UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 _________________________________

FORM 10-Q

 _________________________________

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

For the quarterly period ended July 30, 2016

OR

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

For the transition period from              to             

Commission file number 1-8344

 _________________________________

L BRANDS, INC.

(Exact name of registrant as specified in its charter)

 _________________________________

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

_______________ 

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

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

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

Large accelerated filer	ý	Accelerated filer	o
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.50 Par Value	Outstanding at August 26, 2016
	285,971,758 Shares

L BRANDS, INC.

TABLE OF CONTENTS

	Page No.
Part I. Financial Information
Item 1. Financial Statements *
Consolidated Statements of Income for the Thirteen Weeks and Twenty-Six Weeks Ended July 30, 2016 and August 1, 2015 (Unaudited)	3
Consolidated Statements of Comprehensive Income for the Thirteen Weeks and Twenty-Six Weeks Ended July 30, 2016 and August 1, 2015 (Unaudited)	3
Consolidated Balance Sheets as of July 30, 2016 (Unaudited), January 30, 2016 and August 1, 2015 (Unaudited)	4
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 30, 2016 and August 1, 2015 (Unaudited)	5
Notes to Consolidated Financial Statements (Unaudited)	6
Report of Independent Registered Public Accounting Firm	29
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995	30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	50
Part II. Other Information	51
Item 1. Legal Proceedings	51
Item 1A. Risk Factors	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3. Defaults Upon Senior Securities	51
Item 4. Mine Safety Disclosures	51
Item 5. Other Information	51
Item 6. Exhibits	52
Signature	53

* The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2016” and “second quarter of 2015” refer to the thirteen week periods ending July 30, 2016 and August 1, 2015, respectively. “Year-to-date 2016” and “year-to-date 2015” refer to the twenty-six week periods ending July 30, 2016 and August 1, 2015, respectively.

2

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in millions except per share amounts)

(Unaudited)

	Second Quarter						Year-to-Date
	2016			2015			2016			2015
Net Sales	$	2,890		$	2,765		$	5,504		$	5,277
Costs of Goods Sold, Buying and Occupancy	(1,777		)	(1,651		)	(3,348		)	(3,107		)
Gross Profit	1,113			1,114			2,156			2,170
General, Administrative and Store Operating Expenses	(705		)	(711		)	(1,424		)	(1,395		)
Operating Income	408			403			732			775
Interest Expense	(101		)	(78		)	(199		)	(158		)
Other Income (Loss)	73			(2		)	80			76
Income Before Income Taxes	380			323			613			693
Provision for Income Taxes	128			121			208			240
Net Income	$	252		$	202		$	405		$	453
Net Income Per Basic Share	$	0.88		$	0.69		$	1.41		$	1.55
Net Income Per Diluted Share	$	0.87		$	0.68		$	1.39		$	1.52
Dividends Per Share	$	0.60		$	0.50		$	3.20		$	3.00

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Second Quarter						Year-to-Date
	2016			2015			2016			2015
Net Income	$	252		$	202		$	405		$	453
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	(18		)	22			(10		)	12
Unrealized Gain (Loss) on Cash Flow Hedges	5			14			(11		)	4
Reclassification of Cash Flow Hedges to Earnings	(5		)	(27		)	9			(10		)
Unrealized Loss on Marketable Securities	(2		)	—			(3		)	—
Reclassification of Gain on Marketable Securities to Earnings	—			—			(3		)	—
Total Other Comprehensive Income (Loss), Net of Tax	(20		)	9			(18		)	6
Total Comprehensive Income	$	232		$	211		$	387		$	459

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)

	July 30, 2016			January 30, 2016			August 1, 2015
	(Unaudited)						(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,273		$	2,548		$	780
Accounts Receivable, Net	266			261			257
Inventories	1,204			1,122			1,106
Other	217			225			320
Total Current Assets	2,960			4,156			2,463
Property and Equipment, Net	2,586			2,330			2,275
Goodwill	1,348			1,318			1,318
Trade Names and Other Intangible Assets, Net	411			411			411
Deferred Income Taxes	30			30			27
Other Assets	206			248			244
Total Assets	$	7,541		$	8,493		$	6,738
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable	$	793		$	668		$	725
Accrued Expenses and Other	879			977			840
Current Portion of Long-term Debt	13			6			—
Income Taxes	134			224			5
Total Current Liabilities	1,819			1,875			1,570
Deferred Income Taxes	268			257			246
Long-term Debt	5,706			5,715			4,720
Other Long-term Liabilities	877			904			849
Shareholders’ Equity (Deficit):
Preferred Stock - $1.00 par value; 10 shares authorized; none issued	—			—			—
Common Stock - $0.50 par value; 1,000 shares authorized; 314, 313 and 312 shares issued; 286, 290 and 291 shares outstanding, respectively	157			156			156
Paid-in Capital	597			545			483
Accumulated Other Comprehensive Income	22			40			41
Retained Earnings (Accumulated Deficit)	(203		)	315			(194		)
Less: Treasury Stock, at Average Cost; 28, 23 and 21 shares, respectively	(1,703		)	(1,315		)	(1,134		)
Total L Brands, Inc. Shareholders’ Equity (Deficit)	(1,130		)	(259		)	(648		)
Noncontrolling Interest	1			1			1
Total Equity (Deficit)	(1,129		)	(258		)	(647		)
Total Liabilities and Equity (Deficit)	$	7,541		$	8,493		$	6,738

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

4

L BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

	Year-to-Date
	2016			2015
Operating Activities:
Net Income	$	405		$	453
Adjustments to Reconcile Net Income to Net Cash Provided by (Used for) Operating Activities:
Depreciation and Amortization of Long-lived Assets	245			224
Amortization of Landlord Allowances	(23		)	(20		)
Share-based Compensation Expense	46			50
Deferred Income Taxes	15			7
Excess Tax Benefits from Share-based Compensation	(37		)	(61		)
Gain on Distribution from Easton Town Center, LLC	(108		)	—
Loss on Extinguishment of Debt	36			—
Gain on Sale of Marketable Securities	(4		)	—
Gain on Divestiture of Third-party Apparel Sourcing Business	—			(78		)
Loss on Sale of Assets	—			3
Changes in Assets and Liabilities, Net of Assets and Liabilities from Acquisition:
Accounts Receivable	(15		)	(6		)
Inventories	(77		)	(71		)
Accounts Payable, Accrued Expenses and Other	(33		)	(36		)
Income Taxes Payable	(53		)	(151		)
Other Assets and Liabilities	24			61
Net Cash Provided by Operating Activities	421			375
Investing Activities:
Capital Expenditures	(497		)	(358		)
Return of Capital from Easton Town Center, LLC	108			—
Acquisition, Net of Cash Acquired of $1	(31		)	—
Proceeds from Sale of Marketable Securities	10			—
Proceeds from Sale of Assets	—			135
Proceeds from Divestiture of Third-party Apparel Sourcing Business	—			85
Purchase of Marketable Securities	—			(50		)
Other Investing Activities	16			1
Net Cash Used for Investing Activities	(394		)	(187		)
Financing Activities:
Proceeds from Issuance of Long-term Debt, Net of Issuance Costs	692			—
Payment of Long-term Debt	(742		)	—
Borrowings from Revolving Facilities	10			—
Dividends Paid	(923		)	(880		)
Repurchases of Common Stock	(385		)	(295		)
Excess Tax Benefits from Share-based Compensation	37			61
Proceeds from Exercise of Stock Options	13			23
Financing Costs and Other	(1		)	—
Net Cash Used for Financing Activities	(1,299		)	(1,091		)
Effects of Exchange Rate Changes on Cash and Cash Equivalents	(3		)	2
Net Decrease in Cash and Cash Equivalents	(1,275		)	(901		)
Cash and Cash Equivalents, Beginning of Period	2,548			1,681
Cash and Cash Equivalents, End of Period	$	1,273		$	780

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

5

L BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business and Basis of Presentation

Description of Business

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

• Victoria’s Secret

• PINK

• Bath & Body Works

• La Senza

• Henri Bendel

Fiscal Year

The Company’s fiscal year ends on the Saturday nearest to January 31. As used herein, “second quarter of 2016” and “second quarter of 2015” refer to the thirteen week periods ending July 30, 2016 and August 1, 2015, respectively. "Year-to-date 2016" and "year-to-date 2015" refer to the twenty-six week periods ending July 30, 2016 and August 1, 2015, 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 on the Consolidated Statements of Income. The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income on the Consolidated Statements of Income. The Company’s equity method investments are required to be tested 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 July 30, 2016 and August 1, 2015 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 2015 Annual Report on Form 10-K.

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

Seasonality of Business

Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.

Concentration of Credit Risk and Investments

The Company maintains cash and cash equivalents and derivative contracts with various major financial institutions. The Company monitors the relative credit standing of financial institutions with whom the Company transacts and limits the amount of credit exposure with any one entity. Currently, 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.

6

Use of Estimates in the Preparation of Financial Statements

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

2. New Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective beginning in fiscal 2018, with early adoption as of fiscal 2017 permitted. The standard allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating this standard, including the transition method and timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal 2019, with early adoption permitted. The Company is currently evaluating this standard, including the timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.

Simplifying the Presentation of Share-Based Compensation

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance requires companies to recognize income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The standard also will require all tax-related cash flows resulting from share-based payments to be reported as operating activities on the statements of cash flows, and any cash payments made to taxing authorities on an employee's behalf as financing activities. The standard will be effective beginning in fiscal 2017, with early adoption permitted. The Company is currently evaluating this standard, including the timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This guidance requires companies to recognize debt issuance costs related to recognized debt liabilities on the balance sheet as a direct deduction from the carrying amount of those debt liabilities, consistent with debt discounts. This guidance is effective beginning in fiscal year 2016, with early adoption permitted.

The Company elected to early adopt this standard effective January 30, 2016. Upon adoption, prior period financial statements were recast as required by the standard to present debt issuance costs as a direct deduction from the carrying value of the related debt liabilities. The impact of the adoption of this standard is a decrease of $39 million to Other Assets and Long-term Debt on the August 1, 2015 Consolidated Balance Sheet.

Balance Sheet Classification of Deferred Taxes

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies to present all deferred tax assets and liabilities as noncurrent in the balance sheet. This guidance will be effective beginning in fiscal 2017, and early adoption is permitted.

The Company elected to early adopt this standard effective January 30, 2016 using the retrospective application transition method. Upon adoption, prior period financial statements were recast to present all deferred tax assets and liabilities as noncurrent on the balance sheet. The impact of the adoption of this standard on the August 1, 2015 Consolidated Balance Sheet

7

is a decrease in current deferred income tax assets of approximately $35 million; an increase in noncurrent deferred income tax assets of $8 million; and a decrease to noncurrent deferred income tax liabilities of $27 million.

3. Earnings Per Share and Shareholders’ Equity (Deficit)

Earnings Per Share

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

The following table provides shares utilized for the calculation of basic and diluted earnings per share for the second quarter and year-to-date 2016 and 2015:

	Second Quarter				Year-to-Date
	2016		2015		2016		2015
	(in millions)
Weighted-average Common Shares:
Issued Shares	314		312		314		312
Treasury Shares	(27	)	(21	)	(27	)	(20	)
Basic Shares	287		291		287		292
Effect of Dilutive Options and Restricted Stock	4		6		5		6
Diluted Shares	291		297		292		298
Anti-dilutive Options and Awards (a)	3		1		2		1

 _______________

(a) These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

Shareholders’ Equity (Deficit)

Common Stock Share Repurchases

Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs for year-to-date 2016 and 2015:

	Amount Authorized		Shares Repurchased		Amount Repurchased				Average Stock Price of Shares Repurchased within Program
Repurchase Program			2016	2015	2016		2015
	(in millions)		(in thousands)		(in millions)
February 2016	$	500	4,968	NA	$	388	NA		$	78.07
June 2015	$	250	NA	624	NA		$	52	$	83.75
February 2015	$	250	NA	2,788	NA		$	250	$	89.45

In the first quarter of 2016, the Company's Board of Directors approved a new $500 million share repurchase program, which included $17 million remaining under the June 2015 repurchase program.

The February 2016 repurchase program had $112 million remaining as of July 30, 2016. Subsequent to July 30, 2016, the Company repurchased an additional 0.3 million shares of common stock for $19 million under this program.

There were $3 million of share repurchases reflected in Accounts Payable on the July 30, 2016 Consolidated Balance Sheet and $7 million as of August 1, 2015. There were no share repurchases reflected in Accounts Payable on the January 30, 2016 Consolidated Balance Sheet.

