ITEM 1. BUSINESS.
General
The company, which was founded in 1963 in Columbus, Ohio, has evolved over time from an apparel-based specialty retailer to a segment leader focused on home fragrance, body care products and soaps and sanitizer products operating under the Bath & Body Works, White Barn and other brand names. On August 2, 2021, the company completed the spin-off of its Victoria's Secret business, which included the Victoria's Secret and PINK brands, into an independent publicly traded company ("Victoria's Secret & Co." and such transaction, the "Separation") on a tax-free basis. Accordingly, the operating results of the Victoria's Secret business are reported as discontinued operations for all periods presented. All discussion within this Annual Report on Form 10-K, including amounts, percentages and disclosures for all periods presented, reflect only the continuing operations of the company unless otherwise noted. In connection with the spin-off of the Victoria's Secret business, the company changed its name from L Brands, Inc. to Bath & Body Works, Inc. ("we," the "Company" or "Bath & Body Works"). Additionally, starting August 3, 2021, our common stock began trading under the stock symbol "BBWI."
We make the world a brighter, happier place through the power of fragrance. This idea is what we were founded on, and it's at the heart of everything we do. We're a team that cares about our customers and believes in giving them a reason to celebrate with fragrance every day. We remain committed to fostering a diverse, equitable and inclusive culture that is focused on delivering exceptional fragrances and experiences. We work hard to improve our communities and our planet because we believe the world is a better place whenever everyone has access to the things that make them happy. We are one of the world’s leading specialty retailers and home to America’s Favorite Fragrances® offering a breadth of exclusive fragrances for the body and home, including the number one selling collections for fine fragrance mist, body lotion and body cream, 3-wick candles, home fragrance diffusers and liquid hand soap. For more than 30 years, customers have looked to Bath & Body Works for quality, on-trend products and the newest, freshest fragrances.
We believe we benefit from global brand awareness, a wide and compelling product assortment and a deep connection with our customers. As of January 29, 2022, our merchandise is sold through 1,755 company-operated stores and e-commerce sites in the United States of America ("U.S.") and Canada, and in 338 stores and 27 e-commerce sites in more than 35 other countries operating under franchise, license and wholesale arrangements.
Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. As used herein, “2021,” “2020” and “2019” refer to the 52-week periods ended January 29, 2022, January 30, 2021 and February 1, 2020, respectively.
Our Competitive 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 and Products
We have developed and operate a well-known, beloved and broadly appealing brand, which allows us to target markets across the economic spectrum, across demographics and across the world. Customers look to us to celebrate the season, transport them to a time and place, decorate their home, and find the perfect gift. During 2021, we grew our active customer file to over 60 million customers, an increase of 13% compared to pre-coronavirus pandemic levels. We benefit from a diverse range of customers who are loyal brand enthusiasts, with retention rates over 60% and increasing levels of average spend in 2021.
We have developed trusted and market leading products in the body care, home fragrance, and soap and sanitizer categories. Our products are differentiated through a combination of fragrance, packaging and quality at an accessible price. We also sell products under our trusted sub brands, including White Barn and Aromatherapy.
In-Store Experience and Store Operations
We view our customers' in-store experience as an important vehicle for communicating the image of our brand. We utilize visual presentation of merchandise, in-store marketing, music and our sales associates to reinforce the image represented by our brand. Our in-store marketing is designed to convey the principal elements and personality of our brand. The store design, visual marketing and storytelling, fixtures, scents, and music are all carefully planned and coordinated to create a unique shopping experience. We display 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 and enables convenience for the customer when desired. 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
Quality and innovation are at the core of our sourcing strategy. We seek to drive efficiencies and mitigate risk through our strong technical research and prolific product development. We believe a large part of our success comes from frequent new fragrances, packaging and other product launches. Our merchant, design and sourcing teams have a long history of bringing innovative and covetable products to our customers.
Our strategic vendor relationships provide deep capabilities across our product categories. Our supply base, which is predominantly located in North America, includes numerous long-standing vendor relationships. We also utilize the Beauty Park, a business park that includes several vendors in our vertically-integrated supply chain within close proximity of our Columbus, Ohio distribution centers. We believe the partnerships with our vendors help to deliver high-quality products to our customers and enable us to respond quickly to shifting consumer trends.
We utilize Company-owned distribution centers located in the Columbus, Ohio area to support our operations. We also utilize third-party regional distribution centers located throughout North America that enable us to position inventory geographically closer to stores. Additionally, we utilize third-party operated direct channel fulfillment centers, and pop-up third-party operated fulfillment facilities throughout North America to support peak needs. Finally, we are investing in a new Company-operated fulfillment center in Columbus, Ohio to support the anticipated future growth of our online business.
Experienced and Committed Management Team
Our senior management team has a wealth of retail and business experience at Bath & Body Works, Inc. and other companies such as Ann Taylor and Loft, Banana Republic, Ross Stores, Abercrombie & Fitch, Madewell, Carter’s, Rosetta Stone, IBM, KPMG and Accenture. We believe that we have one of the most experienced management teams in retail.
Growth Strategy
Growth in existing categories
We believe that we are well positioned to capitalize on a growing market and will continue to innovate and drive the market through new forms, new fragrances and additional products. Our products are designed to be used daily and replenished frequently. Our product pipeline is full and we expect to continue to launch new fragrances and products about every four to six weeks. We believe we have opportunity for growth in our existing categories through the constant flow of new product launches, formula upgrades and packaging refreshes, which drives traffic and repeat customers. In the near term, we plan on repackaging many of our best-selling fragrances, upgrading certain of our formulas and testing various new container and vessel concepts in candles and soaps.
Growth in new or adjacent categories
We are also focused on innovation into new categories and new forms, such as recent launches of spray sanitizers and bar soaps. We see growth opportunities by leveraging current strengths into new categories such as men's and wellness products, facial skincare, hair care, home care, and adjacent cleanser, moisturizing and candle categories. Our men’s collection has been the fastest growing part of our body care assortment during 2021, and we will continue to focus on and expand the collection. Men’s antiperspirant and deodorant is currently featured in about one-third of our stores, and we plan to introduce these products to all stores in 2022. We are also testing an expanded men’s shop in a few stores, which will include an expanded men’s assortment featuring hair care, beard care, face and shave.
We are also focused on developing clean and eco-friendly products for our customers and our planet. We recently introduced recycled plastics across certain categories. By the end of 2022, we plan to have all of our plastic bottles made from a minimum of 50%, and up to 100%, of post-consumer recycled content.
