			3,209
Goodwill	628			628			1,348
Trade Names	411			411			411
Deferred Income Taxes	74			84			62
Other Assets	335			218			179
Total Assets	$	10,880		$	10,125		$	10,618
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable	$	957		$	647		$	763
Accrued Expenses and Other	1,340			1,052			919
Current Debt	460			61			75
Current Operating Lease Liabilities	624			478			456
Income Taxes	52			134			3
Total Current Liabilities	3,433			2,372			2,216
Deferred Income Taxes	191			219			241
Long-term Debt	6,269			5,487			5,475
Long-term Operating Lease Liabilities	2,698			3,052			3,165
Other Long-term Liabilities	193			490			450
Shareholders’ Equity (Deficit):
Preferred Stock - $1.00 par value; 10 shares authorized; none issued	—			—			—
Common Stock - $0.50 par value; 1,000 shares authorized; 286, 285 and 284 shares issued; 278, 277 and 276 shares outstanding, respectively	143			142			142
Paid-in Capital	869			847			806
Accumulated Other Comprehensive Income	49			52			49
Retained Earnings (Deficit)	(2,611		)	(2,182		)	(1,572		)
Less: Treasury Stock, at Average Cost; 8, 8 and 8 shares, respectively	(358		)	(358		)	(358		)
Total L Brands, Inc. Shareholders’ Equity (Deficit)	(1,908		)	(1,499		)	(933		)
Noncontrolling Interest	4			4			4
Total Equity (Accumulated Deficit)	(1,904		)	(1,495		)	(929		)
Total Liabilities and Equity (Deficit)	$	10,880		$	10,125		$	10,618

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

4

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

(in millions except per share amounts)

(Unaudited)

Second Quarter 2020

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings (Accumulated Deficit)			Treasury Stock, at Average Cost			Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, May 2, 2020	278	$	143	$	865	$	51		$	(2,562	)	$	(358	)	$	3	$	(1,858	)
Net Loss	—	—		—		—			(49		)	—			—		(49		)
Other Comprehensive Loss	—	—		—		(2		)	—			—			—		(2		)
Total Comprehensive Loss	—	—		—		(2		)	(49		)	—			—		(51		)
Share-based Compensation and Other	—	—		4		—			—			—			1		5
Balance, August 1, 2020	278	$	143	$	869	$	49		$	(2,611	)	$	(358	)	$	4	$	(1,904	)

Second Quarter 2019

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings (Accumulated Deficit)			Treasury Stock, at Average Cost			Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, May 4, 2019	276	$	142	$	786	$	55		$	(1,527	)	$	(358	)	$	4	$	(898	)
Net Income	—	—		—		—			38			—			—		38
Other Comprehensive Loss	—	—		—		(6		)	—			—			—		(6		)
Total Comprehensive Income (Loss)	—	—		—		(6		)	38			—			—		32
Cash Dividends ($0.30 per share)	—	—		—		—			(83		)	—			—		(83		)
Share-based Compensation and Other	—	—		20		—			—			—			—		20
Balance, August 3, 2019	276	$	142	$	806	$	49		$	(1,572	)	$	(358	)	$	4	$	(929	)

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

5

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)

(in millions except per share amounts)

(Unaudited)

Year-to-Date 2020

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings (Accumulated Deficit)			Treasury Stock, at Average Cost			Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, February 1, 2020	277	$	142	$	847	$	52		$	(2,182	)	$	(358	)	$	4	$	(1,495	)
Net Loss	—	—		—		—			(346		)	—			—		(346		)
Other Comprehensive Loss	—	—		—		(3		)	—			—			—		(3		)
Total Comprehensive Loss	—	—		—		(3		)	(346		)	—			—		(349		)
Cash Dividends ($0.30 per share)	—	—		—		—			(83		)	—			—		(83		)
Share-based Compensation and Other	1	1		22		—			—			—			—		23
Balance, August 1, 2020	278	$	143	$	869	$	49		$	(2,611	)	$	(358	)	$	4	$	(1,904	)

