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 July 30, 1994. The filing covers the thirteen and twenty-six weeks ended on that date. The company operates primarily in the retail and catalogue sectors, with a fiscal year divided into Spring and Fall selling seasons.
Key Financial Metrics
| Metric | 13 Weeks Ended July 30, 1994 | 26 Weeks Ended July 30, 1994 |
|---|---|---|
| Net Sales | $1,585,392,000 | $3,067,020,000 |
| Gross Income | $402,666,000 | $787,597,000 |
| Operating Income | $102,266,000 | $193,436,000 |
| Net Income | $53,832,000 | $101,108,000 |
| Earnings Per Share | $0.15 | $0.28 |
| Cash and Equivalents | $108,250,000 | $108,250,000 |
| Long-Term Debt | $650,000,000 | $650,000,000 |
| Working Capital | $1,491,327,000 | $1,491,327,000 |
Margin Analysis: Gross income margin for the quarter was 25.4% (up from 25.3% prior year). Operating income margin was 6.5% for the quarter and 6.3% year-to-date.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 6% in the quarter and 4% year-to-date compared to 1993. This decline is largely attributed to the exclusion of Brylane mail-order sales in the 1994 figures following the sale of a 60% interest in that business.
- Profitability Pressure: Net income fell 21% in the quarter and 10% year-to-date. Operating income decreased 19% in the quarter and 9% year-to-date.
- Comparable Store Sales: Women's apparel businesses (Express, Lerner, Limited Stores, Lane Bryant, Henri Bendel) saw a 13% decline in comparable store sales for the quarter. Conversely, non-women's apparel businesses (including Bath & Body Works and Victoria's Secret) achieved comparable store sales increases of over 10%.
- Cash Flow: Net cash used for operating activities was $18.6 million for the 26-week period, a reversal from the $24.6 million provided in the prior year. This was driven by increased cash requirements for accounts receivable (due to new proprietary credit cards) and inventory buildup for new store openings.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates total 1994 capital expenditures of $350 million to $375 million. Approximately $250 million to $275 million is allocated for new stores, remodeling, and fixturing.
- Store Expansion: The company expects to add approximately 1.2 million net additional selling square feet for the remainder of the year.
- Liquidity: The company maintains $840 million in available committed credit facilities and has a shelf registration for up to $250 million in additional debt securities. Management expects operating cash flow to fund substantially all 1994 capital expenditures.
- IRS Contingency: The Internal Revenue Service has assessed the company for additional taxes and interest for 1989 and 1990 regarding foreign operations and construction allowances. The company is vigorously contesting this assessment but has made a deposit related to the matter. Management believes the resolution will not have a material adverse effect.
- Restructuring: A plan approved in late 1993 involves closing and remodeling approximately 360 Limited and Lerner stores. As of July 30, 1994, 85 stores were closed and 95 remodeled. The net impact is anticipated to be immaterial to future operations.
Investor Verification Checklist
- Verify the impact of the Brylane divestiture on year-over-year sales comparisons, as the 1993 figures include Brylane while 1994 figures exclude them.
- Monitor the performance of the women's apparel divisions, which are currently experiencing a 13% decline in comparable store sales.
- Track the resolution of the IRS tax assessment for 1989-1990 to ensure no material financial impact materializes.
- Confirm the execution of the store remodeling and closing program to ensure it remains on schedule and within budget.
- Review the cash flow statement to ensure the negative operating cash flow is a temporary seasonal or strategic buildup rather than a structural issue.