Business Context and Reporting Period
This Form 10-Q covers The Limited, Inc. (parent company of Bath & Body Works, Victoria's Secret, and Express) for the thirteen and thirty-nine weeks ended November 3, 2001. The company operates specialty retail stores and direct response businesses. The reporting period was significantly impacted by the sale of the Lane Bryant apparel business on August 16, 2001, and the economic environment following the September 11, 2001 events.
Key Financial Metrics
| Metric | 13 Weeks Ended Nov 3, 2001 | 39 Weeks Ended Nov 3, 2001 |
|---|---|---|
| Net Sales | $1,906.5 million | $6,225.4 million |
| Gross Income | $566.6 million (29.7% margin) | $1,929.1 million (31.0% margin) |
| Operating Income | $153.5 million | $293.2 million |
| Net Income | $90.2 million | $192.4 million |
| Diluted EPS | $0.21 | $0.44 |
| Cash and Equivalents | $317.9 million | $317.9 million (Ending Balance) |
| Long-Term Debt | $250.0 million | $250.0 million |
| Working Capital | $992.2 million | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 12% in the third quarter and 5% year-to-date compared to 2000. Excluding the sold Lane Bryant business, comparable store sales declined 7% in the quarter and 5% year-to-date, attributed to the post-September 11 economic environment.
- Profitability Drivers: Reported net income increased due to a $170 million pretax gain from the sale of Lane Bryant and a $62.1 million gain from the IPOs of investees (Alliance Data Systems and Galyan's). Excluding these non-recurring items, the company reported a net loss of $11.8 million for the quarter.
- Margin Compression: Gross income rates declined (29.7% vs. 33.2% in Q3 2000) due to higher markdowns and increased buying/occupancy expense rates as sales volume dropped.
- Debt Reduction: Long-term debt decreased from $400 million to $250 million following the repayment of $150 million in notes due in February 2001.
- Cash Flow: Net cash used for operating activities improved to $147.5 million (used) from $201.7 million (used) in the prior year, driven by reduced inventory purchases.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates spending approximately $435 million on capital expenditures for the full year 2001, primarily for new stores and remodeling.
- Liquidity: The company maintains a $1.25 billion unsecured revolving credit facility with no outstanding borrowings as of November 3, 2001. Management expects operating cash flows to fund 2001 capital needs.
- Risks: Significant risks include changes in consumer spending patterns, the impact of national security concerns on retail, competition, and the seasonality of the industry. The company also faces ongoing litigation regarding labor practices in Saipan and shareholder derivative suits, though management does not expect these to have a material adverse effect.
- Accounting Changes: The company is assessing the impact of new FASB statements (SFAS 141, 142, and 144) regarding business combinations and goodwill, effective in 2002.
Investor Verification Checklist
- Non-Recurring Gains: Verify the sustainability of earnings by excluding the $170 million Lane Bryant sale gain and $62.1 million investee IPO gains, which mask an underlying operating loss for the quarter.
- Comparable Store Sales: Confirm the severity of the 7% comparable store sales decline in Q3 2001 and its correlation with the broader economic downturn post-September 11.
- Inventory Levels: Review inventory balances ($1.34 billion) relative to the sales decline to assess potential future markdown risks.
- Segment Performance: Analyze the divergence between the struggling Apparel segment (Express, Limited) and the Intimate Brands segment (Victoria's Secret, Bath & Body Works), noting the latter's store expansion despite sales declines.
- Debt Covenants: Confirm continued compliance with fixed charge and debt-to-capital ratios under the new $1.25 billion credit facility.