BBWI

Business Context and Reporting Period

This Form 10-Q covers The Limited, Inc. (parent company of Bath & Body Works, Victoria's Secret, and other apparel brands) for the thirteen and thirty-nine weeks ended October 30, 1999. The filing reflects significant corporate restructuring, including the spin-off of Limited Too (completed August 23, 1999) and the sale of a 60% majority interest in Galyan's Trading Co. (completed August 31, 1999). The company operates primarily through two reportable segments: Apparel Businesses and Intimate Brands.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3% in the third quarter and 6% year-to-date compared to 1998. This growth was driven by comparable store sales increases of 9% (Q3) and 10% (YTD), partially offset by the loss of sales from spun-off or divested entities (Limited Too, Galyan's, and Abercrombie & Fitch).
• Profitability: Operating income rose 14.2% in the third quarter to $92.5 million, driven by improved performance in the Apparel segment and higher gross margins. Year-to-date operating income was $280.5 million, a significant decrease from the $1.95 billion reported in 1998, which included a $1.65 billion one-time tax-free gain from the Abercrombie & Fitch split-off.
• Cash Flow: Net cash used for operating activities was $299.8 million for the thirty-nine weeks ended October 30, 1999, compared to $312.7 million in the prior year. This usage was primarily due to inventory buildup for the Fall season and a $112 million tax payment related to an IRS assessment.
• Capital Structure: The company issued $300 million in floating rate notes in May 1999 and repurchased $751.5 million of its own common stock during the period.

Guidance, Outlook, and Risks

• Capital Expenditures: The company anticipates total capital expenditures of $400 million to $420 million for fiscal 1999, with $280 million to $300 million allocated to new stores and remodeling.
• Year 2000 Compliance: The company has completed remediation for legacy systems and embedded technologies. Total costs incurred through October 30, 1999, were $80 million, with an additional $5 million to $10 million expected in 1999 and 2000. Management believes the risk of material disruption is low but acknowledges reliance on third-party vendors.
• Legal Proceedings: The company is involved in litigation regarding labor practices in Saipan and shareholder derivative suits concerning the rescission of a stock redemption agreement and a tender offer. Management does not expect these to have a material adverse effect.
• Contingencies: A $57 million liability remains for store closing and lease termination costs from a 1997 restructuring plan, with payments scheduled through 2016.

Investor Verification Checklist

• Divestiture Impact: Verify the comparability of year-over-year results given the spin-off of Limited Too and the partial sale of Galyan's, which removed significant revenue streams from the consolidated statements.
• One-Time Gains/Losses: Note that 1998 results were inflated by a $1.65 billion gain from the Abercrombie & Fitch split-off, making standard year-over-year comparisons misleading without adjusting for special items.
• Cash Position: Review the significant drop in cash and equivalents from $870.3 million (Jan 30, 1999) to $173.3 million (Oct 30, 1999), driven by share repurchases and tax payments.
• Debt Maturity: Confirm the status of the $300 million floating rate notes, $200 million of which were classified as current liabilities due to an early redemption election in November 1999.
• Year 2000 Costs: Assess the remaining $5 million to $10 million in estimated Year 2000 expenditures and the potential for disruption from third-party vendors.