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 2, 1996 ---------------- 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) 479-7000 ----------------------------- 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 December 2, 1996 - --------------------- ------------------------------- $.50 Par Value 271,062,248 shares
THE LIMITED, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen and Thirty-nine Weeks Ended November 2, 1996 and October 28, 1995......................... 3 Consolidated Balance Sheets November 2, 1996 and February 3, 1996......................... 4 Consolidated Statements of Cash Flows Thirty-nine Weeks Ended November 2, 1996 and October 28, 1995......................... 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 6. Exhibits and Reports on Form 8-K........................... 19 2
PART I - 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 2, October 28, November 2, October 28, 1996 1995 1996 1995 ---------------- ---------------- --------------- ---------------- <S> <C> <C> <C> <C> NET SALES $1,994,986 $1,803,295 $ 5,678,530 $ 5,110,072 Cost of Goods Sold, Occupancy and Buying Cost 1,439,612 1,350,337 4,161,706 3,830,752 ---------------- ---------------- --------------- ---------------- GROSS INCOME 555,374 452,958 1,516,824 1,279,320 General, Administrative and Store Operating Expenses (467,024) (361,597) (1,293,096) (1,011,186) ---------------- ---------------- --------------- ---------------- OPERATING INCOME 88,350 91,361 223,728 268,134 Interest Expense (20,621) (22,573) (55,902) (59,261) Other Income, net 6,791 3,025 30,445 9,913 Minority Interest (4,574) - (17,023) - Gain on Sale of Subsidiary Stock 118,567 613,500 118,567 613,500 ---------------- ---------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 188,513 685,313 299,815 832,286 Provision for Income Taxes 29,000 28,000 79,000 87,000 ---------------- ---------------- --------------- ---------------- NET INCOME $ 159,513 $ 657,313 $ 220,815 $ 745,286 ================ ================ =============== ================ NET INCOME PER SHARE $.59 $1.83 $.78 $2.08 ================ ================ =============== ================ DIVIDENDS PER SHARE $.10 $.10 $.30 $.30 ================ ================ =============== ================ WEIGHTED AVERAGE SHARES OUTSTANDING 271,728 358,920 284,765 358,619 ================ ================ =============== ================ </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 2, 1996 February 3, 1996 ---------------- ---------------- (Unaudited) <S> <C> <C> ASSETS ------ CURRENT ASSETS: Cash and Equivalents $ 56,675 $1,645,731 Accounts Receivable 104,421 77,516 Inventories 1,361,095 958,953 Other 150,440 117,832 ---------------- ---------------- TOTAL CURRENT ASSETS 1,672,631 2,800,032 PROPERTY AND EQUIPMENT, NET 1,816,772 1,741,456 RESTRICTED CASH 351,600 351,600 OTHER ASSETS 436,436 373,475 ---------------- ---------------- TOTAL ASSETS $ 4,277,439 $5,266,563 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 440,541 $ 280,659 Accrued Expenses 426,233 388,818 Commercial Paper 346,900 - Notes Payable 29,733 - Income Taxes 31,128 47,098 ---------------- ---------------- TOTAL CURRENT LIABILITIES 1,274,535 716,575 LONG-TERM DEBT 650,000 650,000 DEFERRED INCOME TAXES 167,017 250,857 OTHER LONG-TERM LIABILITIES 51,764 50,791 MINORITY INTEREST 46,884 45,699 CONTINGENT STOCK REDEMPTION AGREEMENT 351,600 351,600 SHAREHOLDERS' EQUITY: Common Stock 180,352 180,352 Paid-in Capital 142,498 137,134 Retained Earnings 3,339,908 3,200,350 ---------------- ---------------- 3,662,758 3,517,836 Less Treasury Stock, at Average Cost (1,927,119) (316,795) ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 1,735,639 3,201,041 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,277,439 $5,266,563 ================ ================ </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 2, October 28, 1996 1995 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 220,815 $ 745,286 Gain on Sale of Subsidiary Stock (118,567) (613,500) Impact of Other Operating Activities on Cash Flows: Depreciation and Amortization 216,086 214,893 Minority Interest, Net of Dividends Paid 1,185 - Changes in Assets and Liabilities: Accounts Receivable (26,905) (19,805) Inventories (402,142) (399,829) Accounts Payable and Accrued Expenses 197,297 68,027 Income Taxes (99,810) (241,446) Other Assets and Liabilities (66,164) 23,339 ----------- ----------- NET CASH USED FOR OPERATING ACTIVITIES (78,205) (223,035) ----------- ----------- INVESTING ACTIVITIES: Capital Expenditures (319,834) (285,576) Business Acquired - (18,000) ----------- ----------- CASH USED FOR INVESTING ACTIVITIES (319,834) (303,576) ----------- ----------- FINANCING ACTIVITIES: Net Proceeds from Commercial Paper Borrowings and Certificates of Deposit 346,900 29,000 Proceeds from Notes Payable 150,000 250,000 Repayment of Notes Payable (120,267) (250,000) Net Proceeds from Sale of Subsidiary Stock 118,567 635,000 Dividends Paid (81,257) (107,273) Purchase of Treasury Stock (1,615,000) (8,981) Stock Options and Other 10,040 10,971 ----------- ----------- NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES (1,191,017) 558,717 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,589,056) 32,106 Cash and Equivalents, Beginning of Year 1,645,731 242,780 ----------- ----------- CASH AND EQUIVALENTS, END OF PERIOD $ 56,675 $ 274,886 =========== =========== </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) which are more than 20 percent owned are accounted for using the equity method. The consolidated financial statements as of and for the periods ended November 2, 1996 and October 28, 1995 are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the Company's 1995 Annual Report. 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 2, 1996 and for the thirteen and thirty-nine week periods ended November 2, 1996 and October 28, 1995 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 October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company will make the required disclosures in its 1996 Annual report. 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 2, February 3, 1996 1996 ----------- ----------- <S> <C> <C> Property and equipment, at cost $ 3,243,957 $ 3,018,757 Accumulated depreciation and amortization (1,427,185) (1,277,301) ----------- ----------- Property and equipment, net $ 1,816,772 $ 1,741,456 =========== =========== </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 2, 1996 and October 28, 1995 approximated $163.1 million and $191.4 million. The Internal Revenue Service has assessed the Company for additional taxes and interest for years 1989 - 1992. The assessment was based primarily on the treatment of transactions involving the Company's foreign operations and construction allowances. Although a deposit has been made to mitigate further interest being assessed, 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 2, February 3, 1996 1996 ----------- ----------- <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> The Company maintains a $1 billion unsecured revolving credit agreement (the "Agreement"). Borrowings outstanding under the Agreement are due December 14, 2000. 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 (December 15, 1995), subject to the approval of the lending banks. 7
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 1/8% 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 2, 1996. 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 2, 1996 approximated $347 million. Two subsidiaries of Abercrombie & Fitch Co. ("A&F"), a consolidated subsidiary of the Company, borrowed $150 million under a bank credit agreement in July 1996. The borrowings are guaranteed by A&F. The LIBOR- related interest rate at November 2, 1996 was 5.92%. The agreement places certain limitations on A&F and contains financial covenants, including fixed charge coverage and a maximum ratio of debt to earnings before income taxes, depreciation and amortization. The amounts borrowed are repayable in nine consecutive semi-annual installments, commencing on June 30, 1997. In addition, any outstanding borrowings must be paid in full in the event that the Company ceases to own directly at least 80% of the outstanding stock of A&F. A&F repaid approximately $120.3 million of this borrowing from proceeds received from its initial public offering and cash from operations in September, 1996 leaving $29.7 million outstanding at November 2, 1996. 