L Brands debt has steadily grown – but leverage remains in low-to-mid 3-times area

By Paul Deckelman

New York, Jan. 13 – L Brands, Inc. – the Columbus, Ohio-based retailing company formerly and more familiarly known as Limited Brands – has sharply increased its debt load over the last decade.

That debt has helped to fuel its transition from primarily a traditional operator of clothing stores like Abercrombie & Fitch and full-line women’s apparel stores such as Lane Bryant and its former flagship operation, The Limited, to its present form, operating such specialty retail brands in the lingerie, fragrance, beauty products and accessories lines as Victoria’s Secret, PINK and Bed & Body Works, as well as La Senza and Henri Bendel.

But as its balance-sheet debt and the capitalized lease obligations associated with its more than 2,700 stores in the United States, Canada and elsewhere has grown exponentially – to an estimated $5.8 billion of balance sheet debt and $11.3 billion of total adjusted debt, including the lease obligations, at the end of 2015, versus $1.7 billion of balance sheet debt and $6.3 billion of total adjusted debt in 2005 – the company’s ability to deal with that debt has kept pace, with its leverage ratio holding in the low-to-mid 3 times area for almost all of that time.

“We have been pro-active, and we’d like to think, balanced, in our use of debt financing in our business,” the company’s executive vice president and chief financial officer, Stuart B. Burgdoerfer, told participants on Wednesday at the 18th Annual ICR Xchange Conference in Orlando, Fla.

“You can see that balance-sheet debt has increased meaningfully, from $1.7 billion [in 2005] to $5.8 billion [in 2015],” he said, “but the growth in EBITDAR, our profit, and our cash flows, have been substantial as well.”

Leverage in the 3X area

Showing a slide-presentation chart tracking changes in the company’s leverage ratio, the CFO declared that “we think about our leverage on an adjusted basis being appropriate in the mid-3s.”

Between 2005 and the present, the ratio measuring the company’s total adjusted debt, net of balance-sheet cash, as a multiple of its year-end EBITDAR – a retailing industry version of the standard corporate EBITDA earnings measure, plus total store-rent expenses – mostly ranged during that time between a low of 3 times and a high of 3.6 times, save for one spike up to 3.9 times, way back in fiscal 2006.

Burgdoerfer noted that for fiscal 2015, which is slated to end on Jan. 31, the company is projecting a 3.5 times leverage measure.

While both the balance-sheet debt and the capitalized lease obligations that make up the total adjusted debt figure have grown substantially over the past 10 years, as noted, EBITDAR also increased robustly during that timeframe, to an estimated $3.3 billion for fiscal 2015 from $1.9 billion a decade earlier.

So did end-of-year cash, which is projected at $2.4 billion as of the end of 2015 – double the $1.2 billion of cash that was on the books at end of 2005.

Burgdoerfer noted that the latest year-end cash level was augmented by a $1 billion financing the company did late in the year, when it sold $1 billion of 6 7/8% senior notes due 2035 – an unusual 20-year tenor not often seen among high-yield bond issuers. The quick-to-market offering – more than doubled in size from an originally announced $400 million – priced at par on Oct. 27.

Proceeds from the big deal were slated to be used for general corporate purposes, including capital expenditures, dividends and share repurchases.

Ample cash for shareholders

The CFO told the conference attendees that “this business generates a lot of cash.”

Over the years, he said, “we’ve increased substantially” the payment of the company’s regular dividends to its shareholders, including last year’s “very significant increase in the regular dividend to $2 a share.”

Even after capital spending and the scheduled cost of the regular dividend payments, “we still have additional cash retained and cash available for distribution to shareholders.”

According to end-of-year projections the company released in mid-November, when it reported its results for the fiscal third quarter ended Oct. 31, L Brands expects to have generated between $1.55 billion and $1.65 billion of operating cash flow. Subtracting the projected $800 million of total capital spending for the year, that would amount to $750 million to $850 million of free cash flow.

With regular dividend payments for the year of $590 million figured in, that would leave $160 million to $260 million as expected retained earnings.

“We’ll be considering how to best distribute our excess cash, in consultation with our board,” he said.

“We’ve had a regular pattern of increasing the regular dividend in line [with] or ahead of earnings growth, maintaining a payout level in the 40% to 50% level. We’ve bought back a lot of stock over time and will continue to pay out special dividends from time to time with excess cash.”

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.