SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 1, 1997 ---------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- --------------------- Commission file number 1-8344 ------ THE LIMITED, INC. ---------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 31-1029810 - ----------------------------------- ------------------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) THREE LIMITED PARKWAY, P.O. BOX 16000, COLUMBUS, OH 43216 --------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (614) 415-7000 ------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. CLASS A COMMON STOCK OUTSTANDING AT NOVEMBER 25, 1997 - -------------------------------- -------------------------------------- $.50 PAR VALUE 272,491,148 SHARES
THE LIMITED, INC. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE NO. -------- <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996..........................3 CONSOLIDATED BALANCE SHEETS NOVEMBER 1, 1997 AND FEBRUARY 1, 1997..........................4 CONSOLIDATED STATEMENTS OF CASH FLOWS THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996..........................5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................10 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS...............................................19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................19 </TABLE> 2
PART 1 - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS THE LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-nine Weeks Ended ----------------------------------- ---------------------------------- November 1, November 2, November 1, November 2, 1997 1996 1997 1996 --------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> NET SALES $2,070,559 $1,994,986 $5,920,423 $5,678,530 Cost of Goods Sold, Occupancy and Buying Costs 1,449,577 1,439,612 4,259,063 4,161,706 --------------- -------------- ------------- ------------- GROSS INCOME 620,982 555,374 1,661,360 1,516,824 General, Administrative and Store Operating Expenses (525,750) (467,024) (1,443,844) (1,293,096) Special and Nonrecurring Items, Net 62,785 - 62,785 - --------------- -------------- ------------- ------------- OPERATING INCOME 158,017 88,350 280,301 223,728 Interest Expense (17,925) (20,621) (50,744) (55,902) Other Income 6,221 6,791 21,876 30,445 Minority Interest (7,631) (4,574) (23,910) (17,023) Gain in Connection with Initial Public Offerings - 118,567 8,606 118,567 --------------- -------------- ------------- ------------- INCOME BEFORE INCOME TAXES 138,682 188,513 236,129 299,815 Provision for Income Taxes 59,000 29,000 104,000 79,000 --------------- -------------- ------------- ------------- NET INCOME $79,682 $159,513 $132,129 $220,815 =============== ============== ============= ============= NET INCOME PER SHARE $.29 $.59 $.48 $.78 =============== ============== ============= ============= DIVIDENDS PER SHARE $.12 $.10 $.36 $.30 =============== ============== ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 275,519 271,728 273,737 284,765 =============== ============== ============= ============= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
THE LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Thousands) <TABLE> <CAPTION> November 1, February 1, 1997 1997 ----------- ----------- ASSETS (Unaudited) ------ <S> <C> <C> CURRENT ASSETS: Cash and Equivalents $37,046 $312,796 Accounts Receivable 113,356 69,337 Inventories 1,442,866 1,007,303 Store Supplies 97,398 90,400 Other 99,412 65,261 ----------- ----------- TOTAL CURRENT ASSETS 1,790,078 1,545,097 PROPERTY AND EQUIPMENT, NET 1,728,069 1,828,869 RESTRICTED CASH 351,600 351,600 OTHER ASSETS 367,687 394,436 ----------- ----------- TOTAL ASSETS $4,237,434 $4,120,002 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $432,765 $307,841 Accrued Expenses 481,697 481,744 Commercial Paper 101,269 - Income Taxes Payable 14,161 117,308 ----------- ----------- TOTAL CURRENT LIABILITIES 1,029,892 906,893 LONG-TERM DEBT 650,000 650,000 DEFERRED INCOME TAXES 91,741 169,932 OTHER LONG-TERM LIABILITIES 54,833 51,659 MINORITY INTEREST 74,455 67,336 CONTINGENT STOCK REDEMPTION AGREEMENT 351,600 351,600 SHAREHOLDERS' EQUITY: Common Stock 180,352 180,352 Paid-in Capital 148,790 142,860 Retained Earnings 3,560,602 3,526,256 ----------- ----------- 3,889,744 3,849,468 Less Treasury Stock, at Average Cost (1,904,831) (1,926,886) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 1,984,913 1,922,582 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,237,434 $4,120,002 =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
