BBWI

Business Context and Reporting Period

This Form 10-Q is filed by The Limited, Inc. (parent company of Bath & Body Works, Victoria's Secret, and other brands) for the quarterly period ended August 2, 1997. The report covers the thirteen and twenty-six weeks ended on this date. The company operates in the retail sector, managing multiple brands including Intimate Brands (Victoria's Secret, Bath & Body Works), Women's businesses (Express, Lane Bryant), and Emerging businesses (Abercrombie & Fitch, Limited Too).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7% in the second quarter and 5% year-to-date compared to 1996. This growth was driven primarily by new and remodeled stores and catalogue sales, as comparable store sales were flat for the quarter and down 2% year-to-date.
• Profitability Decline: Operating income decreased 11% in the quarter and 10% year-to-date. Net income fell 17% in the quarter and 15% year-to-date (excluding a one-time gain).
• Segment Performance:
  • Intimate Brands: Strong performance with a 27% sales increase in the quarter. Bath & Body Works saw a 58% sales gain and 43% operating profit increase. Victoria's Secret Stores recorded a 15% comparable store sales increase.
  • Women's Businesses: Significant underperformance with an 11% decline in comparable store sales, driven largely by a 24% drop at Express.
  • Emerging Businesses: Sales increased 16% in the quarter, bolstered by Limited Too (25% comp sales gain) and Abercrombie & Fitch (15% comp sales gain).
• Cash Flow: Net cash used for operating activities increased significantly to $138.9 million year-to-date (vs. $31.7 million used in 1996), primarily due to higher income tax payments and increased inventory levels.

Guidance, Outlook, and Risks

• Capital Expenditures: The company anticipates spending between $390 million and $410 million on capital expenditures for the full year 1997, with $240-$260 million allocated to new and remodeled stores. Funding is expected to come from operating cash flows.
• Dividends: Dividends per share increased to $0.12 for the quarter (up from $0.10 in the prior year).
• Legal Proceedings: The company is defending a lawsuit filed by the American Textiles Manufacturers Institute alleging violations of the False Claims Act regarding country of origin records. Management believes the allegations are without merit and does not expect a material adverse effect.
• Tax Contingency: The IRS has assessed additional taxes and interest for years 1989-1992 regarding foreign operations. The company is vigorously contesting this and does not expect a material adverse effect.
• Forward-Looking Risks: Risks include changes in consumer spending, competition, weather patterns, and the ability to secure suitable store locations.

Investor Verification Checklist

• Express Performance: Verify the extent of the 24% comparable store sales decline at Express and the specific turnaround strategies being implemented.
• Inventory Levels: Review the $1.16 billion inventory balance and the $148 million cash outflow for inventory to assess potential markdown risks or overstocking.
• Cash Position: Note the significant drop in cash and equivalents from $312.8 million (Feb 1997) to $22.5 million (Aug 1997) and confirm reliance on the $1 billion credit facility and commercial paper.
• One-Time Gains: Confirm the impact of the $8.6 million pre-tax gain from the Brylane IPO on year-to-date net income.
• IRS Dispute: Monitor the status of the IRS assessment for 1989-1992 taxes to ensure no material liability emerges.