Growth in direct channel
We see a significant opportunity for growth in the direct channel (also referred to as digital or e-commerce) by continuing to invest in capabilities to provide an exceptional customer experience. We are continuously improving the online experience by enhancing graphics, video and the marketing/content mix, as well as making our websites and mobile application easier to navigate. To increase speed to our customers, we upgraded the order management system and are investing in a Company-operated direct channel fulfillment center to complement the six permanent third-party operated direct channel fulfillment
centers we utilize. Over time, we expect this additional fulfillment center, which will be highly automated, will support the growth of our direct channel.
We are focused on omnichannel initiatives and enhanced capabilities to engage our customers how, when and where they want, including offering buy online, pick-up in store ("BOPIS") at approximately 550 locations as of January 29, 2022. We plan to introduce BOPIS to approximately 250 additional stores in the near term. Our increased focus on mobile and application interactions will continue to provide flexibility and convenience to our customers, while creating a seamless shopping experience. Our shopping and services initiatives will continue to modernize the customer’s digital shopping experience through features like a loyalty program, shoppable mobile application and auto-replenishment. Further, with our customer at the core of our strategy, we are also increasing the personalization of our digital platforms through site experience and expanded text messaging marketing designed for our customers.
During 2021, we launched a Company-operated e-commerce website servicing our customers in Canada. In 2022, we plan to introduce our new customer loyalty program to our entire chain of U.S. stores. We have been piloting the loyalty program in select markets and have been encouraged by the results. Our loyalty members generally have higher spend and retention rates than our average customer. The program will also provide us with in-depth customer data that will enable us to market more effectively.
Growth internationally
We believe that there is substantial opportunity for international growth. Scaling opportunities in existing markets coupled with growth in new markets set the foundation for sustained growth. We believe our fragrance portfolio allows successful olfactive distortions to local preferences. Our franchise partners are committed to greater expansion and opened 50 net new stores in 2021, bringing the total to 338 internationally as of January 29, 2022. Our partners plan to open 70 to 100 new international stores in 2022. Additionally, we expect to continue growing the digital components of our international business, including through country-specific web platforms tailored to local languages and preferences and through additional regional expansion. As of January 29, 2022, our partners operated 27 international websites, an increase of 6 from January 30, 2021.
Real Estate
Company-operated Stores
We have a diversified store portfolio in the U.S. and Canada across venue tiers and types, with approximately half of our fleet located in shopping malls and half of our fleet located off-mall. We are continuing our off-mall expansion to limit our exposure to vulnerable mall locations. As a result of our strong brand and established retail presence, we have been able to lease high-traffic locations in most retail centers in which we operate. We proactively manage our stores and adjust our investment levels based on performance.
Our White Barn store design has delivered increased sales and profitability, with increases in sales and traffic following remodel completion. Approximately 60% of our stores were in the White Barn store design as of January 29, 2022, and we expect to remodel approximately 50% of the remaining core stores over the next two to four years.
Over time, we expect low-single digit annual increases in North American square footage, with off-mall penetration increasing. We will open new stores in emerging non-mall venues or as replacement stores for non-viable malls, while closing stores in non-viable or declining malls. During 2021, we increased our net square footage by 3% through 54 new off-mall stores and 79 remodels, partially offset by 35 store closures, principally in malls.
We are planning approximately 150 total real estate projects in 2022, consisting of approximately 100 new off-mall stores and approximately 50 remodels to the White Barn store design, offset by about 40 to 50 mall closures, yielding expected square footage growth of approximately 6%.
The following table provides the number of our Company-operated retail stores in operation as of January 29, 2022 and January 30, 2021:
| | | | | | | | | | | |
| January 29, 2022 | | January 30, 2021 |
United States | 1,651 | | 1,633 | |
Canada | 104 | | 103 | |
Total | 1,755 | | | 1,736 | |
The following table provides the changes in the number of our Company-operated retail stores for the past three fiscal years:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning of Year | | Opened | | Closed | | | | End of Year |
2021 | 1,736 | | | 54 | | | (35) | | | | | 1,755 | |
2020 | 1,739 | | | 27 | | | (30) | | | | | 1,736 | |
2019 | 1,721 | | | 39 | | | (21) | | | | | 1,739 | |
| | | | | | | | | |
| | | | | | | | | |
Franchise, License and Wholesale Arrangements
In addition to our Company-operated stores, our products are sold at partner-operated locations and websites in more than 35 countries. Our partner-based business model allows us to own assortment, pricing architecture, promotions, store designs and real estate approval while our partners make investments as experts in local real estate, people and practices.
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 international stores operated by our partners as of January 29, 2022 and January 30, 2021: | | | | | | | | | | | |
| January 29, 2022 | | January 30, 2021 |
International | 317 | | | 270 | |
International - Travel Retail | 21 | | | 18 | |
Total | 338 | | | 288 | |
Our partners operated 27 websites as of January 29, 2022, compared to 21 websites as of January 30, 2021.
Additional Information
Merchandise Vendors
During 2021, we purchased merchandise from approximately 125 vendors, primarily located in North America. Our largest vendor supplied approximately 12% of our total merchandise purchases, while no other single vendor provided more than 10% of our merchandise purchases. Our five largest vendors supplied approximately 35% of our total merchandise purchases on a combined basis during 2021.
Distribution and Merchandise Inventory
Most of our merchandise is produced in the U.S. and is shipped to our distribution centers in the Columbus, Ohio area. In addition to our Company-operated distribution centers, we also utilize third-party logistics providers to warehouse and distribute product throughout North America. We proactively evaluate our distribution channels to ensure we are able to provide the right product at the right place to meet or exceed our customers’ expectations. Our policy is to maintain sufficient quantities of inventories on hand in our retail stores, fulfillment and distribution centers to enable us to meet customer demand.
We continue to actively manage our inventory to adjust for the impacts of the coronavirus ("COVID-19") pandemic, including channel shifts and product category shifts. The current environment requires unprecedented agility, and we believe we are leveraging the speed that we have in our supply chain, our close partnerships with our suppliers and the capabilities of our sourcing, production and logistics teams to respond quickly.
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. Victoria's Secret & Co. currently administers and maintains operations of existing technology and serves as the technology service provider to us under a transition services agreement we entered into in connection with the Separation ("TSA"). Initiatives to separate systems are underway and will occur over a multi-year time period.
