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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
______________________________________________________ 
FORM 10-K
______________________________________________________ 
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from                  to                 
Commission file number 1-8344
______________________________________________________ 
L BRANDS, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________

Delaware
 
31-1029810
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
Three Limited Parkway,
 
 
Columbus,
Ohio
 
43230
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (614) 415-7000
______________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.50 Par Value
LB
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒    Accelerated filer ☐    Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was: $5,587,493,009.
Number of shares outstanding of the registrant’s Common Stock as of March 20, 2020: 276,533,315.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Registrant’s 2020 Annual Meeting of Stockholders are incorporated by reference into Part III.
 

Table of Contents

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

Table of Contents

PART I

ITEM 1. BUSINESS.
General
L Brands, Inc. (“we” or the "Company”) operates in the highly competitive specialty retail business. Founded in 1963 in Columbus, Ohio, we have evolved from an apparel-based specialty retailer to a segment leader focused on women’s intimate and other apparel, personal care, beauty and home fragrance products. We sell our merchandise through company-owned specialty retail stores in the United States (“U.S.”), Canada, the United Kingdom ("U.K."), Ireland and Greater China (China and Hong Kong); through websites; and through international franchise, license and wholesale partners (collectively, "partners").
On February 20, 2020, we and SP VS Buyer LP ("Sycamore"), an affiliate of Sycamore Partners Management, L.P., entered into a Transaction Agreement (the "Transaction Agreement'') pursuant to which, among other things, we will transfer certain assets and liabilities relating to our business conducted under the Victoria's Secret and PINK brands to our newly formed subsidiary ("Victoria's Secret Holdco") and sell 55% of the equity interests of Victoria's Secret Holdco to Sycamore. After taking into account certain liabilities, Sycamore will purchase the 55% interest in Victoria's Secret Holdco. for approximately $525 million. We will retain a 45% interest in Victoria’s Secret to enable our shareholders to participate in the upside potential of the business. We intend to use the proceeds from the transaction, along with approximately $500 million of excess balance sheet cash, to reduce debt. For additional information, see "Recent Developments" below. For additional information regarding the risks and other uncertainties and factors related to the transaction, refer to Item 1A. Risk Factors.
Bath & Body Works
Bath & Body Works, which sells products under the Bath & Body Works, White Barn, C.O. Bigelow and other brand names, is one of the leading specialty retailers of body care, home fragrance products, soaps and sanitizers. We sell our Bath & Body Works products online and at more than 1,735 Bath & Body Works company-owned stores in the U.S. and Canada. Additionally, Bath & Body Works has more than 275 stores in more than 30 other countries operating under franchise, license and wholesale arrangements.
Victoria’s Secret
Victoria’s Secret, including PINK, is a specialty retailer of women's intimate and other apparel with fashion-inspired collections and prestige fragrances. We sell our Victoria’s Secret products online and at more than 1,180 Victoria’s Secret and PINK company-owned stores in the U.S., Canada, U.K., Ireland and Greater China. Additionally, Victoria’s Secret and PINK have more than 440 stores in more than 70 countries operating under franchise, license and wholesale arrangements.
Divestiture and Closure
La Senza
On January 6, 2019, we completed the sale of the La Senza business to an affiliate of Regent LP, a global private equity firm. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Henri Bendel
In January 2019, we closed all of our Henri Bendel stores and the e-commerce website. For additional information, see Note 5 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. As used herein, “2019,” “2018,” “2016” and “2015” refer to the 52-week periods ended February 1, 2020, February 2, 2019, January 28, 2017 and January 30, 2016, respectively. "2017" refers to the 53-week period ended February 3, 2018.
Real Estate
Company-owned Retail Stores
Our company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the U.S., Canada, the U.K., Ireland and Greater China. As a result of our strong brands and established retail presence, we have been able to lease high-traffic locations in most retail centers in which we operate.

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The following table provides the number of our company-owned retail stores in operation for each brand as of February 1, 2020 and February 2, 2019:
 
February 1, 2020
 
February 2, 2019
Victoria’s Secret U.S.
1,053

 
1,098

Victoria’s Secret Canada
38

 
45

Bath & Body Works U.S.
1,637

 
1,619

Bath & Body Works Canada
102

 
102

Victoria's Secret U.K. / Ireland
26

 
26

Victoria's Secret Greater China
23

 
15

Victoria's Secret Beauty and Accessories Greater China
41

 
38

Total
2,920
 
2,943


The following table provides the changes in the number of our company-owned retail stores operated for the past five fiscal years:
 
Beginning
of Year
 
Opened
 
Closed
 
Acquired (a)
 
Sold (b)
 
End of Year
2019
2,943

 
64

 
(87
)
 
—

 
—

 
2,920

2018
3,075

 
88

 
(90
)
 
—

 
(130
)
 
2,943

2017
3,074

 
66

 
(65
)
 
—

 
—

 
3,075

2016
3,005

 
72

 
(29
)
 
26

 
—

 
3,074

2015
2,969

 
72

 
(36
)
 
—

 
—

 
3,005

_______________
(a)    Relates to the acquisition of Victoria's Secret Beauty and Accessories franchise stores in Greater China.
(b)    Relates to the sale of the La Senza business. For additional information see Note 5 to the Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.    
Franchise, License and Wholesale Arrangements
In addition to our company-owned stores, our products are sold at hundreds of partner locations in more than 70 countries. Under these arrangements, third parties operate stores that sell our products under our brand names. Revenue recognized under franchise and license arrangements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers. Revenue is generally recognized under wholesale and sourcing arrangements at the time the title passes to the partner. We continue to increase the number of locations under these types of arrangements as part of our international expansion.
The following table provides the number of our international stores operated by our partners for each business as of February 1, 2020 and February 2, 2019:
 
February 1, 2020
 
February 2, 2019
Victoria’s Secret Beauty and Accessories
360

 
383

Victoria’s Secret
84

 
56

Bath & Body Works
278

 
235

Total
722
 
674




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Our Strengths
We believe the following competitive strengths contribute to our leading market position, differentiate us from our competitors and will drive future growth:
Industry Leading Brands
We have developed and operate brands that allow us to target markets across the economic spectrum, across demographics and across the world. We believe that our three brands, Victoria's Secret, PINK and Bath & Body Works, are highly recognizable, which provides us with a competitive advantage.
•
At Victoria’s Secret, we market glamorous and sexy product lines to our customers. While bras and panties are the core of what we do, this brand also gives our customers choices in beauty products, fragrances, sleepwear, loungewear, athletic attire and personal care accessories.
•
At PINK, we market products to the college-aged woman. While bras and panties are the core of what we do, this brand also gives our customers choices in apparel, loungewear, athletic attire and accessories.
•
Bath & Body Works caters to our customers’ entire well-being, providing shower gels and lotions, aromatherapy, home fragrance, soaps and sanitizers and body care accessories.
In-Store Experience and Store Operations
We view our customers' in-store experience as an important vehicle for communicating the image of each brand. We utilize visual presentation of merchandise, in-store marketing, music and our sales associates to reinforce the image represented by the brands.
Our in-store marketing is designed to convey the principal elements and personality of each brand. The store design, furniture, fixtures and music are all carefully planned and coordinated to create a unique shopping experience. Every brand displays merchandise uniformly to ensure a consistent store experience, regardless of location. Store managers receive detailed plans designating fixture and merchandise placement to ensure coordinated execution of the company-wide merchandising strategy.
Our sales associates and managers are a central element in creating the atmosphere of the stores by providing a high level of customer service.
Digital Experience
In addition to our in-store experience, we strive to create a customer-centric digital platform that integrates the digital and physical brand experience. Our digital presence, including social media, our websites and our mobile applications, allows us to get to know our customers better and communicate with them anytime and anywhere.
Product Development, Sourcing and Logistics
We believe a large part of our success comes from frequent and innovative product launches, which include bra launches at Victoria’s Secret and PINK and new fragrance and other product launches at Bath & Body Works. Our merchant, design and sourcing teams have a long history of bringing innovative products to our customers. Additionally, we believe that our sourcing and production function (Mast Global) has a long and deep presence in the key sourcing markets including those in the U.S. and Asia, which helps us partner with the best manufacturers to get high-quality products quickly.
Experienced and Committed Management Team
We were founded in 1963 and have been led since inception by Leslie H. Wexner. Our senior management team has a wealth of retail and business experience at L Brands, Inc. and other companies such as The Gap, Ralph Lauren, Tory Burch, Starbucks, Land's End, Levi Strauss, Boots, The Home Depot and Yum Brands. We believe that we have one of the most experienced management teams in retail.
Upon closing of the transaction contemplated by the Transaction Agreement (the "Closing"), Mr. Wexner will step down as Chief Executive Officer and Chairman of the Board to become Chairman Emeritus, remaining as a member of the Board. Andrew Meslow, Chief Executive Officer of Bath & Body Works, will be appointed by the Board as the Chief Executive Officer of L Brands, Inc. and as a director of L Brands, Inc., effective upon the Closing. Mr. Meslow, who joined L Brands, Inc. in 2003, has 29 years of experience in the retail industry, including the last 15 at Bath & Body Works. Additionally, Sarah E. Nash, a member of the Board, will be appointed as the Chair of the Board effective upon the Closing.

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Table of Contents

Additional Information
Merchandise Vendors
During 2019, we purchased merchandise from approximately 340 vendors located throughout the world. No vendor provided 10% or more of our merchandise purchases.
Distribution and Merchandise Inventory
Most of our merchandise is shipped to our distribution centers in the Columbus, Ohio, area. We use a variety of shipping terms that result in the transfer of title of the merchandise at either the point of origin or point of destination.
Our policy is to maintain sufficient quantities of inventories on hand in our retail stores and distribution centers to enable us to offer customers an appropriate selection of current merchandise. We emphasize rapid turnover and take markdowns as required to keep merchandise fresh and current.
Information Systems
Our management information systems consist of a full range of retail, financial and merchandising systems. The systems include applications related to point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management, data security and support systems including human resources and finance.
Seasonal Business
Our operations are seasonal in nature and consist of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). The fourth quarter, including the holiday season, accounted for approximately one-third of our net sales for 2019, 2018 and 2017 and is typically our most profitable quarter. Accordingly, cash requirements are highest in the third quarter as our inventories build in advance of the holiday season.
Working Capital
We fund our business operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, our credit facilities are available for additional working capital needs and investment opportunities.
Regulation
We and our products are subject to regulation by various federal, state, local and foreign regulatory authorities. We are subject to a variety of tax and customs regulations and international trade arrangements.
Trademarks and Patents
Our trademarks and patents, which constitute our primary intellectual property, have been registered or are the subject of pending applications in the U.S. Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. We believe our products are identified by our intellectual property and, thus, our intellectual property is of significant value. Accordingly, we intend to maintain our intellectual property and related registrations and vigorously protect our intellectual property assets against infringement.
Segment Information
We have three reportable segments: Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International. For additional information, including the financial results of our reportable segments, see Note 21 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Other Information
For additional information about our business, including our net sales and profits for the last three years and selling square footage, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Competition
The sale of women's intimate and other apparel, home fragrance, personal care and beauty products and accessories through retail stores is a highly competitive business with numerous competitors, including individual and chain specialty stores, department stores and discount retailers. Brand image, marketing, design, price, service, assortment and quality are the principal competitive factors in retail store sales. Our online businesses compete with numerous online merchandisers. Image presentation, fulfillment and the factors affecting retail store sales discussed above are the principal competitive factors in online sales.

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Table of Contents

Associate Relations
As of February 1, 2020, we employed approximately 94,400 associates; 68,900 of whom were part-time. In addition, temporary associates are hired during peak periods, such as the holiday season.
Executive Officers of Registrant
Set forth below is certain information regarding our executive officers.
Leslie H. Wexner, 82, has been our Chief Executive Officer since our founding in 1963 and Chairman of the Board of Directors since 1975.
Stuart B. Burgdoerfer, 57, has been our Executive Vice President and Chief Financial Officer since April 2007.
Charles C. McGuigan, 63, has been our Chief Operating Officer since May 2012 and our Chief Executive Officer and President of Mast Global since February 2011.
Shelley B. Milano, 63, has been our Chief Human Resources Officer since April 2018.
James L. Bersani, 61, has been our President of Real Estate since March 2014 and has led our Real Estate function since April 2006.
Recent Developments
Victoria’s Secret Transaction
On February 20, 2020, we and Sycamore entered into a definitive agreement that is intended to deliver long-term value to L Brands, Inc. shareholders by positioning Bath & Body Works as a standalone public company and transitioning Victoria's Secret, including business conducted under the Victoria's Secret and PINK brands and certain support functions, into a privately-held entity.
After taking into account certain liabilities, Sycamore will purchase a 55% interest in Victoria's Secret for approximately $525 million. We will retain a 45% interest in Victoria’s Secret to enable our shareholders to participate in the upside potential of the business. The transaction is expected to close in the second quarter of 2020, subject to customary closing conditions. We will report the results of Victoria's Secret as discontinued operations beginning in the first quarter of 2020.
Upon the Closing, Leslie H. Wexner will step down as Chief Executive Officer and Chairman of the Board to become Chairman Emeritus, remaining as a member of the Board. Andrew Meslow, Chief Executive Officer of Bath & Body Works, will be appointed by the Board as the Chief Executive Officer of L Brands, Inc. and as director of L Brands, Inc., effective upon the Closing. Sarah E. Nash, a member of the Board, will be appointed as the Chair of the Board effective upon the Closing.
Company Response to Coronavirus
We are closely monitoring the outbreak of respiratory illness caused by a novel coronavirus that was first detected in Wuhan, China and has since spread globally. The coronavirus has been declared by the World Health Organization to be a “pandemic,” has spread to many countries, including the U.S., and is impacting worldwide economic activity. A public health epidemic, including the coronavirus, poses the risk that we or our employees, contractors, suppliers, and other business partners may be prevented from conducting business activities for an unknown period of time. Related industries in the U.S. and across the world may be adversely affected, including manufacturing and textile production. The situation and preventative or protective actions that governments around the world have taken to contain the spread of the coronavirus have resulted in a period of disruption, including closure of stores where our products are sold, limited store operating hours, reduced customer traffic and consumer spending, labor shortages and delays in manufacturing and shipping of products and raw materials in the U.S., China and other countries. To the extent the impact of the coronavirus continues or worsens, we may have difficulty obtaining the materials necessary for the manufacturing of our products, factories which produce our products may remain closed for sustained periods of time, and industry-wide shipment of products may be negatively impacted. Further, if the impact of the coronavirus continues or worsens, consumer behavior may be altered for an extended period of time which would impact our cash and liquidity and financial condition. The coronavirus and resulting economic disruption has also led to significant volatility in the capital markets and may adversely impact our stock price and ability to access cash. Any one adverse effect of the coronavirus, or a combination of adverse effects, could materially impact our results and financial condition.
Subsequent to February 1, 2020, we announced actions in response to the continued spread of the coronavirus.

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On March 16, 2020, in an abundance of caution and as a proactive measure, we elected to borrow $950 million from our secured revolving credit facility ("Secured Revolving Facility"), leaving our availability under the Secured Revolving Facility at $22 million.
On March 17, 2020, we announced the temporary closure of all Bath & Body Works, Victoria’s Secret and PINK stores in the United States and Canada through March 29, 2020. Associates will continue to receive pay and benefits through April 4, 2020, which is one week longer than originally announced.
Based on the continued spread of the coronavirus and stay-at-home orders by government officials across the country, we are extending the closure of our stores beyond the initial March 29th date. As the situation continues to evolve rapidly, we are not currently able to predict the timing of store reopenings. However, we are monitoring the situation closely and will provide updates as appropriate. We continue to serve customers through our direct channels.
In an effort to further strengthen our financial flexibility and efficiently manage through the pandemic, we are proactively taking the following additional actions:
•
Suspending our quarterly cash dividend beginning in the second quarter of fiscal 2020. We remain committed to paying dividends over the long-term and will re-evaluate when appropriate.
•
Executing a substantial reduction in expenses and capital expenditures.  This includes an ongoing reduction in forward inventory receipts.
•
Temporarily reducing base compensation by 20% for senior vice presidents and above.  The cash compensation of Chairman and CEO Leslie H. Wexner and other members of the Board of Directors has been suspended. Additionally, we are deferring annual merit increases.
•
Furloughing most store associates and those who are not currently working to support the online businesses or who cannot work from home, effective April 5, 2020 until further notice. All furloughed associates will continue to receive existing healthcare benefits. As circumstances change, we will make every effort to bring these associates back to work as soon as possible. Furloughed associates will also be able to apply for unemployment benefits, if eligible.
As of March 27, 2020, we currently have more than $2 billion in cash, which includes the $950 million borrowed under the Secured Revolving Facility on March 16, 2020.  Our Secured Revolving Facility has certain financial covenants, including a debt to consolidated EBITDA covenant, which may be breached as early as the end of the fiscal quarter ending May 2, 2020. If we were to violate a covenant, our lenders would have the right to accelerate our Secured Revolving Facility indebtedness, demand cash collateral in respect of the letters of credit issued thereunder and terminate the funding commitments available thereunder.  While we believe that we would be able to obtain temporary waivers for any such breach of a covenant to prevent an acceleration of our outstanding indebtedness or obtain a replacement credit facility, we cannot conclude with certainty that we would have the ability to obtain necessary waivers or negotiate less restrictive debt covenants with our lenders. We are in active conversations with the lenders under our credit facility to obtain a replacement credit facility that does not contain a debt to consolidated EBITDA financial covenant or a temporary waiver in respect of such financial covenant in our existing Secured Revolving Facility. We believe that our current cash balance, along with the actions taken as outlined above, provides us with sufficient current liquidity.
These recent developments could have a material adverse effect on our results of operations, financial condition and cash flows.  Additional information on this risk and other uncertainties and factors, is set forth in Item 1A. Risk Factors.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission ("SEC"). The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's website at www.sec.gov.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our website at www.lb.com.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to:
L Brands, Inc.
Investor Relations Department
Three Limited Parkway
Columbus, Ohio 43230

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ITEM 1A. RISK FACTORS.
We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by our company or our management involve risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “planned,” “potential” and any similar expressions may identify forward-looking statements. Risks associated with the following factors, among others, in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or otherwise made by our company or our management:
•
general economic conditions, consumer confidence, consumer spending patterns and market disruptions including severe weather conditions, natural disasters, significant health hazards or pandemics, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•
the seasonality of our business;
•
the risk that the transactions contemplated (the “VS Transaction”) by the transaction agreement dated as of February 20, 2020 between us and SP VS Buyer LP (the “Transaction Agreement”) are not consummated, including the risk that required regulatory approvals for the VS Transaction may not be obtained;
•
difficulties arising from business uncertainties and contractual restrictions while the VS Transaction is pending;
•
difficulties arising from turnover in company leadership or other key positions;
•
our ability to attract, develop and retain qualified associates and manage labor-related costs;
•
liabilities arising from divested businesses;
•
the dependence on mall traffic and the availability of suitable store locations on appropriate terms;
•
our ability to grow through new store openings and existing store remodels and expansions;
•
our ability to successfully expand internationally and related risks;
•
our independent franchise, license and wholesale partners;
•
our direct channel businesses;
•
our ability to protect our reputation and our brand images;
•
our ability to attract customers with marketing, advertising and promotional programs;
•
our ability to protect our trade names, trademarks and patents;
•
the highly competitive nature of the retail industry and the segments in which we operate;
•
consumer acceptance of our products and our ability to manage the life cycle of our brands, keep up with fashion trends, develop new merchandise and launch new product lines successfully;
•
our ability to source, distribute and sell goods and materials on a global basis, including risks related to:
•
political instability, environmental hazards or natural disasters;
•
significant health hazards or pandemics, which could result in closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in infected areas;
•
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 vendor and distribution facilities in central Ohio;
•
fluctuations in foreign currency exchange rates;
•
stock price volatility;

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•
our ability to pay dividends and related effects;
•
our ability to maintain our credit rating;
•
our ability to service or refinance our debt;
•
shareholder activism matters;
•
the ability of our vendors to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
•
fluctuations in product input costs;
•
our ability to adequately protect our assets from loss and theft;
•
fluctuations in energy costs;
•
increases in the costs of mailing, paper and printing;
•
claims arising from our self-insurance;
•
our ability to implement and maintain information technology systems and to protect associated data;
•
our ability to maintain the security of customer, associate, third-party or company information;
•
our ability to comply with laws and regulations or other obligations related to data privacy and security;
•
our ability to comply with regulatory requirements;
•
legal and compliance matters; and
•
tax, trade and other regulatory matters.
We are not under any obligation and do not intend to make publicly available any update or other revisions to any of the forward-looking statements contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized.
The following discussion of risk factors contains “forward-looking statements.” These risk factors may be important to understanding any statement in this Form 10-K, other filings or in any other discussions of our business. The following information should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation and Item 8. Financial Statements and Supplementary Data.
In addition to the other information set forth in this report, the reader should carefully consider the following factors which could materially affect our business, financial condition or future results. The risks described below are not our only risks. Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also adversely affect our business, operating results and/or financial condition in a material way.
Our net sales, profit results and cash flows are sensitive to, and may be affected by, general economic conditions, consumer confidence, spending patterns, weather, significant health hazards or pandemics or other market disruptions.
Our net sales, profit, cash flows and future growth may be affected by negative local, regional, national or international political or economic trends or developments that reduce the consumers’ ability or willingness to spend, including the effects of national and international security concerns such as war, terrorism or the threat thereof. In addition, market disruptions due to natural disasters, significant health hazards or pandemics, or other major events or the prospect of these events could also impact consumer spending and confidence levels. Extreme weather conditions in the areas in which our stores are located, particularly in markets where we have multiple stores, could adversely affect our business. Purchases of women’s intimate and other apparel, beauty and personal care products and accessories often decline during periods when economic or market conditions are unsettled or weak. In such circumstances, we may increase the number of promotional sales, which could have a material adverse effect on our results of operations, financial condition and cash flows.
We are closely monitoring the outbreak of respiratory illness caused by a novel coronavirus that was first detected in Wuhan, China and has since spread globally. The coronavirus has been declared by the World Health Organization to be a “pandemic,” has spread to many countries, including the U.S., and is impacting worldwide economic activity. A public health epidemic, including the coronavirus, poses the risk that the we or our employees, contractors, suppliers, and other business partners may be prevented from conducting business activities for an unknown period of time. Related industries in the U.S. and across the world may be adversely effected, including manufacturing and textile production. The situation and preventative or protective actions that governments around the world have taken to contain the spread of the coronavirus have resulted in a period of disruption, including closure of stores where our products are sold, limited store operating hours, reduced customer traffic and

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consumer spending, labor shortages or the extended furlough of our employees and delays in manufacturing and shipping of products and raw materials in the U.S., China and other countries. To the extent the impact of the coronavirus continues or worsens, we may have difficulty obtaining the materials necessary for the manufacturing of our products, factories which produce our products may remain closed for sustained periods of time, and industry-wide shipment of products may be negatively impacted. Further, if the impact of the coronavirus continues or worsens, consumer behavior may be altered for an extended period of time which would impact our cash and liquidity and financial condition. The coronavirus and resulting economic disruption has also led to significant volatility in the capital markets and may adversely impact our stock price and ability to access cash. Any one adverse effect of the coronavirus, or a combination of adverse effects, could materially impact our results and financial condition. Our actual results could differ materially from our guidance due to this risk, and other uncertainties and factors.
Recently, the decision by the U.K. to leave the European Union (commonly referred to as “Brexit”) has increased the uncertainty in the economic and political environment in Europe. Ongoing uncertainty remains as to what kind of post-Brexit agreement between the U.K. and the European Union, if any, may be approved by the U.K. parliament. Our business in the U.K. may be adversely impacted by this uncertainty, fluctuations in currency exchange rates, changes in trade policies, or changes in labor, immigration, tax or other laws.
Our net sales, operating income, cash and inventory levels fluctuate on a seasonal basis.
We experience major seasonal fluctuations in our net sales and operating income, with a significant portion of our operating income typically realized during the fourth quarter holiday season. Any decrease in sales or margins during this period could have a material adverse effect on our results of operations, financial condition and cash flows.
Seasonal fluctuations also affect our cash and inventory levels, since we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday season selling period. If we are not successful in selling inventory, we may have to sell the inventory at significantly reduced prices or may not be able to sell the inventory at all, which could have a material adverse effect on our results of operations, financial condition and cash flows.
We have entered into an agreement pursuant to which we will transfer certain assets and liabilities relating to our business conducted under the Victoria’s Secret and PINK brands (the “Victoria’s Secret Business”) to a newly formed subsidiary (“Victoria’s Secret Holdco”) and sell 55% of the equity interests of Victoria’s Secret Holdco to an affiliate of Sycamore Partners Management, L.P. (“Sycamore”). The proposed VS Transaction involves risks, including risks that the proposed transaction may not be completed on the currently contemplated timeline, or at all, and may not achieve the intended benefits.
The VS Transaction is expected to close in the second quarter of 2020, subject to customary closing conditions, including; (1) the expiration or termination of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, (2) the receipt of approval under the Competition Act of Canada, (3) the absence of any applicable law, injunction or other judgment that prohibits the closing, and (iv) the completion of certain restructuring transactions. In addition, each of our and Sycamore’s obligation to complete the VS Transaction is subject to, among other things, the accuracy of the other party’s representations and warranties in the Transaction Agreement (subject in most cases to “material” and “material adverse effect” qualifications), and the other party’s compliance with its covenants and agreements in the Transaction Agreement in all material respects. The Transaction Agreement provides that we or Sycamore may choose not to proceed with the VS Transaction if the VS Transaction has not been completed by August 20, 2020, which date may be extended by either party to November 20, 2020 under certain circumstances where the restructuring transactions have not been completed pending governmental approvals.
The satisfaction of the required conditions could delay the consummation of the proposed transaction with Sycamore or prevent it from occurring. Further, there can be no assurance that the conditions to the closing of the proposed transaction will be satisfied or waived or that the proposed transaction will be consummated. With respect to regulatory approvals, there can be no assurance that the required regulatory approvals will be received in a timely manner or at all, or that such approvals will not contain adverse conditions. Failure to consummate the proposed transaction in a timely manner or at all could negatively impact the market price of our common stock, as well as our future business and its financial condition, results of operations and cash flows.
Assuming the VS Transaction is completed, there can be no assurance that we will be able to realize the anticipated value and benefits therefrom, and the VS Transaction may adversely affect our business. The proposed transaction will result in a smaller, less diversified and more narrowly focused business than before the VS Transaction, which makes us more vulnerable to changing market and economic conditions. Additionally, a potential loss of synergies from separating the businesses could negatively impact our balance sheet, profit margins or earnings, and the price of our common stock may not be equal to or

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greater than the value of our common stock had the VS Transaction not occurred. If we fail to achieve some or all of the benefits that we expect to achieve as a result of the VS Transaction, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.
We will be subject to business uncertainties and contractual restrictions while the VS Transaction is pending.
Uncertainty about the effect of the VS Transaction on employees, commercial partners and vendors may have an adverse effect on us. These uncertainties may impair our ability to retain and motivate key personnel and could cause commercial partners, vendors and others that deal with us to defer or decline entering into contracts with us or seek to change existing business relationships with us. Certain of our contracts contain restrictions that may give rise to a right of termination or cancellation in connection with the VS Transaction. In addition, if key employees depart because of uncertainty about their future roles and the potential complexities of the VS Transaction, our business could be harmed. Furthermore, the Transaction Agreement contains restrictions on our ability take certain actions relating to the Victoria’s Secret Business outside the ordinary course of business prior to the closing, which may delay or prevent us from undertaking certain actions or business opportunities that may arise prior to the closing.
Turnover in company leadership or other key positions may have an adverse impact on company performance.
Upon the consummation of the VS Transaction, our current Chief Executive Officer ("CEO") will step down and a new CEO will be appointed. Leslie H. Wexner will step down from his position as our CEO and Chairman of the Board after leading the company for more than five decades. Mr. Wexner will remain a member of the Board as Chairman Emeritus. Andrew Meslow, the current Chief Executive Officer of Bath & Body Works, will become our new CEO and will be appointed as a member of the Board. Sarah E. Nash, a member of the Board, will be appointed as the Chair of the Board, effective upon Closing. Additionally, current lead independent director Allan Tessler, as well as directors Gordon Gee and Raymond Zimmerman, will retire as of the date of the annual meeting, and upon Mr. Tessler's retirement, Ms. Nash will serve as lead independent director. Such leadership transitions can be inherently difficult to manage, and an inadequate transition of our CEO may cause disruption to our business, including to our relationships with vendors and employees.
We may well experience further changes in key leadership or key positions in the future. The departure of key leadership personnel, especially a long-serving CEO, can take from the company significant knowledge and experience. This loss of knowledge and experience can be mitigated through successful hiring and transition, but there can be no assurance that we will be successful in such efforts. Attracting and retaining qualified senior leadership may be more challenging under adverse business conditions. Failure to attract and retain the right talent, or to smoothly manage the transition of responsibilities resulting from such turnover, would affect our ability to meet our challenges and may cause us to miss performance objectives or financial targets or disrupt our relationships with our customers.
We may be impacted by our ability to attract, develop and retain qualified associates and manage labor-related costs.
We believe our competitive advantage is providing a positive, engaging and satisfying experience for each individual customer, which requires us to have highly trained and engaged associates. Our success depends in part upon our ability to attract, develop and retain a sufficient number of qualified associates, including store personnel and talented merchants. The turnover rate in the retail industry is generally high, and qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas. Competition for such qualified individuals or changes in labor and healthcare laws could require us to incur higher labor costs. Our inability to recruit a sufficient number of qualified individuals in the future may delay planned openings of new stores or affect the speed with which we expand. Delayed store openings, significant increases in associate turnover rates or significant increases in labor-related costs could have a material adverse effect on our results of operations, financial condition and cash flows.
Retained or contingent liabilities from businesses that we divest could adversely affect our financial results. Our continued involvement with Victoria’s Secret Holdco is also subject to various arrangements, and conditions outside of our control could affect our future results.
In the fourth quarter of 2018, we completed the sale of La Senza to an affiliate of Regent LP, a global private equity firm, and in the first quarter of 2020, we signed a Transaction Agreement with Sycamore to effect the VS Transaction. As a result of the La Senza divestiture and upon the consummation of the VS Transaction, we may incur unexpected contingent liabilities, including with respect to leases assumed by the buyer. Our divestiture activities may also present financial and operational risks. Those risks may include difficulties separating personnel, financial and other systems, and indemnities and potential disputes with the buyer of La Senza and/or Victoria’s Secret Holdco. Any of these factors could adversely affect our financial condition and results of operations. In addition, we will continue to have financial involvement with Victoria’s Secret Holdco after the closing, including through our 45% interest in Victoria’s Secret Holdco, transition services agreements and guarantees.

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Under these arrangements, performance by Victoria’s Secret Holdco or other conditions outside of our control could affect our future results.
Our net sales depend on a volume of traffic to our stores and the availability of suitable lease space.
Most of our stores are located in retail shopping areas including malls and other types of retail centers. Sales at these stores are derived, in part, from the volume of traffic in those retail areas. Our stores benefit from the ability of the retail center and other attractions in an area, including “destination” retail stores, to generate consumer traffic in the vicinity of our stores. Sales volume and retail traffic may be adversely affected by factors that we cannot control, such as economic downturns or changes in consumer demographics in a particular area, consumer trends away from brick-and-mortar retail toward online shopping, competition from internet and other retailers and other retail areas where we do not have stores, significant health hazards or pandemics, the closing of other stores or the decline in popularity or safety in the shopping areas where our stores are located and the deterioration in the financial condition of the operators or developers of the shopping areas in which our stores are located.
Part of our future growth is significantly dependent on our ability to operate stores in desirable locations with capital investment and lease costs providing the opportunity to earn a reasonable return. We cannot be sure as to when or whether such desirable locations will become available at reasonable costs. Some of our store locations require significant upfront capital investment and have material lease commitments. Additionally, we are dependent upon the suitability of the lease spaces that we currently use. The leases that we enter into are generally noncancelable leases with initial terms of 10 years. If we determine that it is no longer economical to operate a store and decide to close it, we may remain obligated under the applicable lease for, among other things, payment of the base rent for the balance of the lease term.
These risks could have a material adverse effect on our ability to grow and our results of operations, financial condition and cash flows.
Our ability to grow depends in part on new store openings and existing store remodels and expansions.
Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to partner with developers and landlords to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel and the integration of new stores into existing operations. There can be no assurance we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new, remodeled and expanded stores profitably. These risks could have a material adverse effect on our ability to grow and results of operations, financial condition and cash flows.
Our plans for international expansion include risks that could impact our results and reputation.
We intend to further expand into international markets, including mainland China, through partner arrangements and/or company-owned stores. The risks associated with our expansion into international markets include difficulties in attracting customers due to a lack of customer familiarity with our brands, our lack of familiarity with local customer preferences and seasonal differences in the market. Any of these difficulties may lead to disruption in the overall timing of our international expansion efforts or increased costs. Further, entry into other markets may bring us into competition with new competitors or with existing competitors with an established market presence. Other risks include general economic conditions in specific countries or markets, volatility in the geopolitical landscape, restrictions on the repatriation of funds held internationally, disruptions or delays in shipments, occurrence of significant health hazards or pandemics, changes in diplomatic and trade relationships, political instability and foreign governmental regulation. For example, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in temporary store closures and a decrease in consumer traffic in China. To date, this virus has begun to spread globally. We expect the coronavirus to negatively impact our results of operations, particularly in the Greater China business, and our plans for expansion in China, though the extent and duration of this impact remain uncertain. To the extent the impact of the coronavirus continues or worsens, we may have difficulty obtaining the materials necessary for the manufacturing of our products, factories which produce our products may remain closed for sustained periods of time and industry-wide shipment of products may be negatively impacts. Such expansions will also have upfront investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance.
We also have risks related to identifying suitable partners. In addition, certain aspects of these arrangements are not directly within our control, such as the ability of these third parties to meet their projections regarding store openings and sales and their compliance with federal and local law. We cannot ensure the profitability or success of our expansion into international markets.