THE LIMITED, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) (Unaudited) <TABLE> <CAPTION> Thirty-nine Weeks Ended ----------------------------------- November 1, November 2, 1997 1996 -------------- -------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $132,129 $220,815 Impact of Other Operating Activities on Cash Flows: Gain in connection with Initial Public Offerings (5,606) (118,567) Special and Nonrecurring Items, Net (37,785) - Depreciation and Amortization 226,578 216,086 Minority Interest, Net of Dividends Paid 7,119 1,185 Changes in Assets and Liabilities: Accounts Receivable (44,019) (26,905) Inventories (435,563) (402,142) Accounts Payable and Accrued Expenses 124,877 197,297 Income Taxes (209,338) (99,810) Other Assets and Liabilities (34,240) (66,164) -------------- -------------- NET CASH USED FOR OPERATING ACTIVITIES (275,848) (78,205) -------------- -------------- INVESTING ACTIVITIES: Capital Expenditures (296,363) (319,834) Net Proceeds from Sale of Property and Related Assets 156,731 - Net Proceeds from Partial Sale of Interest in Equity Investee 108,259 - -------------- -------------- NET CASH USED FOR INVESTING ACTIVITIES (31,373) (319,834) -------------- -------------- FINANCING ACTIVITIES: Net Proceeds from Commercial Paper and Other Short-term Borrowings 101,269 346,900 Proceeds from Notes Payable - 150,000 Repayment of Notes Payable - (120,267) Net Proceeds from Sale of Subsidiary Stock - 118,567 Dividends Paid (97,783) (81,257) Purchase of Treasury Stock - (1,615,000) Stock Options and Other 27,985 10,040 -------------- -------------- NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES 31,471 (1,191,017) -------------- -------------- NET DECREASE IN CASH AND EQUIVALENTS (275,750) (1,589,056) Cash and Equivalents, Beginning of Year 312,796 1,645,731 -------------- -------------- CASH AND EQUIVALENTS, END OF PERIOD $37,046 $56,675 ============== ============== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
THE LIMITED, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Limited, Inc. (the "Company") and all significant subsidiaries which are more than 50 percent owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in other entities (including joint ventures) where the Company has the ability to significantly influence operating and financial policies are accounted for on the equity method. The consolidated financial statements as of November 1, 1997 and for the thirteen and thirty-nine week periods ended November 1, 1997 and November 2, 1996 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 1996 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly the financial position and results of operations and cash flows for the interim periods, but are not necessarily indicative of the results of operations for a full fiscal year. The consolidated financial statements as of November 1, 1997 and for the thirteen and thirty-nine week periods ended November 1, 1997 and November 2, 1996 included herein have been reviewed by the independent public accounting firm of Coopers & Lybrand L.L.P. and the report of such firm follows the notes to consolidated financial statements. 2. ADOPTION OF ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." ------------------ The Company will adopt the requirements for earnings per share in the fourth quarter of 1997, the effect of which will not be material to the Company's consolidated financial statements. 3. INVENTORIES The fiscal year of the Company and its subsidiaries is comprised of two principal selling seasons: Spring (the first and second quarters) and Fall (the third and fourth quarters). Valuation of finished goods inventories is based principally upon the lower of average cost or market determined on a first-in, first-out basis utilizing the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for inventory markdowns and shrinkage estimates for the total selling season. 6
4. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (thousands): <TABLE> <CAPTION> November 1, February 1, 1997 1997 ----------- ----------- <S> <C> <C> Property and equipment, at cost $ 3,291,774 $ 3,290,244 Accumulated depreciation and amortization (1,563,705) (1,461,375) ----------- ----------- Property and equipment, net $ 1,728,069 $ 1,828,869 =========== =========== </TABLE> 5. INCOME TAXES The provision for income taxes is based on the current estimate of the annual effective tax rate. Income taxes paid during the thirty-nine weeks ended November 1, 1997 and November 2, 1996 approximated $285.3 million and $163.1 million. The Internal Revenue Service has assessed the Company for additional taxes and interest for years 1992 - 1994 that relate to the treatment of transactions involving the Company's foreign operations. The Company strongly disagrees with the assessment and is vigorously contesting the matter. Management believes resolution of this matter will not have a material adverse effect on the Company's results of operations or financial condition. 6. FINANCING ARRANGEMENTS Unsecured long-term debt consisted of (thousands): <TABLE> <CAPTION> November 1, February 1, 1997 1997 ----------- ------------ <S> <C> <C> 7 1/2% Debentures due March 2023 $250,000 $250,000 7 4/5% Notes due May 2002 150,000 150,000 9 1/8% Notes due February 2001 150,000 150,000 8 7/8% Notes due August 1999 100,000 100,000 ----------- ------------ $650,000 $650,000 =========== ============ </TABLE> 7