8

Dividends

Under the authority and declaration of the Board of Directors, the Company paid the following dividends during year-to-date 2016 and 2015:

	Ordinary Dividends		Special Dividends		Total Dividends		Total Paid
	(per share)						(in millions)
2016
Second Quarter	$	0.60	$	—	$	0.60	$	173
First Quarter	0.60		2.00		2.60		750
2016 Total	$	1.20	$	2.00	$	3.20	$	923
2015
Second Quarter	$	0.50	$	—	$	0.50	$	146
First Quarter	0.50		2.00		2.50		734
2015 Total	$	1.00	$	2.00	$	3.00	$	880

4. Acquisition

On April 18, 2016, the Company completed the acquisition of 100% of the shares of American Beauty Limited for a total purchase price of $44 million. This agreement includes the reacquisition of the franchise rights from one of our partners to operate Victoria's Secret Beauty and Accessories stores in Greater China, including 26 stores already open at the time of acquisition. The purchase price includes $10 million in forgiveness of liabilities owed to the Company from the pre-existing relationship and $2 million related to consideration not yet paid. As a result of this acquisition, the Company's financial statements now include the financial results of American Beauty Limited, which are reported as part of the Victoria's Secret and Bath & Body Works International segment.

The total purchase price was allocated to the net tangible and intangible assets acquired based on their estimated fair value. Such estimated fair values require management to make estimates and judgments, especially with respect to intangible assets. The allocation of the purchase price to goodwill was complete as of July 30, 2016. Goodwill related to the acquisition is not deductible for tax purposes.

The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is as follows:

	(in millions)
Cash and Cash Equivalents	$	1
Inventories	3
Property and Equipment	10
Goodwill	30
Other Assets	3
Current Liabilities	(3		)
Net Assets Acquired	$	44
Forgiveness of Liabilities Owed to the Company	(10		)
Consideration Not Yet Paid	(2		)
Consideration Paid at Closing	$	32

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5. Restructuring Activities

During the first quarter of 2016, the Company announced strategic actions within the Victoria’s Secret segment designed to focus the brand on its core merchandise categories and streamline operations. The Company announced it will place more focus on brand building and loyalty-enhancing marketing and advertising rather than using traditional catalogues and offers. As a result of these actions, the Company recorded charges related to cancellations of fabric commitments for non-go forward merchandise and a reserve against paper that was previously intended for future catalogues. These costs, totaling $11 million, including non-cash charges of $10 million, are included in Cost of Goods Sold, Buying and Occupancy on the year-to-date 2016 Consolidated Statement of Income. These actions also resulted in the elimination of approximately 200 positions primarily in the Company's Ohio and New York home offices. Severance and related costs associated with these eliminations, totaling $24 million, are included in General, Administrative and Store Operating Expenses on the year-to-date 2016 Consolidated Statement of Income. The Company recognized a total pre-tax charge of $35 million for these items in the first quarter of 2016. Through the second quarter of 2016, the Company made cash payments of $8 million and decreased the estimate of expected severance and related costs by $1 million. The remaining balance of $16 million is included in Accrued Expenses and Other on the July 30, 2016 Consolidated Balance Sheet.

6. Inventories

The following table provides details of inventories as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016		January 30, 2016		August 1, 2015
	(in millions)
Finished Goods Merchandise	$	1,062	$	1,014	$	963
Raw Materials and Merchandise Components	142		108		143
Total Inventories	$	1,204	$	1,122	$	1,106

Inventories are principally valued at the lower of cost, as determined by the weighted-average cost method, or market.

7. Property and Equipment, Net

The following table provides details of property and equipment, net as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016			January 30, 2016			August 1, 2015
	(in millions)
Property and Equipment, at Cost	$	5,991		$	5,639		$	5,565
Accumulated Depreciation and Amortization	(3,405		)	(3,309		)	(3,290		)
Property and Equipment, Net	$	2,586		$	2,330		$	2,275

Depreciation expense was $124 million and $113 million for the second quarter of 2016 and 2015, respectively. Depreciation expense was $245 million and $224 million for year-to-date 2016 and 2015, respectively.

8. Equity Investments and Other

Third-party Apparel Sourcing Business

In the first quarter of 2015, the Company divested its remaining ownership interest in its third-party apparel sourcing business. The Company received cash proceeds of $85 million and recognized a pre-tax gain of $78 million (after-tax gain of $69 million). The gain is included in Other Income (Loss) in the year-to-date 2015 Consolidated Statement of Income and the cash proceeds are included in Proceeds from Divestiture of Third-party Apparel Sourcing Business within the Investing Activities section of the 2015 Consolidated Statement of Cash Flows.

Easton Investments

The Company has land and other investments in Easton, a 1,300-acre planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments totaled $80 million as of July 30, 2016, $86 million as of January 30, 2016 and $94 million as of August 1, 2015 and are recorded in Other Assets on the Consolidated Balance Sheets.

Included in the Company’s Easton investments is an equity interest in Easton Town Center, LLC (“ETC”), an entity that owns and has developed a commercial entertainment and shopping center. The Company’s investment in ETC is accounted for using the equity method of accounting. The Company has a majority financial interest in ETC, but another unaffiliated member

10

manages ETC. Certain significant decisions regarding ETC require the consent of unaffiliated members in addition to the Company.

In July 2016, ETC refinanced its bank loan. In conjunction with the loan refinancing, the Company received a cash distribution from ETC of $124 million and recognized a pre-tax gain of $108 million (after-tax gain of $70 million). The gain is included in Other Income (Loss) on the 2016 Consolidated Statements of Income and the return of capital is included within the Investing Activities section of the 2016 Consolidated Statement of Cash Flows.

Also included in the Company's Easton investments is an equity interest in Easton Gateway, LLC ("EG"), an entity that owns and has developed a commercial shopping center in the Easton community. The Company's investment in EG is accounted for using the equity method of accounting. The Company has a majority financial interest in EG, but another unaffiliated member manages EG. Certain significant decisions regarding EG require the consent of the unaffiliated member in addition to the Company.

9. Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s quarterly effective tax rate does not reflect a benefit associated with losses related to certain foreign subsidiaries.

For the second quarter of 2016, the Company’s effective tax rate was 33.6% compared to 37.4% in the second quarter of 2015. The second quarter 2016 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The second quarter 2015 rate was lower than the Company’s combined estimated federal and state statutory rate primarily due to foreign earnings taxed at a rate lower than our combined federal and state rate.

For year-to-date 2016, the Company’s effective tax rate was 34.0% compared to 34.6% year-to-date 2015. The year-to-date 2016 rate was lower than the Company's combined estimated federal and state statutory rate primarily due to the resolution of certain tax matters. The year-to-date 2015 rate was lower than the Company’s combined estimated federal and state statutory rate primarily due to the foreign portion of the divestiture of our third-party apparel sourcing business.

As of July 30, 2016, any unrecognized deferred income tax liability resulting from the Company's undistributed foreign earnings from non-U.S. subsidiaries is not expected to reverse in the foreseeable future; furthermore, the undistributed foreign earnings are permanently reinvested. If the Company elects to distribute these foreign earnings in the future, they could be subject to additional income taxes. Determination of the amount of any unrecognized deferred income tax liability on these undistributed foreign earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

Income taxes paid were approximately $111 million and $182 million for the second quarter of 2016 and 2015, respectively. Income taxes paid were approximately $338 million and $370 million for year-to-date 2016 and 2015, respectively.

Uncertain Tax Positions

The Company had gross unrecognized tax benefits of $248 million as of January 30, 2016, of which approximately $217 million, if recognized, would favorably affect the effective income tax rate in future periods. For year-to-date 2016, the Company had a net decrease to gross unrecognized tax benefits of $90 million, primarily due to the resolution of certain tax matters, resulting in an $11 million benefit to the Company's Provision for Income Taxes.

Of the total unrecognized benefits as of July 30, 2016, it is reasonably possible that $83 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.

The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. As of July 30, 2016, January 30, 2016 and August 1, 2015, the Company had accrued $27 million, $38 million, and $36 million respectively, for the payment of interest and penalties.

11

10. Long-term Debt

The following table provides the Company’s debt balance, net of debt issuance costs and unamortized discounts, as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016			January 30, 2016			August 1, 2015
	(in millions)
Senior Unsecured Debt with Subsidiary Guarantee
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)	$	989		$	988		$	—
$1 billion, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)	992			991			990
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)	991			990			989
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)	692			—			—
$500 million, 8.50% Fixed Interest Rate Notes due June 2019 (“2019 Notes”)(a)	500			499			495
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)	497			496			496
$400 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)	396			396			395
Total Senior Unsecured Debt with Subsidiary Guarantee	$	5,057		$	4,360		$	3,365
Senior Unsecured Debt
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)	$	348		$	348		$	348
$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)	297			297			297
$700 million, 6.90% Fixed Interest Rate Notes due July 2017 (“2017 Notes”)(b)	—			709			710
Foreign Facilities	17			7			—
Total Senior Unsecured Debt	$	662		$	1,361		$	1,355
Total	$	5,719		$	5,721		$	4,720
Current Portion of Long-term Debt	(13		)	(6		)	—
Total Long-term Debt, Net of Current Portion	$	5,706		$	5,715		$	4,720

________________

(a) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $8 million as of July 30, 2016, $8 million as of January 30, 2016 and $5 million as of August 1, 2015.

(b) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $10 million as of January 30, 2016 and $11 million as of August 1, 2015.

In the fourth quarter of 2015, the Company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The impact of the adoption of this standard is a decrease to Other Assets and Long-term Debt on the August 1, 2015 Consolidated Balance Sheet of $39 million. For additional information, see Note 2, "New Accounting Pronouncements."

Issuance of Notes

In June 2016, the Company issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by certain of the Company's 100% owned subsidiaries (the "Guarantors"). The proceeds from the issuance were $692 million, which were net of issuance costs of $8 million. These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the July 30, 2016 Consolidated Balance Sheet.

In October 2015, the Company issued $1 billion of 6.875% notes due in November 2035. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The proceeds from the issuance were $988 million, which were net of issuance costs of $12 million. These issuance costs are being amortized through the maturity date of November 2035 and are included within Long-term Debt on the July 30, 2016 and January 30, 2016 Consolidated Balance Sheets.

Repurchase of Notes

In July 2016, the Company used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. The pre-tax net loss on extinguishment of this debt was $36 million (after-tax net loss of $22 million), which is net of gains of $7 million related to terminated interest rate swaps associated with the 2017 Notes. This loss is included in Other Income (Loss) in the 2016 Consolidated Statements of Income.

12

Revolving Facilities

The Company maintains a secured revolving credit facility (“Revolving Facility”). The Revolving Facility has aggregate availability of $1 billion and expires July 18, 2019. The fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings or British pound borrowings is London Interbank Offered Rate (“LIBOR”) plus 1.50% per annum. The interest rate on outstanding Canadian dollar borrowings is Canadian Dollar Offered Rate ("CDOR") plus 1.50% per annum.

The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. The Company is required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of July 30, 2016, the Company was in compliance with both of its financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.

As of July 30, 2016, there were no borrowings outstanding under the Revolving Facility.

The Revolving Facility supports the Company’s letter of credit program. The Company had $8 million of outstanding letters of credit as of July 30, 2016 that reduce its remaining availability under the Revolving Facility.

In addition to the Revolving Facility, the Company maintains various revolving and term loan bank facilities with availability totaling $100 million to support its foreign operations ("Foreign Facilities"). These Foreign Facilities mature between November 15, 2016 and July 31, 2017. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing.

During the second quarter of 2016, the Company borrowed $4 million under the Foreign Facilities. The maximum daily amount outstanding at any point in time during 2016 was $17 million. As of July 30, 2016, there were borrowings of $17 million outstanding under the Foreign Facilities.

Fair Value Interest Rate Swap Arrangements

For information related to the Company’s fair value interest rate swap arrangements, see Note 11, “Derivative Instruments.”

11. Derivative Instruments

Foreign Exchange Risk

The Company has a cross-currency swap related to an intercompany loan of approximately CAD$170 million maturing in January 2018 which is designated as a cash flow hedge of foreign currency exchange risk. This cross-currency swap mitigates the exposure to fluctuations in the U.S. dollar-Canadian dollar exchange rate related to the Company's Canadian operations. The cross-currency swap requires the periodic exchange of fixed-rate Canadian dollar interest payments for fixed-rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. Changes in the U.S. dollar-Canadian dollar exchange rate and the related swap settlements result in reclassification of amounts from accumulated other comprehensive income to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loan.

13

The following table provides a summary of the fair value and balance sheet classification of the derivative financial instruments designated as foreign exchange cash flow hedges as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016		January 30, 2016		August 1, 2015
	(in millions)
Other Assets	$	16	$	27	$	25

The following table provides a summary of the pre-tax financial statement effect of the gains and losses on the Company’s derivative instruments designated as foreign exchange cash flow hedges for the second quarter and year-to-date 2016 and 2015:

		Second Quarter						Year-to-Date
	Location	2016			2015			2016			2015
		(in millions)
Gain (Loss) Recognized in Other Comprehensive Income (Loss)	Other Comprehensive Income (Loss)	$	5		$	14		$	(11	)	$	4
(Gain) Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Other Income (Loss) (a)	Other Income (Loss)	(5		)	(27		)	9			(10		)

________________

(a) Represents reclassification of amounts from accumulated other comprehensive income (loss) to earnings to completely offset foreign currency transaction gains and losses recognized on the intercompany loans. No ineffectiveness was associated with these foreign exchange cash flow hedges.