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 2, 1996 and October 28, 1995 approximated $53.1 million and $66.9 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. ISSUANCE OF SUBSIDIARY STOCK Gains or losses resulting from stock issued by a subsidiary of the Company are recognized in current year's income. In September 1996, the Company recognized a $118.6 million gain which resulted from the initial public offering of 15.8% of the stock (8.05 million shares) of A&F. In October 1995, the Company recognized a $613.5 million gain which resulted from the initial public offering of 40 million shares (16% of the stock) of Intimate Brands, Inc. ("IBI"). IBI consists of Victoria's Secret Stores, Victoria's Secret Catalogue, Bath & Body Works, Cacique, Penhaligon's and Gryphon. An additional 2.7 million shares (.9% of the stock) of IBI were issued in November 1995 as a result of underwriters exercising options to purchase additional shares which resulted in a net gain of approximately $36 million. None of the aforementioned gains recorded by the Company were subject to tax. 8
[LETTERHEAD OF COOPERS & LYBRAND] 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 2, 1996, and the related condensed consolidated statements of income and cash flows for the thirteen-week and thirty-nine-week periods ended November 2, 1996 and October 28, 1995. 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 3, 1996, 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 26, 1996, except for paragraph 11 in Note 1 and Note 9, as to which the date is March 18, 1996, 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 3, 1996, 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 December 11, 1996 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS During the second half of 1995 and the first three quarters of 1996, the Company entered into a series of transactions that affected the comparability of the quarterly financial statements: 1) the initial public offering of a 16.9% interest in Intimate Brands, Inc. ("IBI"); 2) the sale of a 60% interest in the Company's previously wholly-owned credit card bank, World Financial Network National Bank ("WFNNB"); 3) a reduction in outstanding shares reflecting the Company's 85 million share repurchase via a self-tender consummated effective March 17, 1996; and 4) the initial public offering of a 15.8% interest of Abercrombie & Fitch Co. ("A&F") during the third quarter of 1996. Accordingly, to aid in the analysis of third quarter and year-to-date 1996 financial information as compared to the respective periods in 1995, certain pro-forma adjustments, including the tax impact, have been made to the 1996 and 1995 results as follows: 1) the 1995 general, administrative and store operating expenses have been adjusted for the fourth quarter 1995 sale of a 60% interest in WFNNB, as if the sale had been consummated at the beginning of 1995; 2) the 1995 statement of income has been adjusted to reflect the minority interest arising from the IBI transaction as if it had occurred as of the beginning of 1995; 3) weighted average shares outstanding have been reduced to reflect the 85 million share repurchase as if it occurred at the beginning of 1995; and 4) the 1996 statement of income has been adjusted to remove $10.5 million in interest income earned in the first quarter from the temporary investment of the proceeds from the IBI and WFNNB transactions that were used to consummate the self-tender effective March 17, 1996. The adjusted pro-forma summary income information is presented below (thousands except per share data): <TABLE> <CAPTION> Third Quarter 1995 Third Quarter 1996 -------------------------------------------------------------- ------------------ Adjusted As Reported Pro-Forma Pro-Forma As Reported October 28, 1995 Adjustments October 28, 1995 November 2, 1996 ---------------- ----------- ---------------- ------------------ <S> <C> <C> <C> <C> Net sales $1,803,295 _ $1,803,295 $1,994,986 Gross income 452,958 - 452,958 555,374 General, administrative and store operating expenses (361,597) $(22,275) (a) (383,872) (467,024) ---------------- ----------- ---------------- ------------------ Operating income 91,361 (22,275) 69,086 88,350 Interest expense (22,573) - (22,573) (20,621) Other