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, typically accounts for approximately one-third of our net sales and is 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 facility is 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.
Other Information
For additional information about our business, including our net sales and profits for the last three years, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Competition
The sale of home fragrance, body care products and soaps and sanitizer products is a highly competitive business with numerous competitors, including individual and chain specialty stores, department stores, online retailers and discount retailers. Brand image, presentation, marketing, design, price, service, fulfillment, assortment and quality are the principal competitive factors.
Human Capital Management
Human Capital
At Bath & Body Works, our purpose goes beyond selling product. We work to make a difference in our communities and foster a safe, welcoming and empowering workplace for our thousands of associates.
The Human Capital and Compensation Committee of the Company's Board of Directors oversees, amongst other things, the Company’s programs, policies, practices and strategies relating to culture, talent, diversity, equity and inclusion, equal employment opportunities and the Company’s executive compensation and succession plans.
Workforce Demographics
As of January 29, 2022, we employed approximately 56,900 associates, 48,100 of whom were part-time. The Company supplements resources using temporary associates during peak periods, such as the Christmas holiday season. Approximately 88% of our associates work in our stores, 3% in distribution centers and the balance work in home offices. None of our associates in the U.S. are covered by a collective bargaining agreement.
Our customer base is predominantly women, and we ensure that we reflect this in our associate population and in our Board room. As of January 29, 2022, women make up approximately 90% of our workforce and 44% of the members of our Board of Directors (the "Board"). Our Board is led by Sarah E. Nash, who served as Chair of the Board from May 2020 until February 22, 2022, when she assumed the role of Executive Chair.
Focus on Inclusion
We focus on recruiting, retaining and advancing diverse talent that reflects the customers we serve and the communities where we live and work. By continuing to encourage a workplace environment where diversity, equity and inclusion are valued, we believe we can serve our customers better, as well as attract and retain highly talented associates, suppliers and vendors of different backgrounds and experiences.
Led by our Office of Inclusion and with oversight from the Human Capital and Compensation Committee, we have built an inclusion strategy with five key pillars:
•Increase the diversity of candidate slates and hires for all roles.
•Develop, deploy and ensure completion of required diversity, equity and inclusion training at all levels to bring awareness and education to associates on diversity, equity and inclusion.
•Improve retention of diverse associates at all levels. Monitor culture changes and employee satisfaction through survey results and implement adjustments to better serve our associates.
•Increase volunteerism and giving to organizations promoting racial equity and social justice.
•Increase spend with minority-owned vendors.
More than 97% of our associates at the director level and above have completed training on diversity, equity and inclusion which includes training on bias, equity and conscious inclusion. The training, which will be introduced to all associates throughout the Company in 2022, emphasizes both the Company’s and associates’ responsibility to build an inclusive culture and accountability for senior leaders.
In addition, we have Inclusion Resource Groups that provide opportunities for associates to connect with one another around their shared passion for creating an inclusive workplace for all associates. These groups provide professional development for associates, support the needs of the business, help shape the culture of our Company and provide engagement and volunteerism in the community. We have associates who are members of the six Inclusion Resource Groups designed for associates who identify as, or are allies of, the following groups: Hispanic and Latinx; LGBTQIA+; Black and African American; Asian and Pacific Islander; entry level and junior or early career professionals; and women. During fiscal year 2021, we hosted 70 virtual events with approximately 10,000 attendees, and our associates have volunteered over 2,000 hours of time to non-profits in the communities where our associates are based.
The Company was recognized by The Human Rights Campaign's Corporate Equality Index as a 2022 "Best Place to Work for LGBTQIA+ Equality." For the fifth year in a row, the Company received a perfect - 100% - score on the index, which rates companies on detailed criteria in the following four areas:
•Non-discrimination policies across business entities;
•Equitable benefits for LGBTQIA+ workers and their families;
•Supporting inclusive culture; and
•Corporate social responsibility.
This designation recognizes our ongoing commitment to diversity, equity and inclusion.
Commitment to Equitable and Competitive Wages
We are committed to equal opportunity and treatment for all associates which includes equal career advancement opportunities and equitable and competitive wages. Our commitment to pay equity is evaluated by conducting periodic assessments of pay equity based on gender, race and ethnicity. In addition, we evaluate fairness of total compensation with reference to both internal and external comparisons.
Our compensation programs are designed to link annual changes in compensation to overall Company performance, as well as each individual’s contribution to the results achieved. Our pay for performance philosophy includes participation of all salaried associates in the home offices and distribution centers in our short-term cash incentive compensation program. The emphasis on overall Company performance is intended to align the associates’ financial interests with the interests of our stockholders.
Commitment to Providing Quality Benefits
We offer competitive, performance-based compensation; a company-matched savings and retirement plan; and flexible and affordable health, wellness and lifestyle benefits. Subject to certain eligibility requirements, associates can choose benefits and resources that fit their lifestyle, including, but not limited to, 14 weeks paid maternity leave, six weeks paid paternity leave, tuition reimbursement, free access to life planning services and a generous merchandise discount.
During 2021, we enhanced our benefits by extending mental health benefits to include both full-time and ongoing/non-seasonal part-time associates and their household members and dependents. In addition, we expanded adoption to include surrogacy coverage, and expanded our bereavement leave time and tuition assistance benefits.
Associate Engagement and Development
We are committed to investing in all our associates. In 2021, we conducted a survey to assess associate engagement, culture, leadership communication and effectiveness, diversity and inclusion efforts, work-life balance and career development. In 2021, 89% of associates responded to the survey with an 85% favorable engagement rate. Leaders created action plans that were incorporated into their annual goals in response to input received via the survey.
We provide diverse learning opportunities and challenging work experiences. We believe that associates can reach their career goals through multiple roles, career paths and locations. We offer a variety of enrichment experiences for those joining us as interns, new graduates, in mid-career or as a capstone to a career. Examples include:
•Development Days: Dedicated time to advance technical, creative or business skills.
•Leadership Development: Courses for associates in management positions to build critical skills and grow as effective leaders.
•Merchant-in-Training Program: Immersive program to learn the profession both on the job and from experts in the classroom.
•Onboarding: Dedicated time to learn the business and to form important relationships for mentoring and development.
•Tuition Assistance: Reimbursement of 100% of eligible tuition expenses, up to $3,000 per calendar year.
