Fitch Affirms L Brands' IDR at 'BB+'; Outlook Stable
NEW YORK -- April 11, 2014
Fitch Ratings has affirmed the ratings for L Brands, Inc. (L Brands, formerly
known as Limited Brands, Inc.), including the Long-term Issuer Default Rating
(IDR) at 'BB+'. The Rating Outlook is Stable. A full list of rating actions
follows at the end of this release.
KEY RATING DRIVERS
The affirmations reflect L Brands' strong brand recognition and dominant
market positions in intimate apparel and personal care and beauty products,
strong operating results, reasonable credit metrics and solid cash flow
generation. The ratings also consider the company's track record of
L Brands' strong business profile is anchored by its two flagship brands,
Victoria's Secret and Bath & Body Works; a strong direct business; and a
growing international footprint. The company's strong comparable store sales
(comps) trends since the recession have been driven by relevant and attractive
product offerings and a loyal customer base, although comps have normalized to
low single digits in 2013 from 6% - 10% in 2011/2012. In addition to positive
operating leverage from strong comps growth, the company has driven margin
growth through efficient inventory and expense management. EBITDA margins in
the 20%-range compare favorably to the broader retail average in the low
Fitch expects that L Brands can sustain comps growth in the 2% -3% range and
EBITDA margin to remain in excess of 20% over the next three years. This is
underscored by strong comps growth in both the Victoria's Secret brand
(approximately 62% of sales and EBITDA including the Victoria's Secret direct
business) and Bath & Body Works brand (approximately 27% of sales and 32% of
EBITDA). Fitch expects the growth of PINK in the U.S. (which could double over
the next few years from nearly $2 billion currently) and international
expansion, if executed successfully, could drive top line growth in the
Lease-adjusted leverage stood at 3.5x as of Feb. 1, 2014. Fitch expects the
company to maintain a leverage profile in the mid-3x range, and fund dividends
and share repurchases with free cash flow (FCF) and potential debt issuances.
The company's shareholder-friendly posture is a key constraint to the rating.
Fitch expects the company will continue to generate strong FCF before
dividends in the $650 million - $750 million range annually (or $300 million -
$350 million after regular dividends) over the next two to three years. Capex
is expected to increase to $750 million in 2014 from $690 million in 2013 and
$590 million in 2012, reflecting new store constructions and square footage
expansion to primarily support PINK and international growth (square footage
to grow by approximately 3% - 4% in 2014).
Liquidity is strong, supported by a cash balance of $1.5 billion as of Feb. 1,
2014 and the company's $1 billion revolving credit facility. The company has a
comfortable maturity profile, staggered over many years. Fitch considers
refinancing risk low given L Brands' strong business profile, favorable
operating trends, and reasonable leverage.
A positive rating action would require both the continuation of positive
operating trends and the maintenance of financial leverage in the low 3x on a
A negative rating action could be driven by a trend of negative comps and/or
margin compression from fashion misses, execution missteps, or loss of
competitive traction. A larger than expected debt-financed share repurchase
and/or leverage rising to approximately 4x would be negative for the rating.
Fitch has affirmed L Brands' IDR and issue ratings as follows:
--Long-term IDR at 'BB+';
--Bank credit facility at 'BBB-';
--Senior guaranteed unsecured notes at 'BB+';
--Senior unsecured notes at 'BB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012
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Isabel Hu, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Monica Aggarwal, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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