The Company maintains a $1 billion unsecured revolving credit agreement (the "Agreement"). Borrowings outstanding under the Agreement are due September 28, 2002. However, the revolving term of the Agreement may be extended an additional two years upon notification by the Company on the second and fourth anniversaries of the effective date (September 29, 1997), subject to the approval of the lending banks. The Agreement has several borrowing options, including interest rates which are based on either the lender's "Base Rate", as defined, LIBOR, CD based options or at a rate submitted under a bidding process. Facilities fees payable under the Agreement are based on the Company's long-term credit ratings, and currently approximate 0.1% of the committed amount per annum. The Agreement contains covenants relating to the Company's working capital, debt and net worth. No amounts were outstanding under the Agreement at November 1, 1997. The Agreement supports the Company's commercial paper program which is used from time to time to fund working capital and other general corporate requirements. Commercial paper outstanding at November 1, 1997 was $101.3 million. Up to $250 million of debt securities and warrants to purchase debt securities may be issued under the Company's shelf registration statement. Interest paid during the thirty-nine weeks ended November 1, 1997 and November 2, 1996 approximated $59.1 million and $53.1 million. 7. SELF-TENDER OFFER On March 17, 1996, the Company completed the repurchase for $1.615 billion or $19 per share of 85 million shares of its common stock under a self- tender offer. 8. GAIN IN CONNECTION WITH INITIAL PUBLIC OFFERINGS AND SPECIAL AND NONRECURRING ITEMS During the first quarter of 1997, the Company recognized a pre-tax gain of $8.6 million in connection with the initial public offering ("IPO") of Brylane, Inc., a 26% owned (post IPO) specialty catalogue retailer. During the third quarter of 1997, the Company recognized a net $62.8 million pre- tax gain related to the sale of approximately one-half of its investment in Brylane, partially offset by valuation adjustments on certain investments where the carrying values are permanently impaired. During September 1996, the Company recognized a $118.6 million nontaxable gain that resulted from the initial public offering of 15.8% of the stock (8.05 million shares) of Abercrombie & Fitch ("A & F"). 8
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE] REPORT OF INDEPENDENT ACCOUNTANTS To the Audit Committee of The Board of Directors of The Limited, Inc. We have reviewed the condensed consolidated balance sheet of The Limited, Inc. and Subsidiaries at November 1, 1997, and the related condensed consolidated statements of income and cash flows for the thirteen-week and thirty-nine-week periods ended November 1, 1997 and November 2, 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of February 1, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Columbus, Ohio November 17, 1997 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the first quarter of 1996, the Company repurchased 85 million of its common shares via a self-tender consummated effective March 17, 1996. Accordingly, to aid in the analysis of the thirty-nine weeks ended November 1, 1997 as compared to 1996, certain pro forma adjustments, including the tax impact, have been made to the 1996 results as follows: 1) weighted average shares outstanding have been reduced to reflect the 85 million share repurchase as if it occurred at the beginning of 1996; and 2) the 1996 year-to-date income statement has been adjusted to remove $10.5 million in interest income earned on the temporary investment of the proceeds from the Intimate Brands, Inc. ("IBI") and WFNNB Fall 1995 transactions that were used to consummate the self-tender. The adjusted pro forma summary income information is presented below. <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------------------- ----------------------------------- Adjusted Pro Forma November 1, November 2, November 1, November 2, 1997 1996 1997 1996 -------------- -------------- --------------- ------------- <S> <C> <C> <C> <C> Operating Income $158,017 $88,350 $280,301 $223,728 Interest Expense (17,925) (20,621) (50,744) (55,902) Other Income 6,221 6,791 21,876 19,945 (a) Minority