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 August 1, 1998 -------------- 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 (I.R.S. Employer Identification No.) of 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. Common Stock Outstanding at August 28, 1998 - -------------------------------- ------------------------------ $.50 Par Value 28,080,286 Shares
THE LIMITED, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income Thirteen and Twenty-six Weeks Ended August 1, 1998 and August 2, 1997......................... 3 Consolidated Balance Sheets August 1, 1998 and January 31, 1998....................... 4 Consolidated Statements of Cash Flows Twenty-six Weeks Ended August 1, 1998 and August 2, 1997......................... 5 Notes to Consolidated Financial Statements..................... 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition....... 11 Part II. Other Information Item 1. Legal Proceedings......................................... 19 Item 6. Exhibits and Reports on Form 8-K.......................... 19 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 Twenty-six Weeks Ended ---------------------------------------- ---------------------------------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ------------------ ------------------ ------------------ ------------------ <S> <C> <C> <C> <C> NET SALES $2,083,101 $2,020,084 $ 4,091,178 $3,849,864 Cost of Goods Sold, Occupancy and Buying Costs 1,468,387 1,481,177 2,889,794 2,809,486 ------------------ ------------------ ------------------ ------------------ GROSS INCOME 614,714 538,907 1,201,384 1,040,378 General, Administrative and Store Operating Expenses (538,336) (466,247) (1,068,659) (918,094) Special & Nonrecurring Items, Net 1,651,397 - 1,740,030 - ------------------ ------------------ ------------------ ------------------ OPERATING INCOME 1,727,775 72,660 1,872,755 122,284 Interest Expense (16,414) (16,272) (32,155) (32,819) Other Income 15,595 6,818 31,748 15,655 Minority Interest (12,618) (10,632) (20,541) (16,279) Gain in Connection with Initial Public Offering of Equity Investee - - - 8,606 ------------------ ------------------ ------------------ ------------------ INCOME BEFORE INCOME TAXES 1,714,338 52,574 1,851,807 97,447 Provision for Income Taxes 30,000 25,000 88,000 45,000 ------------------ ------------------ ------------------ ------------------ NET INCOME $1,684,338 $ 27,574 $ 1,763,807 $ 52,447 ================== ================== ================== ================== NET INCOME PER SHARE: Basic $7.13 $.10 $6.92 $.19 ========== ========= =========== ========= Diluted $6.93 $.10 $6.75 $.19 ========== ========= =========== ========= DIVIDENDS PER SHARE $ .13 $.12 $ .26 $.24 ========== ========= =========== ========= </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> August 1, January 31, 1998 1998 ---------------- --------------- (Unaudited) <S> <C> <C> ASSETS ------ CURRENT ASSETS: Cash and Equivalents $ 498,862 $ 746,395 Accounts Receivable 81,131 83,370 Inventories 1,144,545 1,002,710 Store Supplies 91,187 99,167 Other 80,954 99,509 ----------- ----------- TOTAL CURRENT ASSETS 1,896,679 2,031,151 PROPERTY AND EQUIPMENT, NET 1,462,011 1,519,908 RESTRICTED CASH 351,600 351,600 DEFERRED INCOME TAXES 65,613 56,586 OTHER ASSETS 361,042 341,516 ----------- ----------- TOTAL ASSETS $ 4,136,945 $ 4,300,761 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts Payable $ 264,864 $ 300,703 Accrued Expenses 701,746 676,715 Income Taxes Payable 14,004 115,994 ----------- ----------- TOTAL CURRENT LIABILITIES 980,614 1,093,412 LONG-TERM DEBT 650,000 650,000 OTHER LONG-TERM LIABILITIES 54,606 58,720 MINORITY INTEREST 99,258 102,072 CONTINGENT STOCK REDEMPTION AGREEMENT 351,600 351,600 SHAREHOLDERS' EQUITY: Common Stock 180,352 180,352 Paid-in Capital 151,002 148,018 Retained Earnings 5,306,178 3,613,174 ----------- ----------- 5,637,532 3,941,544 Less: Treasury Stock, at Average Cost (3,636,665) (1,896,587) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 2,000,867 2,044,957 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,136,945 $ 4,300,761 =========== =========== </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> Twenty-six Weeks Ended -------------------------------------- August 1, August 2, 1998 1997 ---------------- -------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,763,807 $ 52,447 Impact of Other Operating Activities on Cash Flows: Net Gain in Connection