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 twenty-six weeks ended July 31, 1999. The filing compares these periods to the same periods in 1998. The company operates primarily through two segments: Apparel Businesses and Intimate Brands (IBI). Notable corporate actions during this period include the spin-off of Limited Too (completed August 1999) and a significant share repurchase program.

Key Financial Metrics

Cash Flow (26 Weeks): Net cash provided by operating activities was $23.1 million. Investing activities provided $146.5 million (primarily due to the release of restricted cash), while financing activities used $549.6 million (driven by a $751.5 million share repurchase).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 9% in the quarter and 7% year-to-date compared to 1998. This was driven by a 10% increase in comparable store sales.
• Profitability Volatility: Reported Net Income and Operating Income appear significantly lower than 1998 ($1.68 billion vs. $52 million for the quarter). This is primarily due to a $1.651 billion tax-free gain recorded in Q2 1998 from the split-off of Abercrombie & Fitch (A&F), which is not present in 1999.
• Adjusted Performance: Excluding special items, second-quarter net income increased 83% to $60.4 million from $32.9 million in 1998. Adjusted EPS doubled to $0.26 from $0.13.
• Segment Performance:
  • Intimate Brands: Sales up 16% (Q2) and 15% (YTD). Victoria's Secret Stores sales up 18%; Bath & Body Works sales up 19%.
  • Apparel Businesses: Sales up 3% (Q2) and 6% (YTD). Operating losses narrowed significantly from $(53.6) million in 1998 to $(14.2) million in 1999.
• Balance Sheet: Cash decreased from $870.3 million (Jan 30, 1999) to $490.3 million (July 31, 1999) due to share repurchases and inventory build-up. Long-term debt increased to $950 million total (including current portion) due to new floating rate notes.

Guidance, Outlook, and Risks

• Capital Expenditures: The company anticipates spending $400 to $420 million in capital expenditures for fiscal 1999, with $300 to $320 million allocated to new stores and remodeling.
• Year 2000 Compliance: The company has incurred $79 million in Y2K remediation costs through July 31, 1999. Remaining expenditures are estimated at $6 to $11 million. Management believes systems are compliant, but risks remain regarding third-party vendors and infrastructure.
• Legal Proceedings:
  • ATMI Litigation: A False Claims Act case regarding country of origin declarations is pending appeal in the Sixth Circuit.
  • Saipan Labor Practices: Two complaints filed regarding labor practices by manufacturers on Saipan; motions to dismiss are pending.
  • Shareholder Derivative Suits: Three consolidated actions allege waste of corporate assets regarding the rescission of a stock redemption agreement and the June 1999 tender offer.
• Tax Contingency: The IRS has assessed additional taxes for 1992-1994. A $50 million payment is planned, with a potential additional $56 million if the IRS position is sustained for 1993-1994. Management does not expect a material adverse effect.
• Spin-offs: Limited Too was spun off in August 1999. The company retained a 40% interest in Galyan's Trading Co. following a partial sale in August 1999.

Investor Verification Checklist

• Adjusted Earnings: Verify the "Other Data" section to understand the true operating performance, as reported earnings are distorted by the 1998 A&F spin-off gain and 1999 Limited Too spin-off charges.
• Debt Structure: Review the new $300 million floating rate notes issued in May 1999 and the maturity schedule (2000-2001) to assess near-term refinancing needs.
• Inventory Levels: Inventory increased to $1.24 billion (up from $1.12 billion at year-end). Verify if this aligns with the Fall selling season strategy or indicates potential markdown risks.
• Share Repurchase Impact: Confirm the reduction in share count (15 million shares repurchased at $50/share) and its effect on future EPS calculations.
• Year 2000 Costs: Monitor the remaining $6-11 million in Y2K costs and any potential disruptions from third-party vendors not yet compliant.