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Further, our results of operations and financial condition may be adversely affected by fluctuations in currency exchange rates. See “Fluctuations in foreign currency exchange rates could impact our financial condition and results of operations” below.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our licensees, franchisees and wholesalers could take actions that could harm our business or brand images.
We have global representation through independently owned stores operated by our partners. Although we have criteria to evaluate and select prospective partners, the level of control we can exercise over our partners is limited, and the quality and success of their operations may be diminished by any number of factors beyond our control. For example, our partners may not have the business acumen or financial resources necessary to successfully operate stores in a manner consistent with our standards and may not hire and train qualified store managers and other personnel. Our brand image and reputation may suffer materially, and our sales could decline if our partners do not operate successfully. These risks could have an adverse effect on our results of operations, financial condition and cash flows.
Our direct channel businesses include risks that could have an effect on our results.
Our direct operations are subject to numerous risks that could have a material adverse effect on our results. Risks include, but are not limited to, the difficulty in recreating the in-store experience through our direct channels; domestic or international resellers purchasing merchandise and reselling it outside our control; our ability to anticipate and implement innovations in technology and logistics in order to appeal to existing and potential customers who increasingly rely on multiple channels to meet their shopping needs; the failure of and risks related to the systems that operate our web infrastructure, websites and the related support systems, including computer viruses, theft of customer information, privacy concerns, telecommunication failures and electronic break-ins and similar disruptions.
Our failure to maintain efficient and uninterrupted order-taking and fulfillment operations could also have a material adverse effect on our results. The satisfaction of our online customers depends on their timely receipt of merchandise. If we encounter difficulties with the distribution facilities, or if the facilities were to shut down for any reason, including as a result of fire, natural disaster or work stoppage, we could face shortages of inventory; incur significantly higher costs and longer lead times associated with distributing our products to our customers; and cause customer dissatisfaction.
Any of these issues could have a material adverse effect on our operations, financial condition and cash flows.
Our ability to protect our reputation could have a material effect on our brand images.
Our ability to maintain our reputation is critical to our brand images. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity, including information publicized through traditional or social media platforms and similar venues such as blogs, websites and other forums, may affect our reputation and brand and, consequently, reduce demand for our merchandise, even if such publicity is unverified or inaccurate.
Failure to comply with or the perception that the Company has failed to comply with ethical, social, product, labor and environmental standards, or related political considerations, could also jeopardize our reputation and potentially lead to various adverse consumer actions, including boycotts. Failure to comply with local laws and regulations, to maintain an effective system of internal controls, to maintain the security of customer, associate, third-party or company information or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these or other reasons could have a material adverse effect on our results of operations, financial condition and cash flows, as well as require additional resources to rebuild our reputation.
If our marketing, advertising and promotional programs are unsuccessful, or if our competitors are more effective with their programs than we are, our revenue or results of operations may be adversely affected.
Customer traffic and demand for our merchandise are influenced by our advertising, marketing and promotional activities, the name recognition and reputation of our brands and the location of and service offered in our stores. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, websites, mobile applications, email, print and television, some of our competitors may expend more for their programs than we do, or use different approaches than we do, which may provide them with a competitive advantage. Our programs may not be effective or could require increased expenditures, which could have a material adverse effect on our revenue and results of operations.

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Our ability to adequately protect our trade names, trademarks and patents could have an impact on our brand images and ability to penetrate new markets.
We believe that our trade names, trademarks and patents are important assets and an essential element of our strategy. We have obtained or applied for federal registration of these trade names, trademarks and patents and have applied for or obtained registrations in many foreign countries. There can be no assurance that we will obtain such registrations or that the registrations we obtain will prevent the imitation of our products or infringement of our intellectual property rights by others. In particular, the laws of certain foreign countries may not protect proprietary rights to the same extent as the laws of the U.S. If any third-party copies our products or our stores in a manner that projects lesser quality or carries a negative connotation, it could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
Our ability to compete favorably in our highly competitive segment of the retail industry could impact our results.
The sale of women’s intimate and other apparel, personal care products and accessories is highly competitive. We compete for sales with a broad range of other retailers, including individual and chain specialty stores, department stores and discount retailers. In addition to the traditional store-based retailers, we also compete with direct marketers or retailers that sell similar lines of merchandise and who target customers through online channels. Brand image, marketing, design, price, service, assortment, quality, image presentation and fulfillment are all competitive factors in both the store-based and online channels.
Some of our competitors may have greater financial, marketing and other resources available and trends across our product categories may favor our competitors. We rely to a greater degree than some of our competitors on physical locations in shopping malls and centers and so declines in traffic to such locations may affect us more significantly than our competitors. Some of our competitors sell their products in stores that are located in the same shopping malls and centers as our stores. In addition to competing for sales, we compete for favorable site locations and lease terms in shopping malls and centers.
Increased competition, combined with declines in mall traffic, could result in price reductions, increased marketing expenditures and loss of pricing power and market share, any of which could have a material adverse effect on our results of operations, financial condition and cash flows.
Our ability to manage the life cycle of our brands and to remain current with fashion trends and launch new product lines successfully could impact the image and relevance of our brands.
Our success depends in part on management’s ability to effectively manage the life cycle of our brands and to anticipate and respond to changing fashion preferences and consumer demands and to translate market trends into appropriate, salable product offerings in advance of the actual time of sale to the customer. Customer demands and fashion trends change rapidly. If we are unable to successfully anticipate, identify or react to changing styles or trends or we misjudge the market for our products or any new product lines, our sales will be lower, potentially resulting in significant amounts of unsold finished goods inventory. In response, we may be forced to increase our marketing promotions or price markdowns. These risks could have a material adverse effect on our brand image and reputation as well as our results of operations, financial condition and cash flows.
We may be impacted by our ability to adequately source, distribute and sell merchandise and other materials on a global basis.
We source merchandise and other materials directly in international markets and in our domestic market. We distribute merchandise and other materials globally to our partners in international locations and to our stores. Many of our imports and exports are subject to a variety of customs regulations and international trade arrangements, including existing or potential duties, tariffs or safeguard quotas. We compete with other companies for production facilities.
We also face a variety of other risks generally associated with doing business on a global basis. For example:
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political instability, environmental hazards or natural disasters which could negatively affect international economies, financial markets and business activity;
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significant health hazards or pandemics, which could result in closed factories, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in infected areas;
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imposition of new or retaliatory trade duties, sanctions or taxes and other charges on imports or exports;
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evolving, new or complex legal and regulatory matters;
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volatility in currency exchange rates;

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•
local business practice and political issues (including issues relating to compliance with domestic or international labor standards) which may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts;
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potential delays or disruptions in shipping and transportation and related pricing impacts;
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disruption due to labor disputes; and
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changing expectations regarding product safety due to new legislation or other factors.
We also rely upon third-party transportation providers for substantially all of our product shipments, including shipments to and from our distribution centers, to our stores and to our customers. Our utilization of these delivery services for shipments is subject to risks, including increases in labor costs and fuel prices, which would increase our shipping costs, and associate strikes and inclement weather, which may impact our transportation providers’ ability to provide delivery services that adequately meet our shipping needs.
For example, the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, China has led to work and travel restrictions within, to, and out of mainland China, which in turn has led to delays in textile mill and factory openings, and delays in workers returning, following the Chinese New Year holiday. To date, this virus has begun to spread globally, and various governments have either enforced further restrictions or have begun pondering taking action soon. These restrictions and delays, which may further expand depending on the progression of the illness, may make it difficult for our suppliers to source raw materials in China, manufacture finished goods in China and export our products from China. Additionally, our suppliers throughout Asia source a significant amount of fabric from China. If the severity and reach of the coronavirus outbreak increases, there may be significant and material disruptions to our supply chain and operations, and delays in the manufacture and shipment of our products, which may then have a material adverse effect on our results of operations. Our future performance will depend upon these and the other factors listed above, which are beyond our control, and the occurrence or deepening impact of one or more of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
We rely on a number of vendor and distribution facilities located in the same vicinity, making our business susceptible to local and regional disruptions or adverse conditions.
To achieve the necessary speed and agility in producing our beauty, personal care and home fragrance products, we rely heavily on vendor and distribution facilities in close proximity to our headquarters in Central Ohio. As a result of geographic concentration of the vendor and distribution facilities that we rely upon, our operations are susceptible to local and regional factors, such as accidents, system failures, economic and weather conditions, natural disasters, demographic and population changes, and other unforeseen events and circumstances. Any significant interruption in the operations of these facilities could lead to inventory issues or increased costs, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Fluctuations in foreign currency exchange rates could impact our financial condition and results of operations.
We are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. In addition, our royalty arrangements are calculated based on sales in local currency and, as such, we are exposed to foreign currency exchange rate fluctuations. Although we use foreign currency forward contracts to hedge certain foreign currency risks, these measures may not succeed in offsetting all of the short-term negative impacts of foreign currency rate movements on our business and results of operations. Hedging would generally not be effective in offsetting the long-term impact of sustained shifts in foreign exchange rates on our business results. As a result, the fluctuation in the value of the U.S. dollar against other currencies could have a material adverse effect on our results of operations, financial condition and cash flows.
Our stock price may be volatile.
Our stock price may fluctuate substantially as a result of variations in our actual or projected performance or the financial performance of other companies in the retail industry. Any guidance that we provide is based on goals that we believe are reasonably attainable at the time guidance is given. If, or when, we announce actual results that differ from those that have been predicted by us, outside investment analysts or others, our stock price could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk.
In addition, the stock market may experience price and volume fluctuations that are unrelated or disproportionate to operating performance.

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On March 27, 2020, our Board of Directors announced that it planned to suspend our annual ordinary dividend, beginning with the quarterly dividend to be paid in our second fiscal quarter in 2020. There can be no assurance if, when and at what level our Board of Directors may resume making dividend payments.
On March 27, 2020, our Board of Directors announced that it planned to suspend our annual ordinary dividend, beginning with the quarterly dividend to be paid in our second fiscal quarter in 2020. While we remain committed to paying dividends over the long-term and will re-evaluate when appropriate, there can be no assurance if, when and at what level our Board of Directors may resume making dividend payments. Our dividend program requires the use of a portion of our cash flow. Our ability to pay dividends depends on our ability to generate sufficient cash flows from operations in the future. This ability is subject to certain economic, financial, competitive and other factors that are beyond our control. Our failure to pay dividends may negatively impact our stock price.
Our ability to maintain our credit rating could affect our ability to access capital and could increase our interest expense.
The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. A deterioration in our capital structure or the quality and stability of our earnings could result in a downgrade of our credit rating. Any negative ratings actions could constrain the capital available to our company or our industry and could limit our access to funding for our operations. We are dependent upon our ability to access capital at rates and on terms we determine to be attractive. If our ability to access capital becomes constrained, our interest costs will likely increase, which could have a material adverse effect on our results of operations, financial condition and cash flows. Additionally, changes to our credit rating could affect our future interest costs.
If we breach covenants in our Secured Revolving Facility, our ability to service or refinance our debt as well as our financial stability may be impacted.
We currently have substantial indebtedness. Our Secured Revolving Facility contains covenants which require maintenance of certain financial ratios and also, under certain conditions, restrict our ability to pay dividends, repurchase common shares and make other restricted payments as defined in the agreement. Our cash flow from operations provides the primary source of funds for our debt service payments. If our cash flow from operations declines, we may be unable to service or refinance our current debt, or make certain restricted payments as defined in our Secured Revolving Facility. If we fail to comply with any covenant, including our financial maintenance covenants, it could result in an event of default and our lenders could terminate the commitments under our Secured Revolving Facility as well as certain foreign borrowing facilities and make the entire debt incurred thereunder immediately due and payable or we may be forced to sell assets, restructure our indebtedness or seek additional equity capital, which would dilute our stockholders’ interests. In particular, as of March 27, 2020, we currently have more than $2 billion in cash, which includes the $950 million borrowed under the Secured Revolving Facility on March 16, 2020. However, our Secured Revolving Facility has certain financial covenants, including a debt to consolidated EBITDA covenant, which may be breached as early as the end of the fiscal quarter ending May 2, 2020. We are in active conversations with our lenders regarding a temporary waiver in respect of such financial covenant or the possibility of entering into a replacement credit facility without a similar covenant. If we are unable to obtain a temporary waiver for that anticipated covenant breach or to obtain a replacement credit facility without a similar covenant, our lenders would have the right to accelerate our Secured Revolving Facility indebtedness, demand cash collateral in respect of the letters of credit issued thereunder and terminate the funding commitments available thereunder. If this occurs, we might not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to us.
Shareholder activism could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price.
Shareholder activism, which can take many forms and arise in a variety of situations, could result in substantial costs and divert management’s and our board’s attention and resources from our business. Additionally, such shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with our associates, customers or service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant fees and other expenses related to activist shareholder matters, including for third-party advisors. Our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism.
We may be impacted by our vendors’ ability to manufacture and deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations.
We purchase products from third-party vendors. Factors outside our control, such as production or shipping delays or quality problems, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns.

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In addition, quality problems could result in a product liability judgment or a widespread product recall that may negatively impact our sales and profitability for a period of time depending on product availability, competition reaction and consumer attitudes. Even if the product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions could adversely impact our reputation with existing and potential customers and our brand image.
Our business could also suffer if our third-party vendors fail to comply with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices and our associates visit and monitor the operations of our third-party vendors, we do not control these vendors or their practices. The violation of labor, environmental or other laws by third-party vendors used by us, or the divergence of a third-party vendor’s or partner’s labor or environmental practices from those generally accepted as ethical or appropriate, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation.
These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be affected by fluctuations in product input costs.
Product input costs, including freight, labor and raw materials, fluctuate. These fluctuations may result in an increase in our production costs. We may not be able to, or may elect not to, pass these increases on to our customers which may adversely impact our profit margins. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
Our ability to adequately protect our assets from loss and theft.
Our assets are subject to loss, including those caused by illegal or unethical conduct by associates, customers, vendors or unaffiliated third parties. We have experienced events such as inventory shrinkage in the past, and we cannot assure that incidences of loss and theft will decrease in the future or that the measures we are taking will effectively reduce these losses. Higher rates of loss or increased security costs to combat theft could have a material adverse effect on our results of operations, financial condition and cash flows.
Our results may be affected by fluctuations in energy costs.
Energy costs have fluctuated in the past. These fluctuations may result in an increase in our transportation costs for distribution, utility costs for our retail stores and costs to purchase products from our manufacturers. A continual rise in energy costs could adversely affect consumer spending and demand for our products and increase our operating costs, both of which could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be impacted by increases in costs of mailing, paper and printing.
Postal rate increases and paper and printing costs will affect the cost of our order fulfillment and promotional mailings. We rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting. Future paper and postal rate increases could adversely impact our earnings if we are unable to recover these costs or if we are unable to implement more efficient printing, mailing, delivery and order fulfillment systems. These risks could have a material adverse effect on our results of operations, financial condition and cash flows.
We self-insure certain risks and may be impacted by unfavorable claims experience.
We are self-insured for various types of insurable risks including associate medical benefits, workers’ compensation, property, general liability and automobile up to certain stop-loss limits. Claims are difficult to predict and may be volatile. Any adverse claims experience could have a material adverse effect on our results of operations, financial condition and cash flows.
We significantly rely on our ability to implement and sustain information technology systems and to protect associated data.
Our success depends, in part, on the secure and uninterrupted performance of our information technology systems. Our information technology systems, as well as those of our service providers, are vulnerable to damage from a variety of sources, including telecommunication failures, malicious human acts and natural disasters. Moreover, despite maintaining comprehensive measures, some of our systems, e-commerce environments, servers and those of our service providers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Additionally, these types of problems could result in a breach of confidential customer, merchandise, financial, employee or other important information (including personal information) which could result in damage to our reputation and/or litigation. The increased use of smartphones, tablets and other mobile devices may also heighten these and other operational risks. Despite the precautions we have taken, unanticipated problems may nevertheless cause failures in our information technology systems.

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Sustained or repeated system disruptions that interrupt our ability to process orders and deliver products to the stores, impact our customers’ ability to access our websites in a timely manner or expose confidential customer information, merchandise, financial or other important information (including personal information) could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition, from time to time, we make hardware, software and code modifications and upgrades to our information technology systems for point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management and support systems including human resources and finance. Modifications involve replacing existing systems with successor systems, making changes to existing systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including not accurately capturing data and system disruptions. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations, financial condition and cash flows.
Any significant compromise or breach of our data security, including the security of customer, associate, third-party or company information, could have a material adverse effect on our reputation, results of operations, financial condition and cash flows.
In the operation of our business, we collect, use, transmit and otherwise process a large volume of personal and other confidential, proprietary and sensitive information. Information systems are susceptible to an increasing threat of continually evolving cybersecurity risks. Any significant compromise or breach of our data security, media reports about such an incident, whether accurate or not, or our failure to make adequate or timely disclosures to the public or law enforcement agencies following any such event, whether due to delayed discovery or a failure to follow existing protocols, could significantly damage our reputation with our customers, associates, investors and other third parties, cause the disclosure of personal, confidential, proprietary or sensitive customer, associate, third-party or company information, cause interruptions to our operations and distraction to our management, cause our customers to stop shopping with us and result in significant legal, regulatory and financial liabilities and lost revenues.
While we train our associates and have implemented systems, processes and confidential security measures to protect our physical facilities and information technology systems against unauthorized access and prevent data loss, there is no guarantee that these procedures are adequate to safeguard against all data security breaches. Despite these measures, we may be vulnerable to targeted or random security breaches, phishing attacks, denial of service attacks, acts of vandalism, computer viruses, malware, ransomware, misplaced or lost data, programming and/or human errors or similar events. Our systems and facilities are also subject to compromise from internal threats, such as theft, misuse, unauthorized access or other improper actions by employees, third-party service providers and other third parties with otherwise legitimate access to our systems, website or facilities. Furthermore, because the methods of cyber-attack and deception change frequently, are increasingly complex and sophisticated, and can originate from a wide variety of sources, including nation-state actors, despite our reasonable efforts to ensure the integrity of our systems and website, it is possible that we may not be able to anticipate, detect, appropriately react and respond to, or implement effective preventative measures against, all cybersecurity incidents.
In addition to our own systems, networks and databases, we use third-party service providers to store, transmit and otherwise process certain of this information on our behalf. Due to applicable laws and regulations or contractual obligations, we may be held responsible for any cybersecurity incident attributed to our service providers as they relate to the information we share with them or to which they are granted access. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in their systems.
We may be required to expend significant capital and other resources to protect against, respond to, and recover from any potential, attempted, or existing cybersecurity incidents. As cybersecurity incidents continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. In addition, our remediation efforts may not be successful. The inability to implement, maintain and upgrade adequate safeguards could have a material adverse effect on our results of operations, financial condition and cash flow. Moreover, there could be public announcements regarding any cybersecurity incidents and any steps we take to respond to or remediate such incidents, and if securities analysts or investors perceive these announcements to be negative, it could, among other things, have a substantial adverse effect on the price of our common stock.
While we currently maintain cybersecurity insurance, such insurance may not be sufficient in type or amount to cover us against claims related to breaches, failures or other data security-related incidents, and we cannot be certain that cyber insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance

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coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our results of operations, financial condition and cash flows.
Changes in laws or regulations relating to data privacy and security, or any actual or perceived failure by us to comply with such laws and regulations, or contractual or other obligations relating to data privacy and security, could have a material adverse effect on our reputation, results of operations, financial condition and cash flows.
We are, and may increasingly become, subject to various laws and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The regulatory environment related to data privacy and security is increasingly rigorous, with new and constantly changing requirements applicable to our business, and enforcement practices are likely to remain uncertain for the foreseeable future. These laws and regulations may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that may have a material adverse effect on our results of operations, financial condition and cash flows.
In the U.S., various federal and state regulators, including governmental agencies like the Consumer Financial Protection Bureau and the Federal Trade Commission, have adopted, or are considering adopting, laws and regulations concerning personal information and data security. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to personal information than federal, international or other state laws, and such laws may differ from each other, all of which may complicate compliance efforts. For example, the California Consumer Privacy Act (“CCPA”), which increases privacy rights for California residents and imposes obligations on companies that process their personal information, went into effect on January 1, 2020. Among other things, the CCPA requires covered companies to provide new disclosures to California consumers and provide such consumers new data protection and privacy rights, including the ability to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. In addition, laws in all 50 U.S. states require businesses to provide notice to consumers whose personal information has been disclosed as a result of a data breach. State laws are changing rapidly and there is discussion in Congress of a new comprehensive federal data privacy law to which we would become subject if it is enacted.
We are subject to international laws, regulations and standards in many jurisdictions, which apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. For example, the E.U. General Data Protection Regulation (“GDPR”), which became effective in May 2018, greatly increased the European Commission’s jurisdictional reach of its laws and adds a broad array of requirements for handling personal data. EU member states are tasked under the GDPR to enact, and have enacted, certain implementing legislation that adds to and/or further interprets the GDPR requirements and potentially extends our obligations and potential liability for failing to meet such obligations. The GDPR, together with national legislation, regulations and guidelines of the EU member states and the United Kingdom governing the processing of personal data, impose strict obligations and restrictions on the ability to collect, use, retain, protect, disclose, transfer and otherwise process personal data. In particular, the GDPR includes obligations and restrictions concerning the consent and rights of individuals to whom the personal data relates, the transfer of personal data out of the European Economic Area or the United Kingdom, security breach notifications and the security and confidentiality of personal data. The GDPR authorizes fines for certain violations of up to 4% of global annual revenue or €20 million, whichever is greater.
All of these evolving compliance and operational requirements impose significant costs, such as costs related to organizational changes, implementing additional protection technologies, training associates and engaging consultants, which are likely to increase over time. In addition, such requirements may require us to modify our data processing practices and policies, distract management or divert resources from other initiatives and projects, all of which could have a material adverse effect on our results of operations, financial condition and cash flows. Any failure or perceived failure by us to comply with any applicable federal, state or similar foreign laws and regulations relating to data privacy and security could result in damage to our reputation and our relationship with our customers, as well as proceedings or litigation by governmental agencies or customers, including class action privacy litigation in certain jurisdictions, which would subject us to significant fines, sanctions, awards, penalties or judgments, all of which could have a material adverse effect on our results of operations, financial condition and cash flows.
We may be impacted by our ability to comply with regulatory requirements.
We are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable foreign and domestic laws and regulations, including those required by the Sarbanes-Oxley Act of 2002, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, the SEC and the New York Stock Exchange (the “NYSE”), among others. Although we have put in place policies and procedures aimed at ensuring legal and regulatory compliance, our

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

ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.

ITEM 2. PROPERTIES.
The following table provides the location, use and size of our distribution, corporate and product development facilities as of February 1, 2020:
Location
 
Use
 
Approximate
Square
Footage
Columbus, Ohio area
 
Corporate, distribution and shipping
 
6,938,000

New York
 
Office, sourcing and product development/design
 
495,000

Kettering, Ohio
 
Call center
 
94,000

Hong Kong
 
Office and sourcing
 
60,000

Mainland China
 
Office
 
36,000

Canada
 
Office
 
21,000

Various international locations
 
Office and sourcing
 
153,000


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United States
Our business for the Victoria’s Secret, Bath & Body Works and Victoria's Secret and Bath & Body Works International segments is principally conducted from office, distribution and shipping facilities located in the Columbus, Ohio, area. Additional facilities are located in New York and Kettering, Ohio.
Our distribution and shipping facilities consist of eight buildings located in the Columbus, Ohio, area. These buildings, including attached office space, comprise approximately 6.9 million square feet.
As of February 1, 2020, we operate 2,690 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the U.S. A substantial portion of these lease commitments consists of store leases generally with an initial term of 10 years. The store leases expire at various dates between 2020 and 2033.
Typically, when space is leased for a retail store in a mall or shopping center, we supply all improvements, including interior walls, floors, ceilings, fixtures and decorations. The cost of improvements varies widely, depending on the design, size and location of the store. In certain cases, the landlord of the property may provide an allowance to fund all or a portion of the cost of improvements, serving as a lease incentive. Rental terms for new locations usually include a fixed minimum rent plus a percentage of sales in excess of a specified amount. We usually pay certain operating costs such as common area maintenance, utilities, insurance and taxes. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
International
Canada
We lease offices in the Montreal, Quebec, and Toronto, Ontario, areas.
As of February 1, 2020, we operate 140 retail stores located in leased facilities, primarily in malls and shopping centers, throughout the Canadian provinces. These lease commitments consist of store leases with initial terms of 5 to 10 years expiring on various dates between 2020 and 2030.
United Kingdom / Ireland
As of February 1, 2020, we operate 26 retail stores in leased facilities in the U.K. and Ireland. These lease commitments consist of store leases with initial terms ranging from 10 to 35 years expiring on various dates between 2021 and 2045.
Greater China
We lease offices in Shanghai, Shenzhen and Hong Kong within Greater China.
As of February 1, 2020, we operate 64 retail stores in leased facilities in Greater China. These lease commitments consist of store leases with initial terms ranging from 3 to 15 years expiring on various dates between 2020 and 2032.
Other International
As of February 1, 2020, we also have global representation through stores operated by our partners:
•
360 Victoria’s Secret Beauty and Accessories stores in 68 countries;
•
278 Bath & Body Works stores in more than 30 countries;
•
72 Victoria's Secret stores in 28 countries; and
•
12 PINK stores in 5 countries.
We also operate sourcing-related office facilities in various international locations.

ITEM 3. LEGAL PROCEEDINGS.
We are a defendant in a variety of lawsuits arising in the ordinary course of business. Actions filed against our Company from time to time include commercial, tort, intellectual property, customer, employment, data privacy, securities and other claims, including purported class action lawsuits. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, our current legal proceedings are not expected to have a material adverse effect on our results of operations, financial condition and cash flows.
In July 2019, a plaintiff shareholder filed a putative class action complaint in the U.S. District Court for the Southern District of Ohio alleging that we made false and/or misleading statements relating to the November 2018 announcement that we were

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reducing our quarterly dividend. In September 2019, a different plaintiff shareholder filed a second putative class action complaint in the U.S. District Court for the Southern District of Ohio containing substantially the same allegations and seeking substantially the same relief.  In October 2019, the Court issued an order consolidating the two putative class actions, appointing a lead plaintiff, and approving that lead plaintiff’s selection of lead counsel.  The lead plaintiff filed a consolidated amended complaint on December 20, 2019 that asserted substantially the same allegations and sought substantially the same relief as the initial complaint.  We filed a motion to dismiss the consolidated amended complaint on February 18, 2020.  The lead plaintiff must file any opposition to our motion to dismiss no later than May 4, 2020.  Our reply brief in further support of our motion to dismiss is due on June 3, 2020.  We view this lawsuit as meritless and intend to defend against this lawsuit vigorously. 

On February 19, 2020, a plaintiff shareholder filed a complaint in the U.S. District Court for the Southern District of Ohio alleging derivative claims on behalf of L Brands, Inc. against certain current and former directors and officers of L Brands, Inc.  We were named as nominal defendant.  The lawsuit asserts claims for breach of fiduciary duty, corporate waste and unjust enrichment in connection with alleged misstatements about our quarterly dividend prior to the announced reduction of the dividend in November 2018. We intend to seek dismissal of the lawsuit.
 
ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock (“LB”) is traded on the NYSE. As of February 1, 2020, there were approximately 34,000 shareholders of record. However, including active associates who participate in our stock purchase plan, associates who own shares through our sponsored retirement plans and others holding shares in broker accounts under street names, we estimate the shareholder base to be approximately 138,000.
The following table provides our quarterly market prices and cash dividends per share for 2019 and 2018:
 
 
Market Price
 
Cash Dividend
per Share
 
High
 
Low
 
2019
 
 
 
 
 
Fourth quarter
$
23.63

 
$
15.80

 
$
0.30

Third quarter
24.09

 
15.82

 
0.30

Second quarter
28.02

 
21.45

 
0.30

First quarter
29.02

 
24.73

 
0.30

2018

 

 

Fourth quarter
$
38.00

 
$
23.71

 
$
0.60

Third quarter
33.97

 
25.89

 
0.60

Second quarter
38.14

 
30.42

 
0.60

First quarter
51.13

 
33.88

 
0.60


In February 2020, our Board of Directors declared our first quarter of 2020 dividend of $0.30 per share. This dividend was distributed on March 6, 2020 to shareholders of record at the close of business on February 21, 2020.



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The following graph shows the changes, over the past five-year period, in the value of $100 invested in our common stock, the Standard & Poor’s ("S&P") 500 Composite Stock Price Index and the Standard & Poor’s 500 Retail Composite Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN (a) (b) (c)
AMONG L BRANDS, INC., THE S&P 500 INDEX AND THE S&P 500 RETAIL COMPOSITE INDEX
lb5yearreturntable2019.jpg
_______________
(a)
This table represents $100 invested in stock or in index at the closing price on January 31, 2015, including reinvestment of dividends.
(b)
The January 28, 2017 cumulative total return includes the $2 special dividend in March 2016.
(c)
The January 30, 2016 cumulative total return includes the $2 special dividend in March 2015.
The following table provides our repurchases of our common stock during the fourth quarter of 2019:
Period
 
Total
Number of
Shares
Purchased (a)
 
Average Price
Paid per
Share (b)
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Programs (c)
 
Maximum
Dollar Value of Shares
that May
Yet be Purchased
Under the Programs (c)
 
 
(in thousands)
 
 
 
(in thousands)
November 2019
 
20

 
$
17.17

 
—

 
$
78,677

December 2019
 
5

 
18.26

 
—

 
78,677

January 2020
 
8

 
22.91

 
—

 
78,677

Total
 
33

 


 
—

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


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ITEM 6. SELECTED FINANCIAL DATA.
 
 
Fiscal Year Ended
 
 
February 1, 2020
 
February 2, 2019
 
February 3,
2018 (a)
 
January 28, 2017
 
January 30, 2016
Summary of Operations
 
(in millions)
Net Sales
 
$
12,914

 
$
13,237

 
$
12,632

 
$
12,574

 
$
12,154

Gross Profit
 
4,450

 
4,899

 
4,959

 
5,125

 
5,204

Operating Income (b)
 
258

 
1,237

 
1,728

 
2,003

 
2,192

Net Income (Loss) (c)
 
(366
)
 
644

 
983

 
1,158

 
1,253

 
 
(as a percentage of net sales)
Gross Profit
 
34.5
%
 
37.0
%
 
39.3
%
 
40.8
%
 
42.8
%
Operating Income
 
2.0
%
 
9.3
%
 
13.7
%
 
15.9
%
 
18.0
%
Net Income (Loss)
 
(2.8
%)
 
4.9
%
 
7.8
%
 
9.2
%
 
10.3
%
 
 
 
 
 
 
 
 
 
 
 
Per Share Results
 
 
 

 

 

 

Net Income (Loss) Per Basic Share
 
$
(1.33
)
 
$
2.33

 
$
3.46

 
$
4.04

 
$
4.30

Net Income (Loss) Per Diluted Share
 
$
(1.33
)
 
$
2.31

 
$
3.42

 
$
3.98

 
$
4.22

Dividends Per Share
 
$
1.20

 
$
2.40

 
$
2.40

 
$
4.40

 
$
4.00

Weighted Average Diluted Shares Outstanding (in millions)
 
276

 
279

 
287

 
291

 
297

 
 
 
 
 
 
 
 
 
 
 
Other Financial Information
 
(in millions)
Cash and Cash Equivalents
 
$
1,499

 
$
1,413

 
$
1,515

 
$
1,934

 
$
2,548

Total Assets (d)
 
10,125

 
8,090

 
8,149

 
8,170

 
8,493

Working Capital (d)
 
873

 
1,274

 
1,262

 
1,451

 
2,281

Net Cash Provided by Operating Activities
 
1,236

 
1,377

 
1,406

 
1,990

 
2,027

Capital Expenditures
 
458

 
629

 
707

 
990

 
727

Long-term Debt
 
5,487

 
5,739

 
5,707

 
5,700

 
5,715

Other Long-term Liabilities (d)
 
490

 
1,004

 
924

 
831

 
904

Shareholders’ Equity (Deficit)
 
(1,499
)
 
(869
)
 
(753
)
 
(729
)
 
(259
)
 
 
 
 
 
 
 
 
 
 
 
Comparable Sales Increase (Decrease) (e)
 
(1
%)
 
3
%
 
(3
%)
 
2
%
 
5
%
Comparable Store Sales Increase (Decrease) (e)
 
(3
%)
 
(1
%)
 
(4
%)
 
1
%
 
5
%
Return on Average Assets (d)
 
(4
%)
 
8
%
 
12
%
 
14
%
 
16
%
Current Ratio (d)
 
1.4

 
1.6

 
1.6

 
1.7

 
2.2

 
 
 
 
 
 
 
 
 
 
 
Stores and Associates at End of Year
 
 
 
 
 
 
 
 
 
 
Number of Stores (f)
 
2,920

 
2,943

 
3,075

 
3,074

 
3,005

Selling Square Feet (in thousands) (f)
 
12,258

 
12,396

 
12,656

 
12,395

 
11,902

Number of Associates
 
94,400

 
88,900

 
93,200

 
93,600

 
87,900

 ________________
(a)
The fiscal year ended February 3, 2018 ("2017") represents a 53-week fiscal year.
(b)
Operating income includes the effect of the following special items:
(i)
In 2019, a $720 million impairment charge related to Victoria's Secret goodwill and a $253 million charge related to the impairment of certain Victoria's Secret long-lived store assets.
(ii)
In 2018, a $99 million loss on the sale of La Senza, an $81 million charge related to the impairment of certain Victoria's Secret long-lived store assets and $20 million of Henri Bendel closure costs.

