Bath & Body Works - 10-Q quarterly report FY

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

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 otherwise made by the Company or 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 2002 and beyond to differ materially from those expressed or implied in any forward-looking statements included in this Report or otherwise made by the Company or management: changes in consumer spending patterns, consumer confidence, consumer preferences and overall economic conditions; the potential impact of national and international security concerns on the retail environment; 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 risks associated with the possible lack of availability of suitable store locations on appropriate terms. Investors should read the Company’s filings with the Securities and Exchange Commission for a more detailed discussion of these and other 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.

Limited Brands, Inc. (the “Company” or “Limited Brands”) sells women’s and men’s apparel, women’s intimate apparel and personal care products under various trade names through its specialty retail stores and direct response (catalog and e-commerce) businesses.

The consolidated financial statements include the accounts of the Company and its subsidiaries including Intimate Brands, Inc. (“IBI” or “Intimate Brands”), an 84% owned subsidiary through March 21, 2002 and wholly-owned thereafter (see Note 2). All significant intercompany balances and transactions have been eliminated in consolidation.

Investments in unconsolidated entities over which the Company exercises significant influence but does not have control are accounted for using the equity method. The Company’s share of the net income or loss of unconsolidated entities from which the Company purchases merchandise or merchandise components is included in cost of goods sold. The Company’s share of the net income or loss of all other unconsolidated entities is included in other income (expense).

During 2002, Mast Industries, Inc., a subsidiary of the Company, sold its interest in certain joint ventures for $34.1 million in cash, which approximated the carrying value of those joint venture interests.

The consolidated financial statements as of and for the thirteen and thirty-nine week periods ended November 2, 2002 and November 3, 2001 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 2001 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 for a fair statement of the results 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 and for the thirteen and thirty-nine week periods ended November 2, 2002 and November 3, 2001 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. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its report on the consolidated financial statements because that report is not a “report” within the meaning of Sections 7 and 11 of that Act.

On March 21, 2002, the Company completed a tax-free tender offer and merger, which resulted in the acquisition of the IBI minority interest. The acquisition resulted in the recombination of Intimate Brands and Limited Brands. The total purchase price was approximately $1.6 billion, based on approximately 88.9 million Limited Brands common shares issued in the transaction and the average closing price of Limited Brands common stock over the 3-day period before and after the transaction date.

The acquisition was effected through an offer to exchange 1.1 shares of Limited Brands common stock for each share of IBI Class A common stock followed by a merger in which all publicly-held shares not tendered were exchanged for the same consideration. As a result, IBI became a wholly-owned subsidiary of Limited Brands and the former public shareholders of IBI became shareholders of Limited Brands.

The acquisition was accounted for using the purchase method of accounting, as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The Company allocated the purchase price to the minority interest portion of the fair values of identifiable intangible assets acquired.

The purchase price allocation included $411.0 million of acquired intangible assets related to trade names with indefinite lives. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” these intangible assets will not be amortized. The remaining purchase price allocation included the fair market value adjustments related to customer relationships and lists, property and equipment, leases, long-term debt and deferred rent. These adjustments are amortized over their respective useful lives (primarily five years) resulting in a non-cash expense of approximately $5.2 million per year. In addition, the acquisition resulted in approximately $1.2 billion of goodwill. None of these amounts are deductible for tax purposes.

The table on the following page summarizes selected unaudited pro forma information for the thirteen and thirty-nine weeks ended November 2, 2002 and November 3, 2001 as if the recombination had been completed at the beginning of 2001. This selected unaudited pro forma information is not necessarily indicative of the operating results that would have occurred if the recombination had been completed at the beginning of the periods presented and is not necessarily indicative of the results that may be achieved in the future. The pro forma information reflects adjustments related to additional depreciation and amortization from the fair market value adjustments described above, the elimination of minority interest in earnings of Intimate Brands and an increase in total weighted average shares outstanding based on the conversion of Intimate Brands historical weighted average Class A common stock outstanding using the 1.1 exchange ratio.