Interest Rate Risk

Interest Rate Designated Fair Value Hedges

The Company has interest rate swap arrangements related to $300 million of the outstanding 2019 Notes. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage.

The swap arrangements are designated as fair value hedges. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.

The following table provides a summary of the fair value and balance sheet classification of the derivative financial instruments designated as interest rate fair value hedges as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016		January 30, 2016		August 1, 2015
	(in millions)
Other Assets	$	8	$	11	$	7

12. Fair Value Measurements

The following table provides a summary of the principal value and estimated fair value of long-term debt as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016		January 30, 2016		August 1, 2015
	(in millions)
Principal Value	$	5,750	$	5,750	$	4,750
Fair Value (a)	6,349		6,209		5,233

 _______________

(a) The estimated fair value of the Company’s publicly traded debt is based on reported transaction prices which are considered Level 2 inputs in accordance with ASC Topic 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

14

The authoritative guidance included in ASC Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

• Level 1 – Quoted market prices in active markets for identical assets or liabilities.

• Level 2 – Observable inputs other than quoted market prices included in Level 1, such as quoted prices of similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following table provides a summary of assets and liabilities measured in the consolidated financial statements at fair value on a recurring basis as of July 30, 2016, January 30, 2016 and August 1, 2015:

	Level 1		Level 2		Level 3		Total
	(in millions)
As of July 30, 2016
Assets:
Cash and Cash Equivalents	$	1,273	$	—	$	—	$	1,273
Marketable Securities	8		—		—		8
Interest Rate Designated Fair Value Hedges	—		8		—		8
Cross-currency Cash Flow Hedges	—		16		—		16
As of January 30, 2016
Assets:
Cash and Cash Equivalents	$	2,548	$	—	$	—	$	2,548
Marketable Securities	22		—		—		22
Interest Rate Designated Fair Value Hedges	—		11		—		11
Cross-currency Cash Flow Hedges	—		27		—		27
As of August 1, 2015
Assets:
Cash and Cash Equivalents	$	780	$	—	$	—	$	780
Marketable Securities	50		—		—		50
Interest Rate Designated Fair Value Hedges	—		7		—		7
Cross-currency Cash Flow Hedges	—		25		—		25

The Company's Level 1 fair value measurements use unadjusted quoted prices in active markets for identical assets. In the first quarter of 2015, the Company invested $50 million in U.S. Treasury Bills which were classified as available-for-sale. These securities were sold in the third quarter of 2015. In the third quarter of 2015, the Company invested $10 million in marketable equity securities which were classified as available-for-sale. In the first quarter of 2016, the Company sold a portion of this investment and received cash proceeds of $10 million and recognized a pre-tax gain of $4 million (after-tax gain of $3 million). The gain is included within Other Income on the 2016 Consolidated Statement of Income, and the cash proceeds are included in Proceeds from Sale of Marketable Securities within the Investing Activities section of the 2016 Consolidated Statement of Cash Flows. These securities are classified as Level 1 fair value measurements as they are traded with sufficient frequency and volume to enable the Company to obtain pricing information on an ongoing basis.

The Company’s Level 2 fair value measurements use market approach valuation techniques. The primary inputs to these techniques include benchmark interest rates and foreign currency exchange rates, as applicable to the underlying instruments.

Management believes that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.

15

13. Comprehensive Income

The following table provides the rollforward of accumulated other comprehensive income (loss) for year-to-date 2016:

	Foreign Currency Translation			Cash Flow Hedges			Marketable Securities			Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance as of January 30, 2016	$	28		$	4		$	8		$	40
Other Comprehensive Income (Loss) Before Reclassifications	(10		)	(11		)	(3		)	(24		)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	—			9			(3		)	6
Current-period Other Comprehensive Income (Loss)	(10		)	(2		)	(6		)	(18		)
Balance as of July 30, 2016	$	18		$	2		$	2		$	22

The following table provides the rollforward of accumulated other comprehensive income (loss) for year-to-date 2015:

	Foreign Currency Translation		Cash Flow Hedges			Marketable Securities		Accumulated Other Comprehensive Income (Loss)
	(in millions)
Balance as of January 31, 2015	$	51	$	(16	)	$	—	$	35
Other Comprehensive Income (Loss) Before Reclassifications	12		4			—		16
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	—		(10		)	—		(10		)
Current-period Other Comprehensive Income (Loss)	12		(6		)	—		6
Balance as of August 1, 2015	$	63	$	(22	)	$	—	$	41

The components of accumulated other comprehensive income (loss) above are presented net of tax as applicable.

The following table provides a summary of the reclassification adjustments out of accumulated other comprehensive income (loss) for the second quarter and year-to-date 2016 and 2015:

Details About Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)												Location on Consolidated Statements of Income
	Second Quarter						Year-to-Date
	2016			2015			2016			2015
	(in millions)
(Gain) Loss on Cash Flow Hedges	$	(5	)	$	(27	)	$	9		$	(10	)	Other Income (Loss)
	—			—			—			—			Provision for Income Taxes
	$	(5	)	$	(27	)	$	9		$	(10	)	Net Income
Sale of Available-for-Sale Securities	$	—		$	—		$	(4	)	$	—		Other Income (Loss)
	—			—			1			—			Provision for Income Taxes
	$	—		$	—		$	(3	)	$	—		Net Income

14. Commitments and Contingencies

The Company is subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Actions filed against the Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Management believes that the ultimate liability arising from such claims and contingencies, if any, is not likely to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

16

Guarantees

In connection with the disposition of certain businesses, the Company has remaining guarantees of approximately $20 million related to lease payments of Express, Limited Stores and Dick’s Sporting Goods under the current terms of noncancellable leases expiring at various dates through 2021. These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the businesses. In certain instances, the Company’s guarantee may remain in effect if the term of a lease is extended. The Company has not recorded a liability with respect to any of these guarantee obligations as it concluded that payments under these guarantees were not probable as of July 30, 2016.

In connection with the sale and leaseback under noncancellable operating leases of certain assets, the Company provides residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire in 2020, and the total amount of the guarantees is approximately $105 million. The Company recorded a liability of $3 million related to these guarantee obligations as of July 30, 2016 and January 30, 2016, which is included in Other Long-term Liabilities on the Consolidated Balance Sheets.

15. Retirement Benefits

The Company sponsors a tax-qualified defined contribution retirement plan and a non-qualified supplemental retirement plan for substantially all of its associates within the U.S. Participation in the tax-qualified plan is available to associates who meet certain age and service requirements. Participation in the non-qualified plan is available to associates who meet certain age, service, job level and compensation requirements.

The qualified plan permits participating associates to elect contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible annual compensation and years of service. Associate contributions and Company matching contributions vest immediately. Additional Company contributions and the related investment earnings are subject to vesting based on years of service. Total expense recognized related to the qualified plan was $15 million for the second quarter of 2016 and $14 million for the second quarter of 2015. Total expense recognized related to the qualified plan was $32 million for year-to-date 2016 and $31 million for year-to-date 2015.

The non-qualified plan is an unfunded plan which provides benefits beyond the Internal Revenue Code limits for qualified defined contribution plans. The plan permits participating associates to elect contributions up to a maximum percentage of eligible compensation. The Company matches associate contributions according to a predetermined formula and contributes additional amounts based on a percentage of the associates’ eligible compensation and years of service. The plan also permits participating associates to defer additional compensation up to a maximum amount which the Company does not match. Associates’ accounts are credited with interest using a fixed rate determined by the Company and reviewed by the Compensation Committee of the Board of Directors, prior to the beginning of each year. Associate contributions and the related interest vest immediately. Company contributions, along with related interest, are subject to vesting based on years of service. Associates may elect in-service distributions for the unmatched additional deferred compensation component only. The remaining vested portion of associates’ accounts in the plan will be distributed upon termination of employment in either a lump sum or in annual installments over a specified period of up to 10 years. Total expense recognized related to the non-qualified plan was $6 million for the second quarter of 2016 and 2015. Total expense recognized related to the non-qualified plan was $13 million for year-to-date 2016 and 2015.

16. Segment Information

The Company has three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International.

The Victoria’s Secret segment sells women’s intimate and other apparel and personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold through retail stores located in the U.S. and Canada and its website, www.VictoriasSecret.com.

The Bath & Body Works segment sells personal care, soaps, sanitizers and home fragrance products under the Bath & Body Works, White Barn, C.O. Bigelow and other brand names. Bath & Body Works merchandise is sold at retail stores located in the U.S. and Canada and through its website, www.BathandBodyWorks.com.

17

The Victoria's Secret and Bath & Body Works International segment includes the Victoria's Secret and Bath & Body Works company-owned and partner-operated stores located outside of the U.S. and Canada. These businesses include the following:

• Victoria's Secret Beauty and Accessories stores, comprised of company-owned stores in Greater China, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature Victoria's Secret branded beauty and accessories products;

• Victoria's Secret International stores, comprised of company-owned stores in the U.K., as well as stores operated by partners under franchise, license and wholesale arrangements; and

• Bath & Body Works International stores operated by partners under franchise, license and wholesale arrangements.

Other consists of the following:

• Mast Global, a merchandise sourcing and production function serving the Company and its international partners;

• La Senza, comprised of company-owned stores in Canada, as well as stores operated by partners under franchise, license and wholesale arrangements, which feature women's intimate apparel;

• Henri Bendel, operator of 29 specialty stores which feature handbags, jewelry and other accessory products; and

• Corporate functions including non-core real estate, equity investments and other governance functions such as treasury and tax.

The following table provides the Company’s segment information for the second quarter and year-to-date 2016 and 2015:

	Victoria’s Secret		Bath & Body Works		Victoria’s Secret and Bath & Body Works International		Other			Total
	(in millions)
2016
Second Quarter:
Net Sales	$	1,867	$	801	$	100	$	122		$	2,890
Operating Income (Loss)	281		148		8		(29		)	408
Year-to-Date:
Net Sales	$	3,608	$	1,462	$	195	$	239		$	5,504
Operating Income (Loss)	515		260		21		(64		)	732
2015
Second Quarter:
Net Sales	$	1,806	$	748	$	89	$	122		$	2,765
Operating Income (Loss)	298		138		20		(53		)	403
Year-to-Date:
Net Sales	$	3,490	$	1,361	$	181	$	245		$	5,277
Operating Income (Loss)	587		235		41		(88		)	775

The Company's international net sales include sales from company-owned stores, royalty revenue from franchise and license arrangements, wholesale revenues and direct sales shipped internationally. Certain of these sales are subject to the impact of fluctuations in foreign currency. The Company’s international net sales across all segments totaled $333 million and $313 million for the second quarter of 2016 and 2015, respectively. The Company’s international net sales across all segments totaled $628 million and $606 million for year-to-date 2016 and 2015, respectively.

17. Subsequent Events

Subsequent to July 30, 2016, the Company repurchased an additional 0.3 million shares of common stock for $19 million under the February 2016 repurchase program. For additional information, see Note 3, "Earnings Per Share and Shareholders' Equity (Deficit)."

18

18. Supplemental Guarantor Financial Information

The Company’s 2019 Notes, 2020 Notes, 2021 Notes, 2022 Notes, 2023 Notes, 2035 Notes and 2036 Notes are jointly and severally guaranteed on a full and unconditional basis by the Guarantors. The Company is a holding company, and its most significant assets are the stock of its subsidiaries. The Guarantors represent: (a) substantially all of the sales of the Company’s domestic subsidiaries, (b) more than 90% of the assets owned by the Company’s domestic subsidiaries, other than real property, certain other assets and intercompany investments and balances and (c) more than 95% of the accounts receivable and inventory directly owned by the Company’s domestic subsidiaries.

The following supplemental financial information sets forth for the Company and its guarantor and non-guarantor subsidiaries: the Condensed Consolidating Balance Sheets as of July 30, 2016, January 30, 2016 and August 1, 2015 and the Condensed Consolidating Statements of Income, Comprehensive Income and Cash Flows for the periods ended July 30, 2016 and August 1, 2015. The Company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, and ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, effective January 30, 2016. As such, amounts have been recast to include the retrospective application of these standards. For additional information, see Note 2, "New Accounting Pronouncements."