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(iii)
In 2016, a $35 million charge related to strategic actions at Victoria's Secret, including severance charges, fabric cancellations and the write-off of catalogue paper.
(c)
In addition to the special items previously discussed in (b), net income (loss) includes the effect of the following special items:
(i)
In 2019, a $30 million loss associated with the early extinguishment of notes maturing between 2020 and 2022, and $28 million of charges to increase reserves related to ongoing contingent obligations for the La Senza business.
(ii)
In 2017, a $92 million tax benefit related to changes in U.S. tax legislation partially offset by a $29 million loss associated with the early extinguishment of our 2019 Notes.
(iii)
In 2016, a $70 million gain related to a $124 million cash distribution from Easton Town Center, LLC, a $42 million tax benefit related to the favorable resolution of a discrete income tax matter, partially offset by a $22 million loss associated with the early extinguishment of our 2017 Notes.
(iv)
In 2015, a $69 million gain related to the divestiture of our remaining ownership interest in our third-party apparel sourcing business.
For additional information on these special items, see the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
The effect of the special items described in (b) and (c) above decreased earnings per share by $3.62 and $0.51 in 2019 and 2018, respectively, and increased earnings per share by $0.22 in 2017, and $0.23 in 2016 and 2015.
(d)
The 2019 amounts reflect our adoption of Accounting Standards Codification ("ASC") 842, Leases, in the first quarter of 2019.
(e)
The percentage change in comparable sales represents direct and comparable store sales. The percentage change in comparable store sales represents the change in sales at comparable stores only and excludes the change in sales from our direct channels. A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Therefore, the percentage change in comparable sales for 2019, 2018, 2016, and 2015 were calculated on a 52-to-52-week basis, and the percentage change in comparable sales for 2017 was calculated on a 53-to-53-week basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(f)
Number of stores and selling square feet excludes independently owned Victoria's Secret Beauty and Accessories, Victoria's Secret, PINK, Bath & Body Works and La Senza stores operated by our partners.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as codified in the Accounting Standards Codification. The following information should be read in conjunction with our financial statements and the related notes included in Item 8. Financial Statements and Supplementary Data.
Our operating results are generally impacted by economic changes and, therefore, we monitor the retail environment using, among other things, certain key industry performance indicators including competitor performance and mall traffic data. These can provide insight into consumer spending patterns and shopping behavior in the current retail environment and assist us in assessing our performance as well as the potential impact of industry trends on our future operating results. Additionally, we evaluate a number of key performance indicators including comparable sales, gross profit, operating income and other performance metrics such as sales per average selling square foot and inventory per selling square foot in assessing our performance.
Executive Overview
Beginning in 2018, we began making significant changes in our business to focus resources on core categories to enhance performance and accelerate growth. In 2018, these actions included:
•
Closing Henri Bendel;

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•
Selling the La Senza business; and
•
Reducing our regular dividend.
Further, on February 20, 2020, we announced the sale of 55% of the Victoria's Secret business to Sycamore for proceeds of approximately $525 million. The transaction is designed to best position our brands for long-term success and drive shareholder value, and we believe this transaction will highlight the value and performance of the standalone Bath & Body Works business, enhance management focus and reduce structural complexity.
We have a multi-year goal to grow Bath & Body Works and increase operating margins by focusing on these key business priorities:
•
Grow our business in North America;
•
Extend our brand internationally; and
•
Focus on the fundamentals of our business.
We also continue to focus on:
•
Attracting and retaining top talent;
•
Maintaining a strong cash and liquidity position while optimizing our capital structure; and
•
Returning value to our shareholders.
The following is a discussion regarding certain of our key business priorities:
Grow our business in North America
The core assortment of Bath & Body Works is body care, home fragrance products, soaps and sanitizers, which together make up the majority of sales and profits for the business. We see clear opportunities for substantial growth in these categories by focusing on product newness and innovation and expanding into under-penetrated market and price segments. We will continue to invest in the White Barn concept, which continues to yield strong results. In 2020, we plan to increase our square footage at Bath & Body Works North America through the opening of new Bath & Body Works stores, substantially in off-mall locations, and the remodeling of existing stores.
Our Bath & Body Works direct business, with over $950 million in sales and an operating margin in excess of 20%, grew sales by 32% over last year. We continue to invest in direct channel fulfillment to further accelerate growth.
Extend our brand internationally
We believe there is substantial opportunity for international growth. We have a separate, dedicated team that has taken a methodical, "test and learn" approach to expansion. We plan to expand our presence outside of North America by increasing the number of stores operated by our international partners. Our partners opened 43 net new Bath & Body Works stores in 2019, bringing the total in the Middle East, Latin America, Southeast Asia and Europe to 278 stores. Our partners plan to open additional stores in 2020.
Focus on the fundamentals of our business
We are focused on the fundamentals of our business which include knowing our customers, focusing on core merchandise categories, inventory management, speed and agility, managing real estate and store selling and execution. In terms of speed and agility, we are focused on inventory discipline through lead-time reductions and in-season agility to increase sales and reduce promotional activity. In terms of real estate, we will continue to proactively and rigorously review our portfolio, and we will continue to open and close stores when we believe it makes sense to do so. Finally, we continue to optimize our store selling and execution by concentrating on a better store experience and developing, retaining and investing in talented, trained and productive store associates.
2019 Overview
L Brands' overall financial performance in 2019 was below our expectations. Operating income declined as growth at Bath & Body Works was more than offset by declines at Victoria’s Secret. Our net sales decreased $323 million to $12.914 billion primarily driven by Victoria's Secret and the sale of La Senza and closure of Henri Bendel in the fourth quarter of 2018. Our operating income decreased $979 million to $258 million, primarily due to Victoria's Secret underperformance, and goodwill and long-lived store asset impairment charges. Our operating income rate decreased to 2.0% from 9.3%.
At Bath & Body Works, an aligned, experienced leadership team and strong customer response to our merchandise assortments, driven by a close connection to our customer and a fast and agile supply chain, resulted in another record year, on top of a record 2018. In 2019, Bath & Body Works’ comparable sales increased 10% and operating income increased 11%. Sales in the digital

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channel increased 32%. We ended the year with more than 800 newly remodeled stores, which include the White Barn store design. These stores present a new, compelling store experience for the brand and customers alike, driving sales growth.
Victoria’s Secret underperformed in 2019. Reduced traffic resulted in increased promotion that negatively impacted margin rates. Victoria’s Secret segment comparable sales declined 7% for the year, and operating income declined to a loss of $616 million, due to a $690 million goodwill impairment charge and sales and margin underperformance.
In Victoria’s Secret Lingerie, comparable sales declined in the high-single digit range in 2019, and the merchandise margin rate declined significantly. In the fourth quarter, we continued to pull back on promotional activity in bras, and while sales were down significantly, the merchandise margin rate was up. Sleepwear performance was below our expectations, with sales and merchandise margin rate down significantly to last year.
PINK comparable sales declined in the low-double digit range in 2019, and the merchandise margin rate declined significantly. Growth in bras and panties was more than offset by a decline in apparel, particularly in tops.
Victoria’s Secret Beauty had a good year and a solid holiday performance, with positive low-single digit comparable sales and an improvement in the merchandise margin rate.
Outside North America, we opened 59 net new stores in 2019, ending the year with 812 stores. Revenue in our international segment was about flat in 2019 compared to last year, and the operating loss increased by $199 million, primarily driven by store asset and goodwill impairment charges in Greater China.
For additional information related to our 2019 financial performance, see “Results of Operations – 2019 Compared to 2018.”
We are committed to returning value to our shareholders. During 2019, we paid $332 million in dividends. We use cash flow generated from operating and financing activities to fund our dividends and share repurchase programs. Since 2000, we have returned approximately $21 billion to shareholders through dividends and share repurchases.

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Adjusted Financial Information

In addition to our results provided in accordance with GAAP above and throughout this Form 10-K, provided below are non-GAAP measurements which present operating income, net income and earnings per share in 2019, 2018 and 2017 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.
(in millions, except per share amounts)
2019
 
2018
 
2017
Detail of Special Items included in Operating Income
 
 
 
 
 
Impairment of Goodwill (a)
$
(720
)
 
$
—

 
$
—

Victoria's Secret Long-lived Store Asset Impairment (b)
(253
)
 
(81
)
 
—

Loss on Divestiture of La Senza (c)
—

 
(99
)
 
—

Henri Bendel Closure Costs (d)
—

 
(20
)
 
—

Total Special Items included in Operating Income
$
(973
)
 
$
(200
)
 
$
—

 
 
 
 
 
 
Detail of Special Items included in Other Income (Loss)
 
 
 
 
 
La Senza Charges (e)
(37
)
 
—

 
—

Loss on Extinguishment of Debt (f)
(40
)
 
—

 
(45
)
Total Special Items included in Other Income (Loss)
$
(77
)

$
—


$
(45
)
 
 
 
 
 
 
Detail of Special Items included in Provision for Income Taxes
 
 
 
 
 
Tax Benefit related to Changes in U.S. Tax Legislation (g)
$
—

 
$
—

 
$
92

Tax Effect of Special Items included in Operating Income and Other Income (Loss)
46

 
58

 
16

Total Special Items included in Provision for Income Taxes
$
46


$
58


$
108

 
 
 
 
 
 
Reconciliation of Reported Operating Income to Adjusted Operating Income
 
 
 
 
 
Reported Operating Income
$
258

 
$
1,237

 
$
1,728

Special Items included in Operating Income
973

 
200

 
—

Adjusted Operating Income
$
1,231

 
$
1,437

 
$
1,728

 
 
 
 
 
 
Reconciliation of Reported Net Income (Loss) to Adjusted Net Income
 
 
 
 
 
Reported Net Income (Loss)
$
(366
)
 
$
644

 
$
983

Special Items included in Net Income (Loss)
1,004

 
142

 
(63
)
Adjusted Net Income
$
638

 
$
786

 
$
920

 
 
 
 
 
 
Reconciliation of Reported Earnings (Loss) Per Diluted Share to Adjusted Earnings Per Diluted Share
 
 
 
 
 
Reported Earnings (Loss) Per Diluted Share
$
(1.33
)
 
$
2.31

 
$
3.42

Special Items included in Earnings (Loss) Per Diluted Share
3.62

 
0.51

 
(0.22
)
Adjusted Earnings Per Diluted Share
$
2.29

 
$
2.82

 
$
3.20

 ________________
(a)
In the fourth quarter of 2019, we recognized a $690 million pre-tax goodwill impairment charge ($687 million after-tax) related to the Victoria's Secret segment. In the third quarter of 2019, we recognized a $30 million goodwill impairment charge (no tax impact) related to the Victoria's Secret and Bath & Body Works International segment. For additional information see Note 9, "Goodwill and Trade Names" included in Item 8. Financial Statements and Supplementary Data.

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(b)
In the fourth quarter of 2019, we recognized a $35 million pre-tax impairment charge ($30 million after-tax) related to Victoria's Secret long-lived store assets. In the third quarter of 2019, we recognized a $218 million pre-tax impairment charge ($200 million after-tax) related to Victoria's Secret long-lived store assets. In the third quarter of 2018, we recognized an $81 million pre-tax impairment charge ($73 million after-tax) related to Victoria's Secret long-lived store assets. For additional information see Note 7, "Property and Equipment, Net" included in Item 8. Financial Statements and Supplementary Data.
(c)
In the fourth quarter of 2018, we recognized a $99 million ($55 million after-tax) loss on the sale of La Senza. For additional information see Note 5, "Restructuring Activities" included in Item 8. Financial Statements and Supplementary Data.
(d)
In the third quarter of 2018, we recognized $20 million ($15 million after-tax) of closure costs related to the closure of the Henri Bendel business. For additional information see Note 5, "Restructuring Activities" included in Item 8. Financial Statements and Supplementary Data.
(e)
In the third quarter of 2019, we recognized $37 million of pre-tax charges ($28 million after-tax) to increase reserves related to ongoing contingent obligations for the La Senza business, which was sold in the fourth quarter of 2018. For additional information see Note 17, "Commitments and Contingencies" included in Item 8. Financial Statements and Supplementary Data.
(f)
In the second quarter of 2019, we redeemed $764 million of outstanding notes maturing between 2020 and 2022, resulting in a pre-tax loss on extinguishment of $40 million (after-tax loss of $30 million). In the fourth quarter of 2017, we redeemed our $500 million 8.50% Senior Unsecured Notes due June 2019 resulting in a pre-tax loss on extinguishment of $45 million (after-tax loss of $29 million). For additional information see Note 13, "Long-term Debt and Borrowing Facilities" included in Item 8. Financial Statements and Supplementary Data.
(g)
In the fourth quarter of 2017, we recorded a $92 million tax benefit related to changes in U.S. tax legislation. For additional information see Note 12, "Income Taxes" included in Item 8. Financial Statements and Supplementary Data.
2020 Outlook
On February 20, 2020, we announced the sale of 55% of the Victoria’s Secret business to Sycamore for proceeds of approximately $525 million. The transaction is the result of a comprehensive review of a broad range of options undertaken by our Board of Directors, with input from outside financial advisors, designed to best position our brands for long-term success and drive shareholder value. We believe this transaction will highlight the value and performance of the standalone Bath & Body Works business, enhance management focus and reduce structural complexity.
Additionally, we believe that a private entity structure creates the best environment for a Victoria’s Secret turnaround. We believe that Sycamore, which has substantial experience in the retail industry, will bring a new perspective and greater focus to the business. We are pleased that, by retaining a significant ownership stake, our shareholders will have the ability to meaningfully participate in the upside potential of this iconic brand.
Over the next several months, we will be reviewing the functional and corporate support required for the standalone Bath & Body Works business, with a view to simplify our existing structure, while recognizing that we will still be supporting the Victoria’s Secret businesses through a Transition Services Agreement with various terms for different services, which will minimize near-term dissynergies.
The management team, in conjunction with our Board, will also be evaluating the capital structure and cash priorities for the standalone Bath & Body Works business.
Upon the Closing, which is expected to occur in the second quarter, Leslie H. Wexner will step down as Chief Executive Officer and Chairman of the Board to become Chairman Emeritus, remaining as a member of the Board. Andrew Meslow, Chief Executive Officer of Bath & Body Works, will be appointed by the Board as the Chief Executive Officer of L Brands, Inc. and as a director of L Brands, Inc., effective upon the Closing. Sarah E. Nash, a member of the Board, will be appointed as the Chair of the Board effective upon the Closing.
The global retail sector and our business continue to face an uncertain environment and, as a result, we will continue to manage our business thoughtfully, and we will focus on the execution of the retail fundamentals.
At the same time, we are aggressively focusing on bringing compelling merchandise assortments, marketing and store and online experiences to our customers. We will look for, and seek to capitalize on, those opportunities available to us.
We are closely monitoring the outbreak of respiratory illness caused by a novel coronavirus that was first detected in Wuhan, China and has since spread globally. The coronavirus has been declared by the World Health Organization to be a “pandemic,” has spread to many countries, including the U.S., and is impacting worldwide economic activity. A public health epidemic, including the coronavirus, poses the risk that we or our employees, contractors, suppliers, and other business partners may be prevented from conducting business activities for an unknown period of time. Related industries in the U.S. and across the

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world may be adversely affected, including manufacturing and textile production. The situation and preventative or protective actions that governments around the world have taken to contain the spread of the coronavirus have resulted in a period of disruption, including closure of stores where our products are sold, limited store operating hours, reduced customer traffic and consumer spending, labor shortages and delays in manufacturing and shipping of products and raw materials in the U.S., China and other countries. To the extent the impact of the coronavirus continues or worsens, we may have difficulty obtaining the materials necessary for the manufacturing of our products, factories which produce our products may remain closed for sustained periods of time, and industry-wide shipment of products may be negatively impacted. Further, if the impact of the coronavirus continues or worsens, consumer behavior may be altered for an extended period of time which would impact our cash and liquidity and financial condition. The coronavirus and resulting economic disruption has also led to significant volatility in the capital markets and may adversely impact our stock price and ability to access cash. Any one adverse effect of the coronavirus, or a combination of adverse effects, could materially impact our results and financial condition.
These recent developments could have a material adverse effect on our results of operations, financial condition and cash flows.  Additional information on this risk and other uncertainties and factors, is set forth in Item 1A. Risk Factors.
Company-Owned Store Data
The following table compares 2019 company-owned store data to the comparable periods for 2018 and 2017:
 
 
 
 
 
 
 
 
% Change
  
2019
 
2018
 
2017
 
2019
 
2018
Sales per Average Selling Square Foot (a)
 
 
 
 
 
 
 
 
 
Victoria’s Secret U.S.
$
684

 
$
739

 
$
784

 
(7
%)
 
(6
%)
Bath & Body Works U.S.
931

 
891

 
844

 
4
%
 
6
%
Sales per Average Store (in thousands) (a)

 

 

 


 


Victoria’s Secret U.S.
$
4,455

 
$
4,763

 
$
5,003

 
(6
%)
 
(5
%)
Bath & Body Works U.S.
2,428

 
2,279

 
2,107

 
7
%
 
8
%
Average Store Size (selling square feet)

 

 

 


 


Victoria’s Secret U.S.
6,551

 
6,484

 
6,415

 
1
%
 
1
%
Bath & Body Works U.S.
2,631

 
2,585

 
2,532

 
2
%
 
2
%
Total Selling Square Feet (in thousands)

 

 

 


 


Victoria’s Secret U.S.
6,898

 
7,119

 
7,210

 
(3
%)
 
(1
%)
Bath & Body Works U.S.
4,306

 
4,185

 
4,032

 
3
%
 
4
%
 ________________
(a)
Sales per average selling square foot and sales per average store, which are indicators of store productivity, are calculated based on store sales for the period divided by the average, including the beginning and end of year, of total square footage and store count, respectively.

The following table represents company-owned store data for 2019:
 
Stores Operating at
 
 
 
 
 
Stores Operating at
 
February 2, 2019
 
Opened
 
Closed
 
February 1, 2020
Victoria’s Secret U.S.
1,098

 
7

 
(52
)
 
1,053

Victoria’s Secret Canada
45

 
—

 
(7
)
 
38

Total Victoria's Secret
1,143

 
7

 
(59
)
 
1,091

Bath & Body Works U.S.
1,619

 
38

 
(20
)
 
1,637

Bath & Body Works Canada
102

 
1

 
(1
)
 
102

Total Bath & Body Works
1,721

 
39

 
(21
)
 
1,739

Victoria's Secret U.K. / Ireland
26

 
—

 
—

 
26

Victoria's Secret Beauty and Accessories
38

 
10

 
(7
)
 
41

Victoria's Secret Greater China
15

 
8

 
—

 
23

Total Victoria's Secret and Bath & Body Works International
79

 
18

 
(7
)
 
90

Total L Brands Stores
2,943

 
64

 
(87
)
 
2,920


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The following table represents company-owned store data for 2018:
 
Stores Operating at
 
 
 
 
 
 
 
Stores Operating at
 
February 3, 2018
 
Opened
 
Closed
 
Sold (a)
 
February 2, 2019
Victoria’s Secret U.S.
1,124

 
3

 
(29
)
 
—

 
1,098

Victoria’s Secret Canada
46

 
—

 
(1
)
 
—

 
45

Total Victoria's Secret
1,170

 
3

 
(30
)
 
—

 
1,143

Bath & Body Works U.S.
1,592

 
54

 
(27
)
 
—

 
1,619

Bath & Body Works Canada
102

 
1

 
(1
)
 
—

 
102

Total Bath & Body Works
1,694

 
55

 
(28
)
 
—

 
1,721

Victoria's Secret U.K. / Ireland
24

 
2

 
—

 
—

 
26

Victoria's Secret Beauty and Accessories
29

 
13

 
(4
)
 
—

 
38

Victoria's Secret Greater China
7

 
8

 
—

 
—

 
15

Total Victoria's Secret and Bath & Body Works International
60

 
23

 
(4
)
 
—

 
79

Henri Bendel
27

 
—

 
(27
)
 
—

 
—

La Senza U.S.
5

 
7

 
—

 
(12
)
 
—

La Senza Canada
119

 
—

 
(1
)
 
(118
)
 
—

Total L Brands Stores
3,075

 
88

 
(90
)
 
(130
)
 
2,943

_______________
(a)    Relates to the divestiture of La Senza. For additional information see Note 5, "Restructuring Activities"
included in Item 8. Financial Statements and Supplementary Data.

The following table represents company-owned store data for 2017:
 
Stores Operating at
 
 
 
 
 
Stores Operating at
 
January 28, 2017
 
Opened
 
Closed
 
February 3, 2018
Victoria’s Secret U.S.
1,131

 
13

 
(20
)
 
1,124

Victoria’s Secret Canada
46

 
2

 
(2
)
 
46

Total Victoria's Secret
1,177

 
15

 
(22
)
 
1,170

Bath & Body Works U.S.
1,591

 
32

 
(31
)
 
1,592

Bath & Body Works Canada
102

 
—

 
—

 
102

Total Bath & Body Works
1,693

 
32

 
(31
)
 
1,694

Victoria's Secret U.K. / Ireland
18

 
6

 
—

 
24

Victoria's Secret Beauty and Accessories
31

 
4

 
(6
)
 
29

Victoria's Secret Greater China
—

 
7

 
—

 
7

Total Victoria's Secret and Bath & Body Works International
49

 
17

 
(6
)
 
60

Henri Bendel
29

 
—

 
(2
)
 
27

La Senza U.S.
4

 
1

 
—

 
5

La Senza Canada
122

 
1

 
(4
)
 
119

Total L Brands Stores
3,074

 
66

 
(65
)
 
3,075


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Noncompany-Owned Store Data
The following table represents noncompany-owned store data for 2019:
 
Stores Operating at
 
 
 
 
 
Stores Operating at
 
February 2, 2019
 
Opened
 
Closed
 
February 1, 2020
Victoria’s Secret Beauty & Accessories
383

 
24

 
(47
)
 
360

Victoria's Secret
56

 
28

 
—

 
84

Bath & Body Works
235

 
47

 
(4
)
 
278

Total
674

 
99

 
(51
)
 
722

The following table represents noncompany-owned store data for 2018:
 
Stores Operating at
 
 
 
 
 
 
 
Stores Operating at
 
February 3, 2018
 
Opened
 
Closed
 
Sold (a)
 
February 2, 2019
Victoria’s Secret Beauty & Accessories
397

 
32

 
(46
)
 
—

 
383

Victoria's Secret
37

 
19

 
—

 
—

 
56

Bath & Body Works
185

 
56

 
(6
)
 
—

 
235

La Senza
194

 
2

 
(17
)
 
(179
)
 
—

Total
813

 
109

 
(69
)
 
(179
)
 
674

_______________
(a)    Relates to the divestiture of La Senza. For additional information see Note 5, "Restructuring Activities"
included in Item 8. Financial Statements and Supplementary Data.
The following table represents noncompany-owned store data for 2017:
 
Stores Operating at
 
 
 
 
 
Stores Operating at
 
January 28, 2017
 
Opened
 
Closed
 
February 3, 2018
Victoria’s Secret Beauty & Accessories
391

 
34

 
(28
)
 
397

Victoria's Secret
28

 
9

 
—

 
37

Bath & Body Works
159

 
28

 
(2
)
 
185

La Senza
203

 
4

 
(13
)
 
194

Total
781

 
75

 
(43
)
 
813


Results of Operations—2019 Compared to 2018
The following information summarizes our results of operations for 2019 compared to 2018.
Operating Income (Loss)
The following table provides our segment operating income (loss) and operating income (loss) rates (expressed as a percentage of net sales) for 2019 in comparison to 2018:
 
 
 
 
 
Operating Income (Loss) Rate
 
2019

2018
 
2019
 
2018
 
(in millions)
 
 
 
 
Victoria’s Secret
$
(616
)
 
$
462

 
(9.1
%)
 
6.3
%
Bath & Body Works
1,191

 
1,077

 
23.0
%
 
23.3
%
Victoria's Secret and Bath & Body Works International
(236
)
 
(37
)
 
(39.3
%)
 
(6.2
%)
Other (a)
(81
)
 
(265
)
 
(23.9
%)
 
(42.5
%)
Total Operating Income
$
258

 
$
1,237

 
2.0
%
 
9.3
%
 ________________
(a)
Includes sourcing and corporate functions. Results for 2018 also include Henri Bendel and La Senza.
For 2019, operating income decreased $979 million to $258 million, and the operating income rate decreased to 2.0% from 9.3%. The drivers of the operating income results are discussed in the following sections.

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Net Sales
The following table provides net sales for 2019 in comparison to 2018:
 
2019
 
2018
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores (a)
$
5,112

 
$
5,628

 
(9
%)
Victoria’s Secret Direct
1,693

 
1,747

 
(3
%)
Total Victoria’s Secret
6,805

 
7,375

 
(8
%)
Bath & Body Works Stores (a)
4,212

 
3,907

 
8
%
Bath & Body Works Direct
958

 
724

 
32
%
Total Bath & Body Works
5,170

 
4,631

 
12
%
Victoria's Secret and Bath & Body Works International (b)
600

 
605

 
(1
%)
Other (c)
339

 
626

 
(46
%)
Total Net Sales
$
12,914

 
$
13,237

 
(2
%)
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(c)
Includes wholesale revenues from our sourcing function. Results for 2018 also include store and direct sales for Henri Bendel and La Senza.
The following table provides a reconciliation of net sales for 2018 to 2019:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
2018 Net Sales
$
7,375

 
$
4,631

 
$
605

 
$
626

 
$
13,237

Comparable Store Sales
(461
)
 
190

 
(46
)
 
—

 
(317
)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
(55
)
 
117

 
51

 
—

 
113

Divested/Closed Businesses
—

 
—

 
—

 
(316
)
 
(316
)
Foreign Currency Translation
(3
)
 
(2
)
 
(12
)
 
—

 
(17
)
Direct Channels
(57
)
 
234

 
1

 
—

 
178

Private Label Credit Card
6

 
—

 
—

 
—

 
6

International Wholesale, Royalty and Other
—

 
—

 
1

 
29

 
30

2019 Net Sales
$
6,805

 
$
5,170

 
$
600

 
$
339

 
$
12,914


The following table compares 2019 comparable sales to 2018:
 
2019
 
2018
Comparable Sales (Stores and Direct) (a)
 
 
 
Victoria's Secret (b)
(7
%)
 
(2
%)
Bath & Body Works (b)
10
%
 
11
%
Total Comparable Sales
(1
%)
 
3
%
 
 
 
 
Comparable Store Sales (a)
 
 
 
Victoria’s Secret (b)
(9
%)
 
(6
%)
Bath & Body Works (b)
5
%
 
8
%
Total Comparable Store Sales
(3
%)
 
(1
%)
 ________________

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(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. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Therefore, the percentage change in comparable sales for 2019 and 2018 was calculated on a 52-to-52-week basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria’s Secret
For 2019, net sales decreased $570 million to $6.805 billion; comparable sales decreased 7%; and comparable store sales decreased 9%. Victoria's Secret Lingerie comparable sales were down in the high-single digit range, primarily due to declines in bras and apparel, driven by merchandise performance. PINK comparable sales were down in the low-double digit range, primarily driven by declines in apparel, principally in tops, due to merchandise performance and the exit of the swim business. Victoria’s Secret Beauty comparable sales increased in the low-single digit range, as growth in accessories and PINK beauty were partially offset by a decline in the lip business.
The decrease in comparable sales was driven by declines in store traffic, average unit retail and digital conversion.
Bath & Body Works
For 2019, net sales increased $539 million to $5.170 billion; comparable sales increased 10%; and comparable store sales increased 5%. Net sales increased in all of our main categories including home fragrance, body care and soaps and sanitizers, which incorporated newness, innovation and fashion.
The increase in comparable sales was driven by increases in store conversion and digital traffic.
Victoria's Secret and Bath & Body Works International
For 2019, net sales decreased $5 million to $600 million due to declines in the Victoria's Secret Travel Retail business and the negative impact of foreign currency in Greater China, partially offset by the increase from new company-owned Victoria's Secret stores in Greater China.
Other
For 2019, net sales decreased $287 million to $339 million primarily due to the sale of La Senza and closure of Henri Bendel in the fourth quarter of 2018.
Gross Profit
For 2019, our gross profit decreased $449 million to $4.450 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 34.5% from 37.0% primarily as a result of:
Victoria’s Secret
For 2019, the gross profit decrease was primarily driven by lower merchandise margin dollars related to the decrease in net sales, partially offset by a reduction in long-lived store asset impairment charges, from $70 million in 2018 to $51 million in 2019.
The gross profit rate decrease was driven by a decline in the merchandise margin rate due to increased promotions to drive traffic and clear inventory, combined with buying and occupancy deleverage on lower net sales.
Bath & Body Works
For 2019, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales, partially offset by higher occupancy expenses due to higher distribution and fulfillment expenses related to higher direct channel sales and investments in store real estate.
The gross profit rate decrease was driven by a decline in the merchandise margin rate due to increases in supply chain and sourcing costs and the sales mix shift into the direct business, which has a lower merchandise margin rate than the stores channel.

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Victoria's Secret and Bath & Body Works International
For 2019, the gross profit decrease was primarily due to the increase in long-lived store asset impairment charges, related to stores in Greater China, the U.K. and Ireland, from $31 million in 2018 to $212 million in 2019.
The gross profit (loss) rate decrease was driven by the increase in long-lived store asset impairment charges.
General, Administrative and Store Operating Expenses
For 2019, our general, administrative and store operating expenses decreased $91 million to $3.472 billion due to the elimination of the La Senza and Henri Bendel businesses and lower marketing and store selling expenses at Victoria's Secret, partially offset by higher selling and marketing expenses related to higher sales volume at Bath & Body Works.
The general, administrative and store operating expense rate remained flat at 26.9% as the absence of the higher-rate La Senza and Henri Bendel businesses and declines in marketing and store selling expenses at Victoria's Secret were offset by deleverage on lower net sales.
Impairment of Goodwill
In 2019, our goodwill impairment assessments concluded that the carrying values of our Victoria's Secret and Greater China reporting units exceeded their fair values. Accordingly, we recognized pre-tax goodwill impairment charges of $690 million and $30 million in the Victoria's Secret and Victoria's Secret and Bath & Body Works International segments, respectively.
Loss on Divestiture of La Senza
In 2018, we recognized a pre-tax loss on the sale of La Senza of $99 million related to the recognition of $45 million of accumulated translation adjustments and the loss related to the transfer of the net working capital and long-lived store assets to the buyer.
Other Income (Loss) and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2019 and 2018:
 
2019
 
2018
Average daily borrowings (in millions)
$
5,725

 
$
5,853

Average borrowing rate (in percentages)
6.6
%
 
6.6
%

For 2019, our interest expense decreased $7 million to $378 million due to a lower average daily borrowings.
Other Income (Loss)
For 2019, our other income (loss) decreased $66 million to a $61 million loss due to a $40 million pre-tax loss associated with the early extinguishment of $764 million in outstanding notes maturing between 2020 and 2022 and $37 million of charges to increase reserves related to ongoing contingent obligations for the La Senza business, which was sold in the fourth quarter of 2018.
Provision for Income Taxes
For 2019, our effective tax rate was (101.9%) compared to 24.9% in 2018. The 2019 rate varied from our combined estimated federal and state statutory rate primarily due to the Victoria's Secret goodwill impairment charges, which generated minimal tax benefit. The 2018 rate was lower than our combined estimated federal and state statutory rate primarily due to the tax effects of the divestiture of the La Senza business.
Results of Operations—Fourth Quarter of 2019 Compared to Fourth Quarter of 2018
The following information summarizes our results of operations for the fourth quarter of 2019 compared to the fourth quarter of 2018.

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Operating Income
The following table provides our segment operating income (loss) and operating income (loss) rates (expressed as a percentage of net sales) for the fourth quarter of 2019 in comparison to the fourth quarter of 2018:
 
Fourth Quarter
 
Operating Income (Loss) Rate
 
2019
 
2018
 
2019
 
2018
 
(in millions)
 
 
 
 
Victoria’s Secret
$
(543
)
 
$
301

 
(23.9
%)
 
11.9
%
Bath & Body Works
661

 
607

 
30.4
%
 
31.1
%
Victoria's Secret and Bath & Body Works International
(15
)
 
19

 
(8.6
%)
 
9.8
%
Other (a)
(21
)
 
(127
)
 
(25.8
%)
 
(71.0
%)
Total Operating Income
$
82

 
$
800

 
1.7
%
 
16.5
%
 ________________
(a)
Includes sourcing and corporate functions. Results for 2018 also include Henri Bendel and La Senza.
For the fourth quarter of 2019, operating income decreased $718 million to $82 million, and the operating income rate decreased to 1.7% from 16.5%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the fourth quarter of 2019 in comparison to the fourth quarter of 2018:
Fourth Quarter
 
2019
 
2018
 
% Change
 
 
(in millions)
 
 
Victoria’s Secret Stores (a)
 
$
1,649

 
$
1,849

 
(11
%)
Victoria’s Secret Direct
 
627

 
683

 
(8
%)
Total Victoria’s Secret
 
2,276

 
2,532

 
(10
%)
Bath & Body Works Stores (a)
 
1,744

 
1,626

 
7
%
Bath & Body Works Direct
 
431

 
325

 
33
%
Total Bath & Body Works
 
2,175

 
1,951

 
11
%
Victoria's Secret and Bath & Body Works International (b)
 
177

 
190

 
(7
%)
Other (c)
 
79

 
179

 
(56
%)
Total Net Sales
 
$
4,707

 
$
4,852

 
(3
%)
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(c)
Includes wholesale revenues from our sourcing function. Results for 2018 also include store and direct sales for Henri Bendel and La Senza.

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The following table provides a reconciliation of net sales for the fourth quarter of 2019 to the fourth quarter of 2018: 
Fourth Quarter
 
Victoria’s
Secret
 
Bath & Body
Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
(in millions)
2018 Net Sales
 
$
2,532

 
$
1,951

 
$
190

 
$
179

 
$
4,852

Comparable Store Sales
 
(180
)
 
79

 
(18
)
 
—

 
(119
)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
 
(17
)
 
38

 
5

 
—

 
26

Divested/Closed Businesses
 
—

 
—

 
—

 
(94
)
 
(94
)
Foreign Currency Translation
 
1

 
1

 
1

 
—

 
3

Direct Channels
 
(55
)
 
106

 
(3
)
 
—

 
48

Private Label Credit Card Income
 
(5
)
 
—

 
—

 
—

 
(5
)
International, Wholesale, Royalty and Other
 
—

 
—

 
2

 
(6
)
 
(4
)
2019 Net Sales
 
$
2,276

 
$
2,175

 
$
177

 
$
79

 
$
4,707


The following table compares fourth quarter of 2019 comparable sales to fourth quarter of 2018:
Fourth Quarter
 
2019
 
2018
Comparable Sales (Stores and Direct) (a)
 
 
 
 
Victoria's Secret (b)
 
(10
%)
 
(3
%)
Bath & Body Works (b)
 
10
%
 
12
%
Total Comparable Sales
 
(2
%)
 
3
%
 
 
 
 
 
Comparable Store Sales (a)
 
 
 
 
Victoria’s Secret (b)
 
(10
%)
 
(7
%)
Bath & Body Works (b)
 
5
%
 
8
%
Total Comparable Store Sales
 
(4
%)
 
(1
%)
 ________________
(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. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales are calculated on a comparable calendar period as opposed to a fiscal basis. Therefore, the percentage change in comparable sales for 2019 and 2018 was calculated on a 13-to-13-week basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.

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Table of Contents

The results by segment are as follows:
Victoria’s Secret
For the fourth quarter of 2019, net sales decreased $256 million to $2.276 billion; comparable sales decreased 10%; and comparable store sales decreased 10%. Victoria's Secret Lingerie comparable sales were down in the mid-teens as we continued to pull back promotional activity in bras, and due to merchandise performance in sleepwear. PINK comparable sales were down in the mid-teens driven by declines in apparel, principally in tops, due to merchandise performance. PINK lingerie sales were about flat to last year. Victoria’s Secret Beauty comparable sales increased in the low-single digit range due to growth in prestige fragrance, driven by a strong launch of Bombshell Intense, and in PINK beauty and accessories.
The decrease in comparable sales was driven by declines in store traffic, average unit retail and digital conversion.
Bath & Body Works
For the fourth quarter of 2019, net sales increased $224 million to $2.175 billion; comparable sales increased 10%; and comparable store sales increased 5%. Net sales increased in all of our main categories including home fragrance, body care and soaps and sanitizers, which incorporated newness, innovation and fashion.
The increase in comparable sales was driven by increases in store conversion and digital traffic.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2019, net sales decreased $13 million to $177 million, due to declines in the Victoria's Secret U.K. business, partially offset by the increase from new company-owned Victoria's Secret stores in Greater China.
Other
For the fourth quarter of 2019, net sales decreased $100 million to $79 million due to the sale of La Senza and closure of Henri Bendel in the fourth quarter of 2018.
Gross Profit
For the fourth quarter of 2019, our gross profit decreased $174 million to $1.794 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 38.1% from 40.6% primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2019, the gross profit decrease was driven primarily by lower merchandise margin dollars related to the decrease in net sales.
The gross profit rate decrease was driven by a decline in the merchandise margin rate due to increased promotions to drive traffic and clear inventory, combined with buying and occupancy deleverage on lower net sales.
Bath & Body Works
For the fourth quarter of 2019, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales, partially offset by higher occupancy expenses due to higher distribution and fulfillment expenses related to higher direct channel sales and investments in store real estate.
The gross profit rate decrease was primarily driven by a decline in the merchandise margin rate due to increases in supply chain and sourcing costs and the sales mix shift into the direct business, which has a lower merchandise margin rate than the stores channel.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2019, the gross profit decrease was primarily due to $35 million in long-lived store asset impairment charges recognized in the fourth quarter of 2019, which was related to the operating lease asset of a store in Greater China.
The gross profit rate decrease was driven by the long-lived store asset impairment charges.
General, Administrative and Store Operating Expenses
For the fourth quarter of 2019, our general, administrative and store operating expenses decreased $47 million to $1.022 billion due to the elimination of the La Senza and Henri Bendel businesses and lower marketing and store selling expenses at Victoria's Secret, partially offset by higher selling and marketing expenses related to higher sales volume at Bath & Body Works.
The general, administrative and store operating expense rate decreased to 21.7% from 22.0% driven by the absence of the higher-rate La Senza and Henri Bendel businesses.