Year-to-Date 2019

	Common Stock			Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings (Accumulated Deficit)			Treasury Stock, at Average Cost			Noncontrolling Interest		Total Equity (Deficit)
	Shares Outstanding	Par Value
Balance, February 2, 2019	275	$	141	$	771	$	59		$	(1,482	)	$	(358	)	$	4	$	(865	)
Cumulative Effect of Accounting Change	—	—		—		—			(2		)	—			—		(2		)
Balance, February 3, 2019	275	141		771		59			(1,484		)	(358		)	4		(867		)
Net Income	—	—		—		—			78			—			—		78
Other Comprehensive Loss	—	—		—		(10		)	—			—			—		(10		)
Total Comprehensive Income (Loss)	—	—		—		(10		)	78			—			—		68
Cash Dividends ($0.60 per share)	—	—		—		—			(166		)	—			—		(166		)
Share-based Compensation and Other	1	1		35		—			—			—			—		36
Balance, August 3, 2019	276	$	142	$	806	$	49		$	(1,572	)	$	(358	)	$	4	$	(929	)

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

6

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Year-to-Date
	2020			2019
Operating Activities:
Net Income (Loss)	$	(346	)	$	78
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation of Long-lived Assets	266			295
Long-lived Store and Lease Asset Impairment Charges	214			—
Share-based Compensation Expense	28			44
Deferred Income Taxes	(19		)	15
Gain from Hong Kong Store Closure and Lease Termination	(39		)	—
Loss on Extinguishment of Debt	—			40
Gains on Distributions from Easton Investments	—			(2		)
Changes in Assets and Liabilities:
Accounts Receivable	37			55
Inventories	(191		)	(83		)
Accounts Payable, Accrued Expenses and Other	304			(107		)
Income Taxes Payable	(92		)	(138		)
Other Assets and Liabilities	124			(35		)
Net Cash Provided by Operating Activities	286			162
Investing Activities:
Capital Expenditures	(124		)	(244		)
Other Investing Activities	8			7
Net Cash Used for Investing Activities	(116		)	(237		)
Financing Activities:
Proceeds from Issuance of Long-Term Debt, Net of Issuance Costs	1,231			486
Payments of Long-term Debt	—			(799		)
Borrowing from Credit Agreement	950			—
Repayment of Credit Agreement	(950		)	—
Borrowings from Foreign Facilities	33			25
Repayments of Foreign Facilities	(85		)	(14		)
Dividends Paid	(83		)	(166		)
Tax Payments related to Share-based Awards	(6		)	(11		)
Other Financing Activities	(19		)	(4		)
Net Cash Provided by (Used for) Financing Activities	1,071			(483		)
Effects of Exchange Rate Changes on Cash and Cash Equivalents and Restricted Cash	(1		)	(2		)
Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash	1,240			(560		)
Cash and Cash Equivalents and Restricted Cash, Beginning of Period	1,499			1,413
Cash and Cash Equivalents and Restricted Cash, End of Period	$	2,739		$	853

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

7

L BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Basis of Presentation

Description of Business

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

• Bath & Body Works

• Victoria’s Secret

• PINK

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

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

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

Impacts of COVID-19

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

The Company's business operations and financial performance for 2020 have been materially impacted by the COVID-19 pandemic. All the Company's stores in North America were closed on March 17th and almost all remained closed as of the beginning of the second quarter. Operations for Victoria’s Secret Direct were temporarily suspended for approximately one week in late March, while Bath & Body Works Direct has remained open for the duration of 2020. The Company has re-opened approximately 1,600 Bath & Body Works stores and approximately 690 Victoria’s Secret stores in North America, representing the majority of its stores, as of August 1, 2020. On average, Bath & Body Works stores were closed for about half of the second quarter and Victoria’s Secret stores were closed for about 70% of the second quarter (including the impact of the approximately 250 stores which the Company plans to close). Additionally, the Company has dedicated resources to maximize capacity in its direct fulfillment centers to meet increased customer demand, while focusing on distribution, fulfillment and call center safety.