The selected unaudited pro forma information for the thirty-nine week period ended November 2, 2002 includes a pre-tax, non-cash special and nonrecurring charge of $33.8 million (see Note 3). The selected unaudited pro forma information for the thirteen and thirty-nine week periods ended November 3, 2001 includes a pre-tax gain of $170 million (see Note 3). In addition, the selected unaudited pro forma information for the thirty-nine weeks ended November 2, 2002 includes a pre-tax, non-cash compensation cost related to the exchange of unvested IBI stock awards for Limited Brands stock awards that will be recognized as expense over the remaining vesting periods, primarily in fiscal years 2002 and 2003. For the thirteen and thirty-nine weeks ended November 2, 2002, the Company recognized $6.7 million and $19.2 million of pre-tax compensation expense related to these unvested awards.

In connection with the acquisition of the IBI minority interest (see Note 2), vested IBI stock options and restricted stock were exchanged for Limited Brands stock awards with substantially similar terms. In accordance with Emerging Issues Task Force Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44,” the exchange was accounted for as a modification of a stock-based compensation arrangement. As a result, the Company recorded a pre-tax, non-cash special and nonrecurring charge of $33.8 million in the first quarter of 2002.

During the third quarter of 2001, the Company sold one of its apparel businesses, Lane Bryant, to Charming Shoppes, Inc. for $280 million in cash and 8.7 million shares of Charming Shoppes, Inc. common stock valued at $55 million at the time of the issuance. On December 12, 2001, the Company received an additional 0.8 million shares of Charming Shoppes, Inc. common stock valued at $4.3 million at the time of issuance based on a final determination of Lane Bryant’s net tangible assets at closing. The transaction resulted in a third quarter pre-tax gain of $170 million (net of $24 million of transaction costs) and a $68 million tax provision.

During the third quarter of 2002, the Company recognized a $6.1 million pre-tax gain resulting from the sale of its entire interest in Charming Shoppes, Inc. common stock (9.5 million shares) for $65.4 million. The stock was received in connection with the Company’s sale of Lane Bryant during the third quarter of 2001 (see Note 3).

During the second quarter of 2001, the Company recognized $62.1 million of pre-tax 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

The Company adopted SFAS No. 142 in the first quarter of 2002. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but must be tested for impairment annually (or in interim periods if events indicate possible impairment). Other intangible assets will continue to be amortized over their useful lives.

Intangible assets, not subject to amortization, represent trade names that were recorded in connection with the acquisition of the Intimate Brands minority interest and were $411.0 million as of November 2, 2002.

Intellectual property assets and other intangibles, subject to amortization, were as follows (in thousands):

The estimated annual amortization expense for intangibles each year through 2006 is approximately $7.8 million.

The changes in the carrying amount of goodwill for the thirty-nine weeks ended November 2, 2002 are as follows (in thousands):

In accordance with SFAS No.142, neither the thirteen or thirty-nine week periods ended November 3, 2001 have been restated to add back the amortization expense of goodwill. Goodwill amortization expense did not have a material impact on net income for the thirteen or thirty-nine week periods ended November 3, 2001.

At November 2, 2002, one billion shares of $0.50 par value common stock were authorized and 523.0 million were issued and outstanding. At February 2, 2002 and November 3, 2001, 432.2 million shares were issued and 429.1 million and 428.6 million shares were outstanding. Ten million shares of $1.00 par value preferred stock were authorized, none of which were issued.

Earnings per basic share is computed based on the weighted average number of outstanding common shares. Earnings per diluted share includes the weighted average effect of dilutive options and restricted stock on the weighted average shares outstanding. Additionally, earnings per diluted share includes the impact of the dilutive options and restricted stock at IBI prior to the recombination as a reduction to earnings. This had no impact on earnings per diluted share for any of the reported periods.