income, net 3,025 - 3,025 6,791 Minority interest - (2,383) (b) (2,383) (4,574) Gain on sale of subsidiary stock 613,500 - 613,500 118,567 ---------------- ----------- ---------------- ------------------ Income before taxes 685,313 (24,658) 660,655 188,513 Provision for income taxes 28,000 (8,000) (c) 20,000 29,000 ---------------- ----------- ---------------- ------------------ Net income $ 657,313 $(16,658) $ 640,655 $ 159,513 ================ =========== ================ ================== Net income per share $1.83 $2.34 (e) $.59 ================ ================ ================== Net income per share exclusive of gain on sale of subsidiary stock $ .12 $ .10 $.15 ================ ================ ================== Weighted average shares outstanding 358,920 273,920 (e) 271,728 ================ ================ ================== </TABLE> 10
<TABLE> <CAPTION> Year - to - Date Year - to - Date 1995 1996 ------------------------------------------------------------ ------------------- Adjusted Adjusted As Reported Pro-Forma Pro-Forma Pro-Forma October 28, 1995 Adjustments October 28, 1995 November 2, 1996 ---------------- ----------- ---------------- ---------------- <S> <C> <C> <C> <C> Net sales $ 5,110,072 - $ 5,110,072 $ 5,678,530 Gross income 1,279,320 - 1,279,320 1,516,824 General, administrative and store operating expenses (1,011,186) $(76,413) (a) (1,087,599) (1,293,096) ---------------- ----------- ---------------- ---------------- Operating income 268,134 (76,413) 191,721 223,728 Interest expense (59,261) - (59,261) (55,902) Other income, net 9,913 - 9,913 19,945 (d) Minority interest - (12,264) (b) (12,264) (17,023) Gain on sale of subsidiary stock 613,500 - 613,500 118,567 ---------------- ----------- ---------------- ---------------- Income before taxes 832,286 (88,677) 743,609 289,315 Provision for income taxes 87,000 (33,000) (c) 54,000 75,000 (c) ---------------- ----------- ---------------- ---------------- Net income $ 745,286 $(55,677) $ 689,609 $ 214,315 ================ =========== ================ ================ Net income per share $2.08 $2.52 (e) $.79 (e) ================ ================ ================ Net income per share exclusive of gain on sale of subsidiary stock $.37 $.28 $.35 ================ ================ ================ Weighted average shares outstanding 358,619 273,619 (e) 271,709 (e) ================ ================ ================ </TABLE> (a) Sale of a 60% interest in WFNNB as if it were consummated at the beginning of 1995. (b) Minority interest in IBI as if the transaction was consummated at the beginning of 1995. (c) Tax affect of pro-forma adjustments. (d) Reduced 1996 interest income by $10.5 million earned from the temporary investment of proceeds from the IBI and WFNNB transactions that were used to consummate the self-tender. (e) Net income per share and weighted average shares outstanding have been adjusted for the impacted of the self-tender for 85 million shares effective March 17, 1996 as if it were consummated at the beginning of 1995. During the third quarter of 1996, net sales increased 11% to $1.995 billion compared to $1.803 billion a year ago. Net income for the quarter exclusive of gain on sale of subsidiary stock in both years, increased 51% to $40.9 million compared to pro-forma net income of $27.2 million last year. Earnings per share were $.15 compared to pro-forma earnings per share of $.10 in 1995. Third quarter highlights include the following: . Lerner New York substantially improved operating income with a comparable store sales gain of 18%. . Abercrombie & Fitch more than doubled its operating income while producing a 19% comparable store sales gain. . Structure showed substantial improvement in operating results over last year and achieved a 6% comparable store sales gain. . Limited Too produced a 13% comparable store sales gain. 11