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Table of Contents

Impairment of Goodwill
In the fourth quarter of 2019, our annual goodwill impairment assessment concluded that the carrying value of the Victoria's Secret reporting unit exceeded its fair value. Accordingly, we recognized a pre-tax goodwill impairment charge of $690 million in the Victoria's Secret segment.
Loss on Divestiture of La Senza
In the fourth quarter of 2018, we recognized a pre-tax loss on the sale of La Senza of $99 million related to the recognition of $45 million of accumulated translation adjustments and the transfer of the net working capital and long-lived store assets to the buyer.
Other Income (Loss) and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the fourth quarter of 2019 and 2018:
Fourth Quarter
 
2019
 
2018
Average daily borrowings (in millions)
 
$
5,617

 
$
5,880

Average borrowing rate (in percentages)
 
6.6
%
 
6.4
%

For the fourth quarter of 2019, our interest expense decreased $1 million to $92 million due to lower average daily borrowings partially offset by a higher average borrowing rate.
Provision for Income Taxes
For the fourth quarter of 2019, our effective tax rate declined compared to 24.0% in 2018. The 2019 rate varied from our combined estimated federal and state statutory rate primarily due to the Victoria's Secret goodwill impairment charge, which generated minimal tax benefit. The 2018 rate was lower than our combined estimated federal and state statutory rate primarily due to the tax effects of the divestiture of the La Senza business.
Results of Operations—2018 Compared to 2017
We utilize the retail calendar for reporting. As such, the results for 2018 represent the 52-week period ended February 2, 2019, and the results for 2017 represent the 53-week period ended February 3, 2018. 
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for 2018 in comparison to 2017:
 
 
 
 
 
Operating Income Rate
 
2018
 
2017
 
2018
 
2017
 
(in millions)
 
 
 
 
Victoria’s Secret
$
462

 
$
932

 
6.3
%
 
12.6
%
Bath & Body Works
1,077

 
953

 
23.3
%
 
23.0
%
Victoria's Secret and Bath & Body Works International
(37
)
 
5

 
(6.2
%)
 
1.0
%
Other (a)
(265
)
 
(162
)
 
(42.5
%)
 
(27.1
%)
Total Operating Income
$
1,237

 
$
1,728

 
9.3
%
 
13.7
%
 ________________
(a)
Includes sourcing and corporate functions, La Senza and Henri Bendel.
For 2018, operating income decreased $491 million to $1.237 billion, and the operating income rate decreased to 9.3% from 13.7%. The drivers of the operating income results are discussed in the following sections.

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Table of Contents

Net Sales
The following table provides net sales for 2018 in comparison to 2017:
 
2018
 
2017
 
% Change
 
(in millions)
 
 
Victoria’s Secret Stores (a)
$
5,628

 
$
5,879

 
(4
%)
Victoria’s Secret Direct
1,747

 
1,508

 
16
%
Total Victoria’s Secret
7,375

 
7,387

 
—
%
Bath & Body Works Stores (a)
3,907

 
3,589

 
9
%
Bath & Body Works Direct
724

 
559

 
30
%
Total Bath & Body Works
4,631

 
4,148

 
12
%
Victoria's Secret and Bath & Body Works International (b)
605

 
502

 
20
%
Other (c)
626

 
595

 
5
%
Total Net Sales
$
13,237

 
$
12,632

 
5
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(c)
Includes wholesale revenues from our sourcing function, Henri Bendel and La Senza results prior to January 6, 2019.
The following table provides a reconciliation of net sales for 2017 to 2018:
 
Victoria’s
Secret
 
Bath &
Body Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
2017 Net Sales
$
7,387

 
$
4,148

 
$
502

 
$
595

 
$
12,632

Comparable Store Sales
(318
)
 
256

 
(31
)
 
6

 
(87
)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
(58
)
 
67

 
93

 
(25
)
 
77

Foreign Currency Translation
(4
)
 
(5
)
 
2

 
(3
)
 
(10
)
Direct Channels
181

 
165

 
28

 
13

 
387

Private Label Credit Card
187

 
—

 
—

 
—

 
187

International Wholesale, Royalty and Other
—

 
—

 
11

 
40

 
51

2018 Net Sales
$
7,375

 
$
4,631

 
$
605

 
$
626

 
$
13,237


The following table compares 2018 comparable sales to 2017:
 
2018
 
2017
Comparable Sales (Stores and Direct) (a)
 
 
 
Victoria's Secret (b)
(2
%)
 
(8
%)
Bath & Body Works (b)
11
%
 
5
%
Total Comparable Sales
3
%
 
(3
%)
 
 
 
 
Comparable Store Sales (a)
 
 
 
Victoria’s Secret (b)
(6
%)
 
(8
%)
Bath & Body Works (b)
8
%
 
2
%
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. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has

40
Table of Contents

not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales is calculated on a comparable calendar period as opposed to a fiscal basis. Therefore, the percentage change in comparable sales for 2018 was calculated on a 52-to-52-week basis, and the percentage change in comparable sales for 2017 was calculated on a 53-to-53-week basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria’s Secret
For 2018, net sales decreased $12 million to $7.375 billion; comparable sales decreased 2%; and comparable store sales decreased 6%. PINK comparable sales decreased in the mid-single digit range, primarily driven by merchandise performance in apparel and the exit of swim. Victoria's Secret Lingerie comparable sales decreased in the low-single digit range, primarily driven by declines in unconstructed and sport bras, due to merchandise performance and category resets, partially offset by increases in sleep and panties. Victoria's Secret Beauty comparable sales increased low-double digits, driven by the merchandise assortment. Additionally, net sales increased as a result of the change in presentation for income received from our Victoria's Secret private label credit card arrangement.
The decrease in comparable store sales was driven by lower average unit retail and reduced traffic.
Bath & Body Works
For 2018, net sales increased $483 million to $4.631 billion; comparable sales increased 11%; and comparable store sales increased 8%. Net sales increased in most categories including home fragrance, body care and soaps and sanitizers, which incorporated newness, innovation and fashion.
The increase in comparable store sales was driven by higher average dollar sales and conversion.
Victoria's Secret and Bath & Body Works International
For 2018, net sales increased $103 million to $605 million due to new company-owned Victoria's Secret stores, direct channel growth in Greater China and additional stores opened by our partners.
Other
For 2018, net sales increased $31 million to $626 million primarily due to an increase in wholesale sales to our international partners, partially offset by a decline in La Senza as we divested this business on January 6, 2019.
Gross Profit
For 2018, our gross profit decreased $60 million to $4.899 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 37.0% from 39.3% primarily as a result of:
Victoria’s Secret
For 2018, the gross profit decrease was driven by lower merchandise margin dollars related to the decrease in net sales, increased promotional activity to drive traffic and clear inventory, $70 million of long-lived store asset impairment charges related to certain stores in the U.S. and Canada and increased distribution and fulfillment expenses related to higher direct channel sales.
The gross profit rate decrease was driven by a decline in the merchandise margin rate due to increased promotional activity and the long-lived store asset impairment charges.
Bath & Body Works
For 2018, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales and reduced promotional activity, partially offset by higher occupancy expenses due to higher distribution and fulfillment expenses related to higher direct channel sales and investments in store real estate.
The gross profit rate increase was driven by lower promotional activity.
Victoria's Secret and Bath & Body Works International
For 2018, the gross profit decrease was primarily driven by $31 million of long-lived store asset impairment charges related to certain Victoria's Secret stores in the U.K. and higher occupancy expenses due to investments in store real estate in Greater

41
Table of Contents

China, partially offset by increased merchandise margin dollars related to higher net sales in Greater China and additional stores opened by our partners.
The gross profit rate decrease was driven by the long-lived store asset impairment charges and investments in store real estate.
General, Administrative and Store Operating Expenses
For 2018, our general, administrative and store operating expenses increased $332 million to $3.563 billion driven by the change in presentation for income received from our Victoria's Secret private label credit card arrangement, incremental wage investments, higher selling expenses related to higher sales volumes at Bath & Body Works and new company-owned stores in Greater China.
The general, administrative and store operating expense rate increased to 26.9% from 25.6% due to the presentation change for income received from our Victoria's Secret private label credit card and incremental wage investments.
Loss on Divestiture of La Senza
In 2018, we recognized a pre-tax loss on the sale of La Senza of $99 million related to the recognition of $45 million of accumulated translation adjustments and the transfer of the net working capital and long-lived store assets to the buyer.
Other Income and Expenses
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for 2018 and 2017:
 
2018
 
2017
Average daily borrowings (in millions)
$
5,853

 
$
5,827

Average borrowing rate (in percentages)
6.6
%
 
7.0
%

For 2018, our interest expense decreased $21 million to $385 million due to a lower average borrowing rate partially offset by higher average daily borrowings.
Other Income (Loss)
For 2018, our other income (loss) increased $15 million to $5 million of income primarily driven by a $45 million pre-tax loss on extinguishment of the 2019 Notes recognized in 2017, partially offset by fewer distributions received from our Easton investments and the negative impacts of foreign exchange.
Provision for Income Taxes
For 2018, our effective tax rate decreased to 24.9% from 25.1%. The 2018 rate was lower than our combined estimated federal and state statutory rate primarily due to the tax effects of the divestiture of the La Senza business. The 2017 rate was lower than our combined estimated federal and state statutory rate primarily due to the benefit related to changes in U.S. tax legislation.
Results of Operations—Fourth Quarter of 2018 Compared to Fourth Quarter of 2017
We utilize the retail calendar for reporting. As such, the results for the fourth quarter of 2018 represent the 13-week period ended February 2, 2019, and the results for the fourth quarter of 2017 represent the 14-week period ended February 3, 2018. 
Operating Income
The following table provides our segment operating income (loss) and operating income rates (expressed as a percentage of net sales) for the fourth quarter of 2018 in comparison to the fourth quarter of 2017:
 
Fourth Quarter
 
Operating Income Rate
 
2018
 
2017
 
2018
 
2017
 
(in millions)
 
 
 
 
Victoria’s Secret
$
301

 
$
457

 
11.9
%
 
17.1
%
Bath & Body Works
607

 
557

 
31.1
%
 
31.0
%
Victoria's Secret and Bath & Body Works International
19

 
4

 
9.8
%
 
2.3
%
Other (a)
(127
)
 
(31
)
 
(71.0
%)
 
(16.1
%)
Total Operating Income
$
800

 
$
987

 
16.5
%
 
20.5
%
 ________________
(a)
Includes sourcing and corporate functions, La Senza and Henri Bendel.

42
Table of Contents

For the fourth quarter of 2018, operating income decreased $187 million to $800 million, and the operating income rate decreased to 16.5% from 20.5%. The drivers of the operating income results are discussed in the following sections.
Net Sales
The following table provides net sales for the fourth quarter of 2018 in comparison to the fourth quarter of 2017:
Fourth Quarter
 
2018
 
2017
 
% Change
 
 
(in millions)
 
 
Victoria’s Secret Stores (a)
 
$
1,849

 
$
2,038

 
(9
%)
Victoria’s Secret Direct
 
683

 
631

 
8
%
Total Victoria’s Secret
 
2,532

 
2,669

 
(5
%)
Bath & Body Works Stores (a)
 
1,626

 
1,545

 
5
%
Bath & Body Works Direct
 
325

 
249

 
30
%
Total Bath & Body Works
 
1,951

 
1,794

 
9
%
Victoria's Secret and Bath & Body Works International (b)
 
190

 
170

 
12
%
Other (c)
 
179

 
190

 
(6
%)
Total Net Sales
 
$
4,852

 
$
4,823

 
1
%
________________
(a)
Includes company-owned stores in the U.S. and Canada.
(b)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(c)
Includes wholesale revenues from our sourcing function, Henri Bendel and La Senza results prior to January 6, 2019.
The following table provides a reconciliation of net sales for the fourth quarter of 2018 to the fourth quarter of 2017: 
Fourth Quarter
 
Victoria’s
Secret
 
Bath & Body
Works
 
Victoria’s Secret
and
Bath & Body
Works
International
 
Other
 
Total
 
 
(in millions)
2017 Net Sales
 
$
2,669

 
$
1,794

 
$
170

 
$
190

 
$
4,823

Comparable Store Sales
 
(135
)
 
109

 
(7
)
 
5

 
(28
)
Sales Associated with New, Closed and Non-comparable Remodeled Stores, Net
 
(95
)
 
(23
)
 
23

 
(22
)
 
(117
)
Foreign Currency Translation
 
(4
)
 
(5
)
 
(5
)
 
(3
)
 
(17
)
Direct Channels
 
29

 
76

 
7

 
6

 
118

Private Label Credit Card Income
 
68

 
—

 
—

 
—

 
68

International, Wholesale, Royalty and Other
 
—

 
—

 
2

 
3

 
5

2018 Net Sales
 
$
2,532

 
$
1,951

 
$
190

 
$
179

 
$
4,852


The following table compares fourth quarter of 2018 comparable sales to fourth quarter of 2017:
Fourth Quarter
 
2018
 
2017
Comparable Sales (Stores and Direct) (a)
 
 
 
 
Victoria's Secret (b)
 
(3
%)
 
(1
%)
Bath & Body Works (b)
 
12
%
 
6
%
Total Comparable Sales
 
3
%
 
2
%
 
 
 
 
 
Comparable Store Sales (a)
 
 
 
 
Victoria’s Secret (b)
 
(7
%)
 
(6
%)
Bath & Body Works (b)
 
8
%
 
4
%
Total Comparable Store Sales
 
(1
%)
 
(2
%)
 ________________

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(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. The change in comparable sales provides an indication of period over period growth (decline). A store is typically included in the calculation of comparable sales when it has been open 12 months or more and it has not had a change in selling square footage of 20% or more. Additionally, stores of a given brand are excluded if total selling square footage for the brand in the mall changes by 20% or more through the opening or closing of a second store. The percentage change in comparable sales are calculated on a comparable calendar period as opposed to a fiscal basis. Therefore, the percentage change in comparable sales for 2018 was calculated on a 13-to-13-week basis, and the percentage change in comparable sales for 2017 was calculated on a 14-to-14-week basis. Comparable sales attributable to our international stores are calculated on a constant currency basis.
(b)
Includes company-owned stores in the U.S. and Canada.
The results by segment are as follows:
Victoria’s Secret
For the fourth quarter of 2018, net sales decreased $137 million to $2.532 billion; comparable sales decreased 3%; and comparable store sales decreased 7%. PINK comparable sales decreased in the low-double digit range, primarily driven by merchandise performance in apparel. Victoria's Secret Lingerie comparable sales were about flat, primarily driven by declines in intimate apparel, due to merchandise performance and category resets, offset by an increase in sleep. Victoria's Secret Beauty comparable sales increased in the mid-single digit range, driven by the merchandise assortment. Additionally, net sales increased as a result of the change in presentation for income received from our Victoria's Secret private label credit card arrangement.
The decrease in comparable store sales was driven by lower average unit retail and reduced traffic.
Bath & Body Works
For the fourth quarter of 2018, net sales increased $157 million to $1.951 billion; comparable sales increased 12%; and comparable store sales increased 8%. Net sales increased in most categories including home fragrance, body care and soaps and sanitizers, which incorporated newness, innovation and fashion.
The increase in comparable store sales was driven by higher average dollar sales and conversion.
Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2018, net sales increased $20 million to $190 million, due to new company-owned Victoria's Secret stores, direct channel growth in Greater China and additional stores opened by our partners. These increases were partially offset by a decline at Victoria's Secret U.K.
Other
For the fourth quarter of 2018, net sales decreased $11 million to $179 million due to declines in La Senza and Henri Bendel as we divested La Senza and closed Henri Bendel in the quarter.
Gross Profit
For the fourth quarter of 2018, our gross profit decreased $72 million to $1.968 billion, and our gross profit rate (expressed as a percentage of net sales) decreased to 40.6% from 42.3% primarily as a result of:
Victoria’s Secret
For the fourth quarter of 2018, the gross profit decrease was driven by lower merchandise margin dollars related to the decrease in net sales, increased promotional activity to drive traffic and clear inventory and due to $20 million of long-lived store asset impairment charges related to certain stores in the U.S.
The gross profit rate decrease was driven by a decline in the merchandise margin rate due to increased promotional activity and the long-lived store asset impairment charges.
Bath & Body Works
For the fourth quarter of 2018, the gross profit increase was driven by higher merchandise margin dollars related to the increase in net sales and reduced promotional activity, partially offset by higher occupancy expenses due to higher distribution and fulfillment expenses related to higher direct channel sales and investments in store real estate.
The gross profit rate increase was driven by lower promotional activity.

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Victoria's Secret and Bath & Body Works International
For the fourth quarter of 2018, the gross profit increase was driven by higher merchandise margin dollars related to higher net sales in Greater China and additional stores opened by our partners.
The gross profit rate increase was driven by buying and occupancy leverage on higher net sales.
General, Administrative and Store Operating Expenses
For the fourth quarter of 2018, our general, administrative and store operating expenses increased $16 million to $1.069 billion primarily driven by the change in presentation for income received from our Victoria's Secret private label credit card arrangement, incremental wage investments and higher selling expenses related to higher sales volumes at Bath & Body Works, partially offset by lower selling expenses and fashion show costs at Victoria's Secret.
The general, administrative and store operating expense rate increased to 22.0% from 21.8% due to the presentation change for income received from our Victoria's Secret private label credit card and incremental wage investments.
Loss on Divestiture of La Senza
In the fourth quarter of 2018, we recognized a pre-tax loss on the sale of La Senza of $99 million related to the recognition of $45 million of accumulated translation adjustments and the transfer of the net working capital and long-lived store assets to the buyer.
Other Income and Expense
Interest Expense
The following table provides the average daily borrowings and average borrowing rates for the fourth quarter of 2018 and 2017:
Fourth Quarter
 
2018
 
2017
Average daily borrowings (in millions)
 
$
5,880

 
$
5,893

Average borrowing rate (in percentages)
 
6.4
%
 
6.9
%

For the fourth quarter of 2018, our interest expense decreased $13 million to $93 million due to a lower average borrowing rate and lower average daily borrowings.
Other Income (Loss)
For the fourth quarter of 2018, our other income (loss) increased $42 million to $4 million of income primarily driven by a $45 million pre-tax loss on extinguishment of the 2019 Notes recognized in the fourth quarter of 2017.
Provision for Income Taxes
For the fourth quarter of 2018, our effective tax rate increased to 24.0% from 21.1%. The 2018 rate was lower than our combined estimated federal and state statutory rate primarily due to the tax effects of the divestiture of the La Senza business. The 2017 rate was lower than our combined estimated federal and state statutory rate primarily due to the benefit related to changes in U.S. tax legislation.

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 (loss) and working capital changes. Our net income (loss) is impacted by, among other things, sales volume, seasonal sales patterns, success of new product introductions, profit margins and income taxes. 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. Our cash and cash equivalents held by foreign subsidiaries were $265 million as of February 1, 2020.
On February 20, 2020, we and Sycamore entered into a definitive agreement that is intended to deliver long-term value to L Brands, Inc. shareholders by positioning Bath & Body Works as a standalone public company and transitioning Victoria's Secret, including business conducted under the Victoria's Secret and PINK brands and certain support functions, into a privately-held entity.

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After taking into account certain liabilities, Sycamore will purchase a 55% interest in Victoria’s Secret for approximately $525 million. We intend to use the proceeds from the transaction, along with approximately $500 million of excess balance sheet cash, to reduce debt. The transaction is expected to close in the second quarter of 2020, subject to customary closing conditions.
Company Response to Coronavirus
Subsequent to February 1, 2020, we announced actions in response to the continued spread of the coronavirus.
On March 16, 2020, in an abundance of caution and as a proactive measure, we elected to borrow $950 million from our Secured Revolving Facility, leaving our availability under the Secured Revolving Facility at $22 million.
On March 17, 2020, we announced the temporary closure of all Bath & Body Works, Victoria’s Secret and PINK stores in the United States and Canada through March 29, 2020. Associates will continue to receive pay and benefits through April 4, 2020, which is one week longer than originally announced.
Based on the continued spread of the coronavirus and stay-at-home orders by government officials across the country, we are extending the closure of our stores beyond the initial March 29th date. As the situation continues to evolve rapidly, we are not currently able to predict the timing of store reopenings. However, we are monitoring the situation closely and will provide updates as appropriate. We continue to serve customers through our direct channels.
In an effort to further strengthen our financial flexibility and efficiently manage through the pandemic, we are proactively taking the following additional actions:
•
Suspending our quarterly cash dividend beginning in the second quarter of fiscal 2020. We remain committed to paying dividends over the long-term and will re-evaluate when appropriate.
•
Executing a substantial reduction in expenses and capital expenditures.  This includes an ongoing reduction in forward inventory receipts.
•
Temporarily reducing base compensation by 20% for senior vice presidents and above.  The cash compensation of Chairman and CEO Leslie H. Wexner and other members of the Board of Directors has been suspended. Additionally, we are deferring annual merit increases.
•
Furloughing most store associates and those who are not currently working to support the online businesses or who cannot work from home, effective April 5, 2020 until further notice. All furloughed associates will continue to receive existing healthcare benefits. As circumstances change, we will make every effort to bring these associates back to work as soon as possible. Furloughed associates will also be able to apply for unemployment benefits, if eligible.
As of March 27, 2020, we currently have more than $2 billion in cash, which includes the $950 million borrowed under the Secured Revolving Facility on March 16, 2020.  Our Secured Revolving Facility has certain financial covenants, including a debt to consolidated EBITDA covenant, which may be breached as early as the end of the fiscal quarter ending May 2, 2020. If we were to violate a covenant, our lenders would have the right to accelerate our Secured Revolving Facility indebtedness, demand cash collateral in respect of the letters of credit issued thereunder and terminate the funding commitments available thereunder.  While we believe that we would be able to obtain temporary waivers for any such breach of a covenant to prevent an acceleration of our outstanding indebtedness or obtain a replacement credit facility, we cannot conclude with certainty that we would have the ability to obtain necessary waivers or negotiate less restrictive debt covenants with our lenders. We are in active conversations with the lenders under our credit facility to obtain a replacement credit facility that does not contain a debt to consolidated EBITDA financial covenant or a temporary waiver in respect of such financial covenant in our existing Secured Revolving Facility. We believe that our current cash balance, along with the actions taken as outlined above, provides us with sufficient current liquidity.
Working Capital and Capitalization
We believe that our available short-term and long-term capital resources are sufficient to fund foreseeable requirements.

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The following table provides a summary of our working capital position and capitalization as of February 1, 2020, February 2, 2019 and February 3, 2018:
 
February 1, 2020
 
February 2, 2019
 
February 3, 2018
 
(in millions)
Net Cash Provided by Operating Activities
$
1,236

 
$
1,377

 
$
1,406

Capital Expenditures
458

 
629

 
707

Working Capital (a)
873

 
1,274

 
1,262

Capitalization:
 
 
 
 
 
Long-term Debt
5,487

 
5,739

 
5,707

Shareholders’ Equity (Deficit)
(1,499
)
 
(869
)
 
(753
)
Total Capitalization
$
3,988

 
$
4,870

 
$
4,954

Amounts Available Under Credit Agreements (b)
$
981

 
$
991

 
$
991

 ________________
(a)
The February 1, 2020 amount includes Current Operating Lease Liabilities as a result of our adoption of ASC 842, Leases, in the first quarter of 2019.
(b)
Letters of credit issued reduce our availability under the Secured Revolving Facility. We had outstanding letters of credit that reduce our availability under the Secured Revolving Facility of $19 million as of February 1, 2020, and $9 million as of February 2, 2019, and February 3, 2018.
The following table provides certain measures of liquidity and capital resources as of February 1, 2020, February 2, 2019 and February 3, 2018:
 
February 1, 2020
 
February 2, 2019
 
February 3, 2018
Debt-to-capitalization Ratio (a)
138
%
 
118
%
 
115
%
Cash Flow to Capital Investment
270
%
 
219
%
 
199
%
________________
(a)
Long-term debt divided by total capitalization.
Cash Flow
The following table provides a summary of our cash flow activity for the fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018: 
 
2019
 
2018
 
2017
 
(in millions)
Cash and Cash Equivalents, Beginning of Year
$
1,413

 
$
1,515

 
$
1,934

Net Cash Flows Provided by Operating Activities
1,236

 
1,377

 
1,406

Net Cash Flows Used for Investing Activities
(480
)
 
(609
)
 
(698
)
Net Cash Flows Used for Financing Activities
(666
)
 
(872
)
 
(1,127
)
Effects of Exchange Rate Changes on Cash
(4
)
 
2

 
—

Net Increase (Decrease) in Cash and Cash Equivalents
86

 
(102
)
 
(419
)
Cash and Cash Equivalents, End of Year
$
1,499

 
$
1,413

 
$
1,515


Operating Activities
Net cash provided by operating activities in 2019 was $1.236 billion, including net loss of $366 million. Net loss included depreciation of $588 million, goodwill impairment charges of $720 million, long-lived store asset impairment charges of $263 million, share-based compensation expense of $87 million, loss on extinguishment of debt of $40 million, La Senza charges of $37 million and deferred income tax benefits of $29 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 item in working capital was a decrease in operating cash flow of $93 million associated with the decrease in Accounts Payables, Accrued Expenses and Other.

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Net cash provided by operating activities in 2018 was $1.377 billion, including net income of $644 million. Net income included depreciation of $590 million, long-lived store asset impairment charges of $101 million, loss on divestiture of La Senza of $99 million, share-based compensation expense of $97 million and deferred income tax benefits of $52 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 item in working capital was a decrease in operating cash flow of $113 million associated with a decrease in income taxes payable.
Net cash provided by operating activities in 2017 was $1.406 billion, including net income of $983 million. Net income included depreciation of $571 million, deferred income tax benefit of $108 million, share-based compensation expense of $102 million, loss on extinguishment of debt of $45 million and gains on distributions from Easton investments of $20 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 item in working capital was a decrease in operating cash flow of $137 million associated with an increase in inventory.
Investing Activities
Net cash used for investing activities in 2019 was $480 million consisting primarily of $458 million of capital expenditures. The capital expenditures included $286 million for opening new stores and remodeling and improving existing stores. Remaining capital expenditures were primarily related to spending on technology and logistics to support our digital businesses and other retail capabilities.
Net cash used for investing activities in 2018 was $609 million consisting primarily of $629 million of capital expenditures partially offset by a $16 million return of capital from Easton investments. The capital expenditures included $487 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 2017 was $698 million consisting primarily of $707 million of capital expenditures and purchase of marketable securities of $10 million, partially offset by a $29 million return of capital from Easton investments. The capital expenditures included $601 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 2019 was $666 million consisting primarily of $799 million in payments for the early extinguishment of outstanding notes maturing between 2020 and 2022, quarterly dividend payments of $1.20 per share, or $332 million, and tax payments related to share-based awards of $13 million. These were partially offset by the net proceeds of $486 million from the issuance of the 2029 Notes and $5 million of net new borrowings under our Foreign Facilities.
Net cash used for financing activities in 2018 was $872 million consisting primarily of quarterly dividend payments totaling $2.40 per share, or $666 million, payments for repurchases of common stock of $198 million and payment of long-term debt related to our exchange of notes of $52 million, partially offset by $63 million of net new borrowings under our foreign facilities.
Net cash used for financing activities in 2017 was $1.127 billion consisting primarily of quarterly dividend payments totaling $2.40 per share, or $686 million, $540 million to redeem our 2019 Notes, repurchases of common stock of $446 million and tax payments related to share-based awards of $32 million. These were partially offset by the net proceeds of $495 million from the 2028 Notes issuance, $52 million of net new borrowings under our foreign facilities and proceeds from the exercise of stock options of $38 million.
Common Stock Share Repurchases
Our Board of Directors will determine share repurchase authorizations giving consideration to our 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 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.
We did not repurchase any shares during 2019.

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Under the authority of our Board of Directors, we repurchased shares of our common stock under the following repurchase programs during fiscal 2018 and 2017:
 
 
 
 
Shares Repurchased
 
Amount Repurchased
 
Average Stock
Price of
Shares
Repurchased
within
Program
Repurchase Program
 
Amount Authorized
 
2018
 
2017
 
2018
 
2017
 
 
 
(in millions)
 
(in thousands)
 
(in millions)
 
 
March 2018
 
$
250

 
4,852

 
NA

 
$
171

 
NA

 
$
35.29

September 2017
 
250

 
527

 
3,858

 
25

 
$
202

 
$
51.72

February 2017
 
250

 
NA

 
5,500

 
NA

 
240

 
$
43.57

February 2016
 
500

 
NA

 
51

 
NA

 
3

 
$
76.47

Total
 
 
 
5,379

 
9,409

 
$
196

 
$
445

 
 

In March 2018, our Board of Directors approved a new $250 million share repurchase program, which included the $23 million remaining under the September 2017 repurchase program.
The March 2018 repurchase program had $79 million remaining as of February 1, 2020.
Treasury Stock Retirement
In November 2017, we retired 36 million shares of our treasury stock. The retirement resulted in a reduction of $2.036 billion in Treasury Stock, $18 million in the par value of Common Stock, $82 million in Paid-in Capital and $1.936 billion in Retained Earnings.
Dividend Policy and Procedures
Our Board of Directors will determine future dividends after giving consideration to our 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 operating and financing activities to fund our dividends and share repurchase programs.

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Under the authority and declaration of our Board of Directors, we paid the following dividends during fiscal 2019, 2018 and 2017:
 
Ordinary Dividends
 
Total Paid
 
(per share)
 
(in millions)
2019
 
 
 
Fourth Quarter
$
0.30

 
$
83

Third Quarter
0.30

 
83

Second Quarter
0.30

 
83

First Quarter
0.30

 
83

2019 Total
$
1.20

 
$
332

2018
 
 
 
Fourth Quarter
$
0.60

 
$
166

Third Quarter
0.60

 
165

Second Quarter
0.60

 
167

First Quarter
0.60

 
168

2018 Total
$
2.40

 
$
666

2017
 
 
 
Fourth Quarter
$
0.60

 
$
170

Third Quarter
0.60

 
172

Second Quarter
0.60

 
172

First Quarter
0.60

 
172

2017 Total
$
2.40

 
$
686

In November 2018, our Board of Directors reduced our annual ordinary dividend to $1.20 per share from $2.40 per share, beginning with the quarterly dividend paid in March 2019.
Subsequent to February 1, 2020, our Board of Directors declared the first quarter of 2020 ordinary dividend of $0.30 per share.

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Long-term Debt and Borrowing Facilities
The following table provides our outstanding debt balance, net of unamortized debt issuance costs and discounts, as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Senior Debt with Subsidiary Guarantee
 
 
 
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
991

 
$
990

$860 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
858

 
952

$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
693

 
693

$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
498

 
498

$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)
496

 
496

$500 million, 7.50% Fixed Interest Rate Notes due June 2029 ("2029 Notes")
487

 
—

$450 million, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
450

 
776

$297 million, 6.694% Fixed Interest Rate Notes due January 2027 ("2027 Notes")
276

 
273

$338 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
—

 
337

Secured Foreign Facilities
103

 
91

Total Senior Debt with Subsidiary Guarantee
$
4,852

 
$
5,106

Senior Debt
 
 
 
$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348

 
$
348

$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
298

 
297

Unsecured Foreign Facilities
50

 
60

Total Senior Debt
$
696

 
$
705

Total
$
5,548

 
$
5,811

Current Debt
(61
)
 
(72
)
Total Long-term Debt, Net of Current Portion
$
5,487

 
$
5,739

Issuance of Notes
In June 2019, we issued $500 million of 7.50% notes due in June 2029 ("2029 Notes"). The obligation to pay principal and interest on these notes is jointly and severally guaranteed on a full and unconditional basis by certain of our 100% owned subsidiaries (the “Guarantors”). The proceeds from the issuance were $486 million, which were net of discounts and issuance costs of $14 million. The discounts and issuance costs are being amortized through the maturity date and are included within Long-term Debt on the February 1, 2020 Consolidated Balance Sheet.
Repurchases of Notes
In June 2019, we completed the early settlement of tender offers to repurchase $212 million of outstanding 2020 Notes, $330 million of outstanding 2021 Notes and $96 million of outstanding 2022 Notes for $669 million. We used the proceeds from the 2029 Notes, together with cash on hand, to fund the purchase price for the tender offers. Additionally, in July 2019, we redeemed the remaining $126 million of outstanding 2020 Notes for $130 million.
In the second quarter of 2019, we recognized a pre-tax loss on extinguishment of debt of $40 million (after-tax loss of $30 million), which includes redemption fees and the write-off of unamortized issuance costs. This loss is included in Other Income (Loss) in the 2019 Consolidated Statement of Income (Loss).
Exchange of Notes
In June 2018, we completed private offers to exchange $62 million, $220 million and $44 million of outstanding 2020 Notes, 2021 Notes and 2022 Notes, respectively, for $297 million of newly issued 6.694% notes due in January 2027 ("2027 Notes") and $52 million in cash consideration, which included a $24 million exchange premium. The exchange was treated as a modification under ASC 470, Debt, and no gain or loss was recognized. The exchange premium is being amortized through the maturity date of January 2027 and is included within Long-term Debt on the Consolidated Balance Sheets. The obligation to pay principal and interest on the 2027 Notes is jointly and severally guaranteed on a full and unconditional basis by the Guarantors.