Since the global COVID-19 crisis began, the Company has taken prudent actions to manage expenses and to maintain its solid cash position and financial flexibility through the pandemic, including:

• Furloughing most store associates as of April 5 during their temporary store closure, while continuing to provide healthcare benefits for eligible associates;

• Suspending associate merit increases;

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

8

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

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

• Reducing Spring (first and second quarter) inventory receipts versus last year by approximately 45% at Victoria's Secret and PINK, and by approximately 20% at Bath & Body Works;

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

• Suspending most store and select office rent payments during the temporary closures. The Company is in active discussions with its landlords to negotiate with respect to these rent payments and go-forward occupancy costs;

• Converting the revolving credit facility to an asset-backed loan facility and issuing $1.25 billion in new notes; and

• Extending payment terms to vendors.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which, among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the coronavirus outbreak and options to defer payroll tax payments. Based on the Company's evaluation of the CARES Act, it qualifies for certain employer payroll tax credits, which will offset store operating expenses. Year-to-date the Company has recognized $54 million of qualified payroll tax credits.

For most stores and select office locations, rent from April through July was not paid, or only partially paid, due to the temporary closures during the COVID-19 pandemic. The Company is in active discussions with its landlords to negotiate with respect to these rent payments and go-forward occupancy costs. The Financial Accounting Standards Board (“FASB”) issued guidance in April, which allows COVID-19-related rent concessions to be treated as variable rent. The Company has not yet finalized negotiations with respect to the majority of its leases.

Fiscal Year

The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2020” and “second quarter of 2019” refer to the thirteen-week periods ended August 1, 2020 and August 3, 2019, respectively. “Year-to-Date 2020” and “year-to-date 2019” refer to the twenty-six-week periods ending August 1, 2020 and August 3, 2019, respectively.

Basis of Consolidation

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

The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income (Loss) in the Consolidated Statements of Income (Loss). The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other-than-temporary loss in value.

Interim Financial Statements

The Consolidated Financial Statements as of and for the periods ended August 1, 2020 and August 3, 2019 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto contained in the Company’s 2019 Annual Report on Form 10-K.

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

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

Restricted Cash

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

These deposits, totaling $128 million, are recorded in Other Assets on the August 1, 2020 Consolidated Balance Sheet. The Company's total Cash and Cash Equivalents and Restricted Cash was $2.739 billion as of August 1, 2020.

9

Derivative Financial Instruments

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

The earnings of the Company's wholly owned foreign businesses are subject to exchange rate risk as substantially all the merchandise is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure for its Canadian and U.K. businesses. Amounts are reclassified from accumulated other comprehensive income (loss) upon sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The fair value of designated cash flow hedges is not significant as of August 1, 2020.

Concentration of Credit Risk

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

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

Use of Estimates in the Preparation of Financial Statements

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

2. New Accounting Pronouncements

Credit Losses

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

Guarantor Reporting

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

3. Revenue Recognition

Accounts receivable, net from revenue-generating activities were $186 million as of August 1, 2020, $152 million as of February 1, 2020 and $174 million as of August 3, 2019. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days. As a result of the COVID-19 pandemic, the Company has extended the payment terms for certain partners.

The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. Deferred revenue was $316 million as of August 1, 2020, $342 million as of February 1, 2020 and $276 million as of August 3, 2019. The Company recognized $132 million as revenue year-to-date 2020 from amounts recorded as deferred revenue at the beginning of the year. As of August 1, 2020, the Company recorded deferred revenue of $304 million within Accrued Expenses and Other, and $12 million within Other Long-term Liabilities on the Consolidated Balance Sheet.

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

	Second Quarter				Year-to-Date
	2020		2019		2020		2019
	(in millions)
Bath & Body Works Stores (a)	$	678	$	883	$	1,102	$	1,597
Bath & Body Works Direct	519		178		807		335
Total Bath & Body Works	1,197		1,061		1,909		1,932
Victoria’s Secret Stores (a)	364		1,233		877		2,381
Victoria’s Secret Direct	614		373		922		735
Total Victoria’s Secret	978		1,606		1,799		3,116
Victoria's Secret and Bath & Body Works International (b)	80		155		146		289
Other (c)	64		80		120		193
Total Net Sales	$	2,319	$	2,902	$	3,974	$	5,530

 _______________

(a) Includes company-owned stores in the U.S. and Canada.

(b) Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.

(c) Includes wholesale revenues from the Company's sourcing function.