Interest (7,631) (4,574) (23,910) (17,023) Gain in Connection with Initial Public Offerings - 118,567 8,606 118,567 -------------- -------------- --------------- ------------- Income before Income Taxes 138,682 188,513 236,129 289,315 Provision for Income Taxes 59,000 29,000 104,000 75,000 (b) -------------- -------------- --------------- ------------- Net Income $79,682 $159,513 $132,129 $214,315 ============== ============== =============== ============= Net Income per Share $.29 $.59 $.48 $.79 ============== ============== =============== ============= Net Income per Share, Excluding Special and Nonrecurring Items and Gain in Connection with IPO $.15 $.15 $.32 $.35 (c) ============== ============== =============== ============= Weighted Average Shares Outstanding 275,519 271,728 273,737 271,709 (c) ============== ============== =============== ============= </TABLE> (a) Reduced 1996 interest income by $10.5 million derived from the temporary investment of the proceeds from the IBI and WFNNB Fall 1995 transactions that were used to consummate the self-tender. (b) Adjusted taxes for effect of $10.5 million pro forma adjustment to interest income. (c) Adjusted net income per share and weighted average shares outstanding for the impact of the self-tender for 85 million shares effective March 17, 1996 as if it were consummated at the beginning of 1996. Net sales for the third quarter of 1997 grew 4% to $2.071 billion from $1.995 billion a year ago. Operating income, excluding special and nonrecurring items in 1997 increased 8% to $95.2 million compared to operating income of $88.4 million for 1996. Net income, excluding special and nonrecurring items and the gain in connection with the IPO of Abercrombie & Fitch in 1996 increased 2% for the quarter in 1997 to $41.9 million compared to net income of $40.9 million for 1996. 10
Sales for the thirty-nine weeks ended November 1, 1997 increased 4% to $5.920 billion compared to $5.679 billion in 1996. Excluding special and nonrecurring items in 1997 and the gains in connection with the IPOs of Abercrombie & Fitch and Brylane (see Note 8) net income decreased 7% to $88.7 million from adjusted pro forma 1996 net income of $95.7 million (earnings per share were $.32 compared to 1996 adjusted pro forma earnings per share of $.35). Business highlights include the following: Victoria's Secret Stores recorded a sales increase of 9%, while operating income increased 12%. Sales and profits were driven by the successful new `Angels' lingerie line, the continuing growth of Victoria's Secret Bath & Fragrance, and a strategy of fewer price promotions. Bath & Body Works recorded a comparable store sales increase of 9%, with 23% more stores than last year. Total sales grew 37% while operating earnings increased 25%. The third quarter was highlighted by greater than anticipated demand for two new product lines, Face Care and the White Barn Home Fragrance Collection. Victoria's Secret Catalogue continued to enjoy good momentum, with operating profits up 27% on an 8% sales increase. The profit increase resulted primarily from stronger merchandise margins. Abercrombie & Fitch continued their record 1997 performance with third quarter comparable sales growth of 25%, up from 1997's strong first half results of 14% comparable sales growth. Operating income doubled in the third quarter compared to last year. The performance of the Women's businesses offset the majority of the gains in the Intimate Brands and Abercrombie & Fitch businesses, as comparable store sales performance deteriorated to -8%, with an operating loss of approximately $4 million. During the third quarter the Company completed the sale of its interest in the Newport Office Tower in Jersey City, New Jersey for net proceeds of $156.7 million. The Company also sold approximately 2.4 million shares of Brylane stock in a secondary public offering and related share repurchase realizing cash proceeds of approximately $108 million. 11
Financial Summary - ----------------- The following summarized financial and statistical data compares the third quarter and year-to-date periods ended November 1, 1997 to the comparable 1996 periods: <TABLE> <CAPTION> Third Quarter Year - to - Date -------------------------------------- --------------------------------------- Change Change From From Prior Prior 1997 1996 Year 1997 1996 Year ---------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Net Sales (millions): Victoria's Secret Stores $ 332 $ 304 9% $ 1,046 $ 910 15% Victoria's Secret Catalogue 143 133 8% 519 476 9% Bath & Body Works 182 133 37% 572 378 51% Cacique 22 20 10% 64 59 8% Other 11 7 57% 20 13 54% ---------- --------- --------- --------- --------- --------- Total Intimate Brands, Inc. 690 597 16% 2,221 1,836 