L Brands says Q2 liquidity ‘very strong,’ cites cash flow and revolver availability

By Paul Deckelman

New York, Aug, 18 – L Brands, Inc. says that it is in a “very strong” liquidity position, citing the Columbus, Ohio-based specialty retailer’s cash generation ability and the borrowing availability under its revolving credit facilities.

The company said, as part of earnings commentary released in conjunction with its financial results for the 2016 fiscal second quarter ended July 30, that its liquidity “is more than sufficient to fund our working capital, capital expenditures, dividends, and any other foreseeable needs.”

The company said that it expects 2016 free cash flow of “about $600 to $700 million. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends.”

L Brands said that during the quarter, it repurchased 1.8 million shares of stock for $127.8 million; at the quarter’s end, it had $112 million remaining under its current $500 million share repurchase program.

According to figures contained in a slide presentation the company prepared for use in conjunction with its Thursday conference call with analysts by chief financial officer and executive vice president Stuart B. Burgdoerfer and other company executives, L Brands closed out the quarter with cash and equivalents on its balance sheet of nearly $1.273 billion.

That was up slightly on a sequential basis from $1.267 billion at the end of the 2016 fiscal first quarter on April 30, although both quarterly figures were down from the $2.548 billion on the balance sheet at the end of the 2015 fiscal year on Jan. 30 of this year. The year-ago fiscal second-quarter cash balance, meantime, was $780.128 million.

Long-term debt as of the end of this year’s second quarter was nearly $5.707 billion, down marginally from $5.718 billion in the first quarter and $5.715 billion at year-end 2015. The debt load was up by nearly $1 billion from nearly $4.72 billion a year ago.

A pair of junk bond deals

In the interim, L Brands visited the junk bond market twice with large bond offerings.

Last fall, it priced $1 billion of 6 7/8% senior notes due 2035 – an unusual 20-year tenor not generally seen in the high-yield market. That quick-to-market issue priced at par on Oct. 27, 2015, after having been massively upsized from an originally announced $400 million.

Proceeds from that megadeal were slated for general corporate purposes including capital expenditures, dividends and share repurchases.

This spring, L Brands made a return visit to Junkbondland, bringing a quickly shopped $700 million 20-year issue that priced at par on June 13, yielding 6¾%.

Proceeds from the June issue were used to fund the redemption of the company’s outstanding 6.9% senior notes due in July 2017. According to the company’s most recent 10-Q filing with the Securities and Exchange Commission, filed in June when the company released its fiscal first-quarter results, some $713 million of the notes were outstanding at the end of the quarter in April.

Amie Preston, L Brands’ chief investor relations officer, said on the conference that as a result of that redemption transaction, the company took a pre-tax loss of $35.8 million against its second-quarter earnings for early extinguishment of debt.

That loss was $22.4 million, net of $13.4 million tax.

Leverage ratio in mid-3X area

According to financial documentation on the company’s website, L Brands ended 2015 with total adjusted debt of some $11.2 billion – $5.5 billion of capitalized lease obligations in addition to $5.7 billion of balance sheet debt.

With EBITDAR – the familiar EBITDA earnings measure, plus rental or lease expense on the company’s more than 2,700 Victoria’s Secret, PINK and Bath & Body Works stores in the United States, Canada and elsewhere – of $3.3 billion last year, the company had a leverage ratio of adjusted debt as a multiple of EBITDAR of 3.4 times.

L Brands projects that for full-year 2016, adjusted debt will grow to $11.8 billion, due to an increase in capitalized lease obligations of $6.1 billion, up from last year, while balance-sheet debt holds steady at $5.7 billion. With anticipated full-year EBITDAR of $3.4 billion, the company expects a year-end leverage ratio of 3.5 times.

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