Business Context and Reporting Period
Company: Limited Brands, Inc. (Parent of Bath & Body Works, Victoria's Secret, Express, and Limited Stores)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended October 28, 2006
Business Overview: The Company operates specialty retail stores and direct response channels selling women's intimate apparel, personal care, beauty products, and apparel. The reporting period covers the third quarter of fiscal 2006, a season characterized by inventory build-up for the holiday period.
Key Financial Metrics
| Metric | 13 Weeks Ended Oct 28, 2006 | 39 Weeks Ended Oct 28, 2006 |
|---|---|---|
| Net Sales | $2,115 million | $6,646 million |
| Gross Profit | $759 million (35.9% margin) | $2,401 million (36.1% margin) |
| Operating Income | $67 million | $449 million |
| Net Income | $24 million | $236 million |
| Diluted EPS | $0.06 | $0.59 |
| Cash and Equivalents | $178 million | $178 million (Ending Balance) |
| Long-Term Debt | $1,666 million | $1,666 million |
| Commercial Paper Outstanding | $232 million | $232 million |
| Working Capital | $1,133 million | $1,133 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12% in the third quarter and 8% year-to-date compared to 2005. Victoria's Secret sales grew 19% (Q3) and 14% (YTD), while Bath & Body Works grew 16% (Q3) and 12% (YTD). The Apparel segment (Express and Limited) declined 4% (Q3) and 6% (YTD).
- Profitability: Operating income surged 235% in the third quarter ($67M vs. $20M) and 54% year-to-date ($449M vs. $292M). This was driven by significant improvements in the Apparel segment's operating loss reduction and strong performance at Bath & Body Works.
- Cash Flow: Net cash used in operating activities increased to $607 million (YTD 2006) from $230 million (YTD 2005). This increase was primarily due to a $1,015 million increase in inventory to support holiday sales and supply chain system conversions.
- Accounting Changes: The Company adopted SFAS 123(R) regarding share-based compensation in Q1 2006, resulting in an incremental pre-tax expense of $10.1 million for the quarter and $26.5 million year-to-date.
Outlook, Risks, and Unusual Items
- Acquisition: On November 15, 2006, the Company announced a definitive agreement to acquire La Senza Corporation for approximately $628 million (U.S.), expected to close in mid-January 2007. Financing will involve cash on hand and approximately $400 million in new debt.
- Segment Strategy: Victoria's Secret is focusing on "Best At" bra strategies and aggressive marketing. Bath & Body Works is launching its first holiday catalogue. Express is focusing on inventory management and brand repositioning after significant clearance activity in 2005.
- Risks: Key risks include reliance on mall traffic, foreign sourcing disruptions, rising energy/oil prices affecting transportation and utility costs, and the successful integration of the La Senza acquisition.
- Unusual Items: The adoption of SFAS 123(R) reduced net income by $6 million in the quarter and $15 million year-to-date. The Company also recorded a $23 million increase in goodwill due to a personal care business acquisition in September 2006.
Investor Verification Checklist
- Inventory Levels: Verify the $2,175 million inventory balance against holiday sales performance to assess potential markdown risks in Q4.
- La Senza Financing: Confirm the issuance of the anticipated $400 million debt and its impact on leverage ratios and interest expense.
- Apparel Turnaround: Monitor Express and Limited Stores for sustained improvement in comparable store sales and gross margins following the 2005 clearance events.
- Cash Position: Track the reduction in cash equivalents from $1,208 million (Jan 2006) to $178 million (Oct 2006) and the reliance on commercial paper ($232 million) for working capital.
- Share Repurchases: Review the remaining $66.4 million authorization under the June 2006 stock repurchase program.