with Initial Public Offering of Equity Investee - (5,606) Special and Nonrecurring Items, Net of Tax (1,705,030) - Depreciation and Amortization 144,362 149,657 Minority Interest, Net of Dividends Paid 7,720 4,459 Changes in Assets and Liabilities: Accounts Receivable 1,288 (22,208) Inventories (178,542) (148,362) Accounts Payable and Accrued Expenses 34,429 10,354 Income Taxes (148,405) (180,542) Other Assets and Liabilities (11,559) 894 ----------- ---------- NET CASH USED FOR OPERATING ACTIVITIES (91,930) (138,907) ----------- ---------- CASH USED FOR INVESTING ACTIVITIES: Capital Expenditures (158,435) (212,475) Proceeds from Sale of Interest in Investee 131,262 - ----------- ---------- NET CASH USED FOR INVESTING ACTIVITIES (27,173) (212,475) ----------- ---------- FINANCING ACTIVITIES: Net Proceeds from Commercial Paper and Other Short-term Borrowings - 116,121 Dividends Paid (65,219) (65,118) Stock Options and Other 31,923 10,050 Settlement of Abercrombie & Fitch Intercompany Account (47,649) - Repurchase of Subsidiary Common Stock, Net (47,485) - ----------- ---------- NET CASH PROVIDED FROM (USED FOR) FINANCING ACTIVITIES (128,430) 61,053 ----------- ---------- NET DECREASE IN CASH AND EQUIVALENTS (247,533) (290,329) Cash and Equivalents, Beginning of Year 746,395 312,796 ----------- ---------- CASH AND EQUIVALENTS, END OF PERIOD $ 498,862 $ 22,467 =========== ========== </TABLE> In 1998, noncash financing activities include the addition of $1.766 billion to treasury stock as a result of the exchange of 40,484,545 common shares of Abercrombie & Fitch previously owned by the Company for 47,075,052 shares of common stock of the Company. Additional noncash financing activities include a $5.6 million dividend effected by a pro rata spin-off of the Company's remaining shares of Abercrombie & Fitch (see Note 7). 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) that 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 August 1, 1998 and for the thirteen and twenty-six week periods ended August 1, 1998 and August 2, 1997 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 1997 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 August 1, 1998 and for the thirteen and twenty-six week periods ended August 1, 1998 and August 2, 1997 included herein have been reviewed by the independent public accounting firm of PricewaterhouseCoopers LLP and the report of such firm follows the notes to consolidated financial statements. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires that certain external costs and internal payroll and payroll related costs be capitalized during the application development and implementation stages of a software development project and amortized over the software's useful life. The SOP is effective in the first quarter of 1999. Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in April 1998. This SOP requires that entities expense start-up costs and organization costs as they are incurred. The SOP is effective in the first quarter of 1999. 6
2. EARNINGS PER SHARE Weighted average common shares outstanding (thousands): <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-six Weeks Ended -------------------------------------- ------------------------------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ----------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Common shares issued 379,454 379,454 379,454 379,454 Treasury shares (143,322) (107,860) (124,469) (107,821) ----------------- ---------------- ---------------- ---------------- Basic shares 236,132 271,594 254,985 271,633 Dilutive effect of stock options and restricted shares 6,947 1,620 6,236 1,213 ----------------- ---------------- ---------------- ---------------- Diluted shares 243,079 273,214 261,221 272,846 ================= ================ ================ ================ </TABLE> Options to purchase .8 million and 9.0 million shares of common stock were outstanding at August 1, 1998 and August 2, 1997, but were not included in the computation of earnings per share because the options' exercise price was greater than the average market price of the common shares during the period. In addition, the 18.75 million shares subject to the Contingent Stock Redemption Agreement are excluded from the dilution calculation because their redemption would not have a dilutive effect on earnings per share. 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 using 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. 