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Secured Revolving Facility
We and the Guarantors guarantee and pledge collateral to secure a revolving credit facility. The Secured Revolving Facility has aggregate availability of $1 billion and allows us and certain of our non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
In August 2019, we entered into an amendment and restatement (“Amendment”) of the Secured Revolving Facility. The Amendment maintained the aggregate availability under the Secured Revolving Facility at $1 billion and extended the expiration date from May 2022 to August 2024. We incurred fees related to the Amendment of $5 million, which were capitalized and are recorded in Other Assets on the February 1, 2020 Consolidated Balance Sheet and are being amortized over the remaining term of the Secured Revolving Facility.
The Secured Revolving Facility fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.75% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings is the London Interbank Offered Rate ("LIBOR") plus 1.75% per annum. The interest rate on outstanding foreign denominated borrowings is the applicable benchmark rate plus 1.75% per annum.
The Secured 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. Additionally, the Secured 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 3.50 to 1.00 and (b) no default or event of default exists. As of February 1, 2020, we were in compliance with both of our financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.50 to 1.00.
During 2019, we borrowed and repaid $12 million under the Secured Revolving Facility. As of February 1, 2020, there were no borrowings outstanding under the Secured Revolving Facility.
The Secured Revolving Facility supports our letter of credit program. We had $19 million of outstanding letters of credit as of February 1, 2020 that reduced our availability under the Secured Revolving Facility.
On March 16, 2020, as a proactive measure in response to the continued spread of the coronavirus, we elected to borrow $950 million from the Secured Revolving Facility, leaving our availability under the Secured Revolving Facility at $22 million.
Secured Foreign Facilities
We and the Guarantors guarantee and pledge collateral to secure revolving and term loan bank facilities used by certain of our Greater China subsidiaries to support their operations ("Secured Foreign Facilities"). The Secured Foreign Facilities have availability totaling $150 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for each borrowing. During 2019, we borrowed $117 million and made payments of $103 million under the Secured Foreign Facilities. The maximum daily amount outstanding at any point in time in 2019 was $103 million. Borrowings on the Secured Foreign Facilities mature between March 2020 and August 2024. As of February 1, 2020, borrowings of $11 million are included within Current Debt on the Consolidated Balance Sheet and the remaining borrowings are included within Long-term Debt.
Unsecured Foreign Facilities
We guarantee unsecured revolving and term loan bank facilities used by certain of our Greater China subsidiaries to support their operations ("Unsecured Foreign Facilities"). The Unsecured Foreign Facilities have availability totaling $75 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for each borrowing. During 2019, we borrowed $50 million and made payments of $59 million under the Unsecured Foreign Facilities. The maximum daily amount outstanding at any point in time in 2019 was $74 million. Borrowings on the Unsecured Foreign Facilities mature between March 2020 and April 2020. As of February 1, 2020, borrowings of $50 million are included within Current Debt on the Consolidated Balance Sheet.
Credit Ratings
Our borrowing costs under our Secured Revolving Facility and Secured Foreign Facilities are linked to our credit ratings. If we receive an upgrade or downgrade to our corporate credit ratings, the borrowing costs could decrease or increase, respectively. The guarantees of our obligations under the Secured Revolving Facility and Secured Foreign Facilities 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 Secured Revolving Facility and Secured Foreign Facilities 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.

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The following table provides our credit ratings as of February 1, 2020: 
 
Moody’s
 
S&P
Corporate
Ba2
 
BB-
Senior Unsecured Debt with Subsidiary Guarantee
Ba2
 
BB-
Senior Unsecured Debt
B1
 
B
Outlook
Negative
 
Stable
Subsequent to February 1, 2020, Moody's downgraded our Corporate and Senior Unsecured Debt with Subsidiary Guarantee ratings to Ba3, our Senior Unsecured Debt rating to B2 and updated our outlook to Stable. Additionally, S&P downgraded our Corporate and Senior Unsecured Debt with Subsidiary Guarantee ratings to B+, our Senior Unsecured Debt rating to B- and updated our outlook to Negative.
Contingent Liabilities and Contractual Obligations
The following table provides our contractual obligations, aggregated by type, including the maturity profile as of February 1, 2020:
 
 
Payments Due by Period
 
Total
 
Less
Than 1
Year
 
1-3
Years
 
4-5
Years
 
More
than 5
Years
 
Other
 
(in millions)
Long-term Debt (a)
$
9,235

 
$
409

 
$
1,985

 
$
1,102

 
$
5,739

 
$
—

Future Lease Obligations (b)
4,804

 
692

 
1,333

 
1,084

 
1,695

 
—

Purchase Obligations (c)
1,125

 
1,032

 
79

 
12

 
2

 
—

Other Liabilities (d) (e)
411

 
66

 
291

 
30

 
—

 
24

Total
$
15,575

 
$
2,199

 
$
3,688

 
$
2,228

 
$
7,436

 
$
24

________________
(a)
Long-term debt obligations relate to our principal and interest payments for outstanding notes and debentures. Interest payments have been estimated based on the coupon rate for fixed rate obligations. Interest obligations exclude amounts which have been accrued through February 1, 2020. For additional information, see Note 13 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
(b)
Future lease obligations primarily represent minimum payments due under store lease agreements. For additional information, see Note 8 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
(c)
Purchase obligations primarily include purchase orders for merchandise inventory and other agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions.
(d)
Other liabilities primarily include future payments relating to our non-qualified supplemental retirement plan of $280 million in the "1-3 Years" category. The definitive agreement between us and Sycamore for the sale to Sycamore of the 55% interest in Victoria's Secret requires that we terminate our non-qualified supplemental retirement plan as of the Closing with respect to participants affected by the sale and for all other participants within six months. On March 11, 2020, the Compensation Committee of the Board of Directors authorized management to take steps to terminate the plan as to all participants.  The timing and specifics of such termination have not yet been determined.  Any remaining benefits and obligations under the non-qualified plan are expected to be paid out in full approximately one year following the applicable termination.
(e)
Other liabilities also include future estimated payments associated with unrecognized tax benefits. The “Less Than 1 Year” category includes $66 million of these tax items because it is reasonably possible that the amounts could change in the next 12 months due to audit settlements or resolution of uncertainties. The remaining portion totaling $24 million is included in the “Other” category as it is not reasonably possible that the amounts could change in the next 12 months. In addition, we have a remaining liability of $41 million related to the deemed repatriation tax on our undistributed foreign earnings resulting from the Tax Cuts and Jobs Act. The tax liability will be paid over the next five years. For additional information, see Note 12 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

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La Senza
In connection with the sale of La Senza in the fourth quarter of 2018, certain of our subsidiaries have remaining contingent obligations of $40 million related to lease payments under the current terms of noncancelable leases expiring at various dates through 2028. These obligations 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 business. As part of the sale, a liability of $5 million was recorded for these obligations. During 2019, an additional reserve of $35 million was recorded related to these obligations and certain other items. As of February 1, 2020, reserves of $8 million are included within Accrued Expenses and Other on the Consolidated Balance Sheet and the remaining reserves are included within Other Long-term Liabilities.
Other
In connection with noncancelable 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 at various dates through 2021, and the total amount of the guarantees is $94 million. We recorded a liability of $17 million and $11 million related to these guarantee obligations as of February 1, 2020 and February 2, 2019, respectively. This liability is included in Current Operating Lease Liabilities on the February 1, 2020 Consolidated Balance Sheet, and in Other Long-term Liabilities on the February 2, 2019 Consolidated Balance Sheet.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements as defined by Regulation 229.303 Item 303 (a) (4).
Recently Issued Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASC 842, Leases, which requires companies classified as lessees to account for most leases on their balance sheet but recognize expense on their income statement in a manner similar to legacy accounting. The standard also requires enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of expense recognized and expected to be recognized from existing leases. In July 2018, the FASB approved an amendment to the standard that provides companies a modified retrospective transition option that did not require earlier periods to be restated upon adoption.
We adopted the standard in the first quarter of 2019 under the modified retrospective approach. As allowed by the new standard, we elected the package of transition practical expedients but elected to not apply the hindsight practical expedient to its leases at transition.
Upon adoption at the beginning of 2019, we recorded operating lease liabilities of $3.7 billion and operating lease assets for its leases of $3.3 billion. The operating lease assets are net of $470 million of liabilities for deferred rent and unamortized landlord construction allowances that were previously recorded as Other Long-term Liabilities on the Consolidated Balance Sheet. We also recorded a decrease to opening retained earnings, net of tax, of $2 million. The adoption of the standard did not materially impact the Consolidated Statements of Income (Loss) or Cash Flows.
Hedging Activities
In August 2017, the FASB issued Accounting Standards Update ("ASU") 2017-12, Targeted Improvements to Accounting for Hedging Activities, which is intended to better align risk management activities and financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements. We adopted the standard in the first quarter of 2019. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill. The standard eliminates the second step from the goodwill impairment test, which required a hypothetical purchase price allocation to determine the implied fair value of goodwill. Under the new standard, the goodwill impairment charge is the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We adopted this standard in the third quarter of 2019 and performed our interim and annual goodwill impairment assessments in accordance with ASU 2017-04.

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Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires the use of a forward-looking expected loss impairment model for accounts receivable and certain other financial instruments. This guidance will be effective beginning in fiscal 2020, with early adoption permitted. We do not expect this standard to have a material impact on our consolidated results of operations, financial position or cash flows.
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 generally accepted accounting principles 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. Management has discussed the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board of Directors and believes the following assumptions and estimates are most significant to reporting our results of operations and financial position.
Inventories
Inventories are principally valued at the lower of cost or net realizable value, on a weighted-average cost basis.
We record valuation adjustments to our inventories if the cost of inventory on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand and market conditions and analysis of historical experience. If actual demand or market conditions are different than those projected by management, future period merchandise margin rates may be unfavorably or favorably affected by adjustments to these estimates.
We also record inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and operating trends.
Management believes that the assumptions used in these estimates are reasonable and appropriate. A 10% increase or decrease in the inventory valuation adjustment would have impacted net loss by approximately $4 million for 2019. A 10% increase or decrease in the estimated physical inventory loss adjustment would have impacted net loss by approximately $5 million for 2019.
Valuation of Long-lived Assets
Long-lived Store Assets
Long-lived store assets, which include leasehold improvements, store related assets and operating lease assets (subsequent to the adoption of ASC 842, Leases), are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group.  For operating lease assets, we determine the fair value of the assets by comparing the contractual rent payments to estimated market rental rates. An individual asset within an asset group is not impaired below its estimated fair value. The fair value of long-lived store assets are determined using Level 3 inputs within the fair value hierarchy.
In 2019 and 2018, we concluded that the negative operating results for certain of our Victoria's Secret stores were an indicator of potential impairment of the related store asset groups. We determined that the estimated undiscounted future cash flows were less than the carrying values and, as a result, determined the estimated fair values of the store asset groups using estimated discounted future cash flows and estimated market rental rates. Accordingly, we recognized a loss equal to the difference between the carrying value of an asset group and its estimated fair value but did not impair any individual store asset below its estimated fair value.

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In 2019, we recognized impairment charges of $198 million for leasehold improvements and store related assets. Impairment charges of $151 million related to stores in Greater China, the U.K. and Ireland, and impairment charges of $47 million related to stores in the U.S. and Canada. For operating lease assets, we recognized impairment charges of $65 million. Impairment charges of $61 million related to stores in Greater China and the U.K., and impairment charges of $4 million related to stores in the U.S.
In total, we recognized impairment charges of $263 million for long-lived store assets, which are included in Costs of Goods Sold, Buying & Occupancy in the 2019 Consolidated Statement of Income (Loss). Impairment charges of $212 million, related to store assets in Greater China, the U.K. and Ireland, were recorded within the Victoria's Secret and Bath & Body Works International segment. Impairment charges of $51 million, related to store assets in the U.S. and Canada, were recorded within the Victoria's Secret segment.
In 2018, we recognized impairment charges of $101 million for leasehold improvements and store related assets. Impairment charges of $70 million, related to stores in the U.S. and Canada, were recorded within the Victoria's Secret segment. Impairment charges of $31 million, related to stores in the U.K., were recorded within the Victoria's Secret and Bath & Body Works International segment. These charges are included in Costs of Goods Sold, Buying & Occupancy in the 2018 Consolidated Statement of Income (Loss).
Our fair value estimates incorporated significant assumptions and judgments including, but not limited to, estimated future cash flows, discount rates and market rental rates. The use of different assumptions or judgments in our assessment could materially increase or decrease the fair value of our store assets and, accordingly, could materially increase or decrease any related impairment charge. A three percentage point reduction to our comparable sales assumptions, a key input in determining estimated future cash flows, would not have resulted in a material incremental impairment charge in 2019. Further sustained declines in our business performance could result in a material impairment charge in a future period.
When a decision has been made to dispose of property and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life.
Goodwill
Goodwill is reviewed for impairment at the reporting unit level each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. We have the option to either first perform a qualitative assessment to determine whether it is more likely than not that each reporting unit's fair value is less than its carrying value (including goodwill), or to proceed directly to the quantitative assessment which requires a comparison of the reporting unit's fair value to its carrying value (including goodwill). If we determine that the fair value of a reporting unit is less than its carrying value, we recognize an impairment charge equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit. Our reporting units are determined in accordance with the provisions of ASC 350, Intangibles - Goodwill and Other. As a result of goodwill impairment charges recognized in 2019, only the Bath & Body Works reporting unit has goodwill as of February 1, 2020.
As of the end of the third quarter of 2019, we performed a quantitative interim impairment assessment over the Victoria's Secret and Greater China reporting units. An interim assessment was performed in consideration of the negative performance of these reporting units and their impact on the sustained decline in our market capitalization. Further, for the Greater China reporting unit, we considered the results of the long-lived store asset impairment assessment.
The interim assessment concluded that the fair value of the Victoria's Secret reporting unit, which was based on a weighted average of the income and market approaches, exceeded its carrying value. However, the fair value of the Greater China reporting unit, which was based on the income approach, did not exceed its carrying value. Accordingly, we recognized a goodwill impairment charge of $30 million in the third quarter of 2019 related to the Greater China reporting unit. This charge is included in Impairment of Goodwill in the 2019 Consolidated Statement of Income (Loss).
As of the end of the fourth quarter of 2019, we performed our annual goodwill impairment assessment over the Bath & Body Works and Victoria's Secret reporting units. The fair value of the Bath & Body Works reporting unit was estimated using a weighted average of the income and market approaches. As a result of continued fourth quarter declines in business performance and increased risk, volatility and uncertainty related to the Victoria's Secret reporting unit, we estimated its fair value using a market approach.
The annual assessment concluded that the fair value of the Victoria's Secret reporting unit did not exceed its carrying value. Accordingly, we recognized a goodwill impairment charge of $690 million in the fourth quarter of 2019 related to the Victoria's Secret reporting unit. This charge is included in Impairment of Goodwill in the 2019 Consolidated Statement of Income (Loss). The annual assessment also concluded that the fair value of the Bath & Body Works reporting unit exceeded its carrying value.

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The market approach is based on earnings multiples of selected guideline public companies, while the income approach is based on estimated discounted future cash flows. The approaches, which are determined using Level 3 inputs within the fair value hierarchy, incorporated a number of significant assumptions and judgments including, but not limited to, estimated future cash flows, multiples of earnings of similar public companies, discount rates, income tax rates, terminal growth rates and an implied control premium relative to our market capitalization.
The use of different assumptions or judgments in our goodwill impairment assessment, including with respect to the estimated future cash flows, the earnings multiples used in the market approach, the discount rate used to discount such estimated future cash flows to their net present value and the reasonableness of the implied control premium relative to our market capitalization, could materially increase or decrease the fair value of our reporting units and, accordingly, could materially increase or decrease any related impairment charge. Declines in our market capitalization or in our business performance could result in a material impairment charge in a future period.
Intangible Assets - Indefinite Lives
Intangible assets with indefinite lives represent the Victoria’s Secret and Bath & Body Works trade names. Intangible assets with indefinite lives are reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. We have the option to either first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired, or to proceed directly to the quantitative assessment which requires a comparison of the fair value of the intangible asset to its carrying value. To determine if the fair value of the asset is less than its carrying amount, we will estimate the fair value, usually determined by the relief from royalty method under the income approach, and compare that value with its carrying amount. If the carrying value of the intangible asset exceeds its fair value, we recognize an impairment charge equal to the difference.
As of the end of the third quarter of 2019, we performed a quantitative interim impairment assessment of the Victoria's Secret trade name. An interim assessment was performed in consideration of the negative performance of Victoria's Secret. To estimate the fair value of the Victoria's Secret trade name, we used the relief from royalty method under the income approach. The interim assessment concluded that the fair value of the Victoria's Secret trade name exceeded its carrying value.
As of the end of the fourth quarter of 2019, we performed our annual impairment assessment of the Victoria's Secret and Bath & Body Works trade names. To estimate the fair value of the trade names, we used the relief from royalty method under the income approach. The annual assessment concluded that the fair values of the trade names were in excess of their respective carrying values.
The use of different assumptions or judgments in our impairment assessment of our trade names, including with respect to the estimated future cash flows, the discount rate used to discount such estimated future cash flows to their net present value and royalty rates used for the relief from royalty method, could materially increase or decrease the fair value of our trade names. A 50% reduction to our assumed royalty rate would not have resulted in a material incremental impairment charge in 2019.
Claims and Contingencies
We are subject to various claims and contingencies related to lawsuits, taxes, insurance, regulatory and other matters arising out of the normal course of business. Our determination of the treatment of claims and contingencies in the Consolidated Financial Statements is based on management’s view of the expected outcome of the applicable claim or contingency. We consult with legal counsel on matters related to litigation and seek input from both internal and external experts with respect to matters in the ordinary course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is reasonably estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable) or if an estimate is not reasonably determinable, disclosure of a material claim or contingency is disclosed in the Notes to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Income Taxes
We account for income taxes under the asset and liability method. Under this method, taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our Consolidated Statement of Income (Loss) in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

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Significant judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In determining our provision for income taxes, we consider permanent differences between book and tax income and statutory income tax rates. Our effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures and the level of earnings.
We follow the authoritative guidance included in ASC 740, Income Taxes, which contains a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and for which actual outcomes may differ from forecasted outcomes. Our policy is to include interest and penalties related to uncertain tax positions in income tax expense.
Our income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. A number of years may elapse before a particular matter for which we have established an accrual is audited and fully resolved or clarified. We adjust our tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from our established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
Revenue Recognition
In the first quarter of 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach.
We recognize revenue based on the amount we expect to receive when control of the goods or services is transferred to our customer. We recognize sales upon customer receipt of merchandise, which for direct channel revenues reflect an estimate of shipments that have not yet been received by our customer based on shipping terms and historical delivery times. Our shipping and handling revenues are included in Net Sales with the related costs included in Costs of Goods Sold, Buying and Occupancy in our Consolidated Statements of Income (Loss). We also provide a reserve for projected merchandise returns based on historical experience. Net Sales exclude sales and other similar taxes collected from customers.
We offer certain loyalty programs that allow customers to earn points based on purchasing activity. As customers accumulate points and reach point thresholds, they can use the points to purchase merchandise in stores or online. We allocate revenue to points earned on qualifying purchases and defer recognition until the points are redeemed. The amount of revenue deferred is based on the relative stand-alone selling price method, which includes an estimate for points not expected to be redeemed based on historical experience.
We sell gift cards with no expiration dates to customers. We do not charge administrative fees on unused gift cards. We recognize revenue from gift cards when they are redeemed by the customer. In addition, we recognize revenue on unredeemed gift cards where the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). Gift card breakage revenue is recognized in proportion, and over the same period, as actual gift card redemptions. We determine the gift card breakage rate based on historical redemption patterns. Gift card breakage is included in Net Sales in our Consolidated Statements of Income (Loss).
Revenue earned in connection with Victoria’s Secret's private label credit card arrangement is recognized over the term of the license arrangement and is included in Net Sales in our 2019 and 2018 Consolidated Statements of Income (Loss).
We also recognize revenues associated with franchise, license, wholesale and sourcing arrangements. Revenue recognized under franchise and license arrangements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers. Revenue is generally recognized under wholesale and sourcing arrangements at the time the title passes to the partner.

ITEM 7A. 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 may use derivative financial instruments like foreign currency forward contracts, cross-currency swaps and interest rate swap arrangements to manage exposure to market risks. We do not use derivative financial instruments for trading purposes.

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Foreign Exchange Rate Risk
We have operations in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations. Our Canadian dollar, British pound, Chinese Yuan, Hong Kong dollar and Euro denominated earnings are subject to exchange rate risk as substantially all our merchandise sold in Canada, the U.K., Ireland and Greater China is sourced through U.S. dollar transactions. Although we utilize foreign currency forward contracts to partially offset risks associated with our operations in Canada and the U.K., these measures may not succeed in offsetting all 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.
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 is the preservation of principal, the maintenance of liquidity and the maximization of interest income while minimizing risk. Typically, our investment portfolio is 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.
Excluding our Foreign Facilities, all of our long-term debt as of February 1, 2020 has fixed interest rates. We will from time to time adjust our exposure to interest rate risk by entering into 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 February 1, 2020, we believe that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.
The following table provides a summary of the principal value and estimated fair value of outstanding publicly traded debt and other financial instruments as of February 1, 2020 and February 2, 2019:
 
 
February 1, 2020
 
February 2, 2019
 
(in millions)
Long-term Debt:
 
 
 
Principal Value
$
5,458

 
$
5,722

Fair Value, Estimated (a)
5,555

 
5,340

Foreign Currency Cash Flow Hedges (b)
—

 
(2
)
________________
(a)
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.
(b)
Hedge arrangements are in a net 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. Typically, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
L BRANDS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page No.
Our fiscal year ends on the Saturday nearest to January 31. Fiscal years are designated in the Consolidated Financial Statements and Notes by the calendar year in which the fiscal year commences. The results for 2019 and 2018 refer to the 52-week periods ended February 1, 2020 and February 2, 2019, respectively. The results for 2017 refer to the 53-week period ended February 3, 2018.


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Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of February 1, 2020. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
Based on our assessment and the COSO criteria, management believes that the Company maintained effective internal control over financial reporting as of February 1, 2020.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting. Ernst & Young LLP’s report appears on the following page and expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of February 1, 2020.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of L Brands, Inc.

Opinion on Internal Control over Financial Reporting
We have audited L Brands, Inc.’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, L Brands, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheets of L Brands, Inc. as of February 1, 2020 and February 2, 2019 and the related Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Total Equity (Deficit), and Cash Flows for each of the three years in the period ended February 1, 2020, and the related notes and our report dated March 27, 2020 expressed an unqualified opinion thereon.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Ernst & Young     LLP    

Grandview Heights, Ohio
March 27, 2020



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of L Brands, Inc.

Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheets of L Brands, Inc. (the Company) as of February 1, 2020 and February 2, 2019, the related Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Total Equity (Deficit), and Cash Flows for each of the three years in the period ended February 1, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 1, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 27, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method for accounting for leases as of February 3, 2019 due to the adoption of the ASU 2016-02, Leases (Topic 842).

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Impairment of Store Assets
 
 
Description of the Matter
As discussed in Note 1 to the consolidated financial statements, the Company reviews long-lived store assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group.
 
 
 
The Company concluded that negative operating results for certain of the Victoria’s Secret stores were an indicator of potential impairment of the related store asset groups. As a result, the Company recognized an impairment loss on leasehold improvements and store related assets of approximately $188 million in the third quarter of 2019 and $10 million in the fourth quarter of 2019, which represented the amount by which the carrying value exceeded the estimated fair value of the assets. In addition, the Company recognized an impairment loss of $30 million in the third quarter of 2019 and $35 million in the fourth quarter of 2019 for the operating lease assets for the stores.
 
 
 
Auditing management’s long-lived store asset impairment analysis, including operating lease assets, is complex and highly judgmental due to the estimation required in determining the future cash flows used to assess recoverability of the store assets (undiscounted) and determining the fair value (discounted). The significant assumptions used include estimated future cash flows directly related to the future operation of the stores (including sales growth rate and gross margin rate), as well as the discount rate used to determine fair value. Significant assumptions used in determining the fair value of the operating lease assets include the current market rent for the remaining lease term of the related stores. These assumptions are subjective in nature and are affected by expectations about future market or economic conditions.
 
 
How We Addressed the Matter in Our Audit
We tested the design and operating effectiveness of controls over the Company’s process to identify impairment indicators, determine the undiscounted future cash flows for the stores, and determine the fair value for those store assets (including those related to operating leases) that were deemed to be impaired. Our testing included controls over management’s review of the significant assumptions described above.
 
 
 
Our testing of the Company’s impairment measurement included, among other procedures, evaluating the significant assumptions and operating data used to calculate the estimated future cash flows, as well as the estimated fair value. For example, we assessed the Company’s long-range plan that is developed by management and reviewed by the Board of Directors and serves as the basis for the future cash flows in the analysis. We also inquired of the Company’s executives to understand the business initiatives supporting the assumptions in the future cash flows, compared the future cash flows to the Company’s actual performance and assessed the historical accuracy of management’s estimates. We performed a sensitivity analysis on the significant assumptions to evaluate the changes in the fair value of the store assets that would result from changes in the assumptions. We also involved internal specialists to assist in testing the estimated market rental rates of the store leases by comparing them to market rates from comparable leases.


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Valuation of Goodwill
 
 
Description of the Matter
As discussed in Note 1 to the consolidated financial statements, goodwill is tested for impairment annually in the fourth quarter or more frequently if circumstances change. As discussed in Note 9, the Company performed an interim impairment assessment over the Victoria’s Secret reporting unit in the third quarter of 2019 due to its negative operating results and the impact on the Company’s market capitalization. The assessment was based on a weighted average of the income and market approaches, and the Company concluded that the goodwill of the Victoria’s Secret reporting unit was not impaired. During the fourth quarter, the Company performed its annual goodwill impairment assessment over the Victoria’s Secret reporting unit and estimated the fair value using only the market approach. The Company concluded that the goodwill for Victoria’s Secret was fully impaired based on its estimate of fair value and recognized a goodwill impairment charge of $690 million in the fourth quarter of 2019.
 
 
 
Auditing management’s goodwill impairment tests was complex and highly judgmental due to the significant estimation required in determining the fair value of the Victoria’s Secret reporting unit. The fair value estimate was sensitive to significant assumptions, such as estimated future cash flows (including sales growth rate and gross margin rate), discount rates, income tax rates, terminal growth rates, multiples of earnings of comparable public companies and an implied control premium relative to the Company’s market capitalization. These assumptions are subjective in nature and are affected by expectations about future market or economic conditions.
 
 
How We Addressed the Matter in Our Audit
We tested the design and operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above.
 
 
 
To test the estimated fair value of the Victoria’s Secret reporting unit in the third and fourth quarters of 2019, we involved internal specialists to assist in performing audit procedures that included, among others, assessing methodologies and testing the significant assumptions including the discount rate, the comparable public companies identified and the implied control premium. We assessed the Company’s long-range plan that is developed by management and reviewed by the Board of Directors and serves as the basis for the future cash flows in the analysis. We inquired of the Company’s executives to understand the business initiatives supporting the assumptions in the future cash flows, compared the future cash flows to the Company’s actual performance and assessed the historical accuracy of management’s estimates. We performed sensitivity analyses on the significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. In addition, we tested the reconciliation of the fair value of the reporting units to the market capitalization of the Company.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2003.

Grandview Heights, Ohio
March 27, 2020


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L BRANDS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions except per share amounts)
 
 
2019

2018

2017
Net Sales
$
12,914

 
$
13,237

 
$
12,632

Costs of Goods Sold, Buying and Occupancy
(8,464
)
 
(8,338
)
 
(7,673
)
Gross Profit
4,450

 
4,899

 
4,959

General, Administrative and Store Operating Expenses
(3,472
)
 
(3,563
)
 
(3,231
)
Impairment of Goodwill
(720
)
 
—

 
—

Loss on Divestiture of La Senza
—

 
(99
)
 
—

Operating Income
258

 
1,237

 
1,728

Interest Expense
(378
)
 
(385
)
 
(406
)
Other Income (Loss)
(61
)
 
5

 
(10
)
Income (Loss) Before Income Taxes
(181
)
 
857

 
1,312

Provision for Income Taxes
185

 
213

 
329

Net Income (Loss)
$
(366
)
 
$
644

 
$
983

Net Income (Loss) Per Basic Share
$
(1.33
)
 
$
2.33

 
$
3.46

Net Income (Loss) Per Diluted Share
$
(1.33
)
 
$
2.31

 
$
3.42



L BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)

 
2019
 
2018
 
2017
Net Income (Loss)
$
(366
)
 
$
644

 
$
983

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
Foreign Currency Translation
(5
)
 
(20
)
 
23

Reclassification of La Senza Currency Translation to Earnings
—

 
45

 
—

Unrealized Gain (Loss) on Cash Flow Hedges
2

 
10

 
(20
)
Reclassification of Cash Flow Hedges to Earnings
(4
)
 
2

 
7

Unrealized Gain on Marketable Securities
—

 
—

 
2

Total Other Comprehensive Income (Loss), Net of Tax
(7
)
 
37

 
12

Total Comprehensive Income (Loss)
$
(373
)
 
$
681

 
$
995


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

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Table of Contents

L BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions except par value amounts)
 
 
February 1,
2020
 
February 2,
2019
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
1,499

 
$
1,413

Accounts Receivable, Net
306

 
367

Inventories
1,287

 
1,248

Other
153

 
232

Total Current Assets
3,245

 
3,260

Property and Equipment, Net
2,486

 
2,818

Operating Lease Assets
3,053

 
—

Goodwill
628

 
1,348

Trade Names
411

 
411

Deferred Income Taxes
84

 
62

Other Assets
218

 
191

Total Assets
$
10,125

 
$
8,090

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
647

 
$
711

Accrued Expenses and Other
1,052

 
1,082

Current Debt
61

 
72

Current Operating Lease Liabilities
478

 
—

Income Taxes
134

 
121

Total Current Liabilities
2,372

 
1,986

Deferred Income Taxes
219

 
226

Long-term Debt
5,487

 
5,739

Long-term Operating Lease Liabilities
3,052

 
—

Other Long-term Liabilities
490

 
1,004

Shareholders’ Equity (Deficit):
 
 
 
Preferred Stock—$1.00 par value; 10 shares authorized; none issued
—

 
—

Common Stock—$0.50 par value; 1,000 shares authorized; 285 and 283 shares issued; 277 and 275 shares outstanding, respectively
142

 
141

Paid-in Capital
847

 
771

Accumulated Other Comprehensive Income
52

 
59

Retained Earnings (Deficit)
(2,182
)
 
(1,482
)
Less: Treasury Stock, at Average Cost; 8 and 8 shares, respectively
(358
)
 
(358
)
Total L Brands, Inc. Shareholders’ Equity (Deficit)
(1,499
)
 
(869
)
Noncontrolling Interest
4

 
4

Total Equity (Deficit)
(1,495
)
 
(865
)
Total Liabilities and Equity (Deficit)
$
10,125

 
$
8,090


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

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Table of Contents

L BRANDS, INC.
CONSOLIDATED STATEMENTS OF TOTAL EQUITY (DEFICIT)
(in millions except per share amounts)
 
 
Common Stock
 
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings (Accumulated Deficit)
 
Treasury
Stock, at
Average
Cost
 
Noncontrolling Interest
 
Total Equity (Deficit)
Shares
Outstanding
 
Par
Value
 
 
Balance, January 28, 2017
286

 
$
157

 
$
650

 
$
12

 
$
205

 
$
(1,753
)
 
$
2

 
$
(727
)
Net Income
—

 
—

 
—

 
—

 
983

 
—

 
—

 
983

Other Comprehensive Income
—

 
—

 
—

 
12

 
—

 
—

 
—

 
12

Total Comprehensive Income
—

 
—

 
—

 
12

 
983

 
—

 
—

 
995

Cash Dividends ($2.40 per share)
—

 
—

 
—

 
—

 
(686
)
 
—

 
—

 
(686
)
Repurchase of Common Stock
(9
)
 
—

 
—

 
—

 
—

 
(445
)
 
—

 
(445
)
Treasury Share Retirement
—

 
(18
)
 
(82
)
 
—

 
(1,936
)
 
2,036

 
—

 
—

Share-based Compensation and Other
3

 
2

 
110

 
—

 
—

 
—

 
—

 
112

Balance, February 3, 2018
280

 
$
141

 
$
678

 
$
24

 
$
(1,434
)
 
$
(162
)
 
$
2

 
$
(751
)
Cumulative Effect of Accounting Changes
—

 
—

 
—

 
(2
)
 
(26
)
 
—

 
—

 
(28
)
Balance, February 4, 2018
280

 
$
141

 
$
678

 
$
22

 
$
(1,460
)
 
$
(162
)
 
$
2

 
$
(779
)
Net Income
—

 
—

 
—

 
—

 
644

 
—

 
—

 
644

Other Comprehensive Income
—

 
—

 
—

 
37

 
—

 
—

 
—

 
37

Total Comprehensive Income
—

 
—

 
—

 
37

 
644

 
—

 
—

 
681

Cash Dividends ($2.40 per share)
—

 
—

 
—

 
—

 
(666
)
 
—

 
—

 
(666
)
Repurchase of Common Stock
(5
)
 
—

 
—

 
—

 
—

 
(196
)
 
—

 
(196
)
Share-based Compensation and Other
—

 
—

 
93

 
—

 
—

 
—

 
2

 
95

Balance, February 2, 2019
275

 
$
141

 
$
771

 
$
59

 
$
(1,482
)
 
$
(358
)
 
$
4

 
$
(865
)
Cumulative Effect of Accounting Change
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
(2
)
Balance, February 3, 2019
275

 
$
141

 
$
771

 
$
59

 
$
(1,484
)
 
$
(358
)
 
$
4

 
$
(867
)
Net Loss
—

 
—

 
—

 
—

 
(366
)
 
—

 
—

 
(366
)
Other Comprehensive Loss
—

 
—

 
—

 
(7
)
 
—

 
—

 
—

 
(7
)
Total Comprehensive Loss
—

 
—

 
—

 
(7
)
 
(366
)
 
—

 
—

 
(373
)
Cash Dividends ($1.20 per share)
—

 
—

 
—

 
—

 
(332
)
 
—

 
—

 
(332
)
Share-based Compensation and Other
2

 
1

 
76

 
—

 
—

 
—

 
—

 
77

Balance, February 1, 2020
277

 
$
142

 
$
847

 
$
52

 
$
(2,182
)
 
$
(358
)
 
$
4

 
$
(1,495
)

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

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Table of Contents

 
L BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
2019
 
2018
 
2017
Operating Activities
 
 
 
 
 
Net Income (Loss)
$
(366
)
 
$
644

 
$
983

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used for) Operating Activities:
 
 
 
 
 
Depreciation of Long-lived Assets
588

 
590

 
571

Amortization of Landlord Allowances
—

 
(43
)
 
(47
)
Share-based Compensation Expense
87

 
97

 
102

Deferred Income Taxes
(29
)
 
(52
)
 
(108
)
Impairment of Goodwill
720

 
—

 
—

Long-lived Store Asset Impairment Charges
263

 
101

 
—

Loss on Divestiture of La Senza
—

 
99

 
—

Loss on Extinguishment of Debt
40

 
—

 
45

La Senza Charges
37

 
—

 
—

Gains on Distributions from Easton Investments
(5
)
 
(8
)
 
(20
)
Unrealized Losses on Marketable Equity Securities
—

 
6

 
—

Changes in Assets and Liabilities, Net of Assets and Liabilities related to Divestiture:
 
 
 
 
 
Accounts Receivable
31

 
(63
)
 
(13
)
Inventories
(40
)
 
(40
)
 
(137
)
Accounts Payable, Accrued Expenses and Other
(93
)
 
29

 
50

Income Taxes Payable
18

 
(113
)
 
(40
)
Other Assets and Liabilities
(15
)
 
130

 
20

Net Cash Provided by Operating Activities
1,236

 
1,377

 
1,406

Investing Activities
 
 
 
 
 
Capital Expenditures
(458
)
 
(629
)
 
(707
)
Other Investing Activities
(22
)
 
20

 
9

Net Cash Used for Investing Activities
(480
)
 
(609
)
 
(698
)
Financing Activities
 
 
 
 
 
Proceeds from Issuance of Long-term Debt, Net of Issuance Costs
486

 
—

 
495

Payments of Long-term Debt
(799
)
 
(52
)
 
(540
)
Borrowings from Secured Revolving Facility
12

 
92

 
—

Repayments of Secured Revolving Facility
(12
)
 
(92
)
 
—

Borrowings from Foreign Facilities
167

 
172

 
96

Repayments of Foreign Facilities
(162
)
 
(109
)
 
(44
)
Dividends Paid
(332
)
 
(666
)
 
(686
)
Repurchases of Common Stock
—

 
(198
)
 
(446
)
Tax Payments related to Share-based Awards
(13
)
 
(13
)
 
(32
)
Proceeds from Exercise of Stock Options
1

 
1

 
38

Financing Costs and Other
(14
)
 
(7
)
 
(8
)
Net Cash Used for Financing Activities
(666
)
 
(872
)
 
(1,127
)
Effects of Exchange Rate Changes on Cash
(4
)
 
2

 
—

Net Increase (Decrease) in Cash and Cash Equivalents
86

 
(102
)

(419
)
Cash and Cash Equivalents, Beginning of Year
1,413

 
1,515

 
1,934

Cash and Cash Equivalents, End of Year
$
1,499

 
$
1,413

 
$
1,515


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

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Table of Contents

L BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies
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, personal care, beauty and home fragrance products. The Company sells its merchandise through company-owned specialty retail stores in the U.S., Canada, U.K., Ireland and Greater China, and through its websites and other channels. The Company's other international operations are primarily through franchise, license and wholesale partners. The Company currently operates the following retail brands:
•
Victoria’s Secret
•
PINK
•
Bath & Body Works
On February 20, 2020, the Company and SP VS Buyer LP ("Sycamore''), an affiliate of Sycamore Partners Management, L.P., entered into a Transaction Agreement pursuant to which, among other things, the Company will transfer certain assets and liabilities relating to its business conducted under the Victoria's Secret and PINK brands to a newly formed subsidiary of the Company ("Victoria's Secret Holdco'') and sell 55% of the equity interests of Victoria's Secret Holdco to Sycamore. The Company will retain 45% of the equity interests of Victoria's Secret Holdco. For additional information, see Note 23, "Subsequent Events."
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 31. As used herein, “2019” and "2018" refer to the 52-week periods ended February 1, 2020 and February 2, 2019, respectively. “2017” refers to the 53-week period ended February 3, 2018.
Basis of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company accounts for investments in unconsolidated entities where it exercises significant influence, but does not have control, using the equity method. Under the equity method of accounting, the Company recognizes its share of the investee's net income or loss. Losses are only recognized to the extent the Company has positive carrying value related to the investee. Carrying values are only reduced below zero if the Company has an obligation to provide funding to the investee. The Company’s share of net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The Company’s share of net income or loss of all other unconsolidated entities is included in Other Income (Loss) in the Consolidated Statements of Income (Loss). The Company’s equity method investments are required to be reviewed for impairment when it is determined there may be an other than temporary loss in value.
On January 6, 2019, the Company completed the sale of the La Senza business. For additional information, see Note 5, "Restructuring Activities."
Cash and Cash Equivalents
Cash and Cash Equivalents include cash on hand, demand deposits with financial institutions and highly liquid investments with original maturities of less than 90 days. The Company’s outstanding checks, which totaled $15 million as of February 1, 2020 and $13 million as of February 2, 2019, are included in Accounts Payable on the Consolidated Balance Sheets.
Concentration of Credit Risk
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. Typically, the Company’s investment portfolio is primarily comprised of U.S. government obligations, U.S. Treasury and AAA-rated money market funds, commercial paper and bank deposits.
The Company also periodically reviews the relative credit standing of franchise, license and wholesale partners and other entities to which the Company grants credit terms in the normal course of business. The Company records an allowance for uncollectable accounts when it becomes probable that the counterparty will be unable to pay.

