BBWI

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended January 31, 2009, for Limited Brands, Inc. (trading as Bath & Body Works, Inc. in the request metadata, but legally Limited Brands, Inc.). The company operates in the specialty retail sector with two primary reportable segments: Victoria's Secret (including La Senza) and Bath & Body Works. The fiscal year was significantly impacted by a global economic downturn, leading to reduced consumer spending and traffic in retail malls.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 11% to $9.043 billion, driven primarily by a 9% decrease in comparable store sales across all major segments due to the economic recession and reduced mall traffic.
• Profitability Compression: Operating income fell 47% to $589 million. This decline was exacerbated by a $215 million non-cash impairment charge related to goodwill and intangible assets for the La Senza business.
• Segment Performance:
  • Victoria's Secret: Net sales remained flat ($5.604 billion) as a 9% increase in Direct sales offset a 3% decline in store sales. Operating income dropped significantly due to the La Senza impairment.
  • Bath & Body Works: Net sales decreased 5% to $2.374 billion with a 9% decline in comparable store sales.
• Divestitures: The Apparel segment (Express and Limited Stores) was fully divested in 2007; 2008 results reflect only the company's retained 25% equity interest.

Guidance, Outlook, and Risks

Management Commentary: Management adopted a defensive stance for 2009, focusing on conservative management of retail fundamentals including inventory levels, operating expenses, and capital expenditures. Capital expenditures for 2009 are planned at approximately $200 million, a significant reduction from prior years.

Liquidity and Credit: In February 2009, the company amended its credit facilities to provide flexibility. Credit ratings were downgraded to speculative grade (Ba1/BB+) by Moody's and S&P in late 2008 and early 2009, increasing borrowing costs. The company maintains $1.3 billion in revolving credit facilities (reduced to $1 billion after canceling a 364-day facility in Feb 2009).

Risks and Contingencies:

• Economic Sensitivity: Continued deterioration in economic conditions and unemployment could further reduce consumer spending.
• La Senza Impairment: Future impairment charges may be required if economic conditions continue to deteriorate.
• Guarantees: The company holds approximately $194 million in guarantees for lease payments of former subsidiaries (e.g., Express, Limited Stores).

Investor Verification Checklist

• La Senza Valuation: Verify the assumptions used in the discounted cash flow models for the $215 million impairment charge and the sensitivity of future cash flow projections.
• Credit Covenant Compliance: Confirm the company's ability to meet the amended fixed charge coverage (1.60x) and leverage (5.0x) covenants under the new credit facility terms.
• Inventory Levels: Assess the adequacy of inventory valuation reserves given the 9% decline in comparable store sales and the risk of markdowns.
• Guaranteed Lease Obligations: Review the status of the $194 million in lease guarantees for divested businesses and the likelihood of default by former subsidiaries.
• Capital Allocation: Monitor the suspension of share repurchases and the impact of restricted dividend payments ($220 million annual limit) on shareholder returns.