21% ---------- --------- --------- --------- --------- --------- Express 315 350 (10%) 785 982 (20%) Lerner 231 257 (10%) 629 703 (11%) Lane Bryant 218 220 (1%) 639 646 (1%) Limited Stores 177 211 (16%) 532 604 (12%) Henri Bendel 20 26 (23%) 63 66 (5%) ---------- --------- --------- --------- --------- --------- Total Women's Businesses 961 1,064 (10%) 2,648 3,001 (12%) ---------- --------- --------- --------- --------- --------- Structure 143 149 (4%) 423 417 1% The Limited Too 86 73 18% 213 166 28% Galyan's 34 20 70% 100 57 75% Other 8 4 100% 6 6 - ---------- --------- --------- --------- --------- --------- Total Emerging Businesses 271 246 10% 742 646 15% ---------- --------- --------- --------- --------- --------- Abercrombie & Fitch 149 88 69% 309 196 58% ---------- --------- --------- --------- --------- --------- Total Net Sales $ 2,071 $ 1,995 4% $ 5,920 $ 5,679 4% ========== ========= ========= ========= ========= ========= Operating Income (millions): Intimate Brands, Inc. $ 66 $ 53 25% $ 233 $ 189 23% Women's Businesses (4) 22 NM (99) 7 NM Emerging Businesses 15 4 275% 59 17 247% Abercrombie & Fitch 18 9 100% 25 11 127% ---------- --------- --------- --------- --------- --------- Total Operating Income* $ 95 $ 88 8% $ 218 $ 224 (3%) ========== ========= ========= ========= ========= ========= </TABLE> * Excludes $62.8 million in special and nonrecurring items in the third quarter of 1997. 12
<TABLE> <CAPTION> Third quarter Year - to - Date ---------------------------------- ---------------------------------- Change Change From From Prior Prior 1997 1996 Year 1997 1996 Year ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Increase (decrease) in comparable store sales: Victoria's Secret Stores 3% 6% 9% 6% Bath & Body Works 9% 2% 13% 8% Cacique 16% 0% 11% 9% ---------- ---------- ---------- ---------- Total Intimate Brands, Inc. 5% 5% 10% 6% ---------- ---------- ---------- ---------- Express (11%) (7%) (21%) (3%) Lerner (6%) 18% (6%) 8% Lane Bryant (1%) 0% (1%) 1% Limited Stores (13%) 0% (9%) 5% Henri Bendel (23%) (6%) (11%) (2%) ---------- ---------- ---------- ---------- Total Women's Businesses (8%) 2% (11%) 2% ---------- ---------- ---------- ---------- Structure (6%) 6% (2%) 7% The Limited Too 15% 13% 23% (2%) Galyan's 4% 16% 4% 13% * ---------- ---------- ---------- ---------- Total Emerging Businesses 1% 8% 5% 5% ---------- ---------- ---------- ---------- Abercrombie & Fitch 25% 19% 19% 17% ---------- ---------- ---------- ---------- Total comparable store sales increase (decrease) (2%) 4% (2%) 4% ========== ========== ========== ========== Retail Sales Excluding Catalogue and Other: Retail sales increase attributable to new and remodeled stores 5% 7% 6% 8% Retail sales per average selling square foot $66.51 $65.69 1% $187.50 $185.35 1% Retail sales per average store (thousands) $332 $333 - $941 $947 (1%) Average store size at end of quarter (selling square feet) 4,993 5,055 (1%) Retail selling square feet at end of quarter (thousands) 28,931 28,589 1% Number of Stores: Beginning of period 5,690 5,454 5,633 5,298 Opened 129 213 280 421 Closed (25) (11) (119) (63) ---------- ---------- ---------- ---------- End of period 5,794 5,656 5,794 5,656 ========== ========== ========== ========== </TABLE> * Acquired in July 1995 with comparable store sales reporting starting July 1996. 13
<TABLE> <CAPTION> Number of Stores Selling Sq. Ft. (thousands) --------------------------------------- -------------------------------------- Change Change From From Nov. 1, Nov. 2, Prior Nov. 1, Nov. 2, Prior 1997 1996 Year 1997 1996 Year ---------- ---------- ---------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> Victoria's Secret Stores 784 726 58 3,533 3,282 251 Bath & Body Works 906 737 169 1,728 1,313 415 Cacique 118 121 (3) 363 371 (8) Penhaligon's - 4 (4) - 2 (2) ---------- ---------- ---------- ---------- ---------- --------- Total Intimate Brands, Inc. 1,808 1,588 220 5,624 4,968 656 ---------- ---------- ---------- ---------- ---------- --------- Express 755 758 (3) 4,764 4,752 12 Lerner New York 753 811 (58) 5,743 6,168 (425) Lane Bryant 807 830 (23) 3,869 3,982 (113) Limited Stores 648 683 (35) 3,874 4,099 (225) Henri Bendel 6 6 - 113 113 - ---------- ---------- ---------- ---------- ---------- --------- Total Women's Businesses 2,969 3,088 (119) 18,363 19,114 (751) ---------- ---------- ---------- ---------- ---------- --------- Structure 546 543 3 2,149 2,116 33 The Limited Too 311 309 2 976 969 7 Galyan's 11 9 2 641 488 153 ---------- ---------- ---------- ---------- ---------- --------- Total Emerging Businesses 868 861 7 3,766 3,573 193 ---------- ---------- ---------- ---------- ---------- --------- Abercrombie & Fitch 149 119 30 1,178 934 244 ---------- ---------- ---------- ---------- ---------- --------- Total