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Table of Contents

Inventories
Inventories are principally valued at the lower of cost or net realizable value, on a weighted-average cost basis.
The Company records valuation adjustments to its inventories if the cost of inventory on hand exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand, market conditions and analysis of historical experience.
The Company also records inventory loss adjustments for estimated physical inventory losses that have occurred since the date of the last physical inventory. These estimates are based on management’s analysis of historical results and operating trends.
Advertising Costs
Advertising and marketing costs are expensed at the time the promotion first appears in media, in the store or when the advertising is mailed. Advertising and marketing costs totaled $428 million for 2019, $476 million for 2018 and $383 million for 2017.
Property and Equipment
The Company’s property and equipment are recorded at cost and depreciation is computed on a straight-line basis using the following depreciable life ranges:
Category of Property and Equipment
 
Depreciable Life Range
Software, including software developed for internal use
 
3 - 5 years
Store related assets
 
3 - 10 years
Leasehold improvements
 
Shorter of lease term or 10 years
Non-store related building and site improvements
 
10 - 15 years
Other property and equipment
 
20 years
Buildings
 
30 years


When a decision has been made to dispose of property and equipment prior to the end of the previously estimated useful life, depreciation estimates are revised to reflect the use of the asset over the shortened estimated useful life. The Company’s cost of assets sold or retired and the related accumulated depreciation are removed from the accounts with any resulting gain or loss included in net income (loss). Maintenance and repairs are charged to expense as incurred. Major renewals and betterments that extend useful lives are capitalized.
Long-lived store assets, which include leasehold improvements, store related assets and operating lease assets (subsequent to the adoption of ASC 842, Leases), are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Store assets are grouped at the lowest level for which they are largely independent of other assets or asset groups. If the estimated undiscounted future cash flows related to the asset group are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying value and the estimated fair value, determined by the estimated discounted future cash flows of the asset group. For operating lease assets, the Company determines the fair value of the assets by comparing the contractual rent payments to estimated market rental rates.  An individual asset within an asset group is not impaired below its estimated fair value. The fair value of long-lived store assets are determined using Level 3 inputs within the fair value hierarchy.
Leases and Leasehold Improvements
In the first quarter of 2019, the Company adopted ASC 842, Leases, using the modified retrospective approach. Results for 2019 are presented under ASC 842, while the prior period consolidated financial statements have not been adjusted and continue to be presented under the accounting standard in effect at that time.
The Company leases retail space, office space, warehouse facilities, storage space, equipment and certain other items under operating leases. A substantial portion of the Company’s leases are operating leases for its stores, which generally have an initial term of ten years. Annual store rent consists of a fixed minimum amount and/or variable rent based on a percentage of sales exceeding a stipulated amount. Store lease terms generally also require additional payments covering certain operating costs such as common area maintenance, utilities, insurance and taxes. Certain leases contain predetermined fixed escalations of minimum rentals or require periodic adjustments of minimum rentals depending on an index or rate. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property.

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Table of Contents

At lease commencement, the Company recognizes an asset for the right to use the leased asset and a liability based on the present value of the unpaid fixed lease payments. Operating lease costs are recognized on a straight-line basis as lease expense over the lease term. Variable lease payments associated with the Company's leases are recognized upon occurrence of the event or circumstance on which the payments are assessed. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet, and lease expense is recognized on a straight-line basis over the lease term.
The Company uses its incremental borrowing rate, adjusted for collateral, to determine the present value of its unpaid lease payments.
The Company’s store leases often include options to extend the initial term or to terminate the lease prior to the end of the initial term. The exercise of these options is typically at the sole discretion of the Company. These options are included in determining the initial lease term at lease commencement if the Company is reasonably certain to exercise the option. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term.
The Company also has leasehold improvements which are amortized over the shorter of their estimated useful lives or the period from the date the assets are placed in service to the end of the initial lease term. Leasehold improvements made after the inception of the initial lease term are depreciated over the shorter of their estimated useful lives or the remaining lease term, including renewal periods, if reasonably assured.
Goodwill and Intangible Assets
The Company has certain intangible assets resulting from business combinations and acquisitions that are recorded at cost.
Goodwill is reviewed for impairment at the reporting unit level each year in the fourth quarter, and may be reviewed more frequently if certain events occur or circumstances change. The Company has the option to either first perform a qualitative assessment to determine whether it is more likely than not that each reporting unit's fair value is less than its carrying value (including goodwill), or to proceed directly to the quantitative assessment which requires a comparison of the reporting unit's fair value to its carrying value (including goodwill). If the Company determines that the fair value of a reporting unit is less than its carrying value, the Company recognizes an impairment charge equal to the difference, not to exceed the total amount of goodwill allocated to the reporting unit. The Company's reporting units are determined in accordance with the provisions of ASC 350, Intangibles - Goodwill and Other.
Intangible assets with indefinite lives represent the Victoria’s Secret and Bath & Body Works trade names. Intangible assets with indefinite lives are reviewed for impairment each year in the fourth quarter and may be reviewed more frequently if certain events occur or circumstances change. The Company has the option to either first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired, or to proceed directly to the quantitative assessment which requires a comparison of the fair value of the intangible asset to its carrying value. To determine if the fair value of the asset is less than its carrying amount, the Company will estimate the fair value, usually determined by the relief from royalty method under the income approach, and compare that value with its carrying amount. If the carrying value of the intangible asset exceeds its fair value, the Company recognizes an impairment charge equal to the difference.
Foreign Currency Translation
The functional currency of the Company’s foreign operations is generally the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect as of the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period. The Company’s resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Accumulated foreign currency translation adjustments are reclassified to net income (loss) when realized upon sale or upon complete, or substantially complete, liquidation of the investment in the foreign entity.
Derivative Financial Instruments
The Company uses derivative financial instruments to manage exposure to foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. All derivative instruments are recorded on the Consolidated Balance Sheets at fair value.
For derivative financial instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into earnings in the same period during which the hedged item affects earnings. Gains and losses that are reclassified into earnings are recognized in the same line item on the Consolidated Statement of Income (Loss) as the underlying hedged item.

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For derivative financial instruments that are not designated as hedging instruments, the gain or loss on the derivative instrument is recognized in current earnings in Other Income (Loss) on the Consolidated Statements of Income (Loss).
Fair Value
The authoritative guidance included in ASC 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This authoritative guidance further 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 Company estimates the fair value of financial instruments, property and equipment and goodwill and intangible assets in accordance with the provisions of ASC 820.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, taxes currently payable or refundable are accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company’s Consolidated Statement of Income (Loss) in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
In determining the Company’s provision for income taxes, the Company considers permanent differences between book and tax income and statutory income tax rates. The Company’s effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures and the level of earnings.
The Company follows a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and for which actual outcomes may differ from forecasted outcomes. The Company's policy is to include interest and penalties related to uncertain tax positions in income tax expense.
The Company’s income tax returns, like those of most companies, are periodically audited by domestic and foreign tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. A number of years may elapse before a particular matter for which the Company has established an accrual is audited and fully resolved or clarified. The Company adjusts its tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. The Company includes its tax contingencies accrual, including accrued penalties and interest, in Other Long-term Liabilities on the Consolidated Balance Sheets unless the liability is expected to be paid within one year. Changes to the tax contingencies accrual, including accrued penalties and interest, are included in Provision for Income Taxes on the Consolidated Statements of Income (Loss).

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Self-Insurance
The Company is self-insured for medical, workers’ compensation, property, general liability and automobile liability up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred but not reported (“IBNR”) claims. IBNR claims are estimated using historical claim information and actuarial estimates.
Noncontrolling Interest
Noncontrolling interest represents the portion of equity interests of consolidated affiliates not owned by the Company.
Share-based Compensation
The Company recognizes all share-based payments to employees and directors as compensation cost over the service period based on their estimated fair value on the date of grant. The Company estimates award forfeitures at the time awards are granted and adjusts, if necessary, in subsequent periods based on historical experience and expected future forfeitures. 
Compensation cost is recognized over the service period for the fair value of awards that actually vest. Compensation expense for awards without a performance condition is recognized, net of estimated forfeitures, using a single award approach (each award is valued as one grant, irrespective of the number of vesting tranches). Compensation expense for awards with a performance condition is recognized, net of estimated forfeitures, using a multiple award approach (each vesting tranche is valued as one grant).
Revenue Recognition
In the first quarter of 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. Results for 2019 and 2018 are presented under ASC 606, while results for 2017 have not been adjusted and continue to be presented under the accounting standards in effect for that period.
The Company recognizes revenue based on the amount it expects to receive when control of the goods or services is transferred to the customer. The Company recognizes sales upon customer receipt of merchandise, which for direct channel revenues reflect an estimate of shipments that have not yet been received by the customer based on shipping terms and historical delivery times. The Company’s shipping and handling revenues are included in Net Sales with the related costs included in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss). The Company also provides a reserve for projected merchandise returns based on historical experience. Net Sales exclude sales and other similar taxes collected from customers.
The Company offers certain loyalty programs that allow customers to earn points based on purchasing activity. As customers accumulate points and reach point thresholds, they can use the points to purchase merchandise in stores or online. The Company allocates revenue to points earned on qualifying purchases and defers recognition until the points are redeemed. The amount of revenue deferred is based on the relative stand-alone selling price method, which includes an estimate for points not expected to be redeemed based on historical experience.
The Company sells gift cards with no expiration dates to customers. The Company does not charge administrative fees on unused gift cards. The Company recognizes revenue from gift cards when they are redeemed by the customer. In addition, the Company recognizes revenue on unredeemed gift cards where the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions (gift card breakage). Gift card breakage revenue is recognized in proportion, and over the same period, as actual gift card redemptions. The Company determines the gift card breakage rate based on historical redemption patterns. Gift card breakage is included in Net Sales in the Consolidated Statements of Income (Loss).
Revenue earned in connection with Victoria’s Secret's private label credit card arrangement is recognized over the term of the license arrangement and is included in Net Sales in the 2019 and 2018 Consolidated Statements of Income (Loss).
The Company also recognizes revenues associated with franchise, license, wholesale and sourcing arrangements. Revenue recognized under franchise and license arrangements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers. Revenue is generally recognized under wholesale and sourcing arrangements at the time the title passes to the partner.
Costs of Goods Sold, Buying and Occupancy
The Company’s costs of goods sold include merchandise costs, net of discounts and allowances, freight and inventory shrinkage. The Company’s buying and occupancy expenses primarily include payroll, benefit costs and operating expenses for its buying departments and distribution network, rent, common area maintenance, real estate taxes, utilities, maintenance, fulfillment expenses and depreciation for the Company’s stores, warehouse facilities and equipment.

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General, Administrative and Store Operating Expenses
The Company’s general, administrative and store operating expenses primarily include payroll and benefit costs for its store-selling and administrative departments (including corporate functions), marketing, advertising and other operating expenses not specifically categorized elsewhere in the Consolidated Statements of Income (Loss).
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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
Leases
In February 2016, the FASB issued ASC 842, Leases, which requires companies classified as lessees to account for most leases on their balance sheet but recognize expense on their income statement in a manner similar to legacy accounting. The standard also requires enhanced quantitative and qualitative disclosures, including significant judgments made by management, to provide greater insight into the extent of expense recognized and expected to be recognized from existing leases. In July 2018, the FASB approved an amendment to the standard that provides companies a modified retrospective transition option that did not require earlier periods to be restated upon adoption.
The Company adopted the standard in the first quarter of 2019 under the modified retrospective approach. As allowed by the new standard, the Company elected the package of transition practical expedients but elected to not apply the hindsight practical expedient to its leases at transition.
Upon adoption at the beginning of 2019, the Company recorded operating lease liabilities of $3.7 billion and operating lease assets for its leases of $3.3 billion. The operating lease assets are net of $470 million of liabilities for deferred rent and unamortized landlord construction allowances that were previously recorded as Other Long-term Liabilities on the Consolidated Balance Sheet. The Company also recorded a decrease to opening retained earnings, net of tax, of $2 million. The adoption of the standard did not materially impact the Consolidated Statements of Income (Loss) or Cash Flows. See Note 8, “Leases” for additional disclosures required by the new standard.
Hedging Activities
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which is intended to better align risk management activities and financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements. The Company adopted the standard in the first quarter of 2019. The adoption of this standard did not have a material impact on the Company's consolidated results of operations, financial position or cash flows.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill. The standard eliminates the second step from the goodwill impairment test, which required a hypothetical purchase price allocation to determine the implied fair value of goodwill. Under the new standard, the goodwill impairment charge is the excess of the reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company adopted this standard in the third quarter of 2019 and performed its interim and annual goodwill impairment assessments in accordance with ASU 2017-04. For additional information, see Note 9, "Goodwill and Trade Names."
Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires the use of a forward-looking expected loss impairment model for accounts receivable and certain other financial instruments. This guidance will be effective beginning in fiscal 2020, with early adoption permitted. The Company does not expect this standard to have a material impact on its consolidated results of operations, financial position or cash flows.


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3. Revenue Recognition
In the first quarter of 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach. Results for 2019 and 2018 are presented under ASC 606, while results for 2017 have not been adjusted and continue to be presented under the accounting standards in effect in that period.
Accounts receivable, net from revenue-generating activities were $152 million as of February 1, 2020 and $150 million as of February 2, 2019. Accounts receivable primarily relate to amounts due from the Company's franchise, license and wholesale partners. Under these arrangements, payment terms are typically 60 to 90 days.
The Company records deferred revenue when cash payments are received in advance of transfer of control of goods or services. Deferred revenue primarily relates to gift cards, loyalty and private label credit card programs and direct channel shipments, which are all impacted by seasonal and holiday-related sales patterns. The balance of deferred revenue was $342 million as of February 1, 2020 and $331 million as of February 2, 2019. The Company recognized $218 million as revenue in 2019 from amounts recorded as deferred revenue at the beginning of the period. As of February 1, 2020, the Company recorded deferred revenues of $330 million within Accrued Expenses and Other, and $12 million within Other Long-term Liabilities on the Consolidated Balance Sheet.
The following table provides a disaggregation of Net Sales for 2019, 2018 and 2017:
 
2019
 
2018
 
2017 (a)
 
(in millions)
Victoria’s Secret Stores (b)
$
5,112

 
$
5,628

 
$
5,879

Victoria’s Secret Direct
1,693

 
1,747

 
1,508

Total Victoria’s Secret
6,805

 
7,375

 
7,387

Bath & Body Works Stores (b)
4,212

 
3,907

 
3,589

Bath & Body Works Direct
958

 
724

 
559

Total Bath & Body Works
5,170

 
4,631

 
4,148

Victoria's Secret and Bath & Body Works International (c)
600

 
605

 
502

Other (d)
339

 
626

 
595

Total Net Sales
$
12,914

 
$
13,237

 
$
12,632

_______________
(a)
2017 represents a 53-week fiscal year.
(b)
Includes company-owned stores in the U.S. and Canada.
(c)
Includes company-owned stores in the U.K., Ireland and Greater China, direct sales in Greater China and wholesale sales, royalties and other fees associated with non-company owned stores.
(d)
Includes wholesale revenues from the Company's sourcing function. Results for 2018 and 2017 also include store and direct sales for Henri Bendel and La Senza.

4. 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.

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The following table provides shares utilized for the calculation of basic and diluted earnings per share for 2019, 2018 and 2017:
 
2019
 
2018
 
2017 (a)
 
(in millions)
Weighted-average Common Shares:
 
 
 
 
 
Issued Shares
284

 
283

 
308

Treasury Shares
(8
)
 
(7
)
 
(24
)
Basic Shares
276

 
276

 
284

Effect of Dilutive Options and Restricted Stock
—

 
3

 
3

Diluted Shares
276

 
279

 
287

Anti-dilutive Options and Awards (b)
9

 
5

 
4

 ________________
(a)
In November 2017, the Company retired 36 million shares of its Treasury Stock.
(b)
These options and awards were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For 2019, the dilutive impact of outstanding options and awards were excluded from dilutive shares as a result of the Company's net loss for the period.

5. Restructuring Activities
La Senza
On January 6, 2019, in an effort to increase shareholder value and in order to focus on its larger core businesses, the Company divested its ownership interest in La Senza to an affiliate of Regent LP, a global private equity firm. Regent LP assumed La Senza’s operating assets and liabilities in exchange for potential future consideration upon the sale or other monetization of La Senza, as defined in the agreement.  In the fourth quarter of 2018, the Company recognized a pre-tax loss on the divestiture of $99 million, primarily related to $45 million of accumulated foreign currency translation adjustments reclassified into earnings that were previously recognized as a component of equity, as well as losses related to the transfer of the net working capital and long-lived store assets to the buyer. The loss is included in Loss on Divestiture of La Senza in the 2018 Consolidated Statement of Income (Loss). The after-tax loss on the divestiture was $55 million, which includes $44 million of tax benefits primarily associated with the recognition of previously unrecognized deferred tax assets. In 2019, the Company received cash proceeds of $12 million related to a net working capital settlement from the divestiture. These proceeds are included within Investing Activities in the 2019 Consolidated Statement of Cash Flows.
In conjunction with the transaction, certain of the Company's subsidiaries have remaining contingent obligations related to La Senza lease payments under the terms of existing noncancelable leases. In 2019, the Company's subsidiaries recognized pre-tax non-cash charges of $37 million to increase the reserves for potential exposure related to the La Senza business. These charges are included in Other Income (Loss) in the 2019 Consolidated Statement of Income (Loss). For additional information, see Note 17, "Commitments and Contingencies."
Additionally, the Company continues to provide technology and other operational support to La Senza for a period of time expected to continue into fiscal 2020.

Henri Bendel
The Company announced the closure of Henri Bendel in the third quarter of 2018. As a result, the Company recognized a pre-tax charge, primarily cash, consisting of lease termination costs, severance and other costs of $20 million in the third quarter of 2018. In the fourth quarter of 2018, the Company recognized an additional pre-tax charge of $3 million, primarily related to contract termination and employee retention costs. Restructuring charges of $14 million and $9 million are included in Costs of Goods Sold, Buying and Occupancy and General, Administrative and Store Operating Expenses, respectively, in the 2018 Consolidated Statement of Income (Loss).
 
6. Inventories
The following table provides details of inventories as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Finished Goods Merchandise
$
1,152

 
$
1,107

Raw Materials and Merchandise Components
135

 
141

Total Inventories
$
1,287

 
$
1,248



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7. Property and Equipment, Net
The following table provides details of property and equipment, net as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Land and Improvements
$
116

 
$
116

Buildings and Improvements
496

 
492

Furniture, Fixtures, Software and Equipment
3,861

 
3,725

Leasehold Improvements
2,018

 
2,277

Construction in Progress
122

 
123

Total
6,613

 
6,733

Accumulated Depreciation and Amortization
(4,127
)
 
(3,915
)
Property and Equipment, Net
$
2,486

 
$
2,818


Depreciation expense was $588 million in 2019, $590 million in 2018 and $571 million in 2017.
Long-Lived Store Assets
In 2019 and 2018, the Company concluded that the negative operating results for certain of its Victoria's Secret stores were an indicator of potential impairment of the related store asset groups. The Company determined that the estimated undiscounted future cash flows were less than the carrying values and, as a result, determined the estimated fair values of the store asset groups using estimated discounted future cash flows and estimated market rental rates. Long-lived store asset impairment charges are included in Costs of Goods Sold, Buying & Occupancy in the Consolidated Statements of Income (Loss).
The following table provides long-lived store asset impairment charges included in the Consolidated Statements of Income (Loss) for 2019 and 2018:
 
Store Asset
Impairment
 
Operating Lease
Asset Impairment
 
Total
Impairment
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Victoria's Secret (a)
$
47

 
$
70

 
$
4

 
$
—

 
$
51

 
$
70

Victoria's Secret and Bath & Body Works International (b)
151

 
31

 
61

 
—

 
212

 
31

Total
$
198

 
$
101

 
$
65

 
$
—

 
$
263

 
$
101

 ________________
(a)
Includes stores in the U.S. and Canada.
(b)
Includes stores in Greater China, the U.K. and Ireland.

8. Leases
In the first quarter of 2019, the Company adopted ASC 842, Leases, using the modified retrospective approach. Results for 2019 are presented under ASC 842, while prior periods consolidated financial statements have not been adjusted and continue to be presented under the accounting standards in effect at that time.
For leases entered into or reassessed after the adoption of the new standard, the Company has elected the practical expedient allowed by the standard to account for all fixed consideration in a lease as a single lease component. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed operating costs such as common area maintenance and utilities.
The Company has provided residual value guarantees in connection with noncancelable operating leases of certain assets. For additional information, see Note 17, “Commitments and Contingencies.”

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The following table provides the components of lease cost for operating leases for 2019:
 
(in millions)
Operating Lease Costs (a)
$
769

Variable Lease Costs
100

Short-term Lease Costs
30

Total Lease Cost
$
899

_______________
(a)
As discussed in Note 7, "Property and Equipment, Net," the Company recognized operating lease asset impairment charges of $65 million during 2019, which is included as additional operating lease costs.

The following table provides future maturities of operating lease liabilities as of February 1, 2020:
Fiscal Year
(in millions)
2020
$
674

2021
693

2022
619

2023
558

2024
481

Thereafter
1,475

Total Lease Payments
$
4,500

Less: Interest
(970
)
Present Value of Operating Lease Liabilities
$
3,530


As of February 1, 2020, the Company has additional operating lease commitments that have not yet commenced of approximately $264 million.
The following table provides the weighted-average remaining lease term and discount rate for operating leases with lease liabilities as of February 1, 2020:
Weighted Average Remaining Lease Term (years)
7.4

Weighted Average Discount Rate
6.2
%

During 2019, the Company paid $708 million for operating lease liabilities recorded on the balance sheet. These payments are included within the Operating Activities section of the 2019 Consolidated Statement of Cash Flows.
During 2019, the Company obtained $313 million of additional lease assets as a result of new operating lease obligations.
Finance Leases
The Company leases certain fulfillment equipment under finance leases that expire at various dates through 2023. The Company records finance lease assets, net of accumulated amortization, in Property and Equipment, Net on the Consolidated Balance Sheet. Additionally, the Company records finance lease liabilities in Accrued Expenses and Other and Other Long-term Liabilities on the Consolidated Balance Sheet. Finance lease costs are comprised of the straight-line amortization of the lease asset and the accretion of interest expense under the effective interest method.
The Company recorded $21 million and $26 million of finance lease assets, net of accumulated amortization, in Property and Equipment, Net on the February 1, 2020 and February 2, 2019 Consolidated Balance Sheets, respectively. Additionally, the Company recorded finance lease liabilities of $8 million in Accrued Expenses and Other and $13 million in Other Long-term Liabilities on the February 1, 2020 Consolidated Balance Sheet, and $8 million in Accrued Expenses and Other and $19 million in Other Long-term Liabilities on the February 2, 2019 Consolidated Balance Sheet.
Asset Retirement Obligations
The Company has asset retirement obligations related to certain company-owned international stores that contractually obligate the Company to remove leasehold improvements at the end of a lease. The Company's liabilities for asset retirement obligations totaled $22 million as of February 1, 2020 and $18 million as of February 2, 2019. These liabilities are included in Other Long-term Liabilities on the Consolidated Balance Sheets.

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Disclosures for 2018 and 2017
The following table provides rent expense, as presented under the prior accounting standard, for 2018 and 2017:
 
2018
 
2017
 
(in millions)
Store Rent:
 
 
 
Fixed Minimum
$
663

 
$
642

Contingent
72

 
67

Total Store Rent
735

 
709

Office, Equipment and Other
98

 
94

Gross Rent Expense
833

 
803

Sublease Rental Income
(2
)
 
(2
)
Total Rent Expense
$
831

 
$
801



9. Goodwill and Trade Names
Goodwill
The following table provides detail regarding the composition of goodwill as of February 1, 2020 and February 2, 2019: 
 
February 1, 2020
 
February 2, 2019
 
(in millions)
Bath & Body Works
$
628

 
$
628

Victoria's Secret
—

 
690

Victoria's Secret and Bath & Body Works International
—

 
30

Goodwill
$
628

 
$
1,348


As of the end of the third quarter of 2019, the Company performed a quantitative interim impairment assessment over the Victoria's Secret and Greater China reporting units. An interim assessment was performed in consideration of the negative performance of these reporting units and their impact on the sustained decline in the Company's market capitalization. Further, for the Greater China reporting unit, the Company considered the results of the long-lived store asset impairment assessment.
The interim assessment concluded that the fair value of the Victoria's Secret reporting unit, which was based on a weighted average of the income and market approaches, exceeded its carrying value. However, the fair value of the Greater China reporting unit, which was based on the income approach, did not exceed its carrying value. Accordingly, the Company recognized a goodwill impairment charge of $30 million in the third quarter of 2019 related to the Greater China reporting unit. This charge is included in Impairment of Goodwill in the 2019 Consolidated Statement of Income (Loss).
As of the end of the fourth quarter of 2019, the Company performed its annual goodwill impairment assessment over the Bath & Body Works and Victoria's Secret reporting units. The fair value of the Bath & Body Works reporting unit was estimated using a weighted average of the income and market approaches. As a result of continued fourth quarter declines in business performance and increased risk, volatility and uncertainty related to the Victoria's Secret reporting unit, the Company estimated its fair value using a market approach.
The annual assessment concluded that the fair value of the Victoria's Secret reporting unit did not exceed its carrying value. Accordingly, the Company recognized a goodwill impairment charge of $690 million in the fourth quarter of 2019 related to the Victoria's Secret reporting unit. This charge is included in Impairment of Goodwill in the 2019 Consolidated Statement of Income (Loss). The annual assessment also concluded that the fair value of the Bath & Body Works reporting unit exceeded its carrying value.
The market approach is based on earnings multiples of selected guideline public companies, while the income approach is based on estimated discounted future cash flows. The approaches, which are determined using Level 3 inputs within the fair value hierarchy, incorporated a number of significant assumptions and judgments including, but not limited to, estimated future cash flows, multiples of earnings of similar public companies, discount rates, income tax rates, terminal growth rates and an implied control premium relative to the Company's market capitalization.

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Intangible Assets—Indefinite Lives
Intangible assets with indefinite lives represent the Victoria’s Secret and Bath & Body Works trade names. The following table provides additional detail regarding the composition of trade names as of February 1, 2020 and February 2, 2019:
 
February 1, 2020
 
February 2, 2019
 
(in millions)
Victoria's Secret
$
246

 
$
246

Bath & Body Works
165

 
165

Trade Names
$
411

 
$
411


As of the end of the third quarter of 2019, the Company performed a quantitative interim impairment assessment of the Victoria's Secret trade name. An interim assessment was performed in consideration of the negative performance of Victoria's Secret. To estimate the fair value of the Victoria's Secret trade name, the Company used the relief from royalty method under the income approach. The interim assessment concluded that the fair value of the Victoria's Secret trade name exceeded its carrying value.
As of the end of the fourth quarter of 2019, the Company performed its annual impairment assessment of the Victoria's Secret and Bath & Body Works trade names. To estimate the fair value of the trade names, the Company used the relief from royalty method under the income approach. The annual assessment concluded that the fair values of the trade names were in excess of their respective carrying values.

10. Equity Investments
The Company has land and other investments in Easton, a planned community in Columbus, Ohio, that integrates office, hotel, retail, residential and recreational space. These investments, totaling $118 million as of February 1, 2020 and $89 million as of February 2, 2019, are recorded in Other Assets on the Consolidated Balance Sheets.
Included in the Company’s Easton investments are equity interests in Easton Town Center, LLC (“ETC”) and Easton Gateway, LLC (“EG”), entities that own and develop commercial entertainment and shopping centers. The Company’s investments in ETC and EG are accounted for using the equity method of accounting. The Company has a majority financial interest in ETC and EG, but another unaffiliated member manages them, and certain significant decisions regarding ETC and EG require the consent of unaffiliated members in addition to the Company.
The Company received cash distributions of $7 million, $16 million and $29 million during 2019, 2018 and 2017, respectively, from certain of its Easton investments which are included as return of capital within Investing Activities of the Consolidated Statements of Cash Flows. As a result of these distributions, the Company recognized pre-tax gains totaling $5 million, $8 million and $20 million during 2019, 2018 and 2017, respectively, which are included in Other Income (Loss) in the Consolidated Statements of Income (Loss).
11. Accrued Expenses and Other
The following table provides additional information about the composition of Accrued Expenses and Other as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2, 2019
 
(in millions)
Deferred Revenue, Principally from Gift Card Sales
$
330

 
$
316

Compensation, Payroll Taxes and Benefits
216

 
215

Interest
94

 
92

Taxes, Other than Income
74

 
78

Accrued Claims on Self-insured Activities
40

 
45

Rent
35

 
39

Returns Reserve
23

 
27

Other
240

 
270

Total Accrued Expenses and Other
$
1,052

 
$
1,082




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12. Income Taxes
Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.
On December 22, 2017, the Tax Cuts and Jobs Act (the "TCJA") was enacted into law. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TCJA reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The following table provides the components of the Company’s provision for income taxes for 2019, 2018 and 2017:
 
2019
 
2018
 
2017
 
(in millions)
Current:
 
 
 
 
 
U.S. Federal
$
156

 
$
212

 
$
366

U.S. State
35

 
37

 
49

Non-U.S.
23

 
16

 
22

Total
214

 
265

 
437

Deferred:
 
 
 
 
 
U.S. Federal
(7
)
 
(4
)
 
(114
)
U.S. State
1

 
2

 
6

Non-U.S.
(23
)
 
(50
)
 
—

Total
(29
)
 
(52
)
 
(108
)
Provision for Income Taxes
$
185

 
$
213

 
$
329



The non-U.S. component of pre-tax income, arising principally from overseas operations, was a loss of $226 million, loss of $14 million and income of $99 million for 2019, 2018 and 2017, respectively.
The following table provides the reconciliation between the statutory federal income tax rate and the effective tax rate for 2019, 2018 and 2017:
 
2019
 
2018
 
2017
Federal Income Tax Rate
21.0
%
 
21.0
%
 
33.7
%
State Income Taxes, Net of Federal Income Tax Effect
(23.0
%)
 
6.0
%
 
3.6
%
Impact of Non-U.S. Operations
(5.7
%)
 
2.3
%
 
(1.4
%)
Goodwill Impairment
(80.8
%)
 
—
%
 
—
%
Change in Valuation Allowance
(18.5
%)
 
(1.1
%)
 
(0.1
%)
Divestiture of La Senza
—
%
 
(2.7
%)
 
—
 %
U.S. Net Deferred Tax Liability Remeasurement
—
%
 
—
%
 
(12.1
%)
Deemed Mandatory Repatriation
—
%
 
—
%
 
5.1
%
Share-Based Compensation
(7.7
%)
 
1.0
%
 
(1.0
%)
Uncertain Tax Positions
12.3
%
 
(0.5
%)
 
(1.2
%)
Other Items, Net
0.5
%
 
(1.1
%)
 
(1.5
%)
Effective Tax Rate
(101.9
%)
 
24.9
%
 
25.1
%


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Deferred Taxes
The following table provides the effect of temporary differences that cause deferred income taxes as of February 1, 2020 and February 2, 2019. Deferred tax assets and liabilities represent the future effects on income taxes resulting from temporary differences and carryforwards at the end of the respective year.
 