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of (thousands): <TABLE> <CAPTION> August 1, January 31, 1998 1998 -------------- ------------ <S> <C> <C> Property and equipment, at cost $ 3,057,597 $ 3,104,612 Accumulated depreciation and amortization (1,595,586) (1,584,704) -------------- ------------ Property and equipment, net $ 1,462,011 $ 1,519,908 ============== =========== </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 twenty-six weeks ended August 1, 1998 and August 2, 1997 approximated $199 million and $183 million. The Internal Revenue Service has assessed the Company for additional taxes and interest for years 1992 to 1994 related to the treatment of transactions involving the Company's foreign operations for which the Company has provided deferred taxes on the undistributed earnings of foreign affiliates. The Company strongly disagrees with the 7
assessment and is vigorously contesting the assessment. 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> August 1, January 31, 1998 1998 -------------- -------------- <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 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 Company is in compliance with covenants contained in the Agreement relating to the Company's working capital, debt and net worth. No amounts were outstanding under the Agreement at August 1, 1998. 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. No commercial paper was outstanding at August 1, 1998. 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 twenty-six weeks ended August 1, 1998 and August 2, 1997 approximated $32.4 million and $40.1 million. 7. SPECIAL ITEMS On May 19, 1998, the Company completed a tax-free exchange offer to establish Abercrombie & Fitch ("A&F") as an independent company. A total of 47,075,052 shares of the Company's common stock were exchanged at a ratio of .86 of a share of A&F common stock for each Limited share tendered. In connection with the exchange, the Company recorded a $1.65 billion tax-free gain. In addition, on June 1, 1998 a $5.6 million dividend was effected through a pro rata spin-off to shareholders of the Company's remaining 3,115,455 A&F shares. Limited shareholders of record as of the close of trading on May 29, 1998 received .013673 of a share of A&F for each Limited share owned at that time. 8
During the first quarter of 1998, the company recognized a pretax gain of $93.7 million from the sale of its remaining interest in Brylane, Inc., a specialty catalogue retailer. This gain was partially offset by a $5.1 million pretax charge for severance and other associate termination costs related to the closing of five of six Henri Bendel stores. At August 1, 1998, $3.9 million of these charges had been paid. During the first quarter of 1997, the Company recognized a pretax gain of $8.6 million in connection with the initial public offering of Brylane, Inc. During the fourth quarter of 1997, the Company recorded pretax special and nonrecurring charges related to closing the Cacique lingerie business, streamlining the Henri Bendel business from six stores to one store, recognizing charges for impaired assets and closing and downsizing certain stores, principally at the women's businesses. Write-downs related to the $175 noncash component of the charge were recognized in 1997. Outlays for the cash component of the charge are expected to approximate $70 to $80 million during 1998, leaving a remaining accrual at year-end of $20 to $30 million, principally for contractual obligations. Cash outlays of $32 million during the first half of 1998 were principally related to store closings. 9
[LETTERHEAD OF PRICEWATERHOUSECOOPERS 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 (the Company) at August 1, 1998, and the related condensed consolidated statements of income and cash flows for the thirteen-week and twenty-six-week periods ended August 1, 1998 and August 2, 1997. 