19

L BRANDS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(in millions)

(Unaudited)

	July 30, 2016
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries		Eliminations			Consolidated L Brands, Inc.
ASSETS
Current Assets:
Cash and Cash Equivalents	$	—		$	890		$	383	$	—		$	1,273
Accounts Receivable, Net	1			212			53		—			266
Inventories	—			1,068			136		—			1,204
Other	—			132			85		—			217
Total Current Assets	1			2,302			657		—			2,960
Property and Equipment, Net	—			1,780			806		—			2,586
Goodwill	—			1,318			30		—			1,348
Trade Names and Other Intangible Assets, Net	—			411			—		—			411
Net Investments in and Advances to/from Consolidated Affiliates	4,508			15,320			1,661		(21,489		)	—
Deferred Income Taxes	—			11			19		—			30
Other Assets	137			34			647		(612		)	206
Total Assets	$	4,646		$	21,176		$	3,820	$	(22,101	)	$	7,541
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable	$	4		$	438		$	351	$	—		$	793
Accrued Expenses and Other	104			481			294		—			879
Current Portion of Long-term Debt	—			—			13		—			13
Income Taxes	(11		)	4			141		—			134
Total Current Liabilities	97			923			799		—			1,819
Deferred Income Taxes	(3		)	(78		)	349		—			268
Long-term Debt	5,702			597			4		(597		)	5,706
Other Long-term Liabilities	1			736			155		(15		)	877
Total Equity (Deficit)	(1,151		)	18,998			2,513		(21,489		)	(1,129		)
Total Liabilities and Equity (Deficit)	$	4,646		$	21,176		$	3,820	$	(22,101	)	$	7,541

20

L BRANDS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(in millions)

	January 30, 2016
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
ASSETS
Current Assets:
Cash and Cash Equivalents	$	—		$	2,190		$	358		$	—		$	2,548
Accounts Receivable, Net	1			202			58			—			261
Inventories	—			978			144			—			1,122
Other	—			115			110			—			225
Total Current Assets	1			3,485			670			—			4,156
Property and Equipment, Net	—			1,574			756			—			2,330
Goodwill	—			1,318			—			—			1,318
Trade Names and Other Intangible Assets, Net	—			411			—			—			411
Net Investments in and Advances to/from Consolidated Affiliates	5,368			13,649			1,242			(20,259		)	—
Deferred Income Taxes	—			11			19			—			30
Other Assets	141			40			679			(612		)	248
Total Assets	$	5,510		$	20,488		$	3,366		$	(20,871	)	$	8,493
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable	$	—		$	333		$	335		$	—		$	668
Accrued Expenses and Other	100			519			358			—			977
Current Portion of Long-term Debt	—			—			6			—			6
Income Taxes	(3		)	237			(10		)	—			224
Total Current Liabilities	97			1,089			689			—			1,875
Deferred Income Taxes	(3		)	(86		)	346			—			257
Long-term Debt	5,714			597			1			(597		)	5,715
Other Long-term Liabilities	—			670			248			(14		)	904
Total Equity (Deficit)	(298		)	18,218			2,082			(20,260		)	(258		)
Total Liabilities and Equity (Deficit)	$	5,510		$	20,488		$	3,366		$	(20,871	)	$	8,493

21

L BRANDS, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

(in millions)

(Unaudited)

	August 1, 2015
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries		Eliminations			Consolidated L Brands, Inc.
ASSETS
Current Assets:
Cash and Cash Equivalents	$	—		$	453		$	327	$	—		$	780
Accounts Receivable, Net	1			201			55		—			257
Inventories	—			980			126		—			1,106
Other	1			191			128		—			320
Total Current Assets	2			1,825			636		—			2,463
Property and Equipment, Net	—			1,485			790		—			2,275
Goodwill	—			1,318			—		—			1,318
Trade Names and Other Intangible Assets, Net	—			411			—		—			411
Net Investments in and Advances to/from Consolidated Affiliates	3,979			15,589			1,642		(21,210		)	—
Deferred Income Taxes	—			10			17		—			27
Other Assets	140			34			682		(612		)	244
Total Assets	$	4,121		$	20,672		$	3,767	$	(21,822	)	$	6,738
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts Payable	$	7		$	385		$	333	$	—		$	725
Accrued Expenses and Other	85			500			255		—			840
Income Taxes	—			—			5		—			5
Total Current Liabilities	92			885			593		—			1,570
Deferred Income Taxes	(3		)	(59		)	308		—			246
Long-term Debt	4,720			597			—		(597		)	4,720
Other Long-term Liabilities	—			619			243		(13		)	849
Total Equity (Deficit)	(688		)	18,630			2,623		(21,212		)	(647		)
Total Liabilities and Equity (Deficit)	$	4,121		$	20,672		$	3,767	$	(21,822	)	$	6,738

22

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME

(in millions)

(Unaudited)

	Second Quarter 2016
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Sales	$	—		$	2,724		$	808		$	(642	)	$	2,890
Costs of Goods Sold, Buying and Occupancy	—			(1,701		)	(669		)	593			(1,777		)
Gross Profit	—			1,023			139			(49		)	1,113
General, Administrative and Store Operating Expenses	(2		)	(635		)	(106		)	38			(705		)
Operating Income (Loss)	(2		)	388			33			(11		)	408
Interest Expense	(101		)	(11		)	(3		)	14			(101		)
Other Income (Loss)	(36		)	1			108			—			73
Income (Loss) Before Income Taxes	(139		)	378			138			3			380
Provision for Income Taxes	(13		)	72			69			—			128
Equity in Earnings (Loss), Net of Tax	378			223			196			(797		)	—
Net Income (Loss)	$	252		$	529		$	265		$	(794	)	$	252

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Second Quarter 2016
	L Brands, Inc.		Guarantor Subsidiaries		Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Income (Loss)	$	252	$	529	$	265		$	(794	)	$	252
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	—		—		(18		)	—			(18		)
Unrealized Gain (Loss) on Cash Flow Hedges	—		—		5			—			5
Reclassification of Cash Flow Hedges to Earnings	—		—		(5		)	—			(5		)
Unrealized Loss on Marketable Securities	—		—		(2		)	—			(2		)
Reclassification of Gain on Marketable Securities to Earnings	—		—		—			—			—
Total Other Comprehensive Income (Loss), Net of Tax	—		—		(20		)	—			(20		)
Total Comprehensive Income (Loss)	$	252	$	529	$	245		$	(794	)	$	232

23

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME

(in millions)

(Unaudited)

	Second Quarter 2015
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Sales	$	—		$	2,588		$	814		$	(637	)	$	2,765
Costs of Goods Sold, Buying and Occupancy	—			(1,607		)	(705		)	661			(1,651		)
Gross Profit	—			981			109			24			1,114
General, Administrative and Store Operating Expenses	(2		)	(629		)	(106		)	26			(711		)
Operating Income (Loss)	(2		)	352			3			50			403
Interest Expense	(78		)	(4		)	(3		)	7			(78		)
Other Income (Loss)	—			—			(2		)	—			(2		)
Income (Loss) Before Income Taxes	(80		)	348			(2		)	57			323
Provision for Income Taxes	—			90			31			—			121
Equity in Earnings (Loss), Net of Tax	282			154			130			(566		)	—
Net Income (Loss)	$	202		$	412		$	97		$	(509	)	$	202

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Second Quarter 2015
	L Brands, Inc.		Guarantor Subsidiaries		Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Income (Loss)	$	202	$	412	$	97		$	(509	)	$	202
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	—		—		22			—			22
Unrealized Gain (Loss) on Cash Flow Hedges	—		—		14			—			14
Reclassification of Cash Flow Hedges to Earnings	—		—		(27		)	—			(27		)
Total Other Comprehensive Income (Loss), Net of Tax	—		—		9			—			9
Total Comprehensive Income (Loss)	$	202	$	412	$	106		$	(509	)	$	211

24

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME

(in millions)

(Unaudited)

	Year-to-Date 2016
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Sales	$	—		$	5,196		$	1,666		$	(1,358	)	$	5,504
Costs of Goods Sold, Buying and Occupancy	—			(3,240		)	(1,380		)	1,272			(3,348		)
Gross Profit	—			1,956			286			(86		)	2,156
General, Administrative and Store Operating Expenses	(4		)	(1,274		)	(219		)	73			(1,424		)
Operating Income (Loss)	(4		)	682			67			(13		)	732
Interest Expense	(199		)	(20		)	(5		)	25			(199		)
Other Income (Loss)	(36		)	2			114			—			80
Income (Loss) Before Income Taxes	(239		)	664			176			12			613
Provision for Income Taxes	(14		)	134			88			—			208
Equity in Earnings (Loss), Net of Tax	630			285			264			(1,179		)	—
Net Income (Loss)	$	405		$	815		$	352		$	(1,167	)	$	405

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Year-to-Date 2016
	L Brands, Inc.		Guarantor Subsidiaries		Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Income (Loss)	$	405	$	815	$	352		$	(1,167	)	$	405
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	—		—		(10		)	—			(10		)
Unrealized Gain (Loss) on Cash Flow Hedges	—		—		(11		)	—			(11		)
Reclassification of Cash Flow Hedges to Earnings	—		—		9			—			9
Unrealized Loss on Marketable Securities	—		—		(3		)	—			(3		)
Reclassification of Gain on Marketable Securities to Earnings	—		—		(3		)	—			(3		)
Total Other Comprehensive Income (Loss), Net of Tax	—		—		(18		)	—			(18		)
Total Comprehensive Income (Loss)	$	405	$	815	$	334		$	(1,167	)	$	387

25

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF INCOME

(in millions)

(Unaudited)

	Year-to-Date 2015
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Sales	$	—		$	4,957		$	1,630		$	(1,310	)	$	5,277
Costs of Goods Sold, Buying and Occupancy	—			(3,031		)	(1,321		)	1,245			(3,107		)
Gross Profit	—			1,926			309			(65		)	2,170
General, Administrative and Store Operating Expenses	(6		)	(1,245		)	(202		)	58			(1,395		)
Operating Income (Loss)	(6		)	681			107			(7		)	775
Interest Expense	(158		)	(12		)	(5		)	17			(158		)
Other Income (Loss)	—			4			72			—			76
Income (Loss) Before Income Taxes	(164		)	673			174			10			693
Provision for Income Taxes	—			168			72			—			240
Equity in Earnings (Loss), Net of Tax	617			379			253			(1,249		)	—
Net Income (Loss)	$	453		$	884		$	355		$	(1,239	)	$	453

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)

	Year-to-Date 2015
	L Brands, Inc.		Guarantor Subsidiaries		Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Income (Loss)	$	453	$	884	$	355		$	(1,239	)	$	453
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation	—		—		12			—			12
Unrealized Gain (Loss) on Cash Flow Hedges	—		—		4			—			4
Reclassification of Cash Flow Hedges to Earnings	—		—		(10		)	—			(10		)
Total Other Comprehensive Income (Loss), Net of Tax	—		—		6			—			6
Total Comprehensive Income (Loss)	$	453	$	884	$	361		$	(1,239	)	$	459

26

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

	Year-to-Date 2016
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations			Consolidated L Brands, Inc.
Net Cash Provided by (Used for) Operating Activities	$	(258	)	$	490		$	189		$	—		$	421
Investing Activities:
Capital Expenditures	—			(382		)	(115		)	—			(497		)
Return of Capital from Easton Town Center, LLC	—			—			108			—			108
Acquisition, Net of Cash Acquired of $1	—			—			(31		)	—			(31		)
Proceeds from Sale of Marketable Securities	—			—			10			—			10
Net Investments in Consolidated Affiliates	—			—			(38		)	38			—
Other Investing Activities	—			1			15			—			16
Net Cash Used for Investing Activities	—			(381		)	(51		)	38			(394		)
Financing Activities:
Proceeds from the Issuance of Long-term Debt, Net of Issuance Costs	692			—			—			—			692
Payment of Long-term Debt	(742		)	—			—			—			(742		)
Borrowings from Revolving Facilities	—			—			10			—			10
Dividends Paid	(923		)	—			—			—			(923		)
Repurchases of Common Stock	(385		)	—			—			—			(385		)
Excess Tax Benefits from Share-based Compensation	—			33			4			—			37
Net Financing Activities and Advances to/from Consolidated Affiliates	1,603			(1,441		)	(124		)	(38		)	—
Proceeds from Exercise of Stock Options	13			—			—			—			13
Financing Costs and Other	—			(1		)	—			—			(1		)
Net Cash Provided by (Used for) Financing Activities	258			(1,409		)	(110		)	(38		)	(1,299		)
Effects of Exchange Rate Changes on Cash and Cash Equivalents	—			—			(3		)	—			(3		)
Net Increase (Decrease) in Cash and Cash Equivalents	—			(1,300		)	25			—			(1,275		)
Cash and Cash Equivalents, Beginning of Period	—			2,190			358			—			2,548
Cash and Cash Equivalents, End of Period	$	—		$	890		$	383		$	—		$	1,273