February 1, 2020
 
February 2, 2019
 
Assets
 
Liabilities
 
Total
 
Assets
 
Liabilities
 
Total
 
(in millions)
Operating Loss Carryforwards
$
247

 
$
—

 
$
247

 
$
217

 
$
—

 
$
217

Non-qualified Retirement Plan
62

 
—

 
62

 
64

 
—

 
64

Leases
746

 
(712
)
 
34

 
50

 
—

 
50

Share-based Compensation
40

 
—

 
40

 
47

 
—

 
47

Deferred Revenue
20

 
—

 
20

 
28

 
—

 
28

Property and Equipment
—

 
(230
)
 
(230
)
 
—

 
(278
)
 
(278
)
Trade Names and Other Intangibles
—

 
(94
)
 
(94
)
 
—

 
(93
)
 
(93
)
Other Assets
—

 
(60
)
 
(60
)
 
—

 
(60
)
 
(60
)
Other, Net
70

 
(20
)
 
50

 
60

 
(27
)
 
33

Valuation Allowance
(204
)
 
—

 
(204
)
 
(172
)
 
—

 
(172
)
Total Deferred Income Taxes
$
981

 
$
(1,116
)
 
$
(135
)
 
$
294

 
$
(458
)
 
$
(164
)

As of February 1, 2020, the Company had available for state income tax purposes net operating loss carryforwards which expire, if unused, in the years 2020 through 2039. For those states where the Company has determined that it is more likely than not that the state net operating loss carryforwards will not be realized, a valuation allowance has been provided.
As of February 1, 2020, the Company had available for non-U.S. tax purposes net operating loss carryforwards which have an indefinite life and net operating loss carryforwards which expire, if unused, in the years 2028 through 2039. For certain jurisdictions where the Company has determined that it is more likely than not that the net operating loss carryforwards will not be realized, a valuation allowance has been provided on those net operating loss carryforwards as well as other net deferred tax assets.
Income tax payments were $228 million for 2019, $324 million for 2018 and $494 million for 2017.
Uncertain Tax Positions
The following table summarizes the activity related to the Company’s unrecognized tax benefits for U.S. federal, state & non-U.S. tax jurisdictions for 2019, 2018 and 2017, without interest and penalties:
 
2019
 
2018
 
2017
 
(in millions)
Gross Unrecognized Tax Benefits, as of the Beginning of the Fiscal Year
$
114

 
$
67

 
$
90

Increases to Unrecognized Tax Benefits for Prior Years
15

 
35

 
3

Decreases to Unrecognized Tax Benefits for Prior Years
(22
)
 
(25
)
 
(22
)
Increases to Unrecognized Tax Benefits as a Result of Current Year Activity
3

 
44

 
7

Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities
(16
)
 
—

 
(2
)
Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations
(6
)
 
(7
)
 
(9
)
Gross Unrecognized Tax Benefits, as of the End of the Fiscal Year
$
88

 
$
114

 
$
67



Of the total gross unrecognized tax benefits, approximately $81 million, $104 million and $46 million, at February 1, 2020, February 2, 2019, and February 3, 2018, respectively, represent the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. These amounts are net of the offsetting tax effects from other tax jurisdictions.
Of the total unrecognized tax benefits, it is reasonably possible that $66 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

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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. The Company recognized an income tax benefit from interest and penalties of less than $1 million, $5 million and $2 million in 2019, 2018 and 2017, respectively. The Company has accrued $12 million for the payment of interest and penalties as of both February 1, 2020 and February 2, 2019. Accrued interest and penalties are included within Other Long-term Liabilities on the Consolidated Balance Sheets.
The Company files U.S. federal income tax returns as well as income tax returns in various states and in non-U.S. jurisdictions. The Company is a participant in the Compliance Assurance Process ("CAP"), which is a program made available by the Internal Revenue Service ("IRS") to certain qualifying large taxpayers, under which participants work collaboratively with the IRS to identify and resolve potential tax issues through open, cooperative and transparent interaction prior to the annual filing of their federal income tax return. The IRS is currently examining the Company's 2018 consolidated U.S. federal income tax return.
The Company is also subject to various U.S. state and local income tax examinations for the years 2015 to 2018. Finally, the Company is subject to multiple non-U.S. tax jurisdiction examinations for the years 2007 to 2018. In some situations, the Company determines that it does not have a filing requirement in a particular tax jurisdiction. Where no return has been filed, no statute of limitations applies. Accordingly, if a tax jurisdiction reaches a conclusion that a filing requirement does exist, additional years may be reviewed by the tax authority. The Company believes it has appropriately accounted for uncertainties related to this issue.


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13. Long-term Debt and Borrowing Facilities
The following table provides the Company’s outstanding debt balance, net of unamortized debt issuance costs and discounts, as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Senior Debt with Subsidiary Guarantee
 
 
 
$1 billion, 6.875% Fixed Interest Rate Notes due November 2035 (“2035 Notes”)
$
991


$
990

$860 million, 5.625% Fixed Interest Rate Notes due February 2022 (“2022 Notes”)
858

 
952

$700 million, 6.75% Fixed Interest Rate Notes due July 2036 (“2036 Notes”)
693

 
693

$500 million, 5.625% Fixed Interest Rate Notes due October 2023 (“2023 Notes”)
498

 
498

$500 million, 5.25% Fixed Interest Rate Notes due February 2028 (“2028 Notes”)
496

 
496

$500 million, 7.50% Fixed Interest Rate Notes due June 2029 ("2029 Notes")
487

 
—

$450 million, 6.625% Fixed Interest Rate Notes due April 2021 (“2021 Notes”)
450

 
776

$297 million, 6.694% Fixed Interest Rate Notes due January 2027 ("2027 Notes")
276

 
273

$338 million, 7.00% Fixed Interest Rate Notes due May 2020 (“2020 Notes”)
—

 
337

Secured Foreign Facilities
103

 
91

Total Senior Debt with Subsidiary Guarantee
$
4,852

 
$
5,106

Senior Debt

 

$350 million, 6.95% Fixed Interest Rate Debentures due March 2033 (“2033 Notes”)
$
348

 
$
348

$300 million, 7.60% Fixed Interest Rate Notes due July 2037 (“2037 Notes”)
298

 
297

Unsecured Foreign Facilities
50

 
60

Total Senior Debt
$
696

 
$
705

Total
$
5,548

 
$
5,811

Current Debt
(61
)
 
(72
)
Total Long-term Debt, Net of Current Portion
$
5,487

 
$
5,739


The following table provides principal payments due on outstanding debt in the next five fiscal years and the remaining years thereafter:
Fiscal Year (in millions)
 
2020
$
61

2021
459

2022
869

2023
569

2024
5

Thereafter
$
3,648


 
Cash paid for interest was $363 million in 2019, $380 million in 2018 and $391 million in 2017.
Issuance of Notes
In June 2019, the Company issued $500 million of 7.50% notes due in June 2029. 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 $486 million, which were net of discounts and issuance costs of $14 million. The discounts and issuance costs are being amortized through the maturity date and are included within Long-term Debt on the February 1, 2020 Consolidated Balance Sheet.
Repurchases of Notes
In June 2019, the Company completed the early settlement of tender offers to repurchase $212 million of outstanding 2020 Notes, $330 million of outstanding 2021 Notes and $96 million of outstanding 2022 Notes for $669 million. The Company used the proceeds from the 2029 Notes, together with cash on hand, to fund the purchase price for the tender offers. Additionally, in July 2019, the Company redeemed the remaining $126 million of outstanding 2020 Notes for $130 million.

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In the second quarter of 2019, the Company recognized a pre-tax loss on extinguishment of debt of $40 million (after-tax loss of $30 million), which includes redemption fees and the write-off of unamortized issuance costs. This loss is included in Other Income (Loss) in the 2019 Consolidated Statement of Income (Loss).
Exchange of Notes
In June 2018, the Company completed private offers to exchange $62 million, $220 million and $44 million of outstanding 2020 Notes, 2021 Notes and 2022 Notes, respectively, for $297 million of newly issued 6.694% notes due in January 2027 and $52 million in cash consideration, which included a $24 million exchange premium. The exchange was treated as a modification under ASC 470, Debt, and no gain or loss was recognized. The exchange premium is being amortized through the maturity date of January 2027 and is included within Long-term Debt on the Consolidated Balance Sheets. The obligation to pay principal and interest on the 2027 Notes is jointly and severally guaranteed on a full and unconditional basis by the Guarantors.
Secured Revolving Facility
The Company and the Guarantors guarantee and pledge collateral to secure the Secured Revolving Facility. The Secured Revolving Facility has aggregate availability of $1 billion and allows the Company and certain of the Company's non-U.S. subsidiaries to borrow and obtain letters of credit in U.S. dollars, Canadian dollars, Euros, Hong Kong dollars or British pounds.
In August 2019, the Company entered into an amendment and restatement of the Secured Revolving Facility. The Amendment maintained the aggregate availability under the Secured Revolving Facility at $1 billion and extended the expiration date from May 2022 to August 2024. The Company incurred fees related to the Amendment of $5 million, which were capitalized and are recorded in Other Assets on the February 1, 2020 Consolidated Balance Sheet and are being amortized over the remaining term of the Secured Revolving Facility.
The Secured Revolving Facility fees related to committed and unutilized amounts are 0.30% per annum, and the fees related to outstanding letters of credit are 1.75% per annum. In addition, the interest rate on outstanding U.S. dollar borrowings is LIBOR plus 1.75% per annum. The interest rate on outstanding foreign denominated borrowings is the applicable benchmark rate plus 1.75% per annum.
The Secured 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. Additionally, the Secured 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 3.50 to 1.00 and (b) no default or event of default exists. As of February 1, 2020, the Company was in compliance with both of its financial covenants, and the ratio of consolidated debt to consolidated EBITDA was less than 3.50 to 1.00.
During 2019, the Company borrowed and repaid $12 million under the Secured Revolving Facility. As of February 1, 2020, there were no borrowings outstanding under the Secured Revolving Facility.
The Secured Revolving Facility supports the Company’s letter of credit program. The Company had $19 million of outstanding letters of credit as of February 1, 2020 that reduced its availability under the Secured Revolving Facility.
On March 16, 2020, the Company elected to borrow $950 million from the Secured Revolving Facility, leaving our availability under the Secured Revolving Facility at $22 million. For additional information, see Note 23, "Subsequent Events."
Secured Foreign Facilities
The Company and the Guarantors guarantee and pledge collateral to secure revolving and term loan bank facilities used by certain of the Company's Greater China subsidiaries to support their operations. The Secured Foreign Facilities have availability totaling $150 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for each borrowing. During 2019, the Company borrowed $117 million and made payments of $103 million under the Secured Foreign Facilities. The maximum daily amount outstanding at any point in time in 2019 was $103 million. Borrowings on the Secured Foreign Facilities mature between March 2020 and August 2024. As of February 1, 2020, borrowings of $11 million are included within Current Debt on the Consolidated Balance Sheet and the remaining borrowings are included within Long-term Debt.
Unsecured Foreign Facilities
The Company guarantees unsecured revolving and term loan bank facilities used by certain of the Company's Greater China subsidiaries to support their operations. The Unsecured Foreign Facilities have availability totaling $75 million. The interest rates on outstanding borrowings are based upon the applicable benchmark rate for each borrowing. During 2019, the Company

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borrowed $50 million and made payments of $59 million under the Unsecured Foreign Facilities. The maximum daily amount outstanding at any point in time in 2019 was $74 million. Borrowings on the Unsecured Foreign Facilities mature between March 2020 and April 2020. As of February 1, 2020, borrowings of $50 million are included within Current Debt on the Consolidated Balance Sheet.

14. Derivative Financial Instruments
The earnings of the Company's wholly owned foreign businesses are subject to exchange rate risk as substantially all their merchandise is sourced through U.S. dollar transactions. The Company uses foreign currency forward contracts designated as cash flow hedges to mitigate this foreign currency exposure for its Canadian and U.K. businesses. These forward contracts currently have a maximum term of 18 months. Amounts are reclassified from accumulated other comprehensive income upon the sale of the hedged merchandise to the customer. These gains and losses are recognized in Costs of Goods Sold, Buying and Occupancy in the Consolidated Statements of Income (Loss).
The Company uses foreign currency forward contracts to mitigate the impact of fluctuations in foreign currency exchange rates relative to recognized payable balances denominated in non-functional currencies. The fair value of these non-designated foreign currency forward contracts is not significant as of February 1, 2020.
The following table provides the U.S. dollar notional amount of outstanding foreign currency derivative financial instruments as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Notional Amount
$
139

 
$
147


The following table provides a summary of the fair value and balance sheet classification of outstanding derivative financial instruments designated as foreign currency cash flow hedges as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Other Current Assets
$
1

 
$
2

Accrued Expenses and Other
1

 
—


The following table provides a summary of the pre-tax financial statement effect of the gains and losses on derivative financial instruments designated as foreign currency cash flow hedges for 2019 and 2018:
 
2019
 
2018
 
(in millions)
Gain (Loss) Recognized in Accumulated Other Comprehensive Income
$
2

 
$
11

(Gain) Loss Reclassified from Accumulated Other Comprehensive Income into Costs of Goods Sold, Buying and Occupancy Expense
(5
)
 
2


The Company estimates that less than $1 million of net gains included in accumulated other comprehensive income as of February 1, 2020 related to foreign currency forward contracts designated as cash flow hedges will be reclassified into earnings within the following 12 months. Actual amounts ultimately reclassified depend on the exchange rates in effect when derivative contracts that are currently outstanding mature.


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15. Fair Value Measurements
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 February 1, 2020 and February 2, 2019:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
As of February 1, 2020
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,499

 
$
—

 
$
—

 
$
1,499

Foreign Currency Cash Flow Hedges
—

 
1

 
—

 
1

Liabilities:
 
 
 
 
 
 
 
Foreign Currency Cash Flow Hedges
—

 
1

 
—

 
1

As of February 2, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
1,413

 
$
—

 
$
—

 
$
1,413

Marketable Equity Securities
11

 
—

 
—

 
11

Foreign Currency Cash Flow Hedges
—

 
2

 
—

 
2


The Company's Level 1 fair value measurements use unadjusted quoted prices in active markets for identical assets. The Company's marketable equity securities were 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. During 2019, the Company received cash proceeds of $10 million related to sales of its marketable equity securities, which are included within Investing Activities in the 2019 Consolidated Statement of Cash Flows.
The Company’s Level 2 fair value measurements use market approach valuation techniques. The primary inputs to these techniques include foreign currency exchange rates, as applicable to the underlying instruments.
The following table provides a summary of the principal value and estimated fair value of outstanding publicly traded debt as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Principal Value
$
5,458

 
$
5,722

Fair Value, Estimated (a)
5,555

 
5,340

________________
(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 820, Fair Value Measurement. The estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Management believes that the carrying values of accounts receivable, accounts payable, accrued expenses and current debt approximate fair value because of their short maturity.

16. Comprehensive Income
Comprehensive Income includes gains and losses on derivative instruments and foreign currency translation adjustments. The cumulative gains and losses on these items are included in Accumulated Other Comprehensive Income on the Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity (Deficit).

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The following table provides the rollforward of accumulated other comprehensive income for 2019:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of February 2, 2019
$
57

 
$
2

 
$
59

Other Comprehensive Income (Loss) Before Reclassifications
(5
)
 
2

 
(3
)
Amounts Reclassified from Accumulated Other Comprehensive Income
—

 
(5
)
 
(5
)
Tax Effect
—

 
1

 
1

Current-period Other Comprehensive Income (Loss)
(5
)
 
(2
)
 
(7
)
Balance as of February 1, 2020
$
52

 
$
—

 
$
52


The following table provides the rollforward of accumulated other comprehensive income for 2018:
 
Foreign Currency Translation
 
Cash Flow Hedges
 
Marketable Equity Securities
 
Accumulated Other Comprehensive Income
 
(in millions)
Balance as of February 3, 2018
$
32

 
$
(10
)
 
$
2

 
$
24

Amount reclassified to Retained Earnings upon adoption of ASC 321, Investments - Equity Securities
—

 
—

 
(2
)
 
(2
)
Balance as of February 4, 2018
32

 
(10
)
 
—

 
22

Other Comprehensive Income (Loss) Before Reclassifications
(20
)
 
11

 
—

 
(9
)
Amounts Reclassified from Accumulated Other Comprehensive Income
45

 
2

 
—

 
47

Tax Effect
—

 
(1
)
 
—

 
(1
)
Current-period Other Comprehensive Income
25

 
12

 
—

 
37

Balance as of February 2, 2019
$
57

 
$
2

 
$
—

 
$
59


As a result of the divestiture of La Senza in 2018, the Company reclassified $45 million of accumulated foreign-currency translation adjustments out of accumulated other comprehensive income and into earnings. For additional information, see Note 5, "Restructuring Activities."

17. 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.
In July 2019, a plaintiff shareholder filed a putative class action complaint in the U.S. District Court for the Southern District of Ohio alleging that the Company made false and/or misleading statements relating to the November 2018 announcement that the Company was reducing its quarterly dividend. In September 2019, a different plaintiff shareholder filed a second putative class action complaint in the U.S. District Court for the Southern District of Ohio containing substantially the same allegations and seeking substantially the same relief.  In October 2019, the Court issued an order consolidating the two putative class actions, appointing a lead plaintiff, and approving that lead plaintiff’s selection of lead counsel.  The lead plaintiff filed a consolidated amended complaint on December 20, 2019 that asserted substantially the same allegations and sought substantially the same relief as the initial complaint.  The Company filed a motion to dismiss the consolidated amended complaint on February 18, 2020.  The lead plaintiff must file any opposition to our motion to dismiss no later than May 4, 2020.  The Company's reply brief in further support of our motion to dismiss is due on June 3, 2020. The Company views this lawsuit as meritless and intends to defend against this lawsuit vigorously. 
On February 19, 2020, a plaintiff shareholder filed a complaint in the U.S. District Court for the Southern District of Ohio alleging derivative claims on behalf of the Company against certain of its current and former directors and officers.  The Company was named as nominal defendant.  The lawsuit asserts claims for breach of fiduciary duty, corporate waste and unjust

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enrichment in connection with alleged misstatements about our quarterly dividend prior to the announced reduction of the dividend in November 2018. The Company intends to seek dismissal of the lawsuit.
La Senza
In connection with the sale of La Senza in the fourth quarter of 2018, certain of the Company's subsidiaries have remaining contingent obligations of $40 million related to lease payments under the current terms of noncancelable leases expiring at various dates through 2028. These obligations 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 business. As part of the sale, a liability of $5 million was recorded for these obligations. During 2019, an additional reserve of $35 million was recorded related to these obligations and certain other items. As of February 1, 2020, reserves of $8 million are included within Accrued Expenses and Other on the Consolidated Balance Sheet and the remaining reserves are included within Other Long-term Liabilities.
Other
In connection with noncancelable operating leases of certain assets, the Company 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 at various dates through 2021, and the total amount of the guarantees is $94 million. The Company recorded a liability of $17 million and $11 million related to these guarantee obligations as of February 1, 2020 and February 2, 2019, respectively. This liability is included in Current Operating Lease Liabilities on the February 1, 2020 Consolidated Balance Sheet, and in Other Long-term Liabilities on the February 2, 2019 Consolidated Balance Sheet.

18. 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 $79 million for 2019, $76 million for 2018 and $68 million for 2017.
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.
The definitive agreement between the Company and Sycamore for the sale to Sycamore of the 55% interest in Victoria's Secret requires that the Company terminate its non-qualified supplemental retirement plan as of the closing with respect to participants affected by the sale and for all other participants within six months. On March 11, 2020, the Compensation Committee of the Board of Directors authorized management of the Company to take steps to terminate the plan as to all participants.  The timing and specifics of such termination have not yet been determined.  Any remaining benefits and obligations under the non-qualified plan are expected to be paid out in full approximately one year following the applicable termination. For additional information regarding the Victoria's Secret transaction, see Note 23, "Subsequent Events."

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The following table provides the Company’s annual activity for this plan and year-end liability, included in Other Long-term Liabilities on the Consolidated Balance Sheets, as of February 1, 2020 and February 2, 2019:
 
February 1,
2020
 
February 2,
2019
 
(in millions)
Balance at Beginning of Year
$
278

 
$
269

Contributions:
 
 
 
Associate
8

 
10

Company
12

 
11

Interest
14

 
13

Distributions
(32
)
 
(25
)
Balance at End of Year
$
280

 
$
278


Total expense recognized related to the non-qualified plan was $26 million for 2019, $24 million for 2018 and $20 million for 2017.

19. Shareholders’ Equity (Deficit)
Common Stock Share Repurchases
The Company did not repurchase any shares during 2019.
Under the authority of the Company’s Board of Directors, the Company repurchased shares of its common stock under the following repurchase programs for fiscal 2018 and 2017:
 
 
 
 
Shares Repurchased
 
Amount Repurchased
 
Average Stock
Price of
Shares
Repurchased
within
Program
Repurchase Program
 
Amount Authorized
 
2018
 
2017
 
2018
 
2017
 
 
 
(in millions)
 
(in thousands)
 
(in millions)
 
 
March 2018
 
$
250

 
4,852

 
NA

 
$
171

 
NA

 
$
35.29

September 2017
 
250

 
527

 
3,858

 
25

 
$
202

 
$
51.72

February 2017
 
250

 
NA

 
5,500

 
NA

 
240

 
$
43.57

February 2016
 
500

 
NA

 
51

 
NA

 
3

 
$
76.47

Total
 
 
 
5,379

 
9,409

 
$
196

 
$
445

 
 


In March 2018, the Company's Board of Directors approved a new $250 million share repurchase program, which included the $23 million remaining under the September 2017 repurchase program.
The March 2018 repurchase program had $79 million remaining as of February 1, 2020.
Treasury Stock Retirement
In November 2017, the Company retired 36 million shares of its treasury stock. The retirement resulted in a reduction of $2.036 billion in Treasury Stock, $18 million in the par value of Common Stock, $82 million in Paid-in Capital and $1.936 billion in Retained Earnings.

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Dividends
Under the authority and declaration of the Board of Directors, the Company paid the following dividends during fiscal 2019, 2018 and 2017:
 
Ordinary Dividends
 
Total Paid
 
(per share)
 
(in millions)
2019
 
 
 
Fourth Quarter
$
0.30

 
$
83

Third Quarter
0.30

 
83

Second Quarter
0.30

 
83

First Quarter
0.30

 
83

2019 Total
$
1.20

 
$
332

2018
 
 
 
Fourth Quarter
$
0.60

 
$
166

Third Quarter
0.60

 
165

Second Quarter
0.60

 
167

First Quarter
0.60

 
168

2018 Total
$
2.40

 
$
666

2017
 
 
 
Fourth Quarter
$
0.60

 
$
170

Third Quarter
0.60

 
172

Second Quarter
0.60

 
172

First Quarter
0.60

 
172

2017 Total
$
2.40

 
$
686
Subsequent to February 1, 2020, the Company's Board of Directors declared the first quarter of 2020 ordinary dividend of $0.30 per share.

20. Share-based Compensation
Plan Summary
In 2015, the Company's shareholders approved the 2015 Stock Option and Performance Incentive Plan ("2015 Plan"). The 2015 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance-based restricted stock, performance units and unrestricted shares. The Company grants stock options at a price equal to the fair market value of the stock on the date of grant. Stock options have a maximum term of 10 years. Stock options generally vest ratably over three to five years. Restricted stock generally vests (the restrictions lapse) at the end of a three-year period or on a graded basis over a five-year period.
Under the Company’s plans, 160 million options, restricted and unrestricted shares have been authorized to be granted to employees and directors. There were 5 million options and shares available for grant as of February 1, 2020.

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Stock Options
The following table provides the Company’s stock option activity for the fiscal year ended February 1, 2020:
 
Number of
Shares
 
Weighted
Average
Option
Price Per
Share
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
(in thousands)
 
 
 
(in years)
 
(in thousands)
Outstanding as of February 2, 2019
5,292

 
$
53.14

 
 
 
 
Granted
519

 
27.67

 
 
 
 
Exercised
(136
)
 
7.44

 
 
 
 
Cancelled
(395
)
 
52.22

 
 
 
 
Outstanding as of February 1, 2020
5,280

 
$
51.87

 
6.03
 
$
318

Vested and Expected to Vest as of February 1, 2020 (a)
5,190

 
52.29

 
5.99
 
318

Options Exercisable as of February 1, 2020
3,372

 
57.07

 
4.93
 
318

 ________________
(a)
The number of options expected to vest includes an estimate of expected forfeitures.
Intrinsic value for stock options is the difference between the current market value of the Company’s stock and the option strike price. The total intrinsic value of options exercised was $3 million for 2019, $2 million for 2018 and $44 million for 2017.
The total fair value at grant date of option awards vested was $9 million for 2019 and 2018, and $10 million for 2017.
The Company’s total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options was $8 million as of February 1, 2020. This cost is expected to be recognized over a weighted-average period of 1.8 years.
The weighted-average estimated fair value of stock options granted was $6.05 per share for 2019, $6.76 per share for 2018 and $5.96 per share for 2017.
Cash received from stock options exercised was $1 million for 2019 and 2018, and $38 million for 2017. Tax benefits realized from tax deductions associated with stock options exercised was less than $1 million for 2019 and 2018, and $16 million for 2017.
The Company uses the Black-Scholes option-pricing model for valuation of options granted to employees and directors. The Company’s determination of the fair value of options is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors.
The following table contains the weighted-average assumptions used during 2019, 2018 and 2017:
 
2019
 
2018
 
2017
Expected Volatility
40
%
 
36
%
 
28
%
Risk-free Interest Rate
2.2
%
 
2.5
%
 
1.5
%
Dividend Yield
4.4
%
 
5.8
%
 
5.1
%
Expected Life (in years)
3.2

 
2.9

 
3.0



The majority of the Company’s stock-based compensation awards are granted on an annual basis in the first quarter of each year. The expected volatility assumption is based on the Company’s analysis of historical volatility. The risk-free interest rate assumption is based upon the average daily closing rates during the period for U.S. treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts in relation to the stock price at the grant date. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.

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Restricted Stock
The following table provides the Company’s restricted stock activity for the fiscal year ended February 1, 2020:
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Unvested as of February 2, 2019
6,689

 
$
45.29

Granted
4,161

 
23.34

Vested
(1,570
)
 
66.44

Cancelled
(618
)
 
30.75

Unvested as of February 1, 2020
8,662

 
$
32.00


 
The Company’s total intrinsic value of restricted stock vested was $39 million for 2019, $44 million for 2018 and $86 million for 2017.
The Company’s total fair value at grant date of awards vested was $104 million for 2019, $86 million for 2018 and $87 million for 2017. The fair value of restricted stock awards is based on the market value of an unrestricted share on the grant date adjusted for anticipated dividend yields.
As of February 1, 2020, there was $103 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock. That cost is expected to be recognized over a weighted-average period of 1.9 years.
The weighted-average estimated fair value of restricted stock granted was $23.34 per share for 2019, $30.43 per share for 2018 and $39.21 per share for 2017.
Tax benefits realized from tax deductions associated with restricted stock vested were $10 million for 2019 and 2018, and $32 million for 2017.
Income Statement Impact
The following table provides share-based compensation expense included in the Consolidated Statements of Income (Loss) for 2019, 2018 and 2017:
 
2019
 
2018
 
2017
 
(in millions)
Costs of Goods Sold, Buying and Occupancy
$
29

 
$
29

 
$
32

General, Administrative and Store Operating Expenses
58

 
68

 
70

Total Share-based Compensation Expense
$
87

 
$
97

 
$
102


The tax benefit associated with recognized share-based compensation expense was $18 million for 2019, $20 million for 2018 and $23 million for 2017.

21. 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, personal care and beauty products under the Victoria’s Secret and PINK brand names. Victoria’s Secret merchandise is sold online and through retail stores located in the U.S. and Canada.
The Bath & Body Works segment sells body care, home fragrance products, soaps and sanitizers under the Bath & Body Works, White Barn, C.O. Bigelow and other brand names. Bath & Body Works merchandise is sold online and at retail stores located in the U.S. and Canada.

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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, as well as the online business in Greater China. This segment includes the following:
•
Victoria's Secret International, comprised of company-owned stores in the U.K., Ireland and Greater China, as well as stores operated by partners under franchise and license arrangements;
•
Victoria's Secret Beauty and Accessories, 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 in travel retail and other locations; and
•
Bath & Body Works International stores operated by partners under franchise, license and wholesale arrangements.
Other includes Mast Global, a merchandise sourcing and production function serving the Company and its international partners, and Corporate functions, including non-core real estate, equity investments and other governance functions such as treasury and tax. Results for 2018 and 2017 also include La Senza and Henri Bendel.
The following table provides the Company’s segment information as of and for the fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018:
 
Victoria’s
Secret
 
Bath & Body
Works
 
Victoria’s Secret
and
Bath &
Body Works
International
 
Other
 
Total
 
(in millions)
2019
 
 
 
 
 
 
 
 
 
Net Sales
$
6,805

 
$
5,170

 
$
600

 
$
339

 
$
12,914

Depreciation and Amortization
284

 
155

 
40

 
109

 
588

Operating Income (Loss) (a)
(616
)
 
1,191

 
(236
)
 
(81
)
 
258

Total Assets (b) (c)
3,883

 
2,837

 
939

 
2,466

 
10,125

Capital Expenditures
76

 
206

 
24

 
152

 
458

2018
 
 
 
 
 
 
 
 
 
Net Sales
$
7,375

 
$
4,631

 
$
605

 
$
626

 
$
13,237

Depreciation and Amortization
280

 
121

 
43

 
103

 
547

Operating Income (Loss) (d)
462

 
1,077

 
(37
)
 
(265
)
 
1,237

Total Assets (b)
3,129

 
1,898

 
842

 
2,221

 
8,090

Capital Expenditures
150

 
242

 
97

 
140

 
629

2017
 
 
 
 
 
 
 
 
 
Net Sales
$
7,387

 
$
4,148

 
$
502

 
$
595

 
$
12,632

Depreciation and Amortization
279

 
101

 
30

 
114

 
524

Operating Income (Loss)
932

 
953

 
5

 
(162
)
 
1,728

Total Assets (b)
3,369

 
1,753

 
800

 
2,227

 
8,149

Capital Expenditures
270

 
232

 
111

 
94

 
707

________________
(a)
Victoria's Secret includes goodwill and long-lived store asset impairment charges of $690 million and $51 million, respectively. Victoria's Secret and Bath & Body Works International includes long-lived store asset and goodwill impairment charges of $212 million and $30 million, respectively. For additional information see Note 7, “Property and Equipment, Net" and Note 9, "Goodwill and Trade Names."
(b)
Assets are allocated to the operating segments based on decision making authority relevant to the applicable assets.
(c)
The 2019 amounts reflect the Company's adoption of ASC 842, Leases, in the first quarter of 2019.
(d)
Victoria's Secret and Victoria's Secret and Bath & Body Works International includes long-lived store asset impairment charges of $70 million and $31 million, respectively, and Other includes a loss on the sale of La Senza of $99 million and Henri Bendel closures costs of $23 million. For additional information see Note 5, “Restructuring Activities" and Note 7, “Property and Equipment, Net."
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 $1.496 billion in 2019, $1.683 billion in 2018 and $1.553 billion in 2017. The Company’s internationally based long-lived assets were $713 million as of February 1, 2020 and $454 million as of February 2, 2019.

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22. Quarterly Financial Data (Unaudited)
The following table provides summarized quarterly financial data for 2019:
 
Fiscal Quarter Ended
 
May 4,
2019
 
August 3,
2019 (a)
 
November 2,
2019 (b)(c)(d)
 
February 1,
2020 (e)(f)
 
(in millions except per share data)
Net Sales
$
2,629

 
$
2,902

 
$
2,677

 
$
4,707

Gross Profit
934

 
983

 
741

 
1,794

Operating Income (Loss)
153

 
175

 
(151
)
 
82

Income (Loss) Before Income Taxes
60

 
42

 
(277
)
 
(7
)
Net Income (Loss)
40

 
38

 
(252
)
 
(192
)
Net Income (Loss) Per Basic Share (g)
$
0.15

 
$
0.14

 
$
(0.91
)
 
$
(0.70
)
Net Income (Loss) Per Diluted Share (g)
$
0.14

 
$
0.14

 
$
(0.91
)
 
$
(0.70
)
 ________________
(a)
Net income includes the effect of a $40 million pre-tax loss ($30 million after-tax) associated with the early redemption of $764 million of outstanding notes maturing between 2020 and 2022.
(b)
Gross profit includes the effect of a $218 million pre-tax impairment charge ($200 million after-tax) related to certain Victoria's Secret long-lived store assets.
(c)
Operating loss includes the effect of a $30 million (no tax impact) goodwill impairment charge related to the Greater China reporting unit.
(d)
Net loss includes the effect of a $37 million pre-tax charge ($28 million after-tax) to increase reserves related to ongoing contingent obligations for the La Senza business.
(e)
Gross profit includes the effect of a $35 million pre-tax impairment charge ($30 million after-tax) related to certain Victoria's Secret long-lived store assets.
(f)
Operating income includes the effect of a $690 million pre-tax goodwill impairment charge ($687 million after-tax) related to the Victoria's Secret reporting unit.
(g)
Due to changes in stock prices during the year and timing of issuances of shares, the cumulative total of quarterly net income (loss) per share amounts may not equal the net income (loss) per share for the year.
The following table provides summarized quarterly financial data for 2018:
 
Fiscal Quarter Ended
 
May 5,
2018
 
August 4,
2018
 
November 3,
2018 (a)(b)
 
February 2,
2019 (c)
 
(in millions except per share data)
Net Sales
$
2,626

 
$
2,984

 
$
2,775

 
$
4,852

Gross Profit
944

 
1,059

 
928

 
1,968

Operating Income
155

 
228

 
54

 
800

Income (Loss) Before Income Taxes
59

 
129

 
(41
)
 
710

Net Income (Loss)
48

 
99

 
(43
)
 
540

Net Income (Loss) Per Basic Share (d)
$
0.17

 
$
0.36

 
$
(0.16
)
 
$
1.96

Net Income (Loss) Per Diluted Share (d)
$
0.17

 
$
0.36

 
$
(0.16
)
 
$
1.94


 ________________
(a)
Gross profit includes the effect of an $81 million pre-tax impairment charge ($73 million after-tax) related to certain Victoria's Secret long-lived store assets.
(b)
Operating income includes the effect of $20 million ($15 million after-tax) of Henri Bendel closure costs.
(c)
Operating income includes the effect of a pre-tax loss of $99 million ($55 million after-tax) related to the divestiture of La Senza.
(d)
Due to changes in stock prices during the year and timing of issuances and repurchases of shares, the cumulative total of quarterly net income (loss) per share amounts may not equal the net income per share for the year.


