Business Context and Reporting Period
This Form 10-Q covers Limited Brands, Inc. (parent company of Bath & Body Works, Victoria's Secret, Express, and Limited) for the thirteen and thirty-nine weeks ended November 1, 2003. The company operates specialty retail stores and direct response businesses selling women's and men's apparel, intimate apparel, and personal care products.
Key Financial Metrics
| Metric | 13 Weeks Ended Nov 1, 2003 | 39 Weeks Ended Nov 1, 2003 |
|---|---|---|
| Net Sales | $1,846.8 million | $5,703.2 million |
| Operating Income | $42.2 million | $321.6 million |
| Net Income | $129.7 million | $329.2 million |
| Diluted EPS | $0.25 | $0.63 |
| Cash and Equivalents | $1,818.4 million (Nov 1, 2003) | N/A |
| Long-Term Debt | $648.2 million (Nov 1, 2003) | N/A |
| Working Capital | $2,628 million (Nov 1, 2003) | N/A |
Margins (39 Weeks): Gross income rate was 33.5%; Operating income rate was 5.6%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4% year-over-year for both the quarter and the year-to-date period. Comparable store sales increased 2% for the quarter and 1% year-to-date.
- Profitability Surge: Net income increased significantly (726% for the quarter, 121% year-to-date). This is largely driven by non-operating gains rather than core operational improvements.
- Segment Performance:
- Victoria's Secret: Sales up 8% (quarter) and 7% (YTD); Operating income up 49% (quarter).
- Bath & Body Works: Sales up 4% (quarter) and 3% (YTD); Operating income up 150% (quarter).
- Apparel (Express/Limited): Sales declined 2% (quarter) and 2% (YTD); Operating income turned negative for the quarter (-$8.9 million) compared to a loss of -$2.8 million in the prior year.
- Debt Structure: Long-term debt increased from $248 million (Nov 2002) to $648 million (Nov 2003) due to the issuance of $350 million in new debentures, partially offset by the redemption of $250 million in older notes.
Guidance, Outlook, and Unusual Items
Unusual Items Impacting Results:
- Gain on Investee's Stock: A significant non-operating gain of $128.4 million was recognized in the third quarter from the sale of the company's remaining interest in Alliance Data Systems Corp. (ADS). A prior gain of $79.7 million was recognized in Q1.
- Tax Settlement: Interest income included a $30.1 million refund from a tax settlement regarding foreign affiliate earnings.
- Trademark Sale: A $6.9 million gain was recorded from the sale of the Structure trademark.
- Debt Costs: Interest expense included a $13.4 million charge for the early redemption of 7.5% debentures.
Management Commentary & Outlook:
- Capital Expenditures: The company anticipates total capital spending of approximately $310 million for fiscal 2003, focused on store remodeling, new stores, and IT/distribution projects.
- Share Repurchases: The company completed a $150 million repurchase program in the first three quarters. On October 8, 2003, the Board authorized an additional $100 million repurchase program, though no shares had been repurchased under this new authorization as of the filing date.
- Liquidity: The company maintains a $1.25 billion unsecured revolving credit facility with no outstanding borrowings as of November 1, 2003.
Risks and Contingencies:
- Legal Proceedings: The company is a defendant in consolidated derivative actions regarding the rescission of a Contingent Stock Redemption Agreement. Management does not expect a material adverse effect.
- Guarantees: The company holds approximately $536 million in guarantees related to lease payments for divested subsidiaries (e.g., Abercrombie & Fitch, Lerner), though the likelihood of material liability is considered remote.
Investor Verification Checklist
- Core vs. Non-Core Earnings: Verify the "Adjusted" net income figures ($44.3 million for the quarter; $196.1 million YTD) to understand underlying operational performance excluding the $208 million ADS gain and tax refunds.
- Apparel Segment Turnaround: Monitor the Apparel segment (Express/Limited), which reported negative operating income for the quarter and declining comparable store sales, contrasting with the growth in Victoria's Secret and Bath & Body Works.
- Inventory Levels: Review inventory balances ($1.39 billion) relative to sales trends, as the company noted adjustments for estimated markdowns at the end of the quarter.
- Debt Servicing: Confirm the impact of the new $350 million debenture issuance on future interest expense and cash flow, noting the increase in average borrowings.
- Share Count: Verify the impact of the completed $150 million buyback and the new $100 million authorization on future earnings per share.