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 January 31, 1998, 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 20, 1998, 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 January 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Columbus, Ohio August 18, 1998 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net sales for the second quarter of 1998 grew 3% to $2.083 billion from $2.020 billion a year ago. Operating income was $1.728 billion compared to operating income of $72.7 million for 1997. The operating results of Abercrombie & Fitch through May 19, 1998, the date of the split-off (see Note 7), are included in the discussion of Results of Operations herein. Operating income in 1998 included a $1.651 billion gain from the split-off of Abercrombie & Fitch (the "A&F gain"). Excluding the A&F gain, operating income increased 5% to $76.4 million. Net income was $1.684 billion compared to $27.6 million in 1997, and earnings per share was $6.93 compared to $.10 in 1997. Exclusive of the A&F gain, net income increased 19% in 1998 to $32.9 million compared to $27.6 million for 1997 and earnings per share increased to $.13 from $.10 in 1997. Second quarter business highlights include the following: The Intimate Brands businesses continued their consistent performance trend by recording a 16% operating income increase and a 21% increase in net income. Victoria's Secret Stores operating margin and operating income were significantly higher on a comparable store sales increase of 2%. Victoria's Secret Catalogue sales increased 3%. Major lingerie introductions and the semi-annual sale were supported by national television advertising. Bath & Body Works, up against strong comparable store sales of 16% a year ago, delivered a comparable store sales increase of 3% and achieved a 30% increase in operating profits. New product collections and a strong sale event contributed to the sales and profit growth. The women's businesses continued their first quarter improvement in sales and operating income, with Express, Lerner and Lane Bryant as contributors; however, the operating income improvement was partially offset by a significant decline in operating results at Limited Stores. Overall, the women's businesses reported a 10% increase in comparable store sales. Limited Too continued its strong sales momentum with a 20% comparable store sales gain, its eighth consecutive quarter with a double digit comparable store sales increase. Net sales for the twenty-six weeks ended August 1, 1998 increased 6% to $4.091 billion compared to $3.850 billion in 1997. Operating income was $1.873 billion compared to $122.3 million for 1997. Operating income in 1998 included a $93.7 million pretax gain from the sale of the Company's remaining interest in Brylane, Inc. that was partially offset by a $5.1 million first quarter pretax charge for severance and other associate termination costs at Henri Bendel and a $1.651 billion second quarter gain from the split-off of Abercrombie & Fitch. Excluding these special and nonrecurring items, operating income increased 9% to $132.7 million. Net income increased to $1.764 billion compared to $52.4 million in 1997, and earnings per share was $6.75 compared to $.19 in 1997. Exclusive of these special and nonrecurring items and the $8.6 million 1997 gain in connection with the initial public offering of Brylane, Inc., net income increased 26% in 1998 to $58.8 million compared to $46.8 million for 1997 and earnings per share increased to $.22 from $.17 in 1997. 11
Financial Summary - ----------------- The following summarized financial and statistical data compares the thirteen week and twenty-six week periods ended August 1, 1998 to the comparable 1997 periods: <TABLE> <CAPTION> Second Quarter Year - to - Date ------------------------------------ ------------------------------------ Change Change From From Prior Prior 1998 1997 Year 1998 1997 Year --------- --------- --------- --------- --------- -------- <S> <C> <C> <C> <C> <C> <C> Net Sales (millions): Victoria's Secret Stores $413 $389 6% $775 $714 9% Victoria's Secret Catalogue 202 196 3% 401 376 7% Bath & Body Works 254 212 20% 459 389 18% Cacique (a) - 22 N/M - 42 N/M Other 6 8 N/M 11 10 N/M --------- --------- --------- --------- ----------- -------- Total Intimate Brands 875 $827 6% $1,646 $1,531 8% --------- --------- --------- --------- ----------- -------- Express $284 $246 15% $553 $470 18% Lerner 216 203 6% 418 397 5% Lane Bryant 230 217 6% 441 421 5% Limited Stores 169 175 (3%) 340 355 (4%) Henri Bendel (c) 8 17 N/M 20 43 N/M --------- --------- --------- --------- ----------- -------- Total Women's Businesses $907 $858 6% $1,772 $1,686 5% --------- --------- --------- --------- ----------- -------- Structure $131 $152 (14%) $252 $279 (10%) Limited Too 75 61 23% 157 127 24% Galyan's 46 35 31% 81 66 23% Mast and Other 27 - N/A 27 - N/A --------- --------- --------- --------- ----------- -------- Total