Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 3, 1996, for The Limited, Inc. (the "Company"). The filing includes unaudited consolidated financial statements for the thirteen and twenty-six weeks ended August 3, 1996, compared to the same periods in 1995. The Company operates multiple retail divisions, including Victoria's Secret, Bath & Body Works, Express, and Abercrombie & Fitch. Significant corporate actions during the period included a $1.615 billion share repurchase completed in March 1996 and the announcement of an initial public offering (IPO) for its subsidiary, Abercrombie & Fitch Co.
Key Financial Metrics
Revenue and Profitability
- Net Sales (26 weeks): $3.684 billion (1996) vs. $3.307 billion (1995), an 11% increase.
- Net Sales (13 weeks): $1.896 billion (1996) vs. $1.719 billion (1995), a 10% increase.
- Net Income (26 weeks): $61.3 million (1996) vs. $88.0 million (1995).
- Net Income (13 weeks): $33.2 million (1996) vs. $48.8 million (1995).
- Earnings Per Share (26 weeks): $0.21 (1996) vs. $0.25 (1995).
- Gross Margin (26 weeks): 26.1% (1996) vs. 25.0% (1995).
- Operating Income (26 weeks): $135.4 million (1996) vs. $176.8 million (1995).
Cash Flow, Debt, and Liquidity
- Cash and Equivalents: Decreased from $1.646 billion (Feb 3, 1996) to $33.1 million (Aug 3, 1996).
- Net Cash Used in Operating Activities (26 weeks): $31.7 million (1996) vs. $4.8 million used (1995).
- Capital Expenditures (26 weeks): $191.0 million (1996) vs. $170.3 million (1995).
- Long-Term Debt: $650.0 million (unchanged from Feb 3, 1996).
- Short-Term Debt: Includes $117.0 million in Commercial Paper and $150.0 million in Notes Payable.
- Working Capital: $366.0 million (Aug 3, 1996) vs. $2.083 billion (Feb 3, 1996).
Material Changes Versus Prior Period
The most significant material change is the drastic reduction in cash and working capital, primarily driven by a $1.615 billion share repurchase program completed in March 1996. While reported net income declined year-over-year, management provides pro-forma adjustments to account for the share repurchase and the sale of a 60% interest in World Financial Network National Bank. On a pro-forma basis, net income for the 26 weeks ended August 3, 1996, increased 12% to $54.8 million compared to $49.0 million in 1995.
Revenue growth was driven by strong performance in Intimate Brands (Victoria's Secret and Bath & Body Works) and Emerging Businesses (Abercrombie & Fitch and Structure). Bath & Body Works sales surged 60% in the quarter. Conversely, the Women's Businesses segment underperformed, largely due to the Express division, which saw a 2% decline in comparable store sales.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: The Company anticipates spending $350 million to $385 million in capital expenditures for the full fiscal year 1996, with $220 million to $260 million allocated to new and remodeled stores.
- Funding: Management expects to fund 1996 capital expenditures through operating cash flow, supported by a $1 billion unsecured revolving credit agreement and a shelf registration for up to $250 million in debt securities.
- Segment Performance: Management expects disappointing sales results at the Express division to continue into the third quarter. However, Victoria's Secret and Bath & Body Works continue to show strong momentum.
Risks and Contingencies
- Tax Dispute: 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 but has made a deposit to mitigate interest. Management believes the resolution will not have a material adverse effect.
- Store Closures: The Company recognized a $45.6 million nonrecurring charge in late 1995 for planned store closings and expects to complete these actions by the end of fiscal 1996.
- Abercrombie & Fitch IPO: The Company filed a registration statement for the IPO of Abercrombie & Fitch Co., which will result in the Company retaining approximately 86% ownership. This restructuring is intended to encourage entrepreneurial management.
Investor Verification Checklist
- Verify the impact of the $1.615 billion share repurchase on the Company's liquidity and future capital allocation strategy.
- Confirm the pro-forma adjustments made to 1995 results to ensure accurate year-over-year comparability regarding the sale of the credit card bank and minority interests.
- Monitor the performance of the Express division, which is cited as a primary drag on the Women's Businesses segment.
- Review the status of the IRS tax assessment for years 1989-1992 and any potential cash outflows related to the resolution.
- Track the progress of the Abercrombie & Fitch Co. IPO and the resulting ownership structure.