Stores and Selling Square Feet 5,794 5,656 138 28,931 28,589 342 ========== ========== ========== ========== ========== ========= </TABLE> Net Sales - --------- Net sales for the third quarter of 1997 increased 4% over the third quarter of 1996, primarily as a result of sales attributed to new and remodeled stores and an 8% increase in catalogue sales which were partially offset by a 2% decrease in comparable store sales. During the third quarter of 1997, the Company opened 129 new stores, remodeled 87 stores and closed 25 stores. Net sales for the thirty-nine weeks ended November 1, 1997 increased 4% as compared to the same period in 1996 primarily as a result of new and remodeled stores and a 9% increase in catalogue sales which were partially offset by a 2% decrease in comparable store sales. Sales at Intimate Brands, Inc. for the third quarter of 1997 increased 16% over the same period last year. This increase was attributable to the net addition of 220 stores, a 5% increase in comparable store sales and an 8% increase in catalogue net sales. Year-to-date Intimate Brands, Inc. sales increased 21% over the same period in 1996, due to the net addition of new and remodeled stores, a 10% increase in comparable store sales, and a 9% increase in catalogue net sales. 14
Sales at the Women's businesses for the third quarter and year-to-date periods of 1997 decreased 10% and 12%, respectively, compared to the same periods in 1996, primarily due to decreases in comparable store sales of 8% and 11%. A substantial portion of the disappointing year-to-date sales results in the Women's businesses can be attributed to the Express business, which recorded a 27% decline in comparable store sales for the first 26 weeks of 1997. The Express business showed improvement during the third quarter by reducing its decline in comparable store sales to 11%. Sales improved significantly at Abercrombie & Fitch bolstered by comparable store sales increases of 25% for the third quarter 1997 and 19% for the year-to- date period. Gross Income - ------------ Gross income, expressed as a percentage of sales, increased to 30.0% for the third quarter of 1997 from 27.8% for the third quarter of 1996. The increase was attributable to a 2.4% increase in merchandise margins, expressed as a percentage of sales, partially offset by a 0.2% increase in buying and occupancy costs, also expressed as a percentage of sales. The increase in merchandise margin was primarily attributable to higher initial markup and a decrease in the markdown rate. The 1997 year-to-date gross income percentage increased 1.4% to 28.1% in 1997 from 26.7% for the same period in 1996, primarily attributable to higher initial markup partially offset by slightly higher markdowns. General, Administrative and Store Operating Expenses - ---------------------------------------------------- General, administrative and store operating expenses, expressed as a percentage of sales, increased to 25.4% for the third quarter of 1997 as compared to 23.4% for the third quarter of 1996. This increase was attributable to a combination of the increase of Intimate Brands businesses in the overall sales mix and the Women's businesses inability to leverage these expenses due to poor sales performance. The Intimate Brands expense rate increased 3.0% to 26.6%, expressed as a percentage of sales. The increase in the Intimate Brands expense rate was primarily due to three factors: the growth of Bath & Body Works net sales as a percentage of total Intimate Brands sales, the investments made in store staffing and management for the personal care portion of the business at Victoria's Secret Stores and the investment in advertising for brand development for Victoria's Secret. Bath & Body Works has higher than company average general, administrative and store operating expenses due to their emphasis on point-of-sale marketing and in-store staffing. Intimate Brands believes that continued strong growth of Bath & Body Works as a percentage of total Intimate Brands sales may cause these costs to continue to increase, expressed as a percentage of total Intimate Brands sales. Year-to-date general, administrative and store operating expenses increased as a percentage of sales to 24.4% in 1997 from 22.8% in 1996. This increase was due primarily to the reasons discussed above. The Intimate Brands expense rate increased 2.1% to 23.7%, expressed as a percentage of sales, primarily for the reasons discussed above. 15