Emerging Businesses $279 $248 13% $517 $472 10% --------- --------- --------- --------- ----------- -------- Abercrombie & Fitch (b) $22 $87 N/M $156 $161 N/M --------- --------- --------- --------- ----------- -------- Total Net Sales $2,083 $2,020 3% $4,091 $3,850 6% ========= ========= ========= ========= =========== ======== Operating Income (millions): Intimate Brands $125 $107 16% $196 $168 17% Women's Businesses (25) (69) 64% (60)* (96) 37% Emerging Businesses (25) 30 (183%) (15) 43 (135%) Special and Nonrecurring Items 1,651 - N/A 1,740 - N/A Abercrombie & Fitch (b) 2 5 N/M 12 7 N/M --------- --------- --------- --------- ----------- -------- Total Operating Income $1,728 $73 N/M $1,873 $122 N/M ========= ========= ======== ========= =========== ======== </TABLE> (a) The Cacique business was closed effective January 31, 1998. (b) The Abercrombie & Fitch business was split-off effective May 19, 1998 via a tax-free exchange offer. Results up to this date are included in the consolidated financial statements. (c) Five of six Henri Bendel stores were closed at the end of 1997. *The women's businesses exclude a $5 million first quarter charge for special and nonrecurring items (see Note 7). 12
<TABLE> <CAPTION> Second Quarter Year-to-Date ----------------------------------- ------------------------------------- Change Change From From Prior Prior 1998 1997 Year 1998 1997 Year -------- --------- --------- --------- -------- --------- <S> <C> <C> <C> <C> <C> <C> Increase (Decrease) in Comparable Store Sales: Victoria's Secret Stores 2% 15% 4% 11% Bath & Body Works 3% 16% 1% 15% Cacique N/A 11% N/A 8% -------- --------- --------- -------- Total Intimate Brands 2% 15% 3% 12% -------- --------- --------- -------- Express 17% (24%) 18% (27%) Lerner 13% (5%) 11% (6%) Lane Bryant 8% 5% 7% (1%) Limited Stores 0% (12%) (1%) (7%) Henri Bendel (10%) (12%) (21%) (4%) -------- --------- --------- -------- Total Women's Businesses 10% (11%) 9% (12%) -------- --------- --------- -------- Structure (14%) 1% (10%) 0% Limited Too 20% 25% 21% 30% Galyan's 6% 2% 2% 3% -------- --------- --------- -------- Total Emerging Businesses (3%) 6% 0% 7% -------- --------- --------- -------- Abercrombie & Fitch (through May 19, 1998) N/M 15% 48% 14% -------- --------- --------- -------- Total comparable store sales increase (decrease) 6% 0% 7% (2%) ======== ========= ========= ======== Retail Sales Excluding Catalogue and Other: Retail sales increase attributable to net new and remodeled stores (1998 excludes impact of closing Cacique and split- off of A&F) 2% 7% 2% 7% Retail sales per average selling square foot $68 $64 6% $133 $122 9% Retail sales per average store (thousands) $335 $322 4% $657 $614 7% Average store size at end of quarter (selling square feet) 4,913 5,004 (2%) Retail selling square feet at end of quarter (thousands) 26,734 28,474 (6%) Number of Stores: Beginning of period 5,599 5,629 5,640 5,633 Opened 59 80 123 151 Disposed (159)* - (159)* (4) Closed (58) (19) (163) (90) -------- --------- --------- -------- End of period 5,441 5,690 5,441 5,690 ======== ========= ========= ======== </TABLE> *Split-off of Abercrombie & Fitch effective May 19, 1998 13
<TABLE> <CAPTION> Number of Stores Selling Sq. Ft. (thousands) ------------------------------------------------ --------------------------------------------- Change Change Aug. 1, Aug. 2, From Aug. 1, Aug. 2, From 1998 1997 Prior Year 1998 1997 Prior Year ------------ ------------ -------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Victoria's Secret Stores 799 757 42 3,595 3,433 162 Bath & Body Works 1,000 844 156 1,954 1,564 390 Cacique - 118 (118) - 363 (363) ------------ ------------ -------------- ------------ ------------ ----------- Total Intimate Brands 1,799 1,719 80 5,549 5,360 189 ------------ ------------ -------------- ------------ ------------ ----------- Express 724 751 (27) 4,608 4,738 (130) Lerner 687 757 (70) 5,289 5,803 (514) Lane Bryant 770 808 (38) 3,719 3,875 (156) Limited Stores 599 648 (49) 3,615 3,891 (276) Henri Bendel 1 6 (5) 35 113 (78) ------------ ------------ -------------- ------------ ------------ ----------- Total Women's Businesses 2,781 2,970 (189) 17,266 18,420 (1,154) ------------ ------------ -------------- ------------ ------------ ----------- Structure 537 543 (6) 2,129 2,132 (3) Limited Too 311 310 1 979 973 6 Galyan's 13 9 4 811 488 323 ------------ ------------ -------------- ------------ ------------ ----------- Total Emerging Businesses 861 862 (1) 3,919 3,593 326 ------------ ------------ -------------- ------------ ------------ ----------- Abercrombie & Fitch - 139 (139) - 1,101 (1,101) ------------ ------------ -------------- ------------ ------------ ----------- Total stores and selling square feet 5,441 5,690 (249) 26,734 28,474 (1,740) ============ ============ ============== ============ ============ =========== </TABLE> Net Sales - --------- Net sales for the second quarter of 1998 increased 3% over the second quarter of 1997, primarily as a result of the 6% increase in comparable store sales, offset by a 4% decrease from the A&F split-off and the Cacique closing and decreases resulting from closed stores. During the second quarter of 1998, the Company opened 59 new stores, remodeled 130 stores, closed 58 stores and disposed of 159 stores via the A&F split-off. Net sales for the twenty-six weeks ended August 1, 1998 increased 6% as compared to the same period in 1997 primarily as a result of a 7% increase in comparable store sales. Sales at the Intimate Brands businesses for the second quarter of 1998 increased 6% over the same period last year. The increase was attributable to the net addition of new and remodeled stores, a 2% increase in comparable store sales and a 3% increase in catalogue net sales. Year-to-date Intimate Brands sales increased 8% over the same period in 1997, due to the net addition of new and remodeled stores, a 3% increase in comparable store sales, and a 7% increase in catalogue net sales. If the impact of closing Cacique at the end of 1997 were excluded, both the quarter and the year-to-date sales increases would be 3% higher. Sales at the women's businesses for the second quarter and year-to-date periods of 1998 increased 6% and 5%, compared to the same periods in 1997, primarily due to the 10% and 9% increases in comparable store sales, offset by the impact of closed stores. Substantial improvements in comparable store sales were realized at Express, Lerner and Lane Bryant. Structure recorded 14% and 10% declines in comparable store sales for the thirteen and twenty-six week periods ended August 1, 1998. 14
Gross Income - ------------ Gross income, expressed as a percentage of sales, increased to 29.5% for the second quarter of 1998 from 26.7% for the second quarter of 1997. The increase, expressed as a percentage of sales, was attributable to a 2.0% increase in merchandise margins and a .9% decrease in buying and occupancy costs. The increase in merchandise margin was attributable to higher initial markup combined with a slightly lower markdown rate over the comparable period last year. Buying and occupancy costs, expressed as a percentage of sales, decreased as a result of leverage from higher sales at the women's businesses and efforts over the past two years to streamline the businesses and close underperforming stores. The 1998 year-to-date gross income percentage increased 2.4% to 29.4% in 1998 from 27.0% for the same period in 1997, attributable to higher initial markup and lower markdowns and a .6% decline in buying and occupancy. General, Administrative and Store Operating Expenses - ---------------------------------------------------- General, administrative and store operating expenses, expressed as a percentage of sales, increased to 25.8% for the second quarter of 1998 as compared to 23.1% for the second quarter of 1997. This increase was attributable to expenses associated with increased investments in information technology in preparation for the Year 2000, expenses associated with the rollout of the merchandise process redesign and brand building, and an investment in national advertising for Victoria's Secret. Year-to-date general, administrative and store operating expenses increased as a percentage of sales to 26.1% in 1998 compared to 23.8% in 1997. This increase was due primarily to the reasons discussed above. Operating Income - ---------------- Exclusive of special and nonrecurring items described in Note 7, second quarter and year-to-date 1998 operating income, expressed as a percentage of sales, was 3.7% and 3.2%, compared to 3.6% and 3.2%, respectively, for 1997. Increases in gross income were mostly offset by increases in general, administrative and store operating expenses resulting in a 5% second quarter operating income growth. Gains in operating income at Express, Lane Bryant and Lerner were more than offset by