Bath & Body Works - 10-Q quarterly report FY

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

THE LIMITED, INC.

TABLE OF CONTENTS

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Safe Harbor Statement Under The Private Securities Litigation 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 Quarterly Report on Form 10-Q ("Report") or made by management of the Company involve risks and uncertainties and are subject to change based on various important factors, many of 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. Words such as "estimate," "project," "plan," "believe," "expect," "anticipate," "intend," and similar expressions may identify forward-looking statements. 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 2001 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Report or otherwise made by management: changes in consumer spending patterns, consumer preferences and overall economic conditions; the impact of competition and pricing; changes in weather patterns; political stability; postal rate increases and charges; paper and printing costs; risks associated with the seasonality of the retail industry; risks related to consumer acceptance of the Company's products and the ability to develop new merchandise; the ability to retain, hire and train key personnel; risks associated with the possible inability of the Company's manufacturers to deliver products in a timely manner; risks associated with relying on foreign sources of production and availability of suitable store locations on appropriate terms. See the Company's Annual Report on Form 10-K for a more detailed discussion of these matters and other risk factors. 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.

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PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

THE LIMITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Thousands except per share amounts)

(Unaudited)

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THE LIMITED, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands)

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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THE LIMITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands)

(Unaudited)

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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THE LIMITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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Report of Independent Accountants

To the Board of Directors and
Shareholders of
The Limited, Inc.:

We have reviewed the accompanying consolidated balance sheets of The Limited, Inc. and its subsidiaries (the "Company") as of August 4, 2001 and July 29, 2000, and the related consolidated statements of income for each of the thirteen and twenty-six week periods ended August 4, 2001 and July 29, 2000 and the consolidated statements of cash flows for each of the twenty-six week periods ended August 4, 2001 and July 29, 2000. 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 auditing standards generally accepted in the United States of America, 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 consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of February 3, 2001, and the related consolidated statements of income, of shareholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 3, 2001 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP
Columbus, OH
August 23, 2001

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RESULTS OF OPERATIONS

Net sales for the second quarter of 2001 were $2.192 billion compared to $2.289 billion in 2000, as a 5% decline in comparable store sales was partially offset by sales from new stores. Operating income decreased to $77.0 million from $157.1 million in 2000. Net income decreased to $71.6 million from $77.6 million in 2000, and earnings per share decreased to $0.16 from $0.17 in 2000. Net income in 2001 included after-tax non-operating gains totaling $37.1 million as a result of the initial public offerings of Alliance Data Systems Corp. and Galyan's Trading Company, Inc., companies in which the Company has a noncontrolling ownership interest. Excluding these gains, net income for the second quarter of 2001 was $34.4 million and earnings per share were $0.08.

Net sales for the twenty-six weeks ended August 4, 2001 were $4.319 billion compared to $4.414 billion in 2000. Operating income decreased to $139.8 million from $284.1 million in 2000. Net income decreased 27% to $102.2 million from $140.5 million in 2000, and earnings per share decreased 26% to $0.23 from $0.31 in 2000. Excluding the non-operating gains discussed above, net income and earnings per share for the twenty-six weeks ended August 4, 2001 were $65.1 million and $0.15.

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Financial Summary

The following summarized financial and statistical data compares reported results for the thirteen week and twenty-six week periods ended August 4, 2001 to the comparable periods for 2000:

N/M - Not meaningful

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Net Sales

Net sales for the second quarter of 2001 were $2.192 billion compared to $2.289 billion for the same period in 2000. A 5% comparable store sales decrease and a 19% decrease in sales at Victoria's Secret Direct were partially offset by an increase in sales from the net addition of 316 stores at Intimate Brands, Inc. ("IBI").

At IBI, net sales for the second quarter of 2001 decreased 3% to $1.151 billion from $1.191 billion in 2000. The net sales decline was primarily due to a 5% comparable store sales decrease and a 19% decrease in sales at Victoria's Secret Direct, partially offset by an increase in sales from the net addition of 316 new stores (872,000 selling square feet). Victoria's Secret Stores' sales increased 2% to $563.0 million due to the net addition of 80 stores (304,000 selling square feet), partially offset by a 3% decrease in comparable store sales. Bath & Body Works' sales increased 3% to $358.9 million, due to the net addition of 236 new stores (568,000 selling square feet), partially offset by a 9% decrease in comparable store sales. Net sales at Victoria's Secret Direct decreased 19% to $229.1 million due to an acceleration of catalogue mailings into the first quarter as compared to last year, as well as unfavorable results in the clothing, sleepwear, shoes and accessory categories, partially offset by an increase in e-commerce sales.