Safety Is Our Priority
The health and safety of our associates, customers and vendors is our highest priority. We provide safe and clean facilities, comply with all applicable workplace safety laws and have global safety policies and procedures to protect from avoidable injury.
In response to the COVID-19 pandemic, we implemented robust safety protocols to protect associates working in our distribution centers, stores and home offices. The vast majority of associates whose work can be done remotely are working from home. For associates who are working in our stores, offices and distribution centers, we are utilizing COVID-19 safety measures developed to align with or exceed Centers of Disease Control ("CDC") guidelines.
Code of Conduct
We have a written Code of Conduct that is based on our values and is a resource where associates can find information that defines behaviors that are acceptable and those that are not. We conduct an annual Code of Conduct compliance process which requires associates to complete a Code of Conduct disclosure and a separate training course.
We maintain an Ethics Hotline, operated by a third-party, 24 hours a day, 7 days a week where associates may anonymously report potential instances of unethical conduct and potential violations of law or Company policies.
Executive Officers of Registrant
At the end of 2021, our executive officers were as follows:
•Andrew M. Meslow, 52, has been our Chief Executive Officer ("CEO") since May 2020 and has had senior leadership positions with Bath & Body Works since 2005. Mr. Meslow, who joined the Company in 2003, has 30 years of experience in the retail industry, including previous roles at Ann Taylor and Banana Republic;
•Wendy C. Arlin, 51, has been our Executive Vice President and Chief Financial Officer since August 2021. Prior to that, Ms. Arlin served as our Corporate Controller since joining the Company in 2005;
•James L. Bersani, 63, has been our President of Real Estate since March 2014 and has led our real estate function since April 2006. Mr. Bersani has held a variety of roles in the real estate department with increasing leadership since joining the Company in 1986;
•Julie B. Rosen, 56, has been our President of Bath & Body Works since September 2020. Prior to joining the Company, Ms. Rosen was President at Ann Taylor and Loft from 2016 to 2020. She also ran her own retail consulting business with clients including Nike, Theory and Bare Escentuals and has retail experience at Banana Republic and Gap;
•Deon N. Riley, 54, has been our Chief Human Resources Officer since December 2020. Ms. Riley joined the Company from Ross Stores, Inc., where she was the Group Senior Vice President for Human Resources, Culture, Diversity and Inclusion from 2012 to 2020, and also previously served in leadership roles at Abercrombie & Fitch Co.;
•Michael C. Wu, 55, has been our Chief Legal Officer and Secretary since May 2021. Prior to joining, Mr. Wu was the Chief Legal Officer and Corporate Secretary at Madewell, Inc. from 2019 to 2020, and was the Senior Vice President, General Counsel and Secretary at Carter's, Inc. from 2014 to 2019. He also had prior leadership roles at Rosetta Stone, Inc. and Teleglobe International Holding Ltd.; and
•Chris T. Cramer, 50, has been our Chief Operating Officer since September 2020 and has held various senior leadership positions with the Company since 2001.
On February 23, 2022, we announced that Mr. Meslow will step down as CEO and as a member of our Board due to health reasons, effective May 12, 2022. Sarah E. Nash, Chair of the Board, was appointed Executive Chair on February 22, 2022, and will assume the role of Interim CEO upon Mr. Meslow's departure. Our Board is in the process of retaining a national search firm to assist in identifying a permanent CEO.
In February 2021, we announced Stuart B. Burgdoerfer's intention to retire from the Company effective in August 2021. At the request of the Board, Mr. Burgdoerfer continued to serve as Executive Vice President and Chief Financial Officer through the completion of the Separation and was the executive leading the Separation process. On August 2, 2021, the Board appointed Wendy C. Arlin as Executive Vice President and Chief Financial Officer, and Mr. Burgdoerfer retired from the Company on August 20, 2021.
Available Information
We are subject to the reporting requirements of the Exchange Act of 1934, as amended (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.bbwinc.com.
Copies of any of the above-referenced documents will also be made available, free of charge, upon written request to:
Bath & Body Works, Inc.
Investor Relations Department
Three Limited Parkway
Columbus, Ohio 43230
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, inflation, consumer confidence, consumer spending patterns and market disruptions including pandemics or significant health hazards, severe weather conditions, natural disasters, terrorist activities, financial crises, political crises or other major events, or the prospect of these events;
•the COVID-19 pandemic has had and may continue to have an adverse effect on our business and results of operations;
•the seasonality of our business;
•the anticipated benefits from the Victoria's Secret & Co. spin-off may not be realized;
•the spin-off of Victoria’s Secret & Co. may not be tax-free for U.S. federal income tax purposes;
•our dependence on Victoria's Secret & Co. for information technology services;
•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;
•the dependence on store traffic and the availability of suitable store locations on appropriate terms;
•our continued growth in part through new store openings and existing store remodels and expansions;
•our ability to successfully operate and expand internationally and related risks;
•our independent franchise, license and wholesale partners;
•our direct channel business;
•our ability to protect our reputation and our brand image;
•our ability to successfully complete environmental, social and governance initiatives, and associated costs thereof;
•our ability to attract customers with marketing, advertising and promotional programs;
•our ability to maintain, enforce and 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 brand, 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 and/or stores, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in impacted areas;
•duties, taxes and other charges;
•legal and regulatory matters;
•volatility in currency exchange rates;
•local business practices and political issues;
•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;
•our reliance on a limited number of suppliers to support a substantial portion of our inventory purchasing needs;
•the ability of our vendors to deliver products in a timely manner, meet quality standards and comply with applicable laws and regulations;
•fluctuations in foreign currency exchange rates;
•fluctuations in product input costs;
•fluctuations in energy costs;
•our ability to adequately protect our assets from loss and theft;
•increases in the costs of mailing, paper, printing or other order fulfillment logistics;
•claims arising from our self-insurance;
•our and our third-party service providers', including Victoria's Secret & Co. during the term of the Transition Services Agreement, ability to implement and maintain information technology systems and to protect associated data;
•our ability to maintain the security of customer, associate, third-party and Company information;
•stock price volatility;
•our ability to pay dividends and make share repurchases under share repurchase authorizations;
•shareholder activism matters;
•our ability to maintain our credit ratings;
•our ability to service or refinance our debt and maintain compliance with our restrictive covenants;
•the impact of the transition from London Interbank Offered Rate (“LIBOR”) and our ability to adequately manage such transition;
•our ability to comply with laws, regulations and technology platform rules 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 Annual Report on 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.