27

L BRANDS, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

	Year-to-Date 2015
	L Brands, Inc.			Guarantor Subsidiaries			Non- guarantor Subsidiaries			Eliminations		Consolidated L Brands, Inc.
Net Cash Provided by (Used for) Operating Activities	$	(147	)	$	481		$	41		$	—	$	375
Investing Activities:
Capital Expenditures	—			(254		)	(104		)	—		(358		)
Proceeds from the Sale of Assets	—			—			135			—		135
Proceeds from Divestiture of Third-party Apparel Sourcing Business	—			1			84			—		85
Purchase of Marketable Securities	—			(50		)	—			—		(50		)
Other Investing Activities	—			—			1			—		1
Net Cash Provided by (Used for) Investing Activities	—			(303		)	116			—		(187		)
Financing Activities:
Dividends Paid	(880		)	—			—			—		(880		)
Repurchases of Common Stock	(295		)	—			—			—		(295		)
Excess Tax Benefits from Share-based Compensation	—			53			8			—		61
Net Financing Activities and Advances to/from Consolidated Affiliates	1,299			(1,240		)	(59		)	—		—
Proceeds from Exercise of Stock Options	23			—			—			—		23
Net Cash Provided by (Used for) Financing Activities	147			(1,187		)	(51		)	—		(1,091		)
Effects of Exchange Rate Changes on Cash and Cash Equivalents	—			—			2			—		2
Net Increase (Decrease) in Cash and Cash Equivalents	—			(1,009		)	108			—		(901		)
Cash and Cash Equivalents, Beginning of Period	—			1,462			219			—		1,681
Cash and Cash Equivalents, End of Period	$	—		$	453		$	327		$	—	$	780

28

Review Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

of L Brands, Inc.:

We have reviewed the consolidated balance sheet of L Brands, Inc. and subsidiaries as of July 30, 2016 and August 1, 2015, and the related consolidated statements of income and comprehensive income for the thirteen and twenty-six week periods ended July 30, 2016 and August 1, 2015, and cash flows for the twenty-six week periods ended July 30, 2016 and August 1, 2015. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 30, 2016, and the related consolidated statements of income, comprehensive income, total equity (deficit), and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 18, 2016. In our opinion, the accompanying consolidated balance sheet of L Brands, Inc. and subsidiaries as of January 30, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Grandview Heights, Ohio

September 2, 2016

29

SAFE HARBOR STATEMENT UNDER THE PRIVATE

SECURITIES LITIGATION ACT OF 1995

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

L Brands, Inc. cautions any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our company or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “planned,” “potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our company or our management:

• general economic conditions, consumer confidence, consumer spending patterns and market disruptions including severe weather conditions, natural disasters, health hazards, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;

• the seasonality of our business;

• the dependence on mall traffic and the availability of suitable store locations on appropriate terms;

• our ability to grow through new store openings and existing store remodels and expansions;

• our ability to successfully expand internationally and related risks;

• our relationships with independent franchise, license and wholesale partners;

• our direct channel businesses;

• our ability to protect our reputation and our brand images;

• our ability to attract customers with marketing, advertising and promotional programs;

• our ability to protect our trade names, trademarks and patents;

• the highly competitive nature of the retail industry and the segments in which we operate;

• consumer acceptance of our products and our ability to keep up with fashion trends, develop new merchandise and launch new product lines successfully;

• our ability to source, distribute and sell goods and materials on a global basis, including risks related to:

• political instability, significant health hazards, environmental hazards or natural disasters;

• duties, taxes and other charges;

• legal and regulatory matters;

• volatility in currency exchange rates;

• local business practices and political issues;

• potential delays or disruptions in shipping and transportation and related pricing impacts;

• disruption due to labor disputes; and

• changing expectations regarding product safety due to new legislation;

• our geographic concentration of supplier and distribution facilities in central Ohio;

• fluctuations in foreign currency exchange rates;

• stock price volatility;

• our ability to pay dividends and related effects;

• our ability to maintain our credit rating;

• our ability to service or refinance our debt;

• our ability to retain key personnel;

• our ability to attract, develop and retain qualified employees and manage labor-related costs;

• the ability of our manufacturers to deliver products in a timely manner and meet quality standards and comply with applicable laws and regulations;

• 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;

• our ability to maintain the security of customer, associate, supplier or company information;

• our ability to comply with regulatory requirements;

• legal and compliance matters; and

• tax matters.

30

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. Additional information regarding these and other factors can be found in “Item 1A. Risk Factors” in our 2015 Annual Report on Form 10-K.

Item 2. 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 GAAP. The following information should be read in conjunction with our financial statements and the related notes included in Item 1. Financial Statements.

Executive Overview

In the second quarter of 2016, our operating income increased $5 million, or 1%, to $408 million, and our operating income rate decreased to 14.1% from 14.6%. Net sales increased $125 million to $2.890 billion, comparable sales increased 3%, and comparable store sales increased 1%. At Victoria's Secret, net sales increased 3%, and operating income decreased 6%. At Bath & Body Works, net sales increased 7%, and operating income increased 8%. At Victoria's Secret and Bath & Body Works International, net sales increased 12%, and operating income decreased 62%. For additional information related to our second quarter 2016 financial performance, see “Results of Operations.”

The global retail sector and our business continue to face an uncertain environment and, as a result, we continue to manage our business carefully and focus on the execution of the retail fundamentals.

At the same time, we are aggressively focusing on bringing compelling merchandise assortments and store and digital experiences to our customers. We will look for, and capitalize on, those opportunities available to us. We believe that our brands, which lead their categories and offer high emotional content to customers at accessible prices, are well-positioned.

31

Adjusted Financial Information

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

	Year-to-Date
(in millions, except per share amounts)	2016			2015
Detail of Special Items included in Operating Income - Income (Expense)
Victoria's Secret Restructuring (a)	$	(35	)	$	—
Total Special Items included in Operating Income	$	(35	)	$	—
Detail of Special Items included in Other Income (Loss) - Income (Loss)
Loss on Extinguishment of Debt (b)	$	(36	)	$	—
Gain on Distribution from Easton Town Center, LLC (c)	108			—
Gain on Divestiture of Third-Party Apparel Sourcing Business (d)	—			78
Total Special Items included in Other Income (Loss)	$	72		$	78
Detail of Special Items included in Provision for Income Taxes - Provision
Tax effect of Special Items	$	(11	)	$	(9	)
Total Special Items included in Provision for Income Taxes	$	(11	)	$	(9	)
Reconciliation of Reported Operating Income to Adjusted Operating Income
Reported Operating Income	$	732		$	775
Special Items included in Operating Income	35			—
Adjusted Operating Income	$	767		$	775
Reconciliation of Reported Net Income to Adjusted Net Income
Reported Net Income	$	405		$	453
Special Items included in Net Income	(26		)	(69		)
Adjusted Net Income	$	379		$	384
Reconciliation of Reported Earnings Per Diluted Share to Adjusted Earnings Per Diluted Share
Reported Earnings Per Diluted Share	$	1.39		$	1.52
Special Items included in Earnings Per Diluted Share	(0.09		)	(0.23		)
Adjusted Earnings Per Diluted Share	$	1.30		$	1.29

_______________

(a) In the first quarter of 2016, we announced strategic actions within the Victoria’s Secret segment designed to focus the brand on its core merchandise categories and streamline operations. As a result of these actions, we recorded charges related to severance and related costs, fabric cancellations and catalogue paper write-offs. For additional information see Note 5, "Restructuring Activities" included in Item 1. Financial Statements.

(b) In the second quarter of 2016, we repurchased our $700 million6.90% Senior Unsecured Notes due July 2017 resulting in a pre-tax loss on extinguishment of $36 million (after-tax loss of $22 million). For additional information see Note 10, "Long-term Debt" included in Item 1. Financial Statements.

(c) In the second quarter of 2016, we received a $124 million cash distribution from Easton Town Center, LLC resulting in a pre-tax gain of $108 million (after-tax gain of $70 million). For additional information see Note 8, "Equity Investments and Other" included in Item 1. Financial Statements.

(d) In the first quarter of 2015, we divested our remaining ownership interest in our third-party apparel sourcing business. We received cash proceeds of $85 million and recognized a pre-tax gain of $78 million (after-tax gain of $69 million). For additional information see Note 8, "Equity Investments and Other" included in Item 1. Financial Statements.

32

Company-Owned Store Data

The following table compares the second quarter of 2016 company-owned store data to the second quarter of 2015 and year-to-date 2016 store data to year-to-date 2015:

	Second Quarter						Year-to-Date
	2016		2015		% Change		2016		2015		% Change
Sales per Average Selling Square Foot
Victoria’s Secret U.S.	$	201	$	205	(2	)%	$	393	$	398	(1	)%
Bath & Body Works U.S.	176		171		3	%	322		313		3	%
Sales per Average Store (in thousands)
Victoria’s Secret U.S.	$	1,250	$	1,246	—	%	$	2,438	$	2,425	1	%
Bath & Body Works U.S.	422		404		4	%	772		738		5	%
Average Store Size (selling square feet)
Victoria’s Secret U.S.	6,234		6,107		2	%
Bath & Body Works U.S.	2,409		2,362		2	%
Total Selling Square Feet (in thousands)
Victoria’s Secret U.S.	7,000		6,749		4	%
Bath & Body Works U.S.	3,813		3,697		3	%

33

The following table compares second quarter of 2016 company-owned store data to the second quarter of 2015 and year-to-date 2016 store data to year-to-date 2015:

	Second Quarter				Year-to-Date
Number of Stores	2016		2015		2016		2015
Victoria’s Secret U.S.
Beginning of Period	1,121		1,104		1,118		1,098
Opened	4		4		9		11
Closed	(2	)	(3	)	(4	)	(4	)
End of Period	1,123		1,105		1,123		1,105
Victoria’s Secret Canada
Beginning of Period	46		42		46		41
Opened	—		1		—		2
Closed	—		—		—		—
End of Period	46		43		46		43
Bath & Body Works U.S.
Beginning of Period	1,576		1,559		1,574		1,558
Opened	9		7		12		10
Closed	(2	)	(1	)	(3	)	(3	)
End of Period	1,583		1,565		1,583		1,565
Bath & Body Works Canada
Beginning of Period	99		89		98		88
Opened	3		2		4		3
Closed	—		—		—		—
End of Period	102		91		102		91
Victoria’s Secret U.K.
Beginning of Period	15		10		14		10
Opened	1		—		2		—
Closed	—		—		—		—
End of Period	16		10		16		10
Victoria's Secret Beauty and Accessories
Beginning of Period	27		—		—		—
Acquired (a)	—		—		26		—
Opened	1		—		2		—
Closed	—		—		—		—
End of Period	28		—		28		—
La Senza
Beginning of Period	125		133		126		145
Opened	—		—		—		—
Closed	—		—		(1	)	(12	)
End of Period	125		133		125		133
Henri Bendel
Beginning of Period	29		29		29		29
Opened	—		—		—		—
Closed	—		—		—		—
End of Period	29		29		29		29
Total
Beginning of Period	3,038		2,966		3,005		2,969
Acquired (a)	—		—		26		—
Opened	18		14		29		26
Closed	(4	)	(4	)	(8	)	(19	)
End of Period	3,052		2,976		3,052		2,976

_______________

(a)    Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional

information see Note 4, "Acquisition" included in Item 1. Financial Statements.

34

Noncompany-Owned Store Data

The following table compares the second quarter of 2016 noncompany-owned store data to the second quarter of 2015 and year-to-date 2016 store data to year-to-date 2015:

	Second Quarter				Year-to-Date
Number of Stores	2016		2015		2016		2015
Victoria’s Secret Beauty & Accessories
Beginning of Period	356		304		373		290
Opened	11		23		25		38
Closed	(2	)	(2	)	(7	)	(3	)
Transferred (a)	—		—		(26	)	—
End of Period	365		325		365		325
Victoria's Secret
Beginning of Period	20		15		19		14
Opened	2		2		3		3
Closed	—		—		—		—
End of Period	22		17		22		17
Bath & Body Works
Beginning of Period	131		91		125		80
Opened	9		10		16		23
Closed	—		—		(1	)	(2	)
End of Period	140		101		140		101
La Senza
Beginning of Period	217		258		221		266
Opened	1		1		1		1
Closed	(5	)	(26	)	(9	)	(34	)
End of Period	213		233		213		233
Total
Beginning of Period	724		668		738		650
Opened	23		36		45		65
Closed	(7	)	(28	)	(17	)	(39	)
Transferred (a)	—		—		(26	)	—
End of Period	740		676		740		676

_______________

(a)    Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China. For additional

information see Note 4, "Acquisition" included in Item 1. Financial Statements.