Sales for the thirty-nine weeks ended November 2, 1996 increased 11% to $5.679 billion compared to $5.110 billion in 1995. Pro-forma 1996 net income, exclusive of gains on sale of subsidiary stock in both years, increased 26% to $95.7 million from pro-forma 1995 net income of $76.1 million. Pro-forma 1996 earnings per share were $.35 compared to 1995 pro-forma earnings per share of $.28. Financial Summary - ----------------- The following summarized financial data compares the thirteen and thirty-nine week periods ended November 2, 1996 to the comparable periods for 1995: <TABLE> <CAPTION> Third Quarter Year - to - Date ------------------------------------ ------------------------------------ Change Change From From 1996 1995 Prior Year 1996 1995 Prior Year -------- -------- ------------ -------- -------- ------------ <S> <C> <C> <C> <C> <C> <C> Net sales (millions): Victoria's Secret Stores $ 304 $ 264 15% $ 910 $ 786 16% Victoria's Secret Catalogue 133 132 1% 476 455 5% Bath & Body Works 133 87 53% 378 237 59% Cacique 20 19 5% 59 52 13% Other 7 4 75% 13 9 44% -------- -------- ------------ -------- -------- ------------ Total Intimate Brands, Inc. $ 597 $ 506 18% $1,836 $1,539 19% -------- -------- ------------ -------- -------- ------------ Express 350 360 (3%) 982 977 1% Lerner New York 257 223 15% 703 666 6% Lane Bryant 220 219 - 646 629 3% Limited Stores 211 214 (1%) 604 584 3% Henri Bendel 26 24 8% 66 65 2% -------- -------- ------------ -------- -------- ------------ Total Women's Businesses $1,064 $1,040 2% $3,001 $2,921 3% -------- -------- ------------ -------- -------- ------------ Structure 149 128 16% 417 356 17% Abercrombie & Fitch Co. 88 57 54% 196 129 52% The Limited Too 73 58 26% 166 145 14% Galyan's (since 7/2/95) 20 14 43% 57 20 Other 4 - 6 - -------- -------- ------------ -------- -------- ------------ Total Emerging Businesses $ 334 $ 257 30% $ 842 $ 650 30% -------- -------- ------------ -------- -------- ------------ Total Net Sales $1,995 $1,803 11% $5,679 $5,110 11% ======== ======== ============ ======== ======== ============ Operating income (millions): Intimate Brands, Inc. $53 $45 18% $189 $159 19% Women's Businesses 22 21 5% 7 29 (76%) Emerging Businesses 13 3 * 333% 28 4 * 600% -------- -------- ------------ -------- -------- ------------ Total Operating Income $88 $69 * 28% $224 $192 * 17% ======== ======== ============ ======== ======== ============ </TABLE> * Reflects adjusted pro-forma results. Historical operating income for the Emerging Businesses (including WFNNB) was $25 million and $80 million in the third quarter and year-to-date period of 1995 and total operating income was $91 million and $268 million in the same periods. 12
<TABLE> <CAPTION> Third Quarter Year - to - Date ------------------------------------ ------------------------------------ Change Change From From 1996 1995 Prior Year 1996 1995 Prior Year -------- -------- ------------ -------- -------- ------------ <S> <C> <C> <C> <C> <C> <C> Increase (decrease) in comparable store sales: Victoria's Secret Stores 6% (6%) 6% (1%) Bath & Body Works 2% 26% 8% 26% Cacique 0% (18%) 9% (23%) -------- -------- -------- -------- Total Intimate Brands, Inc. 5% (2%) 6% 2% -------- -------- -------- -------- Express (7%) (3%) (3%) 2% Lerner New York 18% (4%) 8% (1%) Lane Bryant 0% (9%) 1% (8%) Limited Stores 0% 4% 5% (6%) Henri Bendel (6%) 3% (2%) 7% -------- -------- -------- -------- Total Women's Businesses 2% (3%) 2% (2%) -------- -------- -------- -------- Structure 6% (7%) 7% (5%) Abercrombie & Fitch Co. 19% 9% 17% 6% The Limited Too 13% (10%) (2%) 1% Galyan's (since 7/2/95) 16% N/A 13% N/A -------- -------- -------- -------- Total Emerging Businesses 11% (5%) 7% (2%) -------- -------- -------- -------- Total comparable store sales increase (decrease) 4% (3%) 4% (2%) ======== ======== ======== ======== Retail sales increase attributable to new and remodeled stores 7% 5% 8% 6% Retail sales per average selling square foot $65.69 $62.25 6% $185.35 $176.91 5% Retail sales per average store (thousands) $ 333 $ 325 2% $ 947 $ 926 2% Average store size at end of quarter (square feet) 5,055 5,201 (3%) Retail selling square feet (thousands) 28,589 27,116 5% Number of stores: Beginning of period 5,454 5,048 5,298 4,867 Opened 213 187 421 385 Acquired - - - 6 Closed (11) (21) (63) (44) -------- -------- -------- -------- End of period 5,656 5,214 5,656 5,214 ======== ======== ======== ======== </TABLE> 13
