Business Context and Reporting Period
This Form 10-Q is filed by The Limited, Inc. (not Bath & Body Works, Inc., which is a subsidiary) for the thirteen-week period ended April 29, 1995. The company operates a diverse portfolio of retail brands including Victoria's Secret, Bath & Body Works, Express, and The Limited. The financial statements are unaudited but have been reviewed by Coopers & Lybrand L.L.P.
Key Financial Metrics
| Metric | Q1 1995 | Q1 1994 |
|---|---|---|
| Net Sales | $1,588.1 million | $1,481.6 million |
| Gross Income | $402.7 million | $384.9 million |
| Operating Income | $80.0 million | $91.2 million |
| Net Income | $39.2 million | $47.3 million |
| Diluted EPS | $0.11 | $0.13 |
| Dividends Per Share | $0.10 | $0.09 |
| Cash and Equivalents | $60.0 million | $159.1 million (end of prior Q1) |
| Long-Term Debt | $650.0 million | $650.0 million |
| Working Capital | $1,738.4 million | $1,750.1 million (Jan 28, 1995) |
Margins: Gross margin decreased to 25.4% from 26.0%. Operating margin decreased to 5.0% from 6.2%.
Cash Flow: Net cash used for operating activities was $119.3 million, compared to $65.4 million in the prior year. Capital expenditures were $68.9 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7% year-over-year, driven primarily by the addition of 97 new stores and strong performance in the "Intibrands" division (Victoria's Secret, Bath & Body Works).
- Profit Decline: Despite revenue growth, Net Income fell 17% to $39.2 million. This was caused by lower merchandise margins (due to higher markdowns), increased buying and occupancy costs, and higher general and administrative expenses.
- Comparable Store Sales: Total comparable store sales declined 1% year-over-year. While Intibrands saw a 3% increase, the "Women's" division (including The Limited and Lane Bryant) saw a 3% decline.
- Liquidity: Cash and equivalents dropped significantly from $242.8 million at the start of the year to $60.0 million, largely due to seasonal inventory build-up and income tax payments.
Guidance, Outlook, and Material Events
- Corporate Restructuring Plan: On May 15, 1995, the Board approved a plan to create two new public companies. Intibrands, Inc. will house Victoria's Secret, Bath & Body Works, and others. A second company will house Express, The Limited, and Lane Bryant. The company plans to sell a majority interest in its credit card bank and distribute proceeds to shareholders.
- Capital Expenditure Outlook: The company anticipates spending $325 million to $375 million on capital expenditures in 1995, with $230 million to $270 million allocated to new and remodeled stores.
- IRS Contingency: The IRS has assessed additional taxes and interest for 1989 and 1990 regarding foreign operations. The company is vigorously contesting this and does not believe the outcome will have a material adverse effect.
- Store Expansion: Bath & Body Works plans to open a record 190 new stores in 1995, bringing the total to over 500.
Investor Verification Checklist
- Restructuring Timeline: Verify the closing dates and expected cash distribution amounts related to the spin-off of Intibrands, Inc. and the sale of the credit card bank.
- Margin Recovery: Monitor whether merchandise margins can recover in subsequent quarters as markdowns normalize.
- Women's Division Turnaround: Assess the strategy to reverse the 3% comparable store sales decline in the core "Women's" division (The Limited, Lane Bryant).
- Liquidity Position: Confirm that the $815 million in available credit facilities remains sufficient to fund operations and the planned $325M+ capital expenditure program given the current cash balance of $60 million.
- IRS Dispute: Track the status of the IRS assessment for 1989-1990 to ensure no unexpected liability materializes.