35

Results of Operations

Second Quarter of 2016 Compared to Second Quarter of 2015

Operating Income

The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the second quarter of 2016 in comparison to the second quarter of 2015:

							Operating Income Rate
	2016			2015			2016		2015
Second Quarter	(in millions)
Victoria’s Secret	$	281		$	298		15.0	%	16.5	%
Bath & Body Works	148			138			18.5	%	18.4	%
Victoria’s Secret and Bath & Body Works International	8			20			7.6	%	22.8	%
Other (a)	(29		)	(53		)	(23.4	)%	(43.0	)%
Total Operating Income	$	408		$	403		14.1	%	14.6	%

 _______________

(a) Includes Mast Global, La Senza, Henri Bendel and Corporate.

For the second quarter of 2016, operating income increased $5 million, or 1%, to $408 million, and the operating income rate decreased to 14.1% from 14.6%. The drivers of the operating income results are discussed in the following sections.

Net Sales

The following table provides net sales for the second quarter of 2016 in comparison to the second quarter of 2015:

	2016		2015		% Change
Second Quarter	(in millions)
Victoria’s Secret Stores (a)	$	1,469	$	1,437	2	%
Victoria’s Secret Direct	398		369		8	%
Total Victoria’s Secret	1,867		1,806		3	%
Bath & Body Works Stores (a)	709		672		6	%
Bath & Body Works Direct	92		76		21	%
Total Bath & Body Works	801		748		7	%
Victoria’s Secret and Bath & Body Works International (b)	100		89		12	%
Other (c)	122		122		—	%
Total Net Sales	$	2,890	$	2,765	5	%

 _______________

(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.

36

The following table provides a reconciliation of net sales for the second quarter of 2016 to the second quarter of 2015:

	Victoria’s Secret			Bath & Body Works			Victoria’s Secret and Bath & Body Works International			Other			Total
	(in millions)
2015 Net Sales	$	1,806		$	748		$	89		$	122		$	2,765
Comparable Store Sales	8			21			—			5			34
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net	26			18			16			(5		)	55
Foreign Currency Translation	(2		)	(2		)	(4		)	(2		)	(10		)
Direct Channels	29			16			—			3			48
International Wholesale, Royalty and Other	—			—			(1		)	(1		)	(2		)
2016 Net Sales	$	1,867		$	801		$	100		$	122		$	2,890

The following table compares the second quarter of 2016 comparable sales to the second quarter of 2015:

Second Quarter	2016		2015
Comparable Sales (Stores and Direct) (a)
Victoria's Secret (b)	2	%	1	%
Bath & Body Works (b)	5	%	6	%
Total Comparable Sales	3	%	3	%
Comparable Store Sales (a)
Victoria’s Secret (b)	1	%	3	%
Bath & Body Works (b)	3	%	5	%
Total Comparable Store Sales	1	%	4	%

________

(a) The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable 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. Comparable store sales attributable to our international stores are calculated on a constant currency basis.

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

The results by segment are as follows:

Victoria's Secret

For the second quarter of 2016, net sales increased $61 million to $1.867 billion, and comparable sales increased 2% (comparable store sales increased 1%). Net sales increased primarily due to increases in PINK and sport, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion. These results were partially offset by decreases in swim and apparel, due to a strategic decision to exit these categories, and beauty as we reposition the category.

The increase in comparable store sales was driven by an increase in total transactions.

Bath & Body Works

For the second quarter of 2016, net sales increased $53 million to $801 million, and comparable sales increased 5% (comparable store sales increased 3%). Net sales increased across most categories including home fragrance, Signature Collection and soaps and sanitizers, which all incorporated newness, innovation and fashion.

The increase in comparable store sales was driven by an increase in higher average dollar sales.

37

Victoria's Secret and Bath & Body Works International

For the second quarter of 2016, net sales increased $11 million to $100 million primarily related to newly acquired Victoria's Secret Beauty and Accessories stores in Greater China, company-owned Victoria's Secret stores in the U.K., and additional stores opened by our partners. These results were partially offset by the negative impacts of foreign currency at Victoria's Secret Beauty and Accessories and Victoria's Secret U.K.

Other

For the second quarter of 2016, net sales remained flat at $122 million.

Gross Profit

For the second quarter of 2016, our gross profit decreased $1 million to $1.113 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 38.5% from 40.3%, primarily driven by the following:

Victoria's Secret

For the second quarter of 2016, the gross profit decrease was primarily driven by a decline in merchandise margin due to clearance activity on non-go forward merchandise categories, as well as promotions and pricing to drive trial in our beauty business. Buying and occupancy expenses decreased primarily driven by the discontinuation of catalogue production, and was partially offset by an increase in occupancy expense driven by investments in store real estate.

The gross profit rate decrease was driven primarily by increases in the promotional and clearance activity described above, partially offset by lower buying and occupancy expenses due to decreased catalogue costs.

Bath & Body Works

For the second quarter of 2016, the gross profit increase was primarily driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin was partially offset by higher buying and occupancy expenses due to an increase in occupancy expenses driven by investments in store real estate.

The gross profit rate decrease was driven by an increase in the buying and occupancy expense rate primarily due to investments in store real estate. The merchandise margin rate was roughly flat and negatively impacted by foreign currency exchange at Bath & Body Works Canada.

Victoria's Secret and Bath & Body Works International

For the second quarter of 2016, the gross profit decrease was primarily due to lower merchandise margin dollars at Victoria's Secret Beauty and Accessories due to the negative impacts of foreign currency and promotions. The decrease in gross profit dollars was also due to higher buying and occupancy expenses driven by the opening and acquisition of new stores, investments in real estate in Greater China, and higher net sales.

The gross profit rate decrease was driven primarily by a decrease in the merchandise margin rate due to Victoria's Secret Beauty and Accessories and negative impacts of foreign currency.

General, Administrative and Store Operating Expenses

For the second quarter of 2016, our general, administrative and store operating expenses decreased $6 million to $705 million primarily due to lower incentive compensation expenses as well as other discrete corporate expenses impacting the prior period that did not reoccur in the current period, partially offset by corporate expenses in Greater China.

The general, administrative and store operating expense rate decreased to 24.4% from 25.7% due to lower incentive compensation expenses, corporate expenses as described above, and leverage associated with higher sales.

Other Income and Expense

Interest Expense

The following table provides the average daily borrowings and average borrowing rates for the second quarter of 2016 and 2015:

Second Quarter	2016			2015
Average daily borrowings (in millions)	$	5,998		$	4,750
Average borrowing rate (in percentages)	6.71		%	6.62		%

For the second quarter of 2016, our interest expense increased $23 million to $101 million primarily due to an increase in average borrowings related to the October 2015 $1 billion note issuance and June 2016 $700 million note issuance.

38

Other Income (Loss)

For the second quarter of 2016, our other income increased $75 million to $73 million primarily driven by a distribution received from Easton Town Center, LLC resulting in a pre-tax gain of $108 million, partially offset by a $36 million pre-tax loss on extinguishment of the 2017 Notes.

Provision for Income Taxes

For the second quarter of 2016, our effective tax rate was 33.6% compared to 37.4% in the second quarter of 2015. The second quarter 2016 rate was lower than our combined estimated federal and state statutory rate primarily due to the favorable resolution of certain tax matters.

Year-to-Date 2016 Compared to Year-to-Date 2015

Operating Income

The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for year-to-date 2016 in comparison to year-to-date 2015:

							Operating Income Rate
	2016			2015			2016		2015
Year-to-Date	(in millions)
Victoria’s Secret	$	515		$	587		14.3	%	16.8	%
Bath & Body Works	260			235			17.8	%	17.2	%
Victoria’s Secret and Bath & Body Works International	21			41			10.6	%	23.1	%
Other (a)	(64		)	(88		)	(26.9	)%	(35.8	)%
Total Operating Income	$	732		$	775		13.3	%	14.7	%

 _______________

(a) Includes Mast Global, La Senza, Henri Bendel and Corporate.

For year-to-date 2016, operating income decreased $43 million, or 6%, to $732 million, and the operating income rate decreased to 13.3% from 14.7%. The drivers of the operating income results are discussed in the following sections.

Net Sales

The following table provides net sales for year-to-date 2016 in comparison to year-to-date 2015:

	2016		2015		% Change
Year-to-Date	(in millions)
Victoria’s Secret Stores (a)	$	2,850	$	2,783	2	%
Victoria’s Secret Direct	758		707		7	%
Total Victoria’s Secret	3,608		3,490		3	%
Bath & Body Works Stores (a)	1,296		1,226		6	%
Bath & Body Works Direct	166		135		23	%
Total Bath & Body Works	1,462		1,361		7	%
Victoria’s Secret and Bath & Body Works International (b)	195		181		8	%
Other (c)	239		245		(2	)%
Total Net Sales	$	5,504	$	5,277	4	%

 _______________

(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.

39

The following table provides a reconciliation of net sales for year-to-date 2016 to year-to-date 2015:

	Victoria’s Secret			Bath & Body Works			Victoria’s Secret and Bath & Body Works International			Other			Total
Year-to-Date	(in millions)
2015 Net Sales	$	3,490		$	1,361		$	181		$	245		$	5,277
Comparable Store Sales	14			43			1			9			67
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net	58			30			22			(10		)	100
Foreign Currency Translation	(5		)	(3		)	(6		)	(5		)	(19		)
Direct Channels	51			31			—			5			87
International Wholesale, Royalty and Other	—			—			(3		)	(5		)	(8		)
2016 Net Sales	$	3,608		$	1,462		$	195		$	239		$	5,504

The following table compares year-to-date 2016 comparable sales to year-to-date 2015:

Year-to-Date	2016		2015
Comparable Sales (Stores and Direct) (a)
Victoria's Secret (b)	2	%	2	%
Bath & Body Works (b)	6	%	6	%
Total Comparable Sales	3	%	3	%
Comparable Store Sales (a)
Victoria’s Secret (b)	1	%	4	%
Bath & Body Works (b)	4	%	5	%
Total Comparable Store Sales	2	%	4	%

________

(a) The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable 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. Comparable store sales attributable to our international stores are calculated on a constant currency basis.

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

The results by segment are as follows:

Victoria's Secret

For year-to-date 2016, net sales increased $118 million to $3.608 billion, and comparable sales increased 2% (comparable store sales increased 1%). Net sales increased primarily due to increases in PINK and sport, driven by a compelling merchandise assortment that incorporated newness, innovation and fashion. These results were partially offset by decreases in swim and apparel due to a strategic decision to exit these categories, and beauty as we reposition the category.

The increase in comparable store sales was driven by an increase in total transactions.

Bath & Body Works

For year-to-date 2016, net sales increased $101 million to $1.462 billion, and comparable sales increased 6% (comparable store sales increased 4%). Net sales increased across most categories including home fragrance, Signature Collection and soaps and sanitizers, which all incorporated newness, innovation and fashion.

The increase in comparable store sales was driven by an increase in average dollar sales.

40

Victoria's Secret and Bath & Body Works International

For year-to-date 2016, net sales increased $14 million to $195 million primarily related to newly acquired Victoria's Secret Beauty and Accessories stores in Greater China, company-owned Victoria's Secret stores in the U.K., and additional stores opened by our partners. These results were partially offset by the negative impacts of foreign currency at Victoria's Secret Beauty and Accessories and Victoria's Secret U.K.

Other

For year-to-date 2016, net sales decreased $6 million to $239 million primarily related to a decrease in net sales at La Senza due to store closures and the negative impacts of foreign currency.

Gross Profit

For year-to-date 2016, our gross profit decreased $14 million to $2.156 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 39.2% from 41.1%, primarily driven by the following:

Victoria's Secret

For year-to-date 2016, the gross profit decrease was primarily driven by a decline in merchandise margin due to clearance activity on non-go forward merchandise categories, promotions and pricing to drive trial in our beauty business, and fabric cancellations and catalogue paper write-offs related to restructuring activities. Buying and occupancy expenses increased primarily driven by an increase in occupancy expense resulting from investments in real estate, partially offset by a decrease in catalogue costs.

The gross profit rate decrease was driven primarily by increases in the promotional and clearance activity described above, the expenses related to the restructuring activities, and investments in store real estate, partially offset by lower buying and occupancy expenses due to decreased catalogue costs.

Bath & Body Works

For year-to-date 2016, the gross profit increase was primarily driven by higher merchandise margin dollars related to the increase in net sales. The increase in merchandise margin was partially offset by higher buying and occupancy expenses due to an increase in occupancy expense driven by investments in store real estate.

The gross profit rate decrease was driven by an increase in the buying and occupancy expense rate primarily due to investments in store real estate. The merchandise margin rate was roughly flat and negatively impacted by foreign currency exchange at Bath & Body Works Canada.

Victoria's Secret and Bath & Body Works International

For year-to-date 2016, the gross profit decrease was due to lower merchandise margin dollars at Victoria's Secret Beauty and Accessories due to the negative impacts of foreign currency and softness in the business. The decrease in gross profit dollars was also due to higher buying and occupancy expenses for our company-owned stores driven by the opening and acquisition of new stores, investments in real estate in Greater China, and higher net sales.