<TABLE> <CAPTION> Number of Stores Selling Sq. Ft. (thousands) ----------------------------------------- ------------------------------------------ Change Change November 2, October 28, From November 2, October 28, From 1996 1995 Prior Year 1996 1995 Prior Year ----------- ----------- ---------- ----------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Victoria's Secret Stores 726 659 67 3,282 2,941 341 Bath & Body Works 737 450 287 1,313 748 565 Cacique 121 119 2 371 363 8 Penhaligon's 4 4 0 2 2 0 ----- ----- --- ------ ------ ----- Total Intimate Brands, Inc. 1,588 1,232 356 4,968 4,054 914 ----- ----- --- ------ ------ ----- Express 758 734 4 4,752 4,552 200 Lerner New York 811 843 (32) 6,168 6,489 (321) Lane Bryant 830 824 6 3,982 3,933 49 Limited Stores 683 702 (19) 4,099 4,269 (170) Henri Bendel 6 4 2 113 88 25 ----- ----- --- ------ ------ ----- Total Women's Businesses 3,088 3,107 (19) 19,114 19,331 (217) ----- ----- --- ------ ------ ----- Structure 543 499 44 2,116 1,916 200 Abercrombie & Fitch Co. 119 86 3 934 689 245 The Limited Too 309 284 25 969 887 82 Galyan's 9 6 3 488 239 249 ----- ----- --- ------ ------ ----- Total Emerging Businesses 980 875 105 4,507 3,731 776 ----- ----- --- ------ ------ ----- Total stores and selling square feet 5,656 5,214 442 28,589 27,116 1,473 ===== ===== === ====== ====== ===== </TABLE> Net Sales - --------- Net sales for the third quarter of 1996 increased 11% over third quarter 1995 primarily as a result of the 4% increase in comparable store sales and the net addition of new and remodeled stores. During the third quarter of this year, the Company opened 213 new stores and closed 11 stores. Consistent with the third quarter, the year-to-date 1996 sales increase of 11% was a result of the 4% increase in comparable store sales and the net addition of 442 stores since the third quarter of 1995. Sales at the Intimate Brands, Inc. businesses for the third quarter of 1996 increased 18% over the same period last year. This increase was attributable to the net addition of 356 new stores and a 5% increase in comparable store sales. Year-to-date Intimate Brands, Inc. sales increased 19% over the same period in 1995, due to the net addition of new and remodeled stores, a 6% increase in comparable store sales and a 5% increase in catalogue net sales. Sales at the women's businesses for the third quarter and year-to-date period of 1996 increased slightly compared to the same periods in 1995, primarily due to the 2% increases in comparable store sales for the third quarter and year. Disappointing results at the Express division, which experienced declines of 7% and 3% in comparable store sales for the third quarter and year-to-date periods, were offset by improved results at Lerner New York, which sales increased by 15% in the third quarter and 6% year-to-date despite having fewer stores throughout the period. 14
In addition, the overall sales increase for the Company included strong sales increases at Structure and Abercrombie & Fitch, bolstered by third quarter comparable stores sales increases of 6% and 19%, respectively. In addition, these divisions experienced 7% and 17% increases, respectively, in comparable store sales for the year-to-date period. Gross Income - ------------ Gross income increased as a percentage of sales to 27.8% for the third quarter 1996 from 25.1% for the same period in 1995. The merchandise margin rate, expressed as a percentage of sales, increased 1.5% due principally to improved initial mark-up which more than offset a slight increase in the markdown rate. Buying and occupancy costs decreased 1.2% as a percentage of sales, primarily due to the sales productivity associated with the 4% increase in comparable store sales. The 1996 year-to-date gross income rate increased 1.7% to 26.7% as compared to 1995. Merchandise margins, expressed as a percentage of sales, increased .8% due to improved initial mark-up partially offset by a slight increase in the markdown rate. Buying and occupancy costs decreased .9% as a percentage of sales, primarily due to sales productivity associated with the 4% increase in comparable store sales. General, Administrative and Store Operating Expenses - ---------------------------------------------------- General, administrative and store operating expenses increased as a percentage of sales to 23.4% in the third quarter of 1996 compared to 21.3% on an adjusted pro-forma