OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed the ratings for L Brands, Inc. (L Brands), including the long-term Issuer Default Rating (IDR) at 'BB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The affirmations reflect L Brands' strong brand recognition and dominant market positions in intimate apparel and personal care and beauty products, strong operating results, and solid cash flow generation that is characteristic of an investment grade profile. While credit metrics have been reasonable, with leverage at or slightly below 3.5x since 2010, the 'BB+' rating takes into consideration the company's track record of shareholder-friendly activities which could push leverage above this range.

L Brands' strong business profile is anchored by its two flagship brands, Victoria's Secret and Bath & Body Works; a strong direct business; and a growing international footprint. The company's strong comparable store sales (comps) trends since the recession have been driven by relevant and attractive product offerings and a loyal customer base. Comps increased 4% in 2014, following a 6% increase in 2012 and 2% in 2013. In addition to positive operating leverage from strong comps growth, the company has driven margin growth through efficient inventory and expense management. EBITDA margins in the 20%+ range compare favorably to the broader retail average in the low teens.

Fitch expects that L Brands can sustain comps growth (excluding its direct business) in the 2%-3% range and EBITDA margin will remain in excess of 20% over the next three years. This is underscored by strong comps growth in both the Victoria's Secret brand (approximately 63% of sales and EBITDA including the Victoria's Secret direct business) and Bath & Body Works brand (approximately 29% of sales and 34% of EBITDA). Its direct business, which accounts for 16% of total revenue, is expected to benefit from continued growth in online sales, offset by the exit off certain non-core categories in the Victoria Secret direct and beauty business in 2015. These categories generated 2014 revenue of approximately \\$185 million or 1.6% of total sales.

Fitch also expects square footage expansion, if executed successfully, could drive overall top line growth in the 4% to 5% range. The growth of PINK in the U.S., which could be a \\$3 billion business over the next few years from nearly \\$2 billion currently, and the inclusion of the full lingerie and swim/sportswear lines in expanded Victoria's Secret stores have led to increased productivity per square foot over the past few years. International expansion provides a strong top line and profit opportunity by allowing the company to diversify outside of mall based locations and reduce operational and execution risks through its substantially franchised model (outside of the UK and Canadian markets).

KEY ASSUMPTIONS

--Fitch expects that L Brands can sustain comps growth (excluding its direct business) in the 2%-3% range over the next three years;
--Square footage expansion, if executed successfully, could drive overall top line growth in the 4% to 5% range;
--Strong free cash flow (FCF) before regular dividends in the \\$700 million-\\$800 million range annually (or \\$100 million-\\$200 million after regular dividends) over the next two to three years;
--Capex is expected to increase to \\$850 million in 2015 reflecting new store constructions and square footage expansion and stay in that range thereafter;
--Maintain a leverage profile in the mid-3x range; with future debt funded special dividends or share buybacks potentially pushing leverage higher than the 3.2x in 2014.

RATING SENSITIVITIES
A positive rating action would require both the continuation of positive operating trends and a public commitment to maintain financial leverage in the low 3x range.

A negative rating action could be driven by a trend of negative comps and/or margin compression from fashion misses, execution missteps or loss of competitive traction. A larger than expected debt-financed share repurchase or special dividend and/or leverage rising to approximately 4x would be negative for the rating.

LIQUIDITY AND DEBT STRUCTURE

Liquidity is strong, supported by a cash balance of \\$650 million as of May 2, 2015 and the company's \\$1 billion revolving credit facility. The company has a comfortable maturity profile, staggered over many years. Fitch considers refinancing risk low given L Brands' strong business profile, favorable operating trends, and reasonable leverage.

Fitch expects the company will continue to generate strong FCF before regular dividends in the \\$700 million-\\$800 million range annually (or \\$100 million-\\$200 million after regular dividends) over the next two to three years. Fitch assumes regular dividends will be increased by 20% to 25% annually, in line with the last few years. Capex is expected to increase to \\$850 million in 2015 from \\$715 million in 2014 and \\$690 million in 2013, reflecting new store constructions and square footage expansion to primarily support PINK and international growth (square footage to grow by approximately 3.5% in 2015).

Lease-adjusted leverage stood at 3.2x as of Jan. 31, 2015. Fitch expects the company to maintain a leverage profile in the mid-3x range, and fund dividends and share repurchases with FCF and potential debt issuances. The company's shareholder-friendly posture is a key constraint to the rating.

FULL LIST OF RATING ACTIONS

Fitch has affirmed L Brands ratings and assigned the following Recovery Ratings (RRs) to its debt:

--Long-term IDR at 'BB+';
--Secured bank credit facility at 'BBB-/RR1';
--Senior guaranteed unsecured notes at 'BB+/RR4';
--Senior unsecured notes at 'BB/RR5'.

The Rating Outlook is Stable.

The assignment of the RRs reflects 'Recovery Ratings and Notching Criteria for Non-Financial Corporates issuers' criteria dated Nov. 18, 2014, which allows for the assignment of recovery ratings for issuers with IDRs in the 'BB' category.