Risks related to our business:
Our net sales, profit results and cash flows are sensitive to, have been affected by and may in the future be further impacted by, general economic conditions, inflation, consumer confidence, spending patterns, significant health hazards or pandemics, weather 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 consumers’ ability or willingness to spend. These risks, which can vary substantially by country, include political, financial or social instability or conditions, geopolitical events, corruption, anti-American sentiment, social and ethnic unrest, military conflicts and terrorism, as well as changes in general economic conditions (including consumer spending, unemployment levels and wage and commodity inflation). 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 our products may 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.
The COVID-19 pandemic has had and may continue to have an adverse effect on our business and results of operations.
The COVID-19 pandemic continued to impact our business and results of operations in fiscal year 2021. While many of our stores were open for most of the year, reduced consumer confidence and changes in shopping patterns adversely impacted store
traffic during certain portions of the year, as more consumers were either not shopping or choosing to shop online as a result of the COVID-19 pandemic. Additionally, resurgences of COVID-19 cases led to temporary store closures for portions of the year in certain markets and have impacted, and continue to impact, our supply chain partners, including third-party manufacturers, logistics providers and other vendors. Current vessel, container and other transportation shortages, labor shortages and port congestion globally have delayed and may continue to delay inventory orders and, in turn, deliveries to our customers and availability in our stores and e-commerce sites. Conversely, in the first quarter of 2021, our operating results benefited from customers receiving government stimulus payments related to the COVID-19 pandemic. These stimulus payments are not expected to be reinstated in the near term and, therefore, the benefit to operating results we realized in the first quarter of 2021 due to the stimulus payments is not expected to reoccur. During this period, we are focused on protecting the health and safety of our customers, associates, contractors, suppliers and other business partners. We are also working with our suppliers to minimize potential disruptions, while managing our business in response to a changing dynamic. Due to the uncertainty of COVID-19 and the speed at which the pandemic continues to impact our markets, we are continuing to assess the situation, including government-imposed restrictions, market by market.
We are unable to accurately predict the full impact that COVID-19, including the potential of new variants (which may be more contagious or severe, and may be less responsive to vaccines or treatments), will have on our operations going forward due to uncertainties which will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration and spread of the COVID-19 pandemic, actions taken to limit the spread, and the public’s willingness to comply with such actions, the availability and efficacy of a vaccine and positive treatments for COVID-19, and the impact of governmental regulations that might be imposed in response to the pandemic. Numerous state, local and foreign jurisdictions have imposed, and others in the future may impose, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders, restrictions and changes in consumer behavior have negatively impacted our operations, especially in our stores and supply chain. In addition to these more near-term impacts, we are unable to accurately predict the full impact COVID-19 will have on our longer-term operations as well, particularly with respect to our current mix of merchandise offerings, event-based categories and store traffic trends.
To the extent COVID-19 adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
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 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 may not realize the anticipated benefits from the Separation, which could harm our business.
On August 2, 2021, we completed the separation of the Bath & Body Works and Victoria’s Secret businesses. We may incur significant additional expenses and challenges in connection with the separation of the Victoria’s Secret business, which may include expenses and challenges related to our separation from the Victoria's Secret information technology environment. We are now a smaller and less diversified business than before the Separation, which could make us more vulnerable to changing market and economic conditions. Additionally, a potential loss of synergies from the Separation could negatively impact our results of operations, financial condition and cash flows. In addition, we may not be able to achieve the full strategic and financial benefits that are expected to result from the Separation and the anticipated benefits of the Separation are based on a number of assumptions, some of which may prove incorrect. If we fail to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, our business could be harmed.
The Separation could result in substantial tax liability to us and our stockholders.
We received an opinion of counsel to the effect that, for U.S. federal income tax purposes, the spin-off and certain related transactions qualify for tax-free treatment under certain sections of the Internal Revenue Code. However, the opinion relies on certain assumptions, representations and undertakings, including those relating to the past and future conduct of our business, and the opinion would not be valid if such assumptions, representations and undertakings were incorrect. Furthermore, the opinion is not binding on the Internal Revenue Service ("IRS") or the courts. If, notwithstanding receipt of the opinion, the spin-off or certain related transactions are determined to be taxable, we would be subject to a substantial tax liability. In addition, if the spin-off is taxable, each holder of our common stock who received shares of Victoria's Secret & Co. in connection with the spin-off would generally be treated as receiving a taxable dividend in an amount equal to the fair market value of the shares received.
Even if the spin-off otherwise qualifies as a tax-free transaction, the distribution would be taxable to us (but not to our stockholders) in certain circumstances if future significant acquisitions of our stock or the stock of Victoria's Secret & Co. are determined to be part of a plan or series of related transactions that included the spin-off. In this event, the resulting tax liability could be substantial. In connection with the spin-off, we entered into a Tax Matters Agreement with Victoria's Secret & Co., pursuant to which Victoria's Secret & Co. agreed to not enter into any transaction that could cause the spin-off or any related transactions to be taxable to us without our consent and to indemnify us for any tax liability resulting from any such transaction. In addition, these potential tax liabilities may discourage, delay or prevent a change of control of us.
Victoria’s Secret & Co. continues to provide information technology services to us on a transitional basis, and we may incur significant costs to perform these services ourselves following the transition period. Any inadequacy, interruption, integration failure or security failure of this technology could harm our ability to effectively operate our business.
Our ability to effectively manage and operate our business depends significantly on information technology systems. We rely heavily on applications related to point-of-sale, e-commerce, merchandising, planning, sourcing, logistics, inventory management, data security and support systems including human resources and finance currently supplied to us by Victoria’s Secret & Co. pursuant to the TSA that we entered into in connection with the Separation. Victoria’s Secret & Co. is not in the business of providing information technology outsourcing services and does not have experience providing such services for third-parties. Victoria's Secret & Co. may not successfully execute all of these services during the transition period or we may have to expend significant efforts and/or costs materially in excess of those estimated by us to transition such services to our information technology systems and we may experience delays in such transition period. Any interruption in, or deficiency of, these services could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Turnover in Company leadership or other key positions may have an adverse impact on Company performance.
We may experience changes in key leadership or key positions in the future. The departure of key leadership personnel can result in the loss of 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, could 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 or other third-parties.