basis in the third quarter of 1995. This increase as a percentage of sales was attributable to a 3.4% rate increase at the IBI businesses sales performance at Express and a slight decline in sales at Limited Stores. IBI's increase is primarily the result of the disproportionate growth of Bath & Body Works in the overall mix of net sales for the Company and investments made in store staffing and management for the personal care portion of Victoria's Secret Stores. Due to the emphasis on point of sale marketing and sales floor coverage, these IBI businesses have higher general, administrative and store operating expenses as a percentage of net sales, which have been more than offset by higher gross margins. Year-to-date general, administrative and store operating expenses increased as a percentage of sales to 22.8% in 1996 compared to 21.3% on an adjusted pro-forma basis in 1995. This increase was primarily due to the reasons discussed above. During the fourth quarter of 1995, the Company recognized a special and nonrecurring charge of approximately $45.6 million related to the planned closing and downsizing of stores. The Company expects to have taken action on virtually all of the planned closing and downsizings by the end of 1996. Operating Income - ---------------- Third quarter and year-to-date operating income, as a percentage of sales, was 4.4% and 3.9% respectively, versus 3.8% on an adjusted pro-forma basis for the comparable periods in 1995. This increase was due to increases in gross income, which more than offset the general, administrative and store operating expense rate increases. 15
Gain on Sale of Subsidiary Stock - -------------------------------- The 1996 third quarter results include a $118.6 million gain from the September, 1996 initial public offering of a 15.8% interest (8.05 million shares of common stock) in A&F (see Note 8). The 1995 third quarter results include a $613.5 million dollar gain which resulted from the October, 1995 initial public offering of a 16% interest in IBI. These gains were not subject to tax. Interest Expense - ---------------- <TABLE> <CAPTION> Third Quarter Year-to-Date -------------- -------------- 1996 1995 1996 1995 ------ ------ ------ ------ <S> <C> <C> <C> <C> Average Borrowings (millions) $1,110 $1,051 $939 $915 Average Effective Interest Rate 7.43% 8.59% 7.94% 8.64% </TABLE> Interest expense decreased in the third quarter and year-to-date periods of 1996 as compared to the comparable periods of 1995 primarily due to lower average effective interest rates, which more than offset a slight increase in average borrowings. Other Income - ------------ The $3.8 million increase in other income in the third quarter of 1996 over 1995 is primarily attributable to interest income associated with the investment of $351.6 million restricted cash. The $20.5 million increase in year-to-date other income over 1995 is attributable to the investment of restricted cash and approximately $10.5 million of interest income arising from $1.6 billion of funds temporarily invested that were used to consummate the Company's self- tender in mid-March of this year. 16
FINANCIAL CONDITION Liquidity and Capital Resources - ------------------------------- Cash provided from operating activities, commercial paper backed by funds available under committed long-term credit agreements and the Company's capital structure continue to provide the resources to support operations, including projected growth, seasonal requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (thousands): <TABLE> <CAPTION> Adjusted November 2, February 3, February 3, 1996 1996 1996* ----------- ----------- ----------- <S> <C> <C> <C> Working Capital $ 398,096 $2,083,457 $ 468,457 Capitalization: Long-term debt $ 650,000 $ 650,000 $ 650,000 Deferred income taxes 167,017 250,857 250,857 Shareholders' equity 1,735,639 3,201,041 1,586,041 ---------- ---------- ---------- Total Capitalization $2,552,656 $4,101,898 $2,486,898 ========== ========== ========== Additional amounts available under committed long-term credit agreements (see note 5) $1,000,000 $1,000,000 $1,000,000 ========== ========== ========== </TABLE> * Adjusted February 3, 1996 reflects the impact of the March 17, 1996 repurchase of 85 