At the apparel businesses, net sales for the second quarter of 2001 decreased 5% to $1.034 billion from $1.091 billion in 2000. The net sales decrease was primarily due to a comparable store sales decrease of 5%.

The 2001 year-to-date net sales were $4.319 billion compared to $4.414 billion in 2000. The sales decrease was due to a comparable store sales decrease of 4%, partially offset by an increase in sales from the net addition of 316 stores at IBI.

Gross Income

For the second quarter of 2001, the gross income rate (expressed as a percentage of net sales) decreased to 31.6% from 32.4% for the same period in 2000. The gross income rate decreased both at IBI and, to a lesser extent, at the apparel businesses.

The decrease in the gross income rate at IBI was principally due to an increase in the buying and occupancy expense rate due to the inability to achieve leverage on store-related costs as comparable store sales decreased 5%. In addition, the buying and occupancy expense rate increase was due to the continuing expansion of Bath & Body Works' stores into non-mall locations, which, although profitable, typically have higher occupancy costs as a percentage of net sales.

At the apparel businesses, the gross income rate decreased slightly, as an improved merchandise margin rate was more than offset by an increase in the buying and occupancy expense rate, due to the inability to achieve leverage as comparable store sales decreased 5%. The merchandise margin rate improved at Lane Bryant, Limited Stores and Structure, but decreased significantly at Express and Lerner New York.

The 2001 year-to-date gross income rate decreased to 31.5% from 32.6% in 2000. The decrease was principally due to the increase in buying and occupancy expense rate due to the inability to

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achieve leverage as comparable store sales decreased 4%. The merchandise margin rate was relatively flat compared to 2000.

General, Administrative and Store Operating Expenses

For the second quarter of 2001, the general, administrative and store operating expense rate (expressed as a percentage of net sales) increased to 28.1% from 25.5% last year. The rate increase was primarily due to overall increases in store selling expenses at IBI and the inability to achieve leverage due to the decrease in comparable store sales.

At IBI, general, administrative and store operating expenses increased 8% primarily due to higher store selling expenses resulting from the net addition of 316 new stores. At Victoria's Secret Stores, the general, administrative and store operating expense rate was relatively flat as lower marketing expenses offset the deleveraging impact of a comparable store sales decrease of 3%. At Bath & Body Works, the general, administrative and store operating expense rate increased significantly due to the inability to achieve leverage on a comparable store sales decrease of 9%. Bath & Body Works' general, administrative and store operating expenses increased due to higher store selling expenses resulting from a 21% increase in selling square feet.

The 2001 year-to-date general, administrative and store operating expense rate increased to 28.3% from 26.2% in 2000. The rate increase was primarily due to increases in store selling expenses and the inability to achieve leverage due to the decrease in comparable store sales.

Operating Income

The second quarter operating income rate (expressed as a percentage of net sales) decreased to 3.5% from 6.9% for the same period in 2000. The rate decrease was due to the 0.8% decrease in the gross income rate and the 2.5% increase in the general, administrative and store operating expense rate.

The year-to-date operating income rate was 3.2% in 2001 and 6.4% in 2000. The rate decrease was due to the 1.1% decrease in the gross income rate and the 2.1% increase in the general, administrative and store operating expense rate.

Interest Expense

The company incurred $8.4 million in interest expense for the second quarter of 2001 compared to $12.7 million for the same period in 2000. Year-to-date interest expense decreased to $16.7 million in 2001 from $26.7 million in 2000. The decreases were primarily the result of decreased borrowing levels.

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Other Income, Net

For the second quarter of 2001, other income, net was $7.1 million versus $11.1 million in 2000. Year-to-date other income, net was $13.1 million versus $20.8 million in 2000. The decreases were due to reduced interest income from lower invested cash balances, the result of debt repayments, stock repurchases during fiscal 2000 and capital expenditures.