4. Restructuring

The Company remains committed to establishing Bath & Body Works as a pure-play public company and is taking the necessary steps to prepare Victoria's Secret to operate as a separate standalone company. Management of the Company is actively engaged in implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. During the second quarter of 2020, the Company completed its comprehensive review of its home office organizations in order to achieve meaningful reductions in overhead expenses and decentralize significant shared functions and services to support the creation of standalone companies. This resulted in a reduction of the home office headcount by approximately 15%, or about 850 associates. Pre-tax severance and related costs associated with these reductions, totaling $81 million, are included in General, Administrative and Store Operating Expenses in the 2020 Consolidated Statements of Loss. Costs of $26 million and $5 million are recorded within the Victoria's Secret and Bath & Body Works segments, respectively, while the remaining $50 million is recorded within Other. As of August 1, 2020, a liability of $79 million related to these costs is included in Accrued Expenses and Other on the Consolidated Balance Sheet.

Victoria's Secret U.K.

The Company is actively working to reduce operating losses in the Victoria's Secret U.K. business. The Company entered into "Light Administration" in June to restructure store lease agreements and explore the sale of the business to a joint venture or franchise partner. The Company subsequently signed a non-binding term sheet with a major fashion retailer and is in an exclusive period of negotiation.

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

Earnings (Loss) Per Share

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

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

	Second Quarter				Year-to-Date
	2020		2019		2020		2019
	(in millions)
Weighted-average Common Shares:
Issued Shares	286		284		285		284
Treasury Shares	(8	)	(8	)	(8	)	(8	)
Basic Shares	278		276		277		276
Effect of Dilutive Options and Restricted Stock (a)	—		2		—		2
Diluted Shares	278		278		277		278
Anti-dilutive Options and Awards (a)	11		6		12		5

 _______________

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

Shareholders’ Equity (Deficit)

Common Stock Share Repurchases

In March 2018, the Company's Board of Directors approved a $250 million repurchase program, which had $79 million remaining as of August 1, 2020.

The Company did not repurchase any shares during 2020 or 2019.

Dividends

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

	Ordinary Dividends		Total Paid
	(per share)		(in millions)
2020
Second Quarter	$	—	$	—
First Quarter	0.30		83
Total	$	0.30	$	83
2019
Second Quarter	$	0.30	$	83
First Quarter	0.30		83
Total	$	0.60	$	166

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

6. Inventories

The following table provides details of inventories as of August 1, 2020, February 1, 2020 and August 3, 2019:

	August 1, 2020		February 1, 2020		August 3, 2019
	(in millions)
Finished Goods Merchandise	$	1,259	$	1,152	$	1,132
Raw Materials and Merchandise Components	217		135		197
Total Inventories	$	1,476	$	1,287	$	1,329

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

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7. Long-Lived Assets

The following table provides details of property and equipment, net as of August 1, 2020, February 1, 2020 and August 3, 2019:

	August 1, 2020			February 1, 2020			August 3, 2019
	(in millions)
Property and Equipment, at Cost	$	6,276		$	6,613		$	6,808
Accumulated Depreciation and Amortization	(3,984		)	(4,127		)	(4,052		)
Property and Equipment, Net	$	2,292		$	2,486		$	2,756

Depreciation expense was $127 million and $150 million for the second quarter of 2020 and 2019, respectively. Depreciation expense was $266 million and $295 million for year-to-date 2020 and 2019, respectively.

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

The Company remains committed to taking the necessary steps to prepare the Victoria's Secret business to operate as a separate, standalone company. Management is actively working on implementing a comprehensive profit improvement plan that will better position the Company to evaluate the next steps for the separation of the Victoria's Secret business. A component of the profit improvement plan includes a rationalization of the Victoria’s Secret company-owned store footprint. The Company expects that it will close approximately 250 stores in North America in 2020. Given the closures as well as the negative operating results of certain Victoria's Secret stores, the Company determined that the estimated undiscounted future cash flows were less than the carrying values for certain asset groups and, as a result, determined the estimated fair values of the store asset groups using estimated discounted future cash flows and estimated market rental rates. Long-lived store asset impairment charges are included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Loss.