million shares of the Company's common stock for $1.615 billion. Net cash used for operating activities totaled $78.2 million for the thirty-nine weeks ended November 2, 1996 versus $223 million in the same period of 1995. Lower amounts of cash were required to fund inventories due to an increase in accounts payable and accrued expenses primarily resulting from increases in merchandise payables related to holiday inventory purchases. Cash used for income taxes is due principally to the timing of payment of taxes on the prior year's fourth quarter earnings. Cash required for other assets and liabilities includes additional investments in joint ventures. Investing activities included capital expenditures, primarily for new and remodeled stores. In addition, 1995 included the acquisition of Galyan's for $18 million in cash and stock. 17
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 (see Note 8). Financing activities also included $1.615 billion used to repurchase 85 million shares of the Company's common stock (see Note 7). Financing activities in 1995 include proceeds from and the repayment of $250 million in short-term debt borrowed by IBI and net proceeds of $635 million from the initial public offering of IBI. Capital Expenditures - -------------------- Capital expenditures totaled $319.8 million during the thirty-nine weeks ended November 2, 1996, compared to $285.6 million for the comparable period of 1995. The Company anticipates spending approximately $380 - $390 million for capital expenditures in 1996 of which approximately $240 - $250 million will be for new stores, the remodeling of existing stores, and fixturing and related improvements for the retail businesses. The Company presently anticipates that substantially all 1996 capital expenditures will be funded by net cash provided from operating activities. In addition, the Company presently has available $1 billion under committed, unsecured long-term credit agreements and has the ability to offer up to $250 million in additional debt securities and warrants to purchase debt securities under its shelf registration statement (see Note 5). 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 and 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 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. 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. 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. 19
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 December 15, 1995 among the Company, Morgan Guaranty Trust Company of New York and the banks listed therein, incorporated by reference to Exhibit 4.8 to the Company's 1995 Annual Report on Form 10-K. 4.9 Credit Agreement dated as of June 28, 1996 among Abercrombie & Fitch Stores, Inc., Abercrombie & Fitch Trademark, Inc., the banks listed therein and Chase Manhattan Bank, N.A. as Agent, incorporated by reference to Exhibit 4.9 to the Company's quarterly report on Form 10-Q for the quarter ended August 3, 1996. 10. Material Contracts 10.1 The Limited, Inc. 1993 Stock Option and Performance Incentive Plan (1996 Amendment and Restatement). 10.2 The Limited, Inc. 1996 Stock Plan for Non-Associate Directors. 10.3 The Limited, Inc. Incentive Compensation Plan 11. Statement re: Computation of Per Share Earnings 12. Statement re: Computation of 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. 20
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/ Kenneth B. Gilman ---------------------------------- Kenneth B. Gilman Vice Chairman and Chief Financial Officer* Date: December 13, 1996 - ---------------------------------- * Mr. Gilman is the principal financial officer and has been duly authorized to sign on behalf of the Registrant. 21
EXHIBIT INDEX ------------- Exhibit No. Document - ----------- -------- 10.1 The Limited, Inc. 1993 Stock Option and Performance Incentive Plan (1996 Amendment and Restatement). 10.2 The Limited, Inc. 1996 Stock Plan for Non-Associate Directors. 10.3 The Limited, Inc. Incentive Compensation Plan 11 Statement re: Computation of Per Share Earnings. 12 Statement re: Ratio of Earnings to Fixed Charges. 15 Letter re: Unaudited Interim Financial Information re: Incorporation of Report of Independent Accountants. 27 Financial Data Schedule.