Gains on Sale of Stock by Subsidiary and Investee

During the thirteen week period ended August 4, 2001, the Company recognized $62.1 million of pretax gains as a result of the initial public offerings ("IPO's") of Alliance Data Systems Corp. ("ADS") and Galyan's Trading Company, Inc. ("Galyan's"). ADS is a provider of electronic transaction services, credit services and loyalty and database marketing services. Galyan's is a specialty retailer that sells outdoor and athletic equipment, apparel and footwear and accessories. Prior to the IPO's, the Company's ownership interest in ADS and Galyan's was approximately 31% and 37%, respectively. Subsequent to the IPO's, the Company owns approximately 14.7 million shares of ADS common stock, representing a 20% ownership interest, and 3.9 million shares of Galyan's common stock, representing a 22% ownership interest. Deferred taxes were provided on the gains using the Company's effective tax rate. The investments are accounted for using the equity method.

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FINANCIAL CONDITION

Liquidity and Capital Resources

Cash provided from operating activities and funds available from commercial paper backed by bank credit agreements provide the resources to support current operations, projected growth, seasonal funding requirements and capital expenditures. A summary of the Company's working capital position and capitalization follows (millions):

In addition, the Company may offer up to $250 million of debt securities and warrants to purchase debt securities under its shelf registration statement.

The Company's operations are seasonal in nature. As a result, the Company expects significant changes in certain asset and liability accounts between its fiscal year-end and subsequent interim periods. Consequently, the Company believes that comparing operating cash flow changes from the current interim period to similar changes from the previous year generally provides the best comparison, rather than analyzing the absolute current year activity. For investing and financing activities, the Company believes the absolute measure of current year activity generally provides the best comparison.

Net cash provided by operating activities was $14.8 million for the twenty-six weeks ended August 4, 2001 versus $15.6 million used for operating activities for the same period in 2000. The increase in cash provided by operating activities compared to a year ago was driven by a decrease in the growth of inventories, partially offset by lower net income and changes in other operating assets and liabilities which were primarily driven by the timing of certain payments.

In 2001, major investing activities included $210 million in capital expenditures (see "Capital Expenditures" section on page 22).

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Financing activities in 2001 primarily consisted of the quarterly dividend payment of $0.075 per share.

Financing activities in 2000 included the repayment of $100 million Series C floating rate notes and the quarterly dividend payment of $0.075 per share. In addition, the Company repurchased 6.3 million shares of common stock for $150.3 million. Also, in 2000, IBI repurchased 1.4 million shares from its public shareholders for $31.4 million and 7.4 million shares from The Limited, Inc. for $166.5 million, which had no cash flow impact to The Limited, Inc.

Capital Expenditures

Capital expenditures amounted to $210 million for the twenty-six weeks ended August 4, 2001 compared to $150 million for the same period in 2000. The increase in 2001 is primarily related to the timing of capital expenditures associated with new and remodeled stores. The Company accelerated the timing of these projects to complete the stores prior to the key fall selling period. Additionally, the Company made increased investments in information technology.

The Company anticipates spending approximately $450 million for capital expenditures in 2001, of which approximately $320 million will be for new stores and for the remodeling of and improvements to existing stores. Remaining capital expenditures are primarily related to information technology and distribution centers. The Company expects that 2001 capital expenditures will be funded principally by net cash provided by operating activities.

Future Cash Flows

On August 16, 2001, the Company completed the sale of one of its apparel businesses, Lane Bryant, to Charming Shoppes, Inc. for $280 million of cash and 8.7 million shares of Charming Shoppes common stock valued at $55 million. The consideration received by the Company is subject to adjustment based on Lane Bryant's net tangible assets at closing.

Recently Issued Accounting Pronouncements

EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," will be effective in the first quarter of 2002 and addresses the accounting for, and classification of, various sales incentives. The Company has determined that adopting the provisions of this EITF Issue will not have a material impact on its results of operations or financial position.

On June 29, 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and also addresses the accounting for goodwill and other intangible assets. SFAS No. 142 addresses the accounting for goodwill and other intangible assets subsequent to their acquisition, and will be effective in the first quarter of 2002. The Company is currently evaluating the impact of adopting SFAS No. 141 and SFAS No. 142.

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Impact of Inflation

The Company's results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, the Company believes the effects of inflation, if any, on the results of operations and financial condition have been minor.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk of the Company's financial instruments as of August 4, 2001 has not significantly changed since February 3, 2001. Information regarding the Company's financial instruments and market risk as of February 3, 2001 is disclosed in the Company's 2000 Annual Report on Form 10-K.

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PART II - OTHER INFORMATION

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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.

Date: September 17, 2001

*Ms. Hailey is the principal financial officer and has been duly authorized to sign on behalf of the Registrant.

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