On February 22, 2022, our Board appointed then Board Chair Sarah E. Nash as Executive Chair. Effective May 12, 2022, Ms. Nash will be appointed Interim CEO, and Andrew M. Meslow will step down as CEO and as a member of the Board due to health reasons. Our Board is in the process of retaining a national search firm to assist in identifying a permanent CEO. Such leadership transitions can be inherently difficult to manage, and an inadequate transition may cause disruption to our business, including to our relationships with our associates and other third-parties.
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.
An increase in the costs of associate wages, benefits and insurance (including workers’ compensation, general liability, property and health) could adversely affect our operating results. In particular, labor shortages and the current competitive labor market have increased competition for qualified associates, which has compelled, and may continue to compel, us to pay higher wages to attract or retain qualified associates. Such increases in costs may result from general economic or competitive conditions or from government imposition of higher minimum wages at the federal, state or local level, including in connection with the increases in state minimum wages that have recently been enacted by various states. Moreover, there may be a long-term trend toward higher wages in developing markets. Any increase in such operating expenses could have a material adverse effect on our results of operations, financial condition and cash flows.
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. 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 continued growth and success depends in part on new store openings and existing store remodels and expansions.
Our continued growth and success depends 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 international operations and our plans for international expansion include risks that could impact our results and reputation.
We intend to continue to operate internationally and further expand into international markets through partner arrangements. The risks associated with international markets include difficulties in attracting customers due to a lack of customer familiarity with our brand, 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. 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.
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. Further, we have no control as to whether our partners comply with federal and local law. 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 business includes risks that could have a material adverse effect on our results.
Our direct channel (also referred to as digital or e-commerce) is 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; and 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. We utilize third-party service providers for order management and fulfillment services. If these third-party service providers do not maintain efficient and uninterrupted service, we may experience merchandise delivery delays, loss of sales, cancellation charges or excessive promotional activity to clear inventory. Further, we may have difficulty replacing these third-party service providers and there can be no assurance we can do so in a timely manner or on terms favorable to us. 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 image.
Our ability to maintain our reputation is critical to our brand image. 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, privacy 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 and 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.
Our ability, or perceived inability, to complete environmental, social and governance initiatives may have a material effect on our reputation.
There has been an increased focus, including from investors, the general public and U.S. and foreign governmental and nongovernmental organizations, on environmental, social and governance ("ESG") initiatives, including with respect to climate change, greenhouse gases, packaging and waste, human rights, sustainable supply chain practices, animal health and welfare, deforestation and land, energy and water use. As part of our ongoing efforts, we established an ESG function to provide direction and help coordinate ESG work throughout the Company. There may be increased public pressure to expand our disclosures in these areas, make commitments, set targets or establish additional goals and take actions to meet them, which could expose us to market, operational and execution costs or risks. The metrics we disclose, whether they are based on the standards we set for ourselves or those set by others, may influence our reputation and the value of our brand. Our failure to achieve progress on our metrics on a timely basis, or at all, could adversely affect our business, financial performance, and growth. By electing to set and share publicly these metrics and expand upon our disclosures, our business may also face increased scrutiny related to ESG activities. As a result, we could damage our reputation and the value of our brand if we fail to act responsibly in the areas in which we report. Any harm to our reputation resulting from setting these metrics, expanding our
disclosure or our failure, or perceived failure, to meet such metrics or disclosures could adversely affect our business, financial performance, and growth.
We could also be affected by the physical effects of climate change, and other environmental issues, to the extent such issues adversely affect the general economy, adversely impact our supply chain or our stores, or increase the costs of our products and other supplies needed for our operations. In addition, future U.S. and international legislative and regulatory efforts to combat climate change or other environmental considerations could result in increased regulation, and additional taxes and other expenses, in a manner that adversely affects our business.
If our marketing, advertising and promotional programs are unsuccessful, or if our competitors are more effective with their programs than we are, our results of operations, financial condition and cash flows 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 brand and the location of and service offered in our stores and through our direct business. Although we use marketing, advertising and promotional programs to attract customers through various media, including social media, websites, mobile applications, email, and print, 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 results of operations, financial condition and cash flows.
Our ability to adequately maintain, enforce and 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 applied for registrations or that the registrations we obtain will prevent the imitation of our products or infringement or other violation 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.
Third parties may assert rights in or ownership of our trademarks and other intellectual property rights, or trademarks that are similar to our trademarks, or claim that we are infringing, misappropriating or otherwise violating their intellectual property rights. We may be unable to successfully resolve these types of conflicts to our satisfaction and may be required to enter into costly license agreements, be required to pay significant royalties, settlements costs or damages, be required to rebrand our products and/or be prevented from selling some of our products.
Our ability to compete favorably in our highly competitive segments of the retail industry could impact our results.
The retail industry 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 retail centers. Therefore, 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 retail centers as our stores. In addition to competing for sales, we compete for favorable site locations and lease terms in retail centers.
Increased competition, combined with declines in store and/or online website 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 brand and to remain current with trends and launch new product lines successfully could impact the image and relevance of our brand.
Our success depends in part on management’s ability to effectively manage the life cycle of our brand and to anticipate and respond to changing 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. We are dependent on certain product categories, and a decline in consumer demand in these product categories could negatively effect on our results of operations, financial condition and cash flows. Customer demands and trends change rapidly. If we are unable to successfully anticipate, identify or react to changing
preferences 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 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 domestic and international markets. 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:
•political instability, environmental hazards or natural disasters which could negatively affect international economies, financial markets and business activity;
•significant health hazards or pandemics, which could result in closed factories and/or stores, reduced workforces, scarcity of raw materials, and scrutiny or embargoing of goods produced in infected areas;
•imposition of new or retaliatory trade duties, sanctions or taxes and other charges on imports or exports;
•evolving, new or complex legal and regulatory matters;
•volatility in currency exchange rates;
•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;
•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 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. Further, the rapid increase in demand for online shopping has led to increased pressure on the capacity of our fulfillment network.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility of financial markets. The COVID-19 pandemic continues to impact our supply chain partners, including third-party manufacturers, logistics providers and other vendors. Current vessel, container and other transportation shortages, labor shortages and port congestion globally have delayed and may continue to delay inventory orders and, in turn, deliveries to our customers and availability in our stores and e-commerce sites. Disruptions or delays in shipments may have negative impacts to pricing of certain components of our products. The pandemic continues to have the potential to significantly impact our supply chain if the factories that manufacture our products, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers are disrupted, are temporarily closed or experience worker shortages. In addition, the impact of COVID-19 on macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange rates, commodity prices, and interest rates. Even after the COVID-19 global pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may occur in the future.
