BBWI

Business Context and Reporting Period

This Form 10-Q covers the thirteen-week period ended April 29, 2000, for The Limited, Inc. (the "Company"). The Company operates two primary reportable segments: Apparel Businesses (including Express, Lane Bryant, and Limited Stores) and Intimate Brands (including Victoria's Secret and Bath & Body Works). The reporting period reflects the Company's operations following the spin-off of Limited Too (August 1999) and the partial divestiture of Galyan's (August 1999). On May 2, 2000, the Company announced a two-for-one stock split, and all share data in this report has been retroactively adjusted to reflect this split.

Key Financial Metrics

Cash Flow Summary: Net cash used for operating activities was $151.3 million, compared to $217.1 million in the prior year. Investing activities used $61.4 million, primarily for capital expenditures ($57.4 million). Financing activities used $120.5 million, driven by a $100 million debt repayment and dividend payments.

Material Changes vs. Prior Period

• Profitability Surge: Operating income increased 38% and net income increased 38% year-over-year, despite flat total net sales. This was driven by a 200 basis point improvement in gross margin (33.0% vs. 31.0%) and improved merchandise margins in the apparel segment.
• Segment Performance:
  • Intimate Brands: Sales grew 15% to $1.012 billion, driven by an 11% comparable store sales increase and the addition of 194 new stores. Victoria's Secret Stores sales rose 18% with a 14% comparable store sales increase. Bath & Body Works sales rose 18% with a 6% comparable store sales increase.
  • Apparel Businesses: Sales grew 2% to $1.086 billion. Comparable store sales increased 6%, led by Express (16% increase). This growth offset a net reduction of 222 stores in the segment.
• Debt Reduction: Total long-term debt decreased by $150 million to $400 million following the repayment of $100 million in floating rate notes and the reclassification of $50 million to current liabilities.
• Capital Structure: The Company retired 163.7 million treasury shares in conjunction with the stock split, resulting in a non-cash charge against retained earnings.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: The Company anticipates spending between $475 million and $500 million on capital expenditures for fiscal year 2000. Approximately $375 million to $400 million is allocated for new stores and remodeling. Funding is expected to come primarily from operating cash flows.
• Stock Split: A two-for-one stock split was declared, payable May 30, 2000, to shareholders of record on May 12, 2000.
• Legal Proceedings:
  • Saipan Labor Lawsuits: Two complaints regarding labor practices on Saipan remain pending. The Company believes these will not have a material adverse effect.
  • Shareholder Derivative Actions: Consolidated derivative actions regarding the rescission of a Contingent Stock Redemption Agreement and a 1999 tender offer are pending. Management does not expect a material adverse effect.
• Tax Contingency: The IRS has assessed additional taxes and interest for years 1992-1996 regarding foreign affiliate earnings. The Company made a $112 million payment in Q3 1999 and believes the ultimate resolution will not be materially adverse.
• Risk Factors: Forward-looking statements are subject to risks including changes in consumer spending, competition, weather patterns, and the availability of suitable store locations.

Investor Verification Checklist

• Adjusted Comparables: Verify year-over-year growth using the "Adjusted Income Information" provided in the filing, which excludes Limited Too and Galyan's from the 1999 period to provide a more accurate comparison of ongoing operations.
• Inventory Levels: Note that inventories increased to $1.147 billion (up from $1.051 billion at year-end), reflecting build-up for the spring selling season. Monitor future quarters for markdown risks.
• Cash Flow Usage: Confirm that the $151.3 million cash outflow from operations is consistent with seasonal working capital needs and tax payments ($165.8 million paid in taxes during the quarter).
• Store Count Dynamics: Verify the net reduction of 365 total stores (222 in Apparel, offset by 194 additions in Intimate Brands) and the impact on future sales growth projections.
• Debt Covenants: Review the $1 billion revolving credit agreement covenants regarding working capital, debt, and net worth to ensure compliance given the current capitalization structure.