significant declines in second quarter operating results at Structure and Limited Stores. Interest Expense - ---------------- <TABLE> <CAPTION> Second Quarter Year-to-Date ----------------------- ------------------------- 1998 1997 1998 1997 -------- --------- -------- ---------- <S> <C> <C> <C> <C> Average Borrowings (millions) $753 $767 $744 $780 Average Effective Interest Rate 8.72% 8.49% 8.65% 8.42% </TABLE> Interest expense increased $.1 million and decreased $.7 million in the second quarter and year-to-date periods in 1998 from the comparable periods in 1997. The year-to-date decrease was mainly a result of lower average borrowings offset by slightly higher interest rates. 15
Other Income - ------------ Other income increased $8.8 million and $16.1 million in the second quarter and year-to-date periods in 1998 from the comparable periods in 1997 due to interest earned on significantly higher average invested cash balances during 1998. 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> August 1, January 31, 1998 1998 -------------- ------------- <S> <C> <C> Working Capital $ 916,065 $ 937,739 ============== ============= Capitalization: Long-term debt $ 650,000 $ 650,000 Shareholders' equity 2,000,867 2,044,957 -------------- ------------- Total Capitalization $2,650,867 $2,694,957 ============== ============= Amounts available under long-term credit agreements * $1,000,000 $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 $91.9 million for the twenty-six weeks ended August 1, 1998 versus $138.9 million last year. The use of cash in both years is principally from the growth of inventories for the Fall selling seasons and the timing of tax payments related to the fourth quarter of the prior years. Investing activities included capital expenditures of approximately $108 million in 1998 and $107 million in 1997 for new and remodeled stores, and the 1998 proceeds from the sale of the Company's remaining investment in Brylane, Inc. Cash used for financing activities for 1998 reflects an increase in the quarterly dividend to $.13 per share from $.12 per share and lower commercial paper borrowings at quarter end. Intimate Brands has previously announced authorization by its Board of Directors to repurchase up to four million shares of its common stock on the open market, specifically reserved to cover shares needed for employee benefit plans. At August 1, 1998, Intimate Brands had repurchased approximately two million shares for this program and by the end of August all four million shares were repurchased. In connection with the split- off of Abercrombie & Fitch (see Note 7), the Company paid $47.6 million to settle its intercompany balance at May 19, 1998. 16
Capital Expenditures - -------------------- Capital expenditures totaled $158.4 million for the twenty-six weeks ended August 1, 1998, compared to $212.5 million for the same period of 1997. The Company anticipates spending $400 to $420 million for capital expenditures in 1998, of which $200 to $220 million will be for new stores, the remodeling of existing stores and related improvements for the retail businesses. The Company expects that 1998 capital expenditures will be funded with cash from operations. Information Systems and "Year 2000" Compliance - ---------------------------------------------- The Company has completed a comprehensive review of its information systems and is involved in an enterprise-wide program to update computer systems and applications in preparation for the year 2000. The Company will incur internal staff costs as well as outside consulting and other expenditures related to this initiative. Total expenditures related to remediation, testing, conversion, replacement and upgrading system applications are expected to range from $85 to $100 million from 1997 through 2000. Of the total, approximately $50 to $60 million will be capital expenditures related to acquisition and implementation of new package systems. The balance, approximately $35 to $40 million, will be expenses associated with remediation and testing of existing systems. Total incremental expenses, including depreciation and amortization of new package systems, remediation to bring current systems into compliance and writing off legacy systems are not expected to have a material impact on the Company's financial condition in any year during the conversion process from 1997 through 2000. However, incremental expenses could total approximately $30 to $35 million in 1998, of which the majority will impact the first three fiscal quarters of 1998, at a rate of $8 to $10 million per quarter. As of August 1, 1998, the Company has incurred expenses of approximately $16 million relating to the Company's Year 2000 initiatives. The Company is attempting to contact vendors and others on whom it relies to assure that their systems will be timely converted. However, there can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Furthermore, no assurance can be given that any or all of the Company's systems are or will be Year 2000 compliant, or that the ultimate costs required to address the Year 2000 issue or the impact of any failure to achieve substantial Year 2000 compliance will not have a material adverse effect on the Company's financial condition. Adoption of New Accounting Standards - ------------------------------------ In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires that certain external costs and internal payroll and payroll related costs be capitalized during the application development and implementation stages of a software development project and amortized over the software's useful life. The SOP is effective in the first quarter of 1999. Additionally, SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in April 1998. This SOP requires that entities expense start-up costs and organization costs as they are incurred. The SOP is effective in the first quarter of 1999 and the Company does not anticipate that this SOP will have an adverse effect on the Company's reported results of operations. 17
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- The Company cautions that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this Report or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results and could cause actual results for 1998 and beyond to differ materially from those expressed or implied in any such forward-looking statements: 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 at appropriate terms, ability to develop new merchandise and ability to hire and train associates. 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 motion to disqualify was denied on December 22, 1997, but as a matter of his personal discretion, the presiding judge elected to recuse himself from further proceedings and this matter was transferred to another judge of the United States District Court for the Southern District of Ohio, Western Division. On May 21, 1998, this judge reaffirmed the earlier dismissal and denied all pending motions seeking to alter, amend or vacate the judgment that had been entered in favor of the Company. On June 5, 1998, ATMI filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. 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. 19
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. 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, incorporated by reference to Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended November 1, 1997. 10. Material Contracts. 10.1 The 1998 Restatement of The Limited, Inc. 1993 Stock Option and Performance Incentive Plan incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 20, 1998. 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. 10.19 Employment agreement by and between The Limited, Inc. and V. Ann Hailey dated as of July 27, 1998 with exhibits. 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 Independent Accountants' Report. 27. Financial Data Schedule. 20
(b) Reports on Form 8-K. ------------------- i. On May 7, 1998 the Company filed a report on Form 8-K which included an exhibit containing a press release dated May 7, 1998. ii. On May 14, 1998 the Company filed a report on Form 8-K which included an exhibit containing a press release dated May 14, 1998. iii. On May 19, 1998 the Company filed a report on Form 8-K which included an exhibit containing a press release dated May 19, 1998. 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: September 14, 1998 ____________________________________ * 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 - ----------- -------------------------- 10.19 Employment agreement by and between The Limited, Inc. and V. Ann Hailey dated as of July 27, 1998 with exhibits. 12 Statement re: Ratio of Earnings to Fixed Charges. 15 Letter re: Unaudited Interim Financial Information to Securities and Exchange Commission re: Incorporation of Independent Accountants' Report. 27 Financial Data Schedule.