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 Abercrombie & Fitch) for the quarterly period ended November 2, 1996. The filing covers the thirteen-week and thirty-nine-week periods ended on that date. The company operates in three primary segments: Intimate Brands (including Bath & Body Works), Women's Businesses, and Emerging Businesses.
Key Financial Metrics
| Metric | 13 Weeks Ended Nov 2, 1996 | 39 Weeks Ended Nov 2, 1996 |
|---|---|---|
| Net Sales | $1,994,986,000 | $5,678,530,000 |
| Gross Income | $555,374,000 | $1,516,824,000 |
| Operating Income | $88,350,000 | $223,728,000 |
| Net Income | $159,513,000 | $220,815,000 |
| Diluted EPS | $0.59 | $0.78 |
| Cash and Equivalents | $56,675,000 (as of Nov 2, 1996) | |
| Long-Term Debt | $650,000,000 | |
| Commercial Paper Outstanding | $346,900,000 | |
| Working Capital | $398,096,000 |
Note: Net Income includes a one-time gain of $118.6 million from the sale of subsidiary stock (Abercrombie & Fitch Co.).
Material Changes vs. Prior Period
- Sales Growth: Net sales increased 11% in the third quarter and 11% year-to-date compared to 1995, driven by a 4% increase in comparable store sales and the net addition of 442 stores.
- Profitability: Operating income increased to $88.4 million in the quarter (up from $69.1 million on a pro-forma basis in 1995). Gross margin improved to 27.8% of sales in the quarter from 25.1% in 1995.
- Segment Performance:
- Bath & Body Works: Sales surged 53% in the quarter and 59% year-to-date.
- Abercrombie & Fitch: Sales increased 54% in the quarter with a 19% comparable store sales gain.
- Intimate Brands: Overall sales up 18% in the quarter.
- Cash Flow: Net cash used for operating activities was $78.2 million for the 39-week period, a significant improvement from the $223.0 million used in the prior year period. This was largely due to increased accounts payable related to holiday inventory.
- Capital Structure: The company completed a $1.615 billion share repurchase in March 1996, reducing outstanding shares by 85 million.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates spending approximately $380 million to $390 million on capital expenditures for the full year 1996, with roughly $240 million to $250 million allocated to new stores and remodeling.
- Liquidity: Management expects to fund 1996 capital expenditures through operating cash flow. The company maintains a $1 billion unsecured revolving credit agreement, with no amounts outstanding as of November 2, 1996.
- IRS Contingency: The IRS has assessed additional taxes and interest for years 1989-1992 regarding foreign operations and construction allowances. The company is vigorously contesting this assessment and believes the resolution will not have a material adverse effect.
- Store Closures: A special charge of $45.6 million was recognized in late 1995 for planned store closings and downsizing, which management expects to complete by the end of 1996.
- Risks: Forward-looking statements are subject to risks including changes in consumer spending, competition, weather patterns, and the ability to secure suitable store locations.
Investor Verification Checklist
- Verify the impact of the $118.6 million one-time gain on the Abercrombie & Fitch IPO on reported Net Income and EPS.
- Review the pro-forma adjustments made to 1995 results to ensure accurate year-over-year comparability regarding the IBI and WFNNB transactions.
- Monitor the resolution of the IRS tax assessment for years 1989-1992.
- Track the execution of the $380-$390 million capital expenditure plan, specifically the opening of new stores.
- Assess the sustainability of the 53% sales growth at Bath & Body Works and 54% at Abercrombie & Fitch.