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 home fragrance, body care products and soaps and sanitizer 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.
A change in the relationship with our key vendors could have a material effect on our business.
We rely on a limited number of vendors to support our inventory purchasing needs. In fiscal year 2021, our largest vendor supplied approximately 12% of our total merchandise purchases and our largest five vendors supplied approximately 35% of our total merchandise purchases on a combined basis. Our business depends on developing and maintaining close relationships with our vendors and on our vendors’ ability or willingness to sell quality products to us at favorable prices and terms. Many factors outside of our control may harm these relationships and the ability or willingness of these vendors to sell us products on favorable terms. For example, financial or operational difficulties that our vendors may face could increase the cost of the products we purchase from them or our ability to source products from them.
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, shipping delays, quality problems or natural disasters, could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns.
In addition, quality problems could result in product liability judgments or widespread product recalls that may negatively impact our sales and profitability for a period of time depending on product availability, competition reaction and consumer attitudes. Even if product liability claims are unsuccessful or are 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 and third-party compliance auditors 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.
Fluctuations in foreign currency exchange rates could impact our results of operations, financial condition and cash flows.
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 may 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, financial condition and cash flows. 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 results may be affected by fluctuations in product input costs.
Product input costs, including freight, labor and raw materials, fluctuate subject to price volatility caused by any fluctuation in aggregate supply and demand, or other external conditions, such as weather and climate conditions, energy costs or natural events or disasters, taxes and tariffs (including as a result of trade disputes), industry demand, inflationary conditions, labor shortages, transportation issues, fuel costs, product recalls, governmental regulation and other factors, all of which are beyond our control and in many instances are unpredictable. These factors 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 results may be affected by fluctuations in energy costs.
Energy costs have fluctuated in the past and may fluctuate in the future due to changes in factors beyond our control, such as weather and climate conditions or natural events or disasters, taxes and tariffs (including as a result of trade disputes), industry demand, inflationary conditions, labor shortages, transportation issues, fuel costs, political conflicts and wars, governmental regulation and other factors. 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.
Our results may be impacted by 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.
We may be impacted by increases in the cost of mailing, paper, printing or other order fulfillment logistics.
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. We may face unexpected costs in transportation, warehousing or other logistics-related services. 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 and our third-party service providers', including Victoria's Secret & Co., ability to implement and sustain information technology systems and to protect associated data and system availability.
Our success depends, in part, on the secure and uninterrupted performance of our and our third-party services providers' and vendors' information technology systems. Our information technology systems, as well as those of our service providers and vendors, are vulnerable to damage, interruption or breach from a variety of sources, including cyberattacks, ransomware attacks, 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 and vendors are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Such incidents could disrupt our operations including our ability to timely ship and track product orders and project inventory requirements, and lead to interruptions or delays in our supply chain. Additionally, these types of problems could result in an actual or perceived breach of confidential customer, merchandise, financial, associate or other important information (including personal information), which could result in damage to our reputation, costly litigation, customer complaints, negative publicity, breach notification obligations, regulatory or administrative sanctions, inquiries, orders or investigations, indemnity obligations, damages for contract breach or penalties for violations of applicable laws or regulations. 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 or events may nevertheless cause failures in, or unauthorized access to, our and our third-party services providers’ and vendors' information technology systems. 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 and mobile applications 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.
As a result of the Separation, we have entered into a multi-year TSA with Victoria's Secret & Co. for information technology services and systems to support the day-to-day needs for most areas of technology. Over time, we will transition the information technology capabilities from Victoria's Secret & Co. to implement point-of-sale, mobile applications, merchandising, planning, sourcing, logistics, inventory management, human resources and financial systems on to our own platforms, some of which are yet to be established.
As systems are provided, supported and managed by Victoria's Secret & Co., and eventually transitioned to us, we will be required to establish a number of new information technology systems as well as make hardware, software and code modifications and upgrades to certain existing information technology systems for point-of-sale, e-commerce, mobile apps, merchandising, planning, sourcing, logistics, inventory management, data security, 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 and modifying our information technology systems, including risks relative to data integrity and system disruptions. Information technology system disruptions or data corruption, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations, financial condition and cash flows.
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, and our third-party service providers are subject to similar cybersecurity risks.
Due to applicable laws and regulations or contractual obligations, we may be held responsible for any cybersecurity incidents 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 maintain a standard of security (such as implementing reasonable measures), we cannot control third parties and cannot guarantee that a security breach will not occur in their systems.
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. Breaches or failures of security involving our information systems, including those provided, managed and supported by Victoria's Secret & Co., or those of any of our external service providers have occurred, and in the future may occur. 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. Compounding these risks is the complexity of our information systems, which are a collection of our and our third-party service providers’ systems.
While we train our associates and have implemented systems, processes and 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 threats. Despite these measures, we have been and may in the future be vulnerable to targeted or random attacks on our systems that could lead to 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 associates, third-party service providers and other third parties with otherwise legitimate access to our systems, websites, mobile applications or facilities (which risks may be heightened as a result of work-from-home policies and technologies implemented in the wake of the COVID-19 pandemic). 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, websites and mobile applications, 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.
We have and may in the future 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, or may not be completed in a timely manner. The inability to implement, maintain and upgrade adequate safeguards could have a material adverse effect on our results of operations, financial condition and cash flows. 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 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.
Risks related to our common stock:
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.
The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. In particular, our common stock may in the future be traded by short sellers which may put pressure on the supply and demand for our common stock, further influencing volatility in its market price. Public perception and other factors outside of our control may additionally impact the stock price of companies like us that garner a disproportionate degree of public attention, regardless of actual operating performance.
If we are unable to pay quarterly dividends or repurchase our shares at intended levels, our reputation and stock price may be impacted.
Our quarterly cash dividends and share repurchase programs have historically been part of our capital allocation strategy. Although our Board increased the annual dividend to $0.80 per share, beginning with the quarterly dividend paid in March 2022, and authorized a new $1.5 billion share repurchase program in February 2022, we are not required to declare dividends or make any share repurchases under our share repurchase programs in the future. In 2020, we didn't repurchase any of our shares and we suspended our quarterly cash dividends due to the effects of the COVID-19 pandemic. Our Board will determine our future levels of dividend payments and share repurchase authorizations, if any, 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 which may be beyond our control. Any reduction, or failure, to pay dividends or repurchase our shares after we have announced our intention to do so may negatively impact our reputation, investor confidence in us and our stock price.