The following table provides pre-tax long-lived store asset impairment charges included in the 2020 Consolidated Statements of Loss:

	Second Quarter						Year-to-Date
	Store Asset Impairment		Operating Lease Asset Impairment		Total Impairment		Store Asset Impairment		Operating Lease Asset Impairment		Total Impairment
	(in millions)
Victoria's Secret (a)	$	14	$	61	$	75	$	111	$	61	$	172
Victoria's Secret and Bath & Body Works International (b)	—		42		42		—		42		42
Total	$	14	$	103	$	117	$	111	$	103	$	214

 ________________

(a) Includes stores in the U.S. and Canada.

(b) Includes stores in the U.K., Ireland and Greater China.

Victoria's Secret Hong Kong

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

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8. Equity Investments

The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $124 million as of August 1, 2020, $118 million as of February 1, 2020 and $102 million as of August 3, 2019, are recorded in Other Assets on the Consolidated Balance Sheets.

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

9. Income Taxes

The Company has historically calculated the provision for income taxes on the current estimate of the annual effective tax rate and adjusted as necessary for quarterly events. Due to the impacts of the COVID-19 pandemic, the income tax expense for the twenty-six-weeks ended August 1, 2020 was computed on a year-to-date effective tax rate.

For the second quarter of 2020, the Company’s effective tax rate was 17.7% compared to 10.1% in the second quarter of 2019. The second quarter of 2020 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to losses related to certain foreign subsidiaries, which generate no tax benefit, partially offset by recent changes in tax legislation included in the CARES Act, which resulted in a $21 million tax benefit. The second quarter of 2019 rate was lower than the Company's combined federal and state statutory rate primarily due to the resolution of certain tax matters.

For year-to-date 2020, the Company's effective tax rate was 26.7% compared to 24.0% year-to-date 2019. The year-to-date 2020 rate was generally consistent with the Company's combined estimated federal and state statutory rate due to the resolution of certain tax matters, which resulted in a $50 million tax benefit and recent changes in tax legislation included in the CARES Act, which resulted in a $21 million tax benefit, offset by losses related to certain foreign subsidiaries, which generate no tax benefit. The year-to-date 2019 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters.

Income taxes paid were $13 million and $169 million for the second quarter of 2020 and 2019, respectively. Income taxes paid were $22 million and $181 million for year-to-date 2020 and 2019, respectively.

Uncertain Tax Positions

The Company had unrecognized tax benefits of $88 million as of February 1, 2020, of which $81 million, if recognized, would reduce the effective income tax rate. Through August 1, 2020, the Company had a net decrease to gross unrecognized tax benefits of $31 million, primarily due to the resolution of certain tax matters. The changes to the unrecognized tax benefits resulted in a $30 million benefit to the Company’s Provision for Income Taxes year-to-date.

Of the total unrecognized tax benefits as of August 1, 2020, it is reasonably possible that $28 million could change in the next 12 months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in amounts which could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the period in which such matters are effectively settled.

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10. Long-term Debt and Borrowing Facilities

The following table provides the Company’s outstanding debt balance, net of unamortized debt issuance costs and discounts, as of August 1, 2020, February 1, 2020 and August 3, 2019:

	August 1, 2020		February 1, 2020		August 3, 2019
	(in millions)
Senior Secured Debt with Subsidiary Guarantee
$750 million, 6.875% Fixed Interest Rate Secured Notes due July 2025 ("2025 Secured Notes")	$	739	$	—	$	—
Secured Foreign Facilities	101		103		95
Total Senior Secured Debt with Subsidiary Guarantee	$	840	$	103	$	95
Senior Debt with Subsidiary Guarantee
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)	$	991	$	991	$	990
$860 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)	858		858		857
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)	693		693		693
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)	498		498		498
$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)	496		496		496
$500 million, 9.375% Fixed Interest Rate Notes due July 2025 ("2025 Notes")	492		—		—
$500 million, 7.50% Fixed Interest Rate Notes due June 2029 ("2029 Notes")	488		487		486
$450 million, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)	450		450		449
$297 million, 6.694% Fixed Interest Rate Notes due January 2027 (“2027 Notes”)	277		276		274
Total Senior Debt with Subsidiary Guarantee	$	5,243	$	4,749	$	4,743
Senior Debt
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)	$	348	$	348	$	348
$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)	298		298		297
Unsecured Foreign Facilities	—		50		67
Total Senior Debt	$