Fitch Affirms L Brands' IDR at 'BB+'; Outlook Stable

Fri Apr 12, 2013 1:49pm EDT

(The following statement was released by the rating agency) NEW YORK, April 12 (Fitch) Fitch Ratings has affirmed its ratings on 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 appears 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 shareholder-friendly activities. L Brands' strong business profile is anchored by its two profitable flagship brands, Victoria's Secret and Bath & Body Works, a strong direct business, and a growing international footprint. The company's comparable store sales (comps) trends have remained robust in the past three years, driven by relevant brands and merchandise that command attractive pricing and benefit from a loyal customer base. In addition to positive operating leverage from strong comps growth, the company has driven margin growth through efficient inventory management. EBITDA margins in the 20%-range compare favorably to the broader retail average in the low teens. Fitch expects that L Brands can sustain comps growth in 2%-3% range and EBITDA margin to remain in excess of 20% over the next three years. This is underscored by strong comp growth in both the Victoria's Secret brand (approximately 63% of sales and 64% of EBITDA including the Victoria's Secret direct business) and Bath & Body Works brand (approximately 28% 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 $1.5 billion currently) and international expansion, if executed successfully, could drive top line growth in the mid-single-digit range and enable the company to move towards its targeted EBIT margin of the high teens from 16.3% currently. Capex is expected to increase modestly to $600 million-$700 million, from $588 million in 2012, reflecting new store constructions and square footage expansion to primarily support PINK and international growth. The company has been closing underperforming stores to drive improvement in overall store productivity (which resulted in net square footage decline over the past few years), but it expects square footage to grow by approximately 3% in 2013 given PINK and international growth. Lease-adjusted leverage was at 3.4x as of Feb. 2, 2013, which is within the context of the existing rating level. Fitch expects the company to maintain a leverage profile in the mid-3x area, directing free cash flow (FCF) toward dividends and share repurchases. FCF before dividends is expected to be in the $650 million-$750 million range annually over the next 24 months. Besides a regular dividend, six special dividends totaling more than $3.3 billion have been declared since 2010, including the most recent payout announced in December 2012. In addition, the company completed more than $2 billion in share repurchases over the past three years. These actions have been supported by $2 billion of incremental debt over the past two years. As a result, the company's shareholder-friendly posture is a key constraint to the rating. More significant debt-financed dividends and/or share repurchases could be a concern for the rating. Liquidity is strong, as indicated by a cash balance of $773 million as of Feb. 2, 2013 and an undrawn $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. RATING SENSITIVITIES A positive rating action would likely require both the continuation of positive operating trends and a shift in posture toward debt reduction and the maintenance of financial leverage in the low 3x on a consistent basis. A negative rating action could be driven by a trend of negative comparable store sales 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 a negative for the rating. Fitch has affirmed the following ratings on L Brands: --Long-term IDR at 'BB+'; --$1 billion bank credit facility at 'BBB-'; --Senior guaranteed unsecured notes at 'BB+'; --Senior unsecured notes at 'BB'. The Rating Outlook is Stable. Contact: Primary Analyst Isabel Hu, CFA Associate Director +1-212-908-0672 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Monica Aggarwal, CFA Senior Director +1-212-908-0282 Committee Chairperson James Rizzo Managing Director +1-212-908-0548 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Evaluating Corporate Governance' (Dec. 12, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Evaluating Corporate Governance here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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