BBWI

Business Context and Reporting Period

This Form 10-Q is filed by The Limited, Inc. (parent company of Bath & Body Works, Victoria's Secret, and other brands) for the quarterly period ended August 1, 1998. The filing covers the thirteen and twenty-six weeks ended on this date. The financial statements are unaudited but have been reviewed by PricewaterhouseCoopers LLP.

Key Financial Metrics

Note: Operating income and Net Income figures are heavily influenced by a one-time gain from the spin-off of Abercrombie & Fitch (see Material Changes).

Material Changes vs. Prior Period

• Special & Nonrecurring Items: The most significant driver of financial results was a $1.651 billion tax-free gain recorded in the second quarter from the split-off of Abercrombie & Fitch (A&F) on May 19, 1998. Additionally, a $93.7 million gain was recognized in the first quarter from the sale of the remaining interest in Brylane, Inc.
• Adjusted Performance: Excluding the A&F gain and other special items, operating income for the quarter increased 5% to $76.4 million, and net income increased 19% to $32.9 million compared to the prior year.
• Revenue Growth: Net sales increased 3% in the quarter and 6% year-to-date, driven by a 6% increase in comparable store sales. This growth was partially offset by the removal of A&F sales and the closure of the Cacique business.
• Brand Performance:
  • Intimate Brands: Victoria's Secret Stores saw a 2% comparable store sales increase; Bath & Body Works saw a 3% increase.
  • Women's Businesses: Express, Lerner, and Lane Bryant showed improvement, while Limited Stores and Structure experienced declines.
  • Emerging Businesses: Limited Too reported a 20% comparable store sales increase.
• Cash Flow: Net cash used for operating activities was $91.9 million for the 26-week period, primarily due to inventory buildup for the Fall season and tax payments. This compares to $138.9 million used in the prior year.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company anticipates spending $400 to $420 million on capital expenditures for the full year 1998, with $200 to $220 million allocated to new and remodeled stores.
• Year 2000 Compliance: Total expenditures for Year 2000 remediation are expected to range from $85 to $100 million from 1997 through 2000. Incremental expenses for 1998 are estimated at $30 to $35 million. Management does not expect a material adverse effect on financial condition, though risks regarding vendor compliance remain.
• Liquidity: The Company maintains a $1 billion unsecured revolving credit agreement with no outstanding borrowings as of August 1, 1998. Commercial paper was also not outstanding.
• Legal Proceedings: The Company is involved in a lawsuit regarding the False Claims Act (country of origin records). The District Court dismissed the case in May 1998, but the plaintiff has appealed. Management does not expect a material adverse effect.
• Dividends: Dividends per share were $0.13 for the quarter and $0.26 year-to-date.

Investor Verification Checklist

• Verify the sustainability of earnings by excluding the $1.65 billion A&F spin-off gain and the $93.7 million Brylane gain to assess core operational profitability.
• Confirm the impact of the A&F spin-off on future revenue streams, as A&F results are no longer consolidated after May 19, 1998.
• Review the Year 2000 compliance budget ($85-$100 million total) and monitor for any unexpected costs or operational disruptions.
• Monitor the performance of the "Women's Businesses" segment, specifically the divergence between the growth of Express/Lane Bryant and the decline of Limited Stores/Structure.
• Check the status of the appeal regarding the False Claims Act lawsuit to ensure no material liability emerges.