Operating Income - ---------------- Third quarter and year-to-date 1997 operating income excluding the $62.8 million in special and nonrecurring items, expressed as a percentage of sales, were 4.6% and 3.7%, compared to 4.4% and 3.9%, respectively, for 1996. The third quarter increase resulted from a slightly higher increase in gross income as compared to the increase in general, administrative and store operating expenses. The year- to-date decrease was due to a slightly higher increase in general, administrative and store operating expenses than the increase in gross income, expressed as a percentage of sales. Special and nonrecurring items included in third quarter operating income related to the sale of approximately one-half of the Company's investment in Brylane partially offset by valuation adjustments on certain investments where the carrying values are permanently impaired. Interest Expense - ---------------- <TABLE> <CAPTION> Third Quarter Year-to-Date ----------------------- ----------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Average Borrowings (millions) $891 $1,110 $817 $939 Average Effective Interest Rate 8.05% 7.43% 8.28% 7.94% </TABLE> Interest expense decreased $2.7 million in the third quarter and $5.2 million year-to-date from the comparable periods in 1996, principally due to lower average borrowings in 1997 versus 1996, partially offset by slightly higher interest rates. Other Income - ------------ The decrease in 1997 year-to-date other income of $8.6 million compared to 1996, was due to interest income earned on the temporary investment of the proceeds from the Intimate Brands and WFNNB Fall 1995 transactions that were used to consummate the March 17, 1996 self-tender. 16
FINANCIAL CONDITION Liquidity and Capital Resources - ------------------------------- Cash provided from operating activities, commercial paper backed by funds available under the committed long-term credit agreement and the Company's capital structure continue to provide the capital resources to support operations, including projected growth, seasonal working capital requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (thousands): <TABLE> <CAPTION> November 1, February 1, 1997 1997 ----------- ----------- <S> <C> <C> Working Capital $ 760,186 $ 638,204 =========== =========== Capitalization: Long-term debt $ 650,000 $ 650,000 Shareholders' equity 1,984,913 1,922,582 ----------- ----------- Total Capitalization $2,634,913 $2,572,582 =========== =========== Debt-to-equity ratio 32.7% 33.8% =========== =========== Amounts available under long-term credit agreements * $ 898,731 $1,000,000 =========== =========== </TABLE> * In addition, the Company may offer up to $250 million of debt securities and warrants to purchase debt securities under its shelf registration statement. Net cash used for operating activities was $275.8 million for the thirty-nine weeks ended November 1, 1997 versus $78.2 million last year. The increase in cash used for operating activities was primarily attributable to an increase in income tax payments and an increase in inventories as merchandise payables, used to fund inventory purchases, were slightly below last year's level at the end of the third quarter. Investing activities included capital expenditures, approximately $156.5 million of which were for new and remodeled stores. Investing activities also included $108.3 million of net proceeds from the third quarter sale of slightly less than one-half of the Company's investment in Brylane and $156.7 million in net proceeds from the sale of the Newport Tower, an office building in Jersey City, New Jersey. Cash used for financing activities for 1997 reflects an increase in the dividend to $.12 per share from $.10 per share. For 1996, financing activities included $1.615 billion used to repurchase 85 million shares of the Company's common stock. Additionally, 1996 financing activities include proceeds from and the partial repayment of $150 million in short-term debt borrowed by A&F and net proceeds of $118.6 million from A&F's initial public offering. 17
Capital Expenditures - -------------------- Capital expenditures totaled $296.4 million for the thirty-nine weeks ended November 1, 1997, compared to $319.8 million for the same period of 1996. The Company anticipates spending $400 - $420 million for capital expenditures in 1997, of which $230 - $250 million will be for new stores, the remodeling of existing stores and related improvements for the retail businesses. The Company expects that 1997 capital expenditures will be funded by net cash provided by operating activities. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on various important factors which may be beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, changes in consumer spending patterns, consumer preferences and overall economic conditions, the impact of competition and pricing, changes in weather patterns, political stability, currency and exchange risks and changes in existing or potential duties, tariffs or quotas, availability of suitable store locations on appropriate terms, ability to develop new merchandise, ability to hire and train associates, and other factors that may be described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. 18
PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is a defendant in a variety of lawsuits arising in the ordinary course of business. On November 13, 1997, the United States District Court for the Southern District of Ohio, Eastern Division, dismissed with prejudice an amended complaint previously transferred to that court by the United States District Court, Central District of California. The amended complaint, which had been filed against the Company and certain of its subsidiaries by the American Textile Manufacturers Institute ("ATMI"), a textile industry trade association, alleged that the defendants violated the federal False Claims Act by submitting false country of origin records to the US Customs Service. On November 26, 1997, ATMI served a motion to alter or amend judgment and a motion to disqualify the presiding judge and to vacate the order of dismissal. The Company is vigorously opposing these motions. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, the foregoing proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. --------- 3. Articles of Incorporation and Bylaws. 3.1 Certificate of Incorporation of the Company incorporated by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1988. 3.2 Restated Bylaws of the Company incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 1991 (the "1990" form 10-K). 4. Instruments Defining the Rights of Security Holders. 4.1 Copy of the form of Global Security representing the Company's 7 1/2% Debentures due 2023, incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 4, 1993. 4.2 Conformed copy of the Indenture dated as of March 15, 1988 between the Company and The Bank of New York, incorporated by reference to Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated March 21, 1989. 4.3 Copy of the form of Global Security representing the Company's 8 7/8% Notes due August 15, 1999 incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated August 14, 1989. 19
4.4 Copy of the form of Global Security representing the Company's 9 1/8% Notes due February 1, 2001 incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 6, 1991. 4.5 Copy of the form of Global Security representing the Company's 7.80% Notes due May 15, 2002, incorporated by reference to the Company's Current Report on Form 8-K dated February 27, 1992. 4.6 Proposed form of Debt Warrant Agreement for Warrants attached to Debt Securities, with proposed form of Debt Warrant Certificate incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (File no. 33-53366) originally filed with the Securities and Exchange Commission (the "Commission") on October 16, 1992 as amended by Amendment No. 1 thereto, filed with the Commission on February 23, 1993 (the "1993 Form S-3"). 4.7 Proposed form of Debt Warrant Agreement for Warrants not attached to Debt Securities, with proposed form of Debt Warrant Certificate incorporated by reference to Exhibit 4.3 to the 1993 Form S-3. 4.8 Credit Agreement dated as of September 25, 1997 among the Company, Morgan Guaranty Trust Company of New York and the banks listed therein. 10. Material Contracts. 10.1 The 1997 Restatement of The Limited, Inc. 1993 Stock Option and Performance Incentive Plan incorporated by reference to Exhibit B to the Company's Proxy Statement dated April 14, 1997. 10.2 The Limited, Inc. 1996 Stock Plan for Non-Associate Directors incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 1996. 10.3 The Limited, Inc. Incentive Compensation Performance Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 14, 1997. 20
11. Statement re: Computation of Per Share Earnings. 12. Statement re: Ratio of Earnings to Fixed Charges. 15. Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants. 27. Financial Data Schedule. (b) Reports on Form 8-K. ------------------- None. 21
SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LIMITED, INC. (Registrant) By /S/ V. Ann Hailey ------------------ V. Ann Hailey, Executive Vice President and Chief Financial Officer* Date: December 15, 1997 ------------------------------------- * Ms. Hailey is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 22
EXHIBIT INDEX ------------- Exhibit No. Document - ----------- -------------------------------- 4.8 Credit Agreement dated as of September 25, 1997 among the Company, Morgan Guaranty Trust Company of New York and the banks listed therein. 11 Statement re: Computation of Per Share Earnings. 12 Statement re: Ratio of Earnings to Fixed Charges. 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Report of Independent Accountants. 27 Financial Data Schedule.