The gross profit rate decrease was driven primarily by a decrease in the merchandise margin rate due to Victoria's Secret Beauty and Accessories and the negative impacts of foreign currency.

General, Administrative and Store Operating Expenses

For year-to-date 2016, our general, administrative and store operating expenses increased $29 million to $1.424 billion primarily driven by severance charges related to the Victoria's Secret restructuring, an increase in store selling expenses related to higher sales volumes and investments in store selling to improve the customer experience, and corporate expenses in Greater China, partially offset by lower incentive compensation expenses.

The general, administrative and store operating expense rate decreased to 25.9% from 26.4% primarily due to leverage from higher sales and lower incentive compensation expenses, partially offset by deleverage associated with the Victoria's Secret restructuring and corporate expenses in Greater China.

41

Other Income and Expense

Interest Expense

The following table provides the average daily borrowings and average borrowing rates for year-to-date 2016 and 2015:

Year-to-Date	2016			2015
Average daily borrowings (in millions)	$	5,879		$	4,750
Average borrowing rate (in percentages)	6.72		%	6.60		%

For year-to-date 2016, our interest expense increased $41 million to $199 million primarily due to an increase in average borrowings related to the October 2015 $1 billion note issuance and June 2016 $700 million note issuance.

Other Income (Loss)

For year-to-date 2016, our other income (loss) increased $4 million to $80 million primarily driven by a distribution received from Easton Town Center, LLC resulting in a pre-tax gain of $108 million, partially offset by a $36 million pre-tax loss on extinguishment of the 2017 Notes. In the first quarter of 2015, we recognized a pre-tax gain of $78 million due to the divestiture of our remaining ownership interest in the third-party apparel sourcing business.

Provision for Income Taxes

For year-to-date 2016, our effective tax rate was 34.0% compared to 34.6%year-to-date 2015. The year-to-date 2016 rate was lower than our combined estimated federal and state statutory rate primarily due to the favorable resolution of certain tax matters. The year-to-date 2015 rate was lower than our combined estimated federal and state statutory rate primarily due to the foreign portion of the divestiture of our third-party apparel sourcing business.

FINANCIAL CONDITION

Liquidity and Capital Resources

Liquidity, or access to cash, is an important factor in determining our financial stability. We are committed to maintaining adequate liquidity. Cash generated from our operating activities provides the primary resources to support current operations, growth initiatives, seasonal funding requirements and capital expenditures. Our cash provided from operations is impacted by our net income and working capital changes. Our net income is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions and profit margins. Historically, sales are higher during the fourth quarter of the fiscal year due to seasonal and holiday-related sales patterns. Generally, our need for working capital peaks during the summer and fall months as inventory builds in anticipation of the holiday period.

We believe in returning value to our shareholders through a combination of dividends and share repurchase programs. During 2016, we have paid $923 million in regular and special dividends and repurchased $388 million of our common stock. We use cash flow generated from operating activities and financing activities to fund our dividends and share repurchase programs.

Our total cash and cash equivalents held by foreign subsidiaries were $381 million as of July 30, 2016. Under current tax laws and regulations, if cash and cash equivalents held outside the U.S. are repatriated to the U.S., in certain circumstances we may be subject to additional income taxes.

42

The following table provides our debt balance, net of debt issuance costs and unamortized discounts, as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016			January 30, 2016			August 1, 2015
	(in millions)
Senior Unsecured Debt with Subsidiary Guarantee
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 ("2035 Notes")	$	989		$	988		$	—
$1 billion, 5.625% Fixed Interest Rate Notes due February 2022 ("2022 Notes")	992			991			990
$1 billion, 6.625% Fixed Interest Rate Notes due April 2021 ("2021 Notes")	991			990			989
$700 million, 6.75% Fixed Interest Rate Notes due July 2036 ("2036 Notes")	692			—			—
$500 million, 8.50% Fixed Interest Rate Notes due June 2019 ("2019 Notes") (a)	500			499			495
$500 million, 5.625% Fixed Interest Rate Notes due October 2023 ("2023 Notes")	497			496			496
$400 million, 7.00% Fixed Interest Rate Notes due May 2020 ("2020 Notes")	396			396			395
Total Senior Unsecured Debt with Subsidiary Guarantee	$	5,057		$	4,360		$	3,365
Senior Unsecured Debt
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 ("2033 Notes")	$	348		$	348		$	348
$300 million, 7.60% Fixed Interest Rate Notes due July 2037 ("2037 Notes")	297			297			297
$700 million, 6.90% Fixed Interest Rate Notes due July 2017 ("2017 Notes") (b)	—			709			710
Foreign Facilities	17			7			—
Total Senior Unsecured Debt	$	662		$	1,361		$	1,355
Total	$	5,719		$	5,721		$	4,720
Current Portion of Long-term Debt	(13		)	(6		)	—
Total Long-term Debt, Net of Current Portion	$	5,706		$	5,715		$	4,720

 _______________

(a) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $8 million as of July 30, 2016, $8 million as of January 30, 2016 and $5 million as of August 1, 2015.

(b) The balances include a fair value interest rate hedge adjustment which increased the debt balance by $10 million as of January 30, 2016 and $11 million as of August 1, 2015.

Issuance of Notes

In June 2016, we issued $700 million of 6.75% notes due in July 2036. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by our Guarantors. The proceeds from the issuance were $692 million, which were net of issuance costs of $8 million. These issuance costs are being amortized through the maturity date of July 2036 and are included within Long-term Debt on the July 30, 2016 Consolidated Balance Sheet.

In October 2015, we issued $1 billion of 6.875% notes due in November 2035. The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by our Guarantors. The proceeds from the issuance were $988 million, which were net of issuance costs of $12 million. These issuance costs are being amortized through the maturity date of November 2035 and are included within Long-term Debt on the July 30, 2016 and January 30, 2016 Consolidated Balance Sheets.

Repurchase of Notes

In July 2016, we used the proceeds from the 2036 Notes to repurchase the $700 million 2017 Notes for $742 million. The pre-tax net loss on extinguishment of this debt was $36 million (after-tax net loss of $22 million), which is net of gains of $7 million related to terminated interest rate swaps associated with the 2017 Notes. This loss is included in Other Income (Loss) in the 2016 Consolidated Statements of Income.

Revolving Facilities

We maintain a secured revolving credit facility (“Revolving Facility”). The Revolving Facility has aggregate availability of $1 billion and expires July 18, 2019. The fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.50% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings or British pound borrowings is LIBOR plus 1.50% per annum. The interest rate on outstanding Canadian dollar borrowings is CDOR plus 1.50% per annum.

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The Revolving Facility contains fixed charge coverage and debt to EBITDA financial covenants. We are required to maintain a fixed charge coverage ratio of not less than 1.75 to 1.00 and a consolidated debt to consolidated EBITDA ratio not exceeding 4.00 to 1.00 for the most recent four-quarter period. In addition, the Revolving Facility provides that investments and restricted payments may be made, without limitation on amount, if (a) at the time of and after giving effect to such investment or restricted payment, the ratio of consolidated debt to consolidated EBITDA for the most recent four-quarter period is less than 3.00 to 1.00 and (b) no default or event of default exists. As of July 30, 2016, we were in compliance with both of our financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.00 to 1.00.

As of July 30, 2016, there were no borrowings outstanding under the Revolving Facility.

The Revolving Facility supports our letter of credit program. We had $8 million of outstanding letters of credit as of July 30, 2016 that reduce our remaining availability under our Revolving Facility.

In addition to the Revolving Facility, we maintain various revolving and term loan bank facilities with availability totaling $100 million to support our foreign operations ("Foreign Facilities"). These Foreign Facilities mature between November 15, 2016 and July 31, 2017. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for the currency of each borrowing.

During the second quarter of 2016, we borrowed $4 million under the Foreign Facilities. The maximum daily amount outstanding at any point in time during 2016 was $17 million. As of July 30, 2016, there were borrowings of $17 million outstanding under the Foreign Facilities.

Fair Value Interest Rate Swap Arrangements

We have interest rate swap arrangements related to $300 million of the outstanding 2019 Notes. The interest rate swap arrangements effectively convert the fixed interest rate on the related debt to a variable interest rate based on LIBOR plus a fixed percentage.

The swap arrangements are designated as fair value hedges. The changes in the fair value of the interest rate swaps have an equal and offsetting impact to the carrying value of the debt on the balance sheet. The differential to be paid or received on the interest rate swap arrangements is accrued and recognized as an adjustment to interest expense.

Working Capital and Capitalization

We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements.

The following table provides a summary of our working capital position and capitalization as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016			January 30, 2016			August 1, 2015
	(in millions)
Net Cash Provided by Operating Activities (a)	$	421		$	1,869		$	375
Capital Expenditures (a)	497			727			358
Working Capital	1,141			2,281			893
Capitalization:
Long-term Debt	5,706			5,715			4,720
Shareholders’ Equity (Deficit)	(1,130		)	(259		)	(648		)
Total Capitalization	$	4,576		$	5,456		$	4,072
Remaining Amounts Available Under Credit Agreements (b)	$	992		$	992		$	981

 _______________

(a) The January 30, 2016 amounts represent a twelve-month period, and the July 30, 2016 and August 1, 2015 amounts represent six-month periods.

(b) Letters of credit issued reduce our remaining availability under the Revolving Facility. We have outstanding letters of credit that reduce our remaining availability under the Revolving Facility of $8 million as of July 30, 2016 and January 30, 2016 and $19 million as of August 1, 2015.

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Credit Ratings

The following table provides our credit ratings as of July 30, 2016:

	Moody’s	S&P	Fitch
Corporate	Ba1	BB+	BB+
Senior Unsecured Debt with Subsidiary Guarantee	Ba1	BB+	BB+
Senior Unsecured Debt	Ba2	BB-	BB
Outlook	Stable	Stable	Stable

Our borrowing costs under our Revolving Facility are linked to our credit ratings at Moody’s, S&P and Fitch. If we receive an upgrade or downgrade to our corporate credit ratings by Moody’s, S&P or Fitch, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Revolving Facility by the Guarantors and the security interests granted in our and the Guarantors’ collateral securing such obligations are released if our credit ratings are higher than a certain level. Additionally, the restrictions imposed under the Revolving Facility on our ability to make investments and to make restricted payments cease to apply if our credit ratings are higher than certain levels. Credit rating downgrades by any of the agencies do not accelerate the repayment of any of our debt.

Common Stock Share Repurchases

Under the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase programs for year-to-date 2016 and 2015:

	Amount Authorized		Shares Repurchased		Amount Repurchased				Average Stock Price of Shares Repurchased within Program
Repurchase Program			2016	2015	2016		2015
	(in millions)		(in thousands)		(in millions)
February 2016	$	500	4,968	NA	$	388	NA		$	78.07
June 2015	$	250	NA	624	NA		$	52	$	83.75
February 2015	$	250	NA	2,788	NA		$	250	$	89.45

In the first quarter of 2016, our Board of Directors approved a new $500 million share repurchase program, which included $17 million remaining under the June 2015 repurchase program.

The February 2016 repurchase program had $112 million remaining as of July 30, 2016. Subsequent to July 30, 2016, we repurchased an additional 0.3 million shares of common stock for $19 million under this program.

There were $3 million of share repurchases reflected in Accounts Payable on the July 30, 2016 Consolidated Balance Sheet and $7 million as of August 1, 2015. There were no share repurchases reflected in Accounts Payable on the January 30, 2016 Consolidated Balance Sheet.

We use cash flow generated from operating and financing activities to fund our share repurchase programs. The timing and amount of any repurchases will be made at our discretion taking into account a number of factors including market conditions.

Dividend Policy and Procedures

Under the authority and declaration of our Board of Directors, we paid the following dividends during year-to-date 2016 and 2015:

	Ordinary Dividends		Special Dividends		Total Dividends		Total Paid
	(per share)						(in millions)
2016
Second Quarter	$	0.60	$	—	$	0.60	$	173
First Quarter	0.60		2.00		2.60		750
2016 Total	$	1.20	$	2.00	$	3.20	$	923
2015
Second Quarter	$	0.50	$	—	$	0.50	$	146
First Quarter	0.50		2.00		2.50		734
2015 Total	$	1.00	$	2.00	$	3.00	$	880

Our Board of Directors will determine future dividends and share repurchase authorizations after giving consideration to the Company's levels of profit and cash flow, capital requirements, current and forecasted liquidity, the restrictions placed upon us by our borrowing arrangements as well as financial and other conditions existing at the time. We use cash flow generated from

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operating activities to fund our ordinary dividends and a combination of cash flow generated from operating activities and financing activities to fund our special dividends and share repurchases.