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23. Subsequent Events
Victoria's Secret Transaction
On February 20, 2020, the Company and Sycamore entered into a definitive agreement that is intended to deliver long-term value to L Brands, Inc. shareholders by positioning Bath & Body Works as a standalone public company and transitioning Victoria's Secret, including business conducted under the Victoria's Secret and PINK brands and certain support functions, into a privately-held entity.
After taking into account certain liabilities, Sycamore will purchase a 55% interest in Victoria’s Secret for approximately $525 million. The Company will retain a 45% interest in Victoria’s Secret to enable its shareholders to participate in the upside potential of the business. The Company intends to use the proceeds from the transaction, along with excess balance sheet cash, to reduce debt. The transaction is expected to close in the second quarter of 2020, subject to customary closing conditions. The Company will report the results of Victoria's Secret as discontinued operations beginning in the first quarter of 2020. The Company expects to recognize a loss in the first quarter of 2020 as a result of classifying Victoria's Secret as held for sale.
Legal Proceedings
On February 19, 2020, a plaintiff shareholder filed a complaint in the U.S. District Court for the Southern District of Ohio alleging derivative claims on behalf of the Company against certain of its current and former directors and officers.  For additional information, see Note 17, "Commitments and Contingencies."
Company Response to Coronavirus
Subsequent to February 1, 2020, the Company announced actions in response to the continued spread of the coronavirus.
On March 16, 2020, in an abundance of caution and as a proactive measure, the Company elected to borrow $950 million from its Secured Revolving Facility, leaving its availability under the Secured Revolving Facility at $22 million.
On March 17, 2020, the Company announced the temporary closure of all Bath & Body Works, Victoria’s Secret and PINK stores in the United States and Canada through March 29, 2020. Associates will continue to receive pay and benefits through April 4, 2020, which is one week longer than originally announced.
Based on the continued spread of the coronavirus and stay-at-home orders by government officials across the country, the Company is extending the closure of its stores beyond the initial March 29th date. As the situation continues to evolve rapidly, the Company is not currently able to predict the timing of store reopenings. However, it is monitoring the situation closely and will provide updates as appropriate. The Company continues to serve customers through its direct channels.
In an effort to further strengthen its financial flexibility and efficiently manage through the pandemic, the Company is proactively taking the following additional actions:
•
Suspending its quarterly cash dividend beginning in the second quarter of fiscal 2020. The Company remains committed to paying dividends over the long-term and will re-evaluate when appropriate.
•
Executing a substantial reduction in expenses and capital expenditures.  This includes an ongoing reduction in forward inventory receipts.
•
Temporarily reducing base compensation by 20% for senior vice presidents and above.  The cash compensation of Chairman and CEO Leslie H. Wexner and other members of the Board of Directors has been suspended. Additionally, the Company is deferring annual merit increases.
•
Furloughing most store associates and those who are not currently working to support the online businesses or who cannot work from home, effective April 5, 2020 until further notice. All furloughed associates will continue to receive existing healthcare benefits. As circumstances change, the Company will make every effort to bring these associates back to work as soon as possible. Furloughed associates will also be able to apply for unemployment benefits, if eligible.
As of March 27, 2020, the Company currently has more than $2 billion in cash, which includes the $950 million borrowed under the Secured Revolving Facility on March 16, 2020.  The Company's Secured Revolving Facility has certain financial covenants, including a debt to consolidated EBITDA covenant, which may be breached as early as the end of the fiscal quarter ending May 2, 2020. If the Company were to violate a covenant, its lenders would have the right to accelerate the Company's Secured Revolving Facility indebtedness, demand cash collateral in respect of the letters of credit issued thereunder and terminate the funding commitments available thereunder.  While the Company believes that it would be able to obtain temporary waivers for any such breach of a covenant to prevent an acceleration of its outstanding indebtedness or obtain a replacement credit facility, the Company cannot conclude with certainty that it would have the ability to obtain necessary waivers or negotiate less restrictive debt covenants with its lenders. The Company is in active conversations with the lenders

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under its credit facility to obtain a replacement credit facility that does not contain a debt to consolidated EBITDA financial covenant or a temporary waiver in respect of such financial covenant in its existing Secured Revolving Facility. The Company believes that its current cash balance, along with the actions taken as outlined above, provides it with sufficient current liquidity.
24. Supplemental Guarantor Financial Information
The Company’s 2021 Notes, 2022 Notes, 2023 Notes, 2027 Notes, 2028 Notes, 2029 Notes, 2035 Notes, 2036 Notes, Secured Revolving Facility and Secured Foreign Facilities 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 February 1, 2020 and February 2, 2019, and the Condensed Consolidating Statements of Income (Loss), Comprehensive Income (Loss) and Cash Flows for the years ended February 1, 2020, February 2, 2019 and February 3, 2018.


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L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
 
 
February 1, 2020
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
—

 
$
1,231

 
$
268

 
$
—

 
$
1,499

Accounts Receivable, Net
—

 
183

 
123

 
—

 
306

Inventories
—

 
1,138

 
149

 
—

 
1,287

Other
—

 
85

 
68

 
—

 
153

Total Current Assets
—

 
2,637

 
608

 
—

 
3,245

Property and Equipment, Net
—

 
1,747

 
739

 
—

 
2,486

Operating Lease Assets
—

 
2,545

 
508

 
—

 
3,053

Goodwill
—

 
628

 
—

 
—

 
628

Trade Names
—

 
411

 
—

 
—

 
411

Net Investments in and Advances to/from Consolidated Affiliates
3,862

 
20,231

 
2,937

 
(27,030
)
 
—

Deferred Income Taxes
—

 
8

 
76

 
—

 
84

Other Assets
130

 
9

 
690

 
(611
)
 
218

Total Assets
$
3,992

 
$
28,216

 
$
5,558

 
$
(27,641
)
 
$
10,125

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
—

 
$
331

 
$
316

 
$
—

 
$
647

Accrued Expenses and Other
93

 
593

 
366

 
—

 
1,052

Current Debt
—

 
—

 
61

 
—

 
61

Current Operating Lease Liabilities
—

 
392

 
86

 
—

 
478

Income Taxes
(11
)
 
89

 
56

 
—

 
134

Total Current Liabilities
82

 
1,405

 
885

 
—

 
2,372

Deferred Income Taxes
—

 
(37
)
 
256

 
—

 
219

Long-term Debt
5,395

 
597

 
92

 
(597
)
 
5,487

Long-term Operating Lease Liabilities
—

 
2,522

 
530

 
—

 
3,052

Other Long-term Liabilities
62

 
383

 
59

 
(14
)
 
490

Total Equity (Deficit)
(1,547
)
 
23,346

 
3,736

 
(27,030
)
 
(1,495
)
Total Liabilities and Equity (Deficit)
$
3,992

 
$
28,216

 
$
5,558

 
$
(27,641
)
 
$
10,125



99
Table of Contents

L BRANDS, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(in millions)
 
 
February 2, 2019
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
—

 
$
997

 
$
416

 
$
—

 
$
1,413

Accounts Receivable, Net
—

 
241

 
126

 
—

 
367

Inventories
—

 
1,093

 
155

 
—

 
1,248

Other
—

 
139

 
93

 
—

 
232

Total Current Assets
—

 
2,470

 
790

 
—

 
3,260

Property and Equipment, Net
—

 
1,922

 
896

 
—

 
2,818

Goodwill
—

 
1,318

 
30

 
—

 
1,348

Trade Names
—

 
411

 
—

 
—

 
411

Net Investments in and Advances to/from Consolidated Affiliates
4,755

 
19,737

 
2,047

 
(26,539
)
 
—

Deferred Income Taxes
—

 
9

 
53

 
—

 
62

Other Assets
127

 
15

 
670

 
(621
)
 
191

Total Assets
$
4,882

 
$
25,882

 
$
4,486

 
$
(27,160
)
 
$
8,090

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts Payable
$
—

 
$
363

 
$
348

 
$
—

 
$
711

Accrued Expenses and Other
92

 
597

 
393

 
—

 
1,082

Current Debt
—

 
—

 
72

 
—

 
72

Income Taxes
(7
)
 
100

 
28

 
—

 
121

Total Current Liabilities
85

 
1,060

 
841

 
—

 
1,986

Deferred Income Taxes
1

 
(44
)
 
269

 
—

 
226

Long-term Debt
5,661

 
606

 
79

 
(607
)
 
5,739

Other Long-term Liabilities
59

 
852

 
107

 
(14
)
 
1,004

Total Equity (Deficit)
(924
)
 
23,408

 
3,190

 
(26,539
)
 
(865
)
Total Liabilities and Equity (Deficit)
$
4,882

 
$
25,882

 
$
4,486

 
$
(27,160
)
 
$
8,090



100
Table of Contents

L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME (LOSS)
(in millions)
 
 
2019
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Sales
$
—

 
$
12,317

 
$
3,382

 
$
(2,785
)
 
$
12,914

Costs of Goods Sold, Buying and Occupancy
—

 
(8,074
)
 
(2,810
)
 
2,420

 
(8,464
)
Gross Profit
—

 
4,243

 
572

 
(365
)
 
4,450

General, Administrative and Store Operating Expenses
(11
)
 
(3,380
)
 
(331
)
 
250

 
(3,472
)
Impairment of Goodwill
—

 
(690
)
 
(30
)
 
—

 
(720
)
Operating Income (Loss)
(11
)
 
173

 
211

 
(115
)
 
258

Interest Expense
(370
)
 
(116
)
 
(7
)
 
115

 
(378
)
Other Income (Loss)
(40
)
 
—

 
(21
)
 
—

 
(61
)
Income (Loss) Before Income Taxes
(421
)
 
57

 
183

 
—

 
(181
)
Provision (Benefit) for Income Taxes
2

 
55

 
128

 
—

 
185

Equity in Earnings (Loss), Net of Tax
57

 
39

 
390

 
(486
)
 
—

Net Income (Loss)
$
(366
)
 
$
41

 
$
445

 
$
(486
)
 
$
(366
)



L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)
 
 
2019
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Income (Loss)
$
(366
)
 
$
41

 
$
445

 
$
(486
)
 
$
(366
)
Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
—

 
—

 
(5
)
 
—

 
(5
)
Unrealized Gain (Loss) on Cash Flow Hedges
—

 
—

 
2

 
—

 
2

Reclassification of Cash Flow Hedges to Earnings
—

 
—

 
(4
)
 
—

 
(4
)
Total Other Comprehensive Income (Loss), Net of Tax
—

 
—

 
(7
)
 
—

 
(7
)
Total Comprehensive Income (Loss)
$
(366
)
 
$
41

 
$
438

 
$
(486
)
 
$
(373
)



101
Table of Contents

L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
 
 
2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Sales
$
—

 
$
12,467

 
$
3,780

 
$
(3,010
)
 
$
13,237

Costs of Goods Sold, Buying and Occupancy
—

 
(8,015
)
 
(2,996
)
 
2,673

 
(8,338
)
Gross Profit
—

 
4,452

 
784

 
(337
)
 
4,899

General, Administrative and Store Operating Expenses
(9
)
 
(3,304
)
 
(482
)
 
232

 
(3,563
)
Loss on Divestiture of La Senza
—

 
(24
)
 
(75
)
 
—

 
(99
)
Operating Income (Loss)
(9
)
 
1,124

 
227

 
(105
)
 
1,237

Interest Expense
(379
)
 
(108
)
 
(6
)
 
108

 
(385
)
Other Income (Loss)
—

 
13

 
(8
)
 
—

 
5

Income (Loss) Before Income Taxes
(388
)
 
1,029

 
213

 
3

 
857

Provision (Benefit) for Income Taxes
12

 
100

 
101

 
—

 
213

Equity in Earnings, Net of Tax
1,044

 
169

 
353

 
(1,566
)
 
—

Net Income (Loss)
$
644

 
$
1,098

 
$
465

 
$
(1,563
)
 
$
644




L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
 
 
2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Income (Loss)
$
644

 
$
1,098

 
$
465

 
$
(1,563
)
 
$
644

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
—

 
—

 
(20
)
 
—

 
(20
)
Reclassification of Foreign Currency Translation to Earnings
—

 
—

 
45

 
—

 
45

Unrealized Gain (Loss) on Cash Flow Hedges
—

 
—

 
10

 
—

 
10

Reclassification of Cash Flow Hedges to Earnings
—

 
—

 
2

 
—

 
2

Total Other Comprehensive Income (Loss), Net of Tax
—


—


37


—


37

Total Comprehensive Income (Loss)
$
644

 
$
1,098

 
$
502

 
$
(1,563
)
 
$
681




102
Table of Contents

L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF INCOME
(in millions)
 
 
2017
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Sales
$
—

 
$
11,931

 
$
3,728

 
$
(3,027
)
 
$
12,632

Costs of Goods Sold, Buying and Occupancy
—

 
(7,463
)
 
(2,868
)
 
2,658

 
(7,673
)
Gross Profit
—

 
4,468

 
860

 
(369
)
 
4,959

General, Administrative and Store Operating Expenses
(10
)
 
(3,063
)
 
(426
)
 
268

 
(3,231
)
Operating Income (Loss)
(10
)
 
1,405

 
434

 
(101
)
 
1,728

Interest Expense
(403
)
 
(99
)
 
(13
)
 
109

 
(406
)
Other Income (Loss)
(46
)
 
11

 
25

 
—

 
(10
)
Income (Loss) Before Income Taxes
(459
)
 
1,317

 
446

 
8

 
1,312

Provision (Benefit) for Income Taxes
65

 
316

 
(52
)
 
—

 
329

Equity in Earnings, Net of Tax
1,507

 
522

 
412

 
(2,441
)
 
—

Net Income (Loss)
$
983

 
$
1,523

 
$
910

 
$
(2,433
)
 
$
983




L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
(in millions)
 
 
2017
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Income (Loss)
$
983

 
$
1,523

 
$
910

 
$
(2,433
)
 
$
983

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
 
 
Foreign Currency Translation
—

 
—

 
23

 
—

 
23

Unrealized Gain (Loss) on Cash Flow Hedges
—

 
—

 
(20
)
 
—

 
(20
)
Reclassification of Cash Flow Hedges to Earnings
—

 
—

 
7

 
—

 
7

Unrealized Gain on Marketable Securities
—

 
—

 
2

 
—

 
2

Total Other Comprehensive Income (Loss), Net of Tax
—


—


12


—


12

Total Comprehensive Income (Loss)
$
983

 
$
1,523

 
$
922

 
$
(2,433
)
 
$
995




103
Table of Contents

L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
 
 
2019
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Cash Provided by (Used for) Operating Activities
$
(427
)
 
$
837

 
$
826

 
$
—

 
$
1,236

Investing Activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures
—

 
(276
)
 
(182
)
 
—

 
(458
)
Net Investments in Consolidated Affiliates
—

 
(13
)
 
—

 
13

 
—

Other Investing Activities
—

 
12

 
(34
)
 
—

 
(22
)
Net Cash Provided by (Used for) Investing Activities
—

 
(277
)
 
(216
)
 
13

 
(480
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from Issuance of Long-term Debt, Net of Issuance Costs
486

 
—

 
—

 
—

 
486

Payments of Long-term Debt
(799
)
 
—

 
—

 
—

 
(799
)
Borrowings from Secured Revolving Facility
12

 
—

 
—

 
—

 
12

Repayments of Secured Revolving Facility
(12
)
 
—

 
—

 
—

 
(12
)
Borrowings from Foreign Facilities
—

 
—

 
167

 
—

 
167

Repayments of Foreign Facilities
—

 
—

 
(162
)
 
—

 
(162
)
Dividends Paid
(332
)
 
—

 
—

 
—

 
(332
)
Tax Payments related to Share-based Awards
(13
)
 
—

 
—

 
—

 
(13
)
Net Financing Activities and Advances to/from Consolidated Affiliates
1,090

 
(318
)
 
(759
)
 
(13
)
 
—

Proceeds from Exercise of Stock Options
1

 
—

 
—

 
—

 
1

Financing Costs and Other
(6
)
 
(8
)
 
—

 
—

 
(14
)
Net Cash Provided by (Used for) Financing Activities
427

 
(326
)
 
(754
)
 
(13
)
 
(666
)
Effects of Exchange Rate Changes on Cash
—

 
—

 
(4
)
 
—

 
(4
)
Net Increase (Decrease) in Cash and Cash Equivalents
—

 
234

 
(148
)
 
—

 
86

Cash and Cash Equivalents, Beginning of Year
—

 
997

 
416

 
—

 
1,413

Cash and Cash Equivalents, End of Year
$
—

 
$
1,231

 
$
268

 
$
—

 
$
1,499
















104
Table of Contents


L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
 
 
2018
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Cash Provided by (Used for) Operating Activities
$
(424
)
 
$
1,541

 
$
260

 
$
—

 
$
1,377

Investing Activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures
—

 
(398
)
 
(231
)
 
—

 
(629
)
Net Investments in Consolidated Affiliates
—

 
—

 
(21
)
 
21

 
—

Other Investing Activities
—

 
4

 
16

 
—

 
20

Net Cash Provided by (Used for) Investing Activities
—

 
(394
)
 
(236
)
 
21

 
(609
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Payments of Long-term Debt
(52
)
 
—

 
—

 
—

 
(52
)
Borrowings from Secured Revolving Facility
92

 
—

 
—

 
—

 
92

Repayments of Secured Revolving Facility
(92
)
 
—

 
—

 
—

 
(92
)
Borrowings from Foreign Facilities
—

 
—

 
172

 
—

 
172

Repayments of Foreign Facilities
—

 
—

 
(109
)
 
—

 
(109
)
Dividends Paid
(666
)
 
—

 
—

 
—

 
(666
)
Repurchases of Common Stock
(198
)
 
—

 
—

 
—

 
(198
)
Tax Payments related to Share-based Awards
(13
)
 
—

 
—

 
—

 
(13
)
Net Financing Activities and Advances to/from Consolidated Affiliates
1,355

 
(1,310
)
 
(24
)
 
(21
)
 
—

Proceeds from Exercise of Stock Options
1

 
—

 
—

 
—

 
1

Financing Costs and Other
(3
)
 
(4
)
 
—

 
—

 
(7
)
Net Cash Provided by (Used for) Financing Activities
424

 
(1,314
)
 
39

 
(21
)
 
(872
)
Effects of Exchange Rate Changes on Cash
—

 
—

 
2

 
—

 
2

Net Increase (Decrease) in Cash and Cash Equivalents
—

 
(167
)
 
65

 
—

 
(102
)
Cash and Cash Equivalents, Beginning of Year
—

 
1,164

 
351

 
—

 
1,515

Cash and Cash Equivalents, End of Year
$
—

 
$
997

 
$
416

 
$
—

 
$
1,413



















105
Table of Contents


L BRANDS, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(in millions)
 
 
2017
 
L Brands, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
L Brands, Inc.
Net Cash Provided by (Used for) Operating Activities
$
(401
)
 
$
1,353

 
$
454

 
$
—

 
$
1,406

Investing Activities:
 
 
 
 
 
 
 
 
 
Capital Expenditures
—

 
(495
)
 
(212
)
 
—

 
(707
)
Other Investing Activities
—

 
(1
)
 
10

 
—

 
9

Net Cash Provided by (Used for) Investing Activities
—

 
(496
)
 
(202
)
 
—

 
(698
)
Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from Issuance of Long-term Debt, Net of Issuance Costs
495

 
—

 
—

 
—

 
495

Payments of Long-term Debt
(540
)
 
—

 
—

 
—

 
(540
)
Borrowings from Foreign Facilities
—

 
—

 
96

 
—

 
96

Repayments of Foreign Facilities
—

 
—

 
(44
)
 
—

 
(44
)
Dividends Paid
(686
)
 
—

 
—

 
—

 
(686
)
Repurchases of Common Stock
(446
)
 
—

 
—

 
—

 
(446
)
Tax Payments related to Share-based Awards
(32
)
 
—

 
—

 
—

 
(32
)
Net Financing Activities and Advances to/from Consolidated Affiliates
1,577

 
(1,252
)
 
(325
)
 
—

 
—

Proceeds from Exercise of Stock Options
38

 
—

 
—

 
—

 
38

Financing Costs and Other
(5
)
 
(3
)
 
—

 
—

 
(8
)
Net Cash Provided by (Used for) Financing Activities
401


(1,255
)

(273
)

—


(1,127
)
Effects of Exchange Rate Changes on Cash
—

 
—

 
—

 
—

 
—

Net Increase (Decrease) in Cash and Cash Equivalents
—

 
(398
)
 
(21
)
 
—

 
(419
)
Cash and Cash Equivalents, Beginning of Year
—

 
1,562

 
372

 
—

 
1,934

Cash and Cash Equivalents, End of Year
$
—

 
$
1,164

 
$
351

 
$
—

 
$
1,515





106
Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

ITEM 9A. 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.
Management’s Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting as of February 1, 2020 is set forth in Item 8. Financial Statements and Supplementary Data.
Attestation Report of the Registered Public Accounting Firm. The Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting as of February 1, 2020 is set forth in Item 8. Financial Statements and Supplementary Data.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred in the fourth quarter 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.
The definitive agreement between the Company and Sycamore for the sale to Sycamore of a 55% interest in Victoria’s Secret requires that the Company terminate its non-qualified supplemental retirement plan as of the closing with respect to participants affected by the sale and for all other participants within six months. On March 11, 2020, the Compensation Committee of the Board of Directors authorized management of the Company to take steps to terminate the plan as to all participants.  The timing and specifics of such termination have not yet been determined.  Any remaining benefits and obligations under the non-qualified plan are expected to be paid out in full approximately one year following the applicable termination. Pursuant to applicable rules under the Internal Revenue Code, certain other deferred compensation arrangements must simultaneously be terminated and liquidated, including any remaining elective deferred stock units and deferral elections under the Company’s Stock Award and Deferred Compensation Plan for Non-Associate Directors. For additional information regarding the Company’s non-qualified supplemental retirement plan, see Note 18 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.


107
Table of Contents

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
We are actively monitoring the public health and travel concerns relating to the novel coronavirus and the related recommendations and protocols issued by federal, state and local governments. In the event that it is not possible or advisable to hold our annual meeting at the time, date and place as originally planned, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication or adjourning or postponing the meeting.  Any such change, including details on how to participate in a remote meeting, would be announced in advance via press release, a copy of which would be filed with the Securities and Exchange Commission as additional proxy solicitation materials and posted on our website at http://www.lb.com.
Information regarding our directors, executive officers and corporate governance is set forth under the captions “ELECTION OF DIRECTORS—Nominees and Directors”, “—Retiring Directors”, “—Director Independence”, “—Board Leadership Structure ”, “—Risk Oversight; Certain Compensation Matters”, “—Cybersecurity Risk", “—Review of Strategic Plans and Capital Structure", “—Social Responsibility", “—Human Capital Management", “—Succession Planning", “—Information Concerning Board Meeting Attendance”, “—Committees of the Board”, “—Meetings of the Company's Non-Management Directors”, “—Communications with Stockholders”, “—Attendance at Annual Meetings”, “—Code of Conduct, Related Person Transaction Policy and Associated Matters”, “—Copies of the Company’s Code of Conduct, Corporate Governance Principles, Policy and Committee Charters”, and “SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT” in the Proxy Statement and is incorporated herein by reference. Information regarding compliance with Section 16(A) of the Securities Exchange Act of 1934, as amended, is set forth under the caption “DELINQUENT SECTION 16(A) REPORTS” in the Proxy Statement and is incorporated herein by reference. Information regarding executive officers is set forth herein under the caption “Executive Officers of Registrant” in Part I.

ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is set forth under the caption “COMPENSATION-RELATED MATTERS” in the Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information regarding the security ownership of certain beneficial owners and management is set forth under the captions “SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT” in the Proxy Statement and “SHARE OWNERSHIP OF PRINCIPAL STOCKHOLDERS” in the Proxy Statement and is incorporated herein by reference.
The following table summarizes share and exercise price information about L Brands’ equity compensation plans as of February 1, 2020.
 
Plan category
 
(a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants and rights
 
(b) Weighted-average
exercise price of
outstanding options,
warrants and rights
 
(c) Number of securities
remaining available for
future issuance under
equity compensation
plan (excluding
securities reflected in
column (a))
Equity compensation plans approved by security holders (1)
 
14,341,674

 
$
51.87

(2)
5,326,219

Equity compensation plans not approved by security holders
 
—

 
—

 
—

Total
 
14,341,674

 
$
51.87

 
5,326,219

 ________________
(1)
Includes the following plans: L Brands, Inc. 2015 Stock Option and Performance Incentive Plan, L Brands, Inc. 2011 Stock Option and Performance Incentive Plan and L Brands, Inc. 1993 Stock Option and Performance Incentive Plan (2009 Restatement). There are no shares remaining available for grant under the 2011 Plan or 1993 Plan.
(2)
Does not include outstanding rights to receive Common Stock upon the vesting of restricted share awards or settlement of deferred stock units.


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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Information regarding certain relationships and related transactions is set forth under the caption “ELECTION OF DIRECTORS—Nominees and Directors” and “—Director Independence” in the Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information regarding principal accountant fees and services is set forth under the captions “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS—Audit Fees”, “—Audit Related Fees”, “—Tax Fees”, “—All Other Fees” and “—Pre-approval Policies and Procedures” in the Proxy Statement and is incorporated herein by reference.

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Table of Contents

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a)
(1)
Consolidated Financial Statements
 
 
 
 
 
 
 
The following consolidated financial statements of L Brands, Inc. are filed as part of this report under Item 8. Financial Statements and Supplementary Data:
 
 
 
 
 
 
 
 
 
Management’s Report on Internal Control Over Financial Reporting
 
 
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
 
 
 
 
 
 
 
 
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income (Loss) for the Years Ended February 1, 2020, February 2, 2019 and February 3, 2018
 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended February 1, 2020, February 2, 2019 and February 3, 2018
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of February 1, 2020 and February 2, 2019
 
 
 
 
 
 
 
 
 
Consolidated Statements of Total Equity (Deficit) for the Years Ended February 1, 2020, February 2, 2019 and February 3, 2018
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Years Ended February 1, 2020, February 2, 2019 and February 3, 2018
 
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
 
(2)
Financial Statement Schedules
 
 
 
 
 
 
 
Schedules have been omitted because they are not required or are not applicable or because the
information required to be set forth therein either is not material or is included in the financial
statements or notes thereto.
 
 
 
 
 
 
(3)
List of Exhibits
 
 
 
 
 
 
 
3.
 
Articles of Incorporation and Bylaws.
 
 
 
 
 
 
 
3.1
 
 
 
 
 
 
 
 
3.2
 
 
 
 
 
 
 
 
4.
 
Instruments Defining the Rights of Security Holders.
 
 
 
 
 
 
 
4.1
 
 
 
 
 
 
 
 
4.2
 
Proposed form of Debt Warrant Agreement for Warrants attached to Debt Securities, with proposed form of Debt Warrant Certificate incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (File No. 33-53366) originally filed with the Securities and Exchange Commission (the “SEC”) on October 16, 1992, as amended by Amendment No. 1 thereto, filed with the SEC on February 23, 1993 (the “1993 Form S-3”). (P)
 
 
 
 
 
 
 
4.3
 
Proposed form of Debt Warrant Agreement for Warrants not attached to Debt Securities, with proposed form of Debt Warrant Certificate incorporated by reference to Exhibit 4.3 to the 1993 Form S-3. (P)
 
 
 
 
 
 
 
4.4
 
 
 
 
 
 

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4.5
 
 
 
 
 
 
 
 
4.6
 
 
 
 
 
 
 
 
4.7
 
 
 
 
 
 
 
 
4.8
 
 
 
 
 
 
 
 
4.9
 
 
 
 
 
 
 
 
4.10
 
 
 
 
 
 
 
 
4.11
 
 
 
 
 
 
 
 
4.12
 
 
 
 
 
 
 
 
4.13
 
 
 
 
 
 
 
 
4.14
 
 
 
 
 
 
 
 
4.15
 
 
 
 
 
 
 
 
4.16
 
 
 
 
 
 
 
 
4.17
 
 
 
 
 
 

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Table of Contents

 
 
4.18
 
 
 
 
 
 
 
 
4.19
 
 
 
 
 
 
 
 
4.20
 
 
 
 
 
 
 
 
4.21
 
 
 
 
 
 
 
 
4.22
 
 
 
 
 
 
 
 
4.23
 
Amendment and Restatement Agreement dated as of May 11, 2017 among the Company, L (Overseas) Holding LP, an Alberta limited partnership, Bath & Body Works (Canada) Corp., a Nova Scotia company, Victoria’s Secret UK Limited, a company organized under the laws of England and Wales, Mast Industries (Far East) Limited, a Hong Kong corporation, and LB Full Assortment HK Limited, a Hong Kong corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (the “Administrative Agent”), in respect of the Amended and Restated Five-Year Revolving Credit Agreement dated as of July 18, 2014, as amended by Amendment No. 1 thereto dated as of April 21, 2015, among the Company, the lenders from time to time party thereto and the Administrative Agent, incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K dated May 17, 2017.

 
 
 
 
 
 
 
4.24
 
 
 
 
 
 
 
 
4.25
 
 
 
 
 
 
 
 
4.26
 
 
 
 
 
 
 
 
4.27
 
 
 
 
 
 
 
 
4.28
 
 
 
 
 
 
 
 
4.29
 
 
 
 
 
 
 
 
4.30
 
 
 
 
 
 
 
 
4.31
 
 
 
 
 
 
 
 
10.
 
Material Contracts.
 
 
 
 
 
 
 
10.1
 
Officers’ Benefits Plan incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 1989 (the “1988 Form 10-K”).** (P)
 
 
 
 
 

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Table of Contents

 
 
10.2
 
 
 
 
 
 
 
 
10.3
 
 
 
 
 
 
 
 
10.4
 
 
 
 
 
 
 
 
10.5
 
 
 
 
 
 
 
 
10.6
 
 
 
 
 
 
 
 
10.7
 
 
 
 
 
 
 
 
10.8
 
 
 
 
 
 
 
 
10.9
 
 
 
 
 
 
 
 
10.10
 
 
 
 
 
 
 
 
10.11
 
 
 
 
 
 
 
 
10.12
 
 
 
 
 
 
 
 
10.13
 
 
 
 
 
 
 
 
10.14
 
 
 
 
 
 
 
 
10.15
 
 
 
 
 
 
 
 
10.16
 
 
 
 
 
 
 
 
10.17
 
 
 
 
 
 
 
 
10.18
 
 
 
 
 
 
 
 
10.19
 
 
 
 
 
 

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Table of Contents

 
 
10.20
 
 
 
 
 
 
 
 
21.
 
 
 
 
 
 
 
 
23.1
 
 
 
 
 
 
 
 
24.
 
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
32.
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
101.DEF
 
Inline XBRL Taxonomy Definition Linkbase Document
 
 
 
 
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
________________
**
Identifies management contracts or compensatory plans or arrangements.
(P)
Paper Exhibits

(b)
Exhibits.
The exhibits to this report are listed in section (a)(3) of Item 15 above.
(c)
Not applicable.

ITEM 16. FORM 10-K SUMMARY.

None.

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Table of Contents


SIGNATURES
Pursuant to the requirements of Section 13 or l5(d) 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.
Date: March 27, 2020
 
L BRANDS, INC. (Registrant)
 
 
 
 
By:
/s/    STUART B. BURGDOERFER
 
 
Stuart B. Burgdoerfer,
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 1, 2020:
Signature
 
Title
 
 
 
/s/    LESLIE H. WEXNER*
 
Chairman of the Board of Directors and Chief Executive Officer
Leslie H. Wexner
 
(Principal Executive Officer)
 
 
 
/s/    STUART B. BURGDOERFER
 
Executive Vice President and Chief Financial Officer
Stuart B. Burgdoerfer
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
/s/    PATRICIA S. BELLINGER*        
 
Director
Patricia S. Bellinger
 
 
 
 
 
/s/    E. GORDON GEE*        
 
Director
E. Gordon Gee
 
 
 
 
 
/s/    DONNA A. JAMES*
 
Director
Donna A. James
 
 
 
 
 
/s/    MICHAEL G. MORRIS*        
 
Director
Michael G. Morris
 
 
 
 
 
/s/    SARAH E. NASH*
 
Director
Sarah E. Nash
 
 
 
 
 
/s/    ROBERT H. SCHOTTENSTEIN*        
 
Director
Robert H. Schottenstein
 
 
 
 
 
/s/    ANNE SHEEHAN*        
 
Director
Anne Sheehan
 
 
 
 
 
/s/    STEPHEN D. STEINOUR*        
 
Director
Stephen D. Steinour
 
 
 
 
 
/s/    ALLAN R. TESSLER*        
 
Director
Allan R. Tessler
 
 
 
 
 
/s/    ABIGAIL S. WEXNER*        
 
Director
Abigail S. Wexner
 
 
 
 
 
/s/    RAYMOND ZIMMERMAN*        
 
Director
Raymond Zimmerman
 
 
*
The undersigned, by signing his name hereto, does hereby sign this report on behalf of each of the above-indicated directors of the registrant pursuant to powers of attorney executed by such directors.
By:
/s/    STUART B. BURGDOERFER
 
Stuart B. Burgdoerfer
Attorney-in-fact

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Table of Contents

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
L BRANDS, INC.
(exact name of Registrant as specified in its charter)
 
 
EXHIBITS

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Table of Contents

EXHIBIT INDEX
 
Exhibit No.
 
Document
 
 
 
4.31
 
Description of Registrant's Securities.
 
 
 
21
 
Subsidiaries of the Registrant.
 
 
 
23.1
 
Consent of Ernst & Young LLP.
 
 
 
24
 
Powers of Attorney.
 
 
 
31.1
 
Section 302 Certification of CEO.
 
 
 
31.2
 
Section 302 Certification of CFO.
 
 
 
32
 
Section 906 Certification (by CEO and CFO).
 
 
 
101.INS
 
Inline XBRL Instance Document  - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
101.SCH
 
Inline XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
Inline XBRL Taxonomy Definition Linkbase Document
 
 
 
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

117