Business Context and Reporting Period
This Form 10-Q covers the thirteen-week period ended April 30, 1994, for The Limited, Inc. (parent company of Bath & Body Works, Victoria's Secret, and other retail brands). The filing includes unaudited consolidated financial statements reviewed by Coopers & Lybrand. The company operates in two principal selling seasons: Spring and Fall.
Key Financial Metrics
| Metric | Q1 1994 | Q1 1993 |
|---|---|---|
| Net Sales | $1,481.6 million | $1,518.6 million |
| Gross Income | $384.9 million | $380.7 million |
| Operating Income | $91.2 million | $85.5 million |
| Net Income | $47.3 million | $44.2 million |
| Diluted EPS | $0.13 | $0.12 |
| Cash and Equivalents (End of Period) | $159.1 million | $60.5 million |
| Long-Term Debt | $650.0 million | $650.0 million |
| Working Capital | $1,522.0 million | $1,513.2 million |
Margins: Gross income margin improved to 26.0% from 25.1%. Operating income margin increased to 6.2% from 5.6%.
Cash Flow: Net cash used for operating activities was $65.4 million (compared to $33.0 million used in the prior year), primarily due to seasonal inventory build-up and income tax payments. Capital expenditures totaled $68.1 million.
Material Changes vs. Prior Period
- Sales Composition: Total net sales decreased 2% year-over-year. However, excluding the Brylane mail-order business (sold in Q3 1993), net sales grew 6%. Retail sales increased 5% due to 184 new stores and 44 remodeled stores, while catalogue sales dropped 45% due to the Brylane exclusion.
- Profitability: Net income rose 7% despite lower total sales, driven by an 18% increase in store-for-store sales at non-women's apparel businesses (Victoria's Secret, Bath & Body Works, Structure) and a shift to less promotional pricing in women's apparel.
- Store Count: Total stores increased from 4,457 to 4,641. Notable growth occurred in Bath & Body Works (+88 stores) and Structure (+58 stores), while Lerner New York (-35) and The Limited (-34) saw closures.
- Liquidity: Cash and equivalents decreased by $161.4 million during the quarter, ending at $159.1 million, reflecting seasonal cash outflows for inventory and taxes.
Guidance, Outlook, and Risks
- Capital Expenditure Guidance: The company anticipates spending $375 million to $400 million on capital expenditures for fiscal 1994. Approximately $275 million to $300 million is allocated for new and remodeled stores, with an additional $10 million for a new catalogue sales center.
- Financing: The company has $840 million available under revolving credit agreements and a shelf registration for up to $250 million in debt securities. No commercial paper was outstanding as of April 30, 1994.
- Restructuring: A plan approved in Q3 1993 involves closing/remodeling approximately 360 Limited and Lerner stores. As of April 30, 1994, 80 stores were closed and 60 remodeled. Management expects the net impact to be immaterial to future operations.
- Legal Contingency: The IRS issued a notice of deficiency regarding taxes and interest for 1989 and 1990 related to foreign operations and construction allowances. The company intends to contest this vigorously and does not expect a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of the 18% store-for-store sales growth in non-women's apparel divisions (Victoria's Secret, Bath & Body Works) versus the decline in women's apparel sales due to reduced promotions.
- Monitor the execution of the store closure and remodeling program (360 stores targeted) and its impact on operating expenses and productivity.
- Assess the impact of the 45% drop in catalogue sales (excluding Brylane) on overall revenue mix and future catalogue growth projections.
- Review the status of the IRS tax deficiency notice and potential cash flow implications if the company is unsuccessful in its contest.
- Confirm that capital expenditures remain within the $375-$400 million guidance range and are funded by operating cash flows as projected.