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.
Risks related to our indebtedness:
Our ability to maintain our credit ratings 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 ratings. 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 ratings could affect our future interest costs.
We may be unable to service or refinance our debt or maintain compliance with restrictive covenants in our debt instruments, including our asset-backed revolving credit facility.
We currently have substantial indebtedness. Our asset-backed revolving credit facility contains a covenant and negative covenants that under certain circumstances require maintenance of a certain financial ratio 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. If we fail to comply with any covenant, including our financial covenant, it could result in an event of default and our lenders could terminate the commitments under our asset-backed revolving credit facility 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.
The interest rates on our credit facilities may be impacted by the phase-out of LIBOR and the transition to the Secured Overnight Financing Rate (“SOFR”).
Interest rates on U.S. borrowings under our asset-backed revolving credit facility ("ABL Facility") are based on LIBOR. On July 27, 2017, the U.K.’s Financial Conduct Authority (the authority that administers LIBOR) announced that it intends to phase out LIBOR by the end of 2023. It remains unclear what rate or rates may develop as accepted alternatives to LIBOR, or what the effect of such changes will be on the markets for LIBOR-based financial instruments. As of the date hereof, the current recommended replacement for USD-LIBOR is SOFR. While we currently do not have any borrowings outstanding under our ABL Facility, any transition away from LIBOR as a benchmark for establishing the applicable interest rate is complex and will affect the cost of servicing any future debt under our ABL Facility. Although the ABL Facility provides for alternative base rates, the composition and characteristics of such alternative base rates are not the same as those of LIBOR, and the consequences of the phase-out of LIBOR cannot be entirely predicted at this time.
Risks related to law and regulation:
Changes in laws, regulations or technology platform rules 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, directives, industry standards and regulations, as well as contractual obligations, relating to data privacy and security in the jurisdictions in which we operate. The legal and 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., privacy and data protection are regulated at federal, state, and local levels. 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 and have prioritized privacy and information security violations for enforcement actions. 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.
Laws range from the “sectoral” variety (i.e. laws that govern specific practices, services, or technologies) to omnibus laws (i.e. laws that comprehensively seek to govern all aspects of data processing practices). As an online and brick-and-mortar retailer, we are subject to both.
In North America, we are subject to sectoral laws that impose different enforcement regimes, whether via government agencies or class-action litigants, with fines and statutory damages that can result in significant exposure when applied to large customer segments. Illustrative of the sectoral variety are laws that govern telephonic communications (e.g., the Federal Telephone Consumer Protection Act), email communications (e.g., the Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act, and Canada’s Anti-Spam Legislation), the use of biometric technology (e.g., the Illinois Biometric Information Privacy Act), the printing of payment card digits on a store receipt (e.g., the Federal Fair and Accurate Credit Transactions Act), the use of call recordings (e.g., Federal and state laws governing consent for recordings), the collection of consumer information at retail point of sale (e.g., the California Song-Beverly Act), and the collection of driver’s license information (e.g., state laws governing the scanning of government ID’s).
We are further subject to omnibus privacy and data protection laws. For example, the California Consumer Privacy Act (“CCPA”), which broadly governs data privacy practices, 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 data sharing arrangements of personal information, and the ability to access and delete 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 certain classifications of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. Furthermore, in November 2020, California voters passed the California Privacy Rights Act of 2020 (“CPRA”). Effective beginning January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding California residents’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and CPRA. Other states and countries have passed comprehensive data privacy laws that are similar to the CCPA and CPRA, further complicating the legal landscape, and similar legislation is pending in more states. In addition, laws in all 50 U.S. states require businesses to provide notice to
consumers (and, in some cases, to regulators) when certain classifications of personal information have been accessed or acquired 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, which may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs or changes in business practices and policies.
While most of our international operations are conducted through franchise, license and wholesale arrangements, we are also subject to certain international laws, regulations and standards in certain international jurisdictions and may be subject to additional international laws, regulations and standards, whether existing or enacted in the future, that apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal information. One set of laws applicable to us is Canada’s Personal Information Protection and Electronic Documents Act (“PIPEDA”), which became effective on January 1, 2001, as well as substantially similar provincial privacy laws. These privacy statutes broadly govern the entire lifecycle of personal information, enumerating principles that govern accountability; purpose; consent; limitations on collection, use, disclosure, and retention; accuracy; safeguards, transparency; right to access; and complaint-handling. Certain of the statutes also contain a mandatory breach notification regime. Federal and provincial authorities enforce these laws. Privacy regulators have an express obligation to investigate complaints, and have the authority to initiate investigations. Under PIPEDA, the Office of the Privacy Commissioner of Canada has the power to require an organization to enter into a compliance agreement and failure to comply may result in a court order or court proceedings. A complainant may also appeal to Federal Court and the court has broad authority including awarding damages. Similarly, 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, and the GDPR serves and has served as a model for other jurisdictions’ data protection laws. 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, depending on the extent and degree to which we conduct business in the European Economic Area (“EEA”) and United Kingdom, 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, and other international jurisdictions are expected to pass similar laws that may include even more stringent requirements. Changes in such international laws, or changes in our business strategy such as direct expansions into additional jurisdictions may cause us to incur additional compliance costs, increase our risks of being subject to lawsuits, complaints and/or regulatory investigations or fines, or restrict our ability to transfer personal data between and among countries and regions in which we operate or may in the future operate. Such international laws, and our compliance with such laws, could impact the manner in which we do business and the geographical location or segregation of our relevant operations, and could adversely affect our results of operations, financial condition and cash flows.
All of these evolving compliance and operational requirements impose significant costs, such as costs related to organizational changes, implementing additional protection technologies, and 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 and data-protection litigation in certain jurisdictions, which could subject us to significant fines, sanctions, awards, penalties or judgments, any 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 ("NYSE"), among others. Although we have put in place policies and procedures aimed at ensuring legal and regulatory compliance, our 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. In addition, notwithstanding our adoption of CDC-recommended guidelines and preventative efforts to ensure the health and safety of our customers and associates, it is possible that our customers and associates may contract COVID-19 while at our stores or facilities, which could subject us to litigation. 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 stockholders, 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 IRS 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, including as a result of any executive action taken or legislative priorities set by the current U.S. presidential administration. 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.