Cash Flow

The following table provides a summary of our cash flow activity for year-to-date 2016 and 2015:

	Year-to-Date
	2016			2015
	(in millions)
Cash and Cash Equivalents, Beginning of Period	$	2,548		$	1,681
Net Cash Flows Provided by Operating Activities	421			375
Net Cash Flows Used for Investing Activities	(394		)	(187		)
Net Cash Flows Used for Financing Activities	(1,299		)	(1,091		)
Effects of Exchange Rate Changes on Cash and Cash Equivalents	(3		)	2
Net Decrease in Cash and Cash Equivalents	(1,275		)	(901		)
Cash and Cash Equivalents, End of Period	$	1,273		$	780

Operating Activities

Net cash provided by operating activities in 2016 was $421 million, including net income of $405 million. Net income included depreciation and amortization of $245 million, gain on distribution from Easton Town Center, LLC of $108 million, share-based compensation expense of $46 million, excess tax benefits from share-based compensation of $37 million, and loss on extinguishment of debt of $36 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Inventories, Income Taxes Payable, and Accounts Payable, Accrued Expenses and Other.

Net cash provided by operating activities in 2015 was $375 million, including net income of $453 million. Net income included depreciation and amortization of $224 million, gain on divestiture of the third-party apparel sourcing business of $78 million, share-based compensation expense of $50 million and excess tax benefits from share-based compensation of $61 million. Other changes in assets and liabilities represent items that had a current period cash flow impact, such as changes in working capital. The most significant items in working capital were the seasonal changes in Income Taxes Payable, Inventories, Other Assets and Liabilities and Accounts Payable, Accrued Expenses and Other.

Investing Activities

Net cash used for investing activities in 2016 was $394 million consisting primarily of capital expenditures of $497 million and $31 million related to the acquisition of our Victoria's Secret Beauty and Accessories franchise partner's operations and stores in Greater China, partially offset by a $108 million distribution from Easton Town Center, LLC and proceeds from the sale of marketable securities of $10 million. The capital expenditures included $405 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.

Net cash used for investing activities in 2015 was $187 million consisting primarily of capital expenditures of $358 million and purchases of marketable securities of $50 million, partially offset by proceeds from the sale of assets of $135 million and divestiture of the third-party apparel sourcing business of $85 million. The capital expenditures included $269 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.

Financing Activities

Net cash used for financing activities in 2016 was $1.299 billion consisting primarily of quarterly and special dividend payments aggregating to $3.20 per share, or $923 million, $742 million to repurchase our 2017 Notes, and repurchases of common stock of $385 million, partially offset by net proceeds of $692 million from the 2036 Notes issuance, excess tax benefits from share-based compensation of $37 million and proceeds from the exercise of stock options of $13 million.

Net cash used for financing activities in 2015 was $1.091 billion consisting primarily of quarterly and special dividend payments aggregating to $3.00 per share, or $880 million, and repurchases of common stock of $295 million, partially offset by excess tax benefits from share-based compensation of $61 million and proceeds from the exercise of stock options of $23 million.

Contingent Liabilities and Contractual Obligations

In connection with the disposition of certain businesses, we have remaining guarantees of approximately $20 million related to lease payments of Express, Limited Stores and Dick’s Sporting Goods under the current terms of noncancellable leases

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expiring at various dates through 2021. These guarantees include minimum rent and additional payments covering taxes, common area costs and certain other expenses and relate to leases that commenced prior to the disposition of the businesses. In certain instances, our guarantee may remain in effect if the term of a lease is extended. We have not recorded a liability with respect to any of these guarantee obligations as of July 30, 2016 as we concluded that payments under these guarantees were not probable.

In the second and third quarters of 2015, in connection with the sale and leaseback under noncancellable operating leases of certain assets, we provided residual value guarantees to the lessor if the leased assets cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. The leases expire in 2020, and the total amount of the guarantees is approximately $105 million. We recorded a liability of $3 million related to these guarantee obligations as of July 30, 2016 and January 30, 2016, which is included in Other Long-term Liabilities on the Consolidated Balance Sheets.

Our contractual obligations primarily consist of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other long-term obligations. These contractual obligations impact our short-term and long-term liquidity and capital resource needs. There have been no material changes in our contractual obligations since January 30, 2016, as discussed in "Contingent Liabilities and Contractual Obligations" in our 2015 Annual Report on Form 10-K, other than the issuance of the 2036 Notes and the repurchase of the 2017 Notes. Certain of our contractual obligations may fluctuate during the normal course of business (primarily changes in our merchandise inventory-related purchase obligations which fluctuate throughout the year as a result of the seasonal nature of our operations).

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective beginning in fiscal 2018, with early adoption as of fiscal 2017 permitted. The standard allows for either a full retrospective or a modified retrospective transition method. We are currently evaluating this standard, including the transition method and timing of adoption, and the related impact on our Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases. This guidance requires companies classified as lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The new standard also will result in enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing leases. The standard requires modified retrospective adoption and will be effective beginning in fiscal 2019, with early adoption permitted. We are currently evaluating this standard, including the timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.

Simplifying the Presentation of Share-Based Compensation

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance requires companies to recognize income tax effects of awards in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The standard also will require all tax-related cash flows resulting from share-based payments to be reported as operating activities on the statements of cash flows, and any cash payments made to taxing authorities on an employee's behalf as financing activities. The standard will be effective beginning in fiscal 2017, with early adoption permitted. We are currently evaluating this standard, including the timing of adoption, and the related impact on its Consolidated Statements of Income and Comprehensive Income, Balance Sheets and Statements of Cash Flows.

Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This guidance requires companies to recognize debt issuance costs related to recognized debt liabilities on the balance sheet as a direct deduction from the carrying amount of those debt liabilities, consistent with debt discounts. This guidance is effective beginning in fiscal year 2016, with early adoption permitted.

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We elected to early adopt this standard effective January 30, 2016. Upon adoption, prior period financial statements were recast as required by the standard to present debt issuance costs as a direct deduction from the carrying value of the related debt liabilities. The impact of the adoption of this standard is a decrease of $39 million to Other Assets and Long-term Debt on the August 1, 2015 Consolidated Balance Sheet.

Balance Sheet Classification of Deferred Taxes

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This guidance requires companies to present all deferred tax assets and liabilities as noncurrent in the balance sheet. This guidance will be effective beginning in fiscal 2017, and early adoption is permitted.

We elected to early adopt this standard effective January 30, 2016 using the retrospective application transition method. Upon adoption, prior period financial statements were recast to present all deferred tax assets and liabilities as noncurrent on the balance sheet. The impact of the adoption of this standard on the August 1, 2015 Consolidated Balance Sheet is a decrease in current deferred income tax assets of approximately $35 million; an increase in noncurrent deferred income tax assets of $8 million; and a decrease to noncurrent deferred income tax liabilities of $27 million.

IMPACT OF INFLATION

While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on the results of operations and financial condition have been minor.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies related to 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. On an ongoing basis, management evaluates its accounting policies, estimates and judgments, including those related to inventories, long-lived assets, claims and contingencies, income taxes and revenue recognition. Management bases our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

There have been no material changes to the critical accounting policies and estimates disclosed in our 2015 Annual Report on Form 10-K.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in foreign currency exchange rates or interest rates. We use derivative financial instruments like cross-currency swaps, forward contracts and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.

Foreign Exchange Rate Risk

We have operations in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations. To mitigate the translation risk to our earnings and the fair value of our Canadian operations associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate, we entered into a cross-currency swap related to a Canadian dollar denominated intercompany loan. This cross-currency swap requires the periodic exchange of fixed rate Canadian dollar interest payments for fixed rate U.S. dollar interest payments as well as exchange of Canadian dollar and U.S. dollar principal payments upon maturity. The swap arrangement matures in January 2018 at the same time as the related loan. As a result of the Canadian dollar denominated intercompany loan and the related cross-currency swap, we do not believe there is any material translation risk to our Canadian net earnings associated with fluctuations in the U.S. dollar-Canadian dollar exchange rate. For additional information, see Note 11, "Derivative Instruments" included in Item 1. Financial Statements.

In addition, our Canadian dollar and British pound denominated earnings are subject to exchange rate risk as substantially all of our merchandise sold in Canada and the U.K. is sourced through U.S. dollar transactions. Although we utilize foreign currency forward contracts to partially offset these risks, these measures may not succeed in offsetting all of the short-term impact of foreign currency rate movements and generally may not be effective in offsetting the long-term impact of sustained shifts in foreign currency rates.

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Further, although our royalty arrangements with our international partners are denominated in U.S. dollars, the royalties we receive in U.S. dollars are calculated based on sales in the local currency. As a result, our royalties in these arrangements are exposed to foreign currency exchange rate fluctuations.

Interest Rate Risk

Our investment portfolio primarily consists of interest-bearing instruments that are classified as cash and cash equivalents based on their original maturities. Our investment portfolio is maintained in accordance with our investment policy, which specifies permitted types of investments, specifies credit quality standards and maturity profiles and limits credit exposure to any single issuer. The primary objective of our investment activities are the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Currently, our investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. Given the short-term nature and quality of investments in our portfolio, we do not believe there is any material risk to principal associated with increases or decreases in interest rates.

The majority of our long-term debt as of July 30, 2016, has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into interest rate swap arrangements. As of July 30, 2016, we have interest rate swap arrangements with notional amounts of $300 million related to a portion of our 2019 Notes.

The effect of the interest rate swap arrangements is to convert the respective amount of debt from a fixed interest rate to a variable interest rate. The variable interest rate associated with these swap arrangements fluctuates based on changes in three-month LIBOR.

For the balance of our long-term debt that is not subject to interest rate swap arrangements, our exposure to interest rate changes is limited to the fair value of the debt issued, which would not have a material impact on our earnings or cash flows.

Fair Value of Financial Instruments

As of July 30, 2016, management believes that the carrying values of cash and cash equivalents, receivables and payables approximate fair value because of the short maturity of these financial instruments.

The following table provides a summary of the principal value and fair value of long-term debt and swap arrangements as of July 30, 2016, January 30, 2016 and August 1, 2015:

	July 30, 2016			January 30, 2016			August 1, 2015
	(in millions)
Long-term Debt (a):
Principal Value	$	5,750		$	5,750		$	4,750
Fair Value, Estimated (b)	6,349			6,209			5,233
Cross-currency Swap Arrangements (c)	(16		)	(27		)	(25		)
Fixed-to-Floating Interest Rate Swap Arrangements (c)	(8		)	(11		)	(7		)

 _______________

(a) The increase in long-term debt is related to the June 2016 issuance of $700 million notes due in July 2036 and the October 2015 issuance of $1 billion notes due in November 2035, offset by the July 2016 repurchase of $700 million notes originally due in July 2017.

(b) The estimated fair value is based on reported transaction prices. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.

(c) Swap arrangements are in an asset position.

Concentration of Credit Risk

We maintain cash and cash equivalents and derivative contracts with various major financial institutions. We monitor the relative credit standing of financial institutions with whom we transact and limit the amount of credit exposure with any one entity. Currently, our investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits. We also periodically review the relative credit standing of franchise, license and wholesale partners and other entities to which we grant credit terms in the normal course of business.

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Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred in the second quarter 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. 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 financial position or results of operations.

Item 1A. RISK FACTORS

The risk factors that affect our business and financial results are discussed in “Item 1A: Risk Factors” in the 2015 Annual Report on Form 10-K. We wish to caution the reader that the risk factors discussed in “Item 1A: Risk Factors” in our 2015 Annual Report on Form 10-K and those described elsewhere in this report or other SEC filings, could cause actual results to differ materially from those stated in any forward-looking statements.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides our repurchases of our common stock during the second quarter of 2016:

Period	Total Number of Shares Purchased (a)	Average Price Paid Per Share (b)		Total Number of Shares Purchased as Part of Publicly Announced Programs (c)	Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Programs (c)
	(in thousands)			(in thousands)
May 2016	126	$	63.92	423	$	209,802
June 2016	21	67.97		753	158,669
July 2016	9	68.36		667	112,034
Total	156			1,843

 _______________

(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 3, "Earnings Per Share and Shareholders' Equity (Deficit)" included in Item 1. Financial Statements.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

None.

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Item 6. EXHIBITS

Exhibits
15	Letter re: Unaudited Interim Financial Information re: Incorporation of Report of Independent Registered Public Accounting Firm.
31.1	Section 302 Certification of CEO.
31.2	Section 302 Certification of CFO.
32	Section 906 Certification (by CEO and CFO).
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

L BRANDS, INC.
(Registrant)
By:	/s/ STUART B. BURGDOERFER
	Stuart B. Burgdoerfer Executive Vice President and Chief Financial Officer *

Date: September 2, 2016

* Mr. Burgdoerfer is the principal financial officer and the principal accounting officer and has been duly authorized to sign on behalf of the Registrant.

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