Weighted average common shares outstanding (thousands):

The quarterly computation of earnings per diluted share excludes options to purchase 21.9 million and 17.8 million shares of common stock at November 2, 2002 and November 3, 2001, and the year-to-date computation of earnings per diluted share excludes options to purchase 10.2 million and 10.8 million shares for 2002 and 2001, because the options’ exercise prices were greater than the average market price of the common shares during the period.

Other comprehensive income follows and relates primarily to fluctuations in the market value of the Company’s investment in Charming Shoppes, Inc. common stock.

Other comprehensive income (thousands):

Accumulated other comprehensive loss, net of tax, is included in retained earnings and was approximately $2.9 million at November 2, 2002, $6.2 million at February 2, 2002 and $9.8 million at November 3, 2001.

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). Inventories are principally valued at the lower of average cost or market, using the retail method. Inventory valuation at the end of the first and third quarters reflects adjustments for estimated inventory markdowns for the total selling season.

Property and equipment, net consisted of (thousands):

The provision for income taxes is based on the current estimate of the annual effective tax rate and, for the thirty-nine weeks ended November 2, 2002, also reflects the nondeductible expense related to the exchange of vested IBI incentive stock options (see Note 3). Income taxes paid during the thirty-nine weeks ended November 2, 2002 and November 3, 2001 approximated $340.3 million and $205.9 million. Income taxes payable included net current deferred tax liabilities of $22.2 million at November 2, 2002, $25.8 million at February 2, 2002 and $11.1 million at November 3, 2001.

The Company’s effective tax rate has historically reflected and continues to reflect a provision related to the undistributed earnings of foreign affiliates. The Internal Revenue Service (IRS) has assessed the Company for additional taxes and interest for the years 1992 to 1998 relating to the undistributed earnings of foreign affiliates. On September 7, 1999, the United States Tax Court sustained the position of the IRS with respect to the 1992 year. In connection with an appeal of the Tax Court judgment, in 1999 the Company made a $112 million payment of taxes and interest for the years 1992 to 1998 that reduced deferred tax liabilities.

On March 29, 2002, the U.S. Court of Appeals for the Sixth Circuit ruled in favor of the Company, reversing the previous Tax Court judgment relating to the 1992 year. This ruling will also apply to years 1993 and 1994. However, the amount of any payment the Company may receive related to the 1992 through 1994 years has not been finalized and the Company will be required to pursue additional actions to obtain any refunds related to the 1995 through 1998 years.

   Unsecured long-term debt consisted of (thousands):

The Company currently has a $1.25 billion unsecured revolving credit facility (the “Facility”). The Facility is comprised of a $500 million 364-day agreement and a $750 million 5-year agreement. Borrowings outstanding under the Facility, if any, are due June 27, 2003 and July 13, 2006, respectively. The Facility has several borrowing and interest rate options. Fees payable under the Facility are based on the Company’s long-term credit ratings, and are currently 0.1% (for the 364-day agreement) and 0.125% (for the 5-year agreement) of the committed amount per year.

The Facility requires the Company to maintain certain specified fixed charge and debt to capital ratios. The Company was in compliance with these requirements at November 2, 2002.

The Facility supports the Company’s commercial paper and letter of credit programs, which are used from time to time to fund working capital and other general corporate requirements. The Company did not issue commercial paper or draw on the Facility during the first three quarters of 2002. In addition, no commercial paper or amounts under the Facility (or the previous credit facility) were outstanding at November 2, 2002.

As of November 2, 2002, the Company had a shelf registration statement, under which up to $250 million of debt securities and warrants to purchase debt securities could be issued (see Note 12).

The Victoria’s Secret segment derives its revenues from sales of women’s intimate and other apparel, personal care products and accessories marketed under the Victoria’s Secret brand name. Victoria’s Secret merchandise is sold through its stores and direct response (catalog and e-commerce) businesses. The Bath & Body Works segment derives its revenues from the sale of personal care products and accessories and home fragrance products marketed under the Bath & Body Works and White Barn Candle brand names. The Apparel segment derives its revenues from sales of women’s and men’s apparel through Express, Express Men’s, Lerner/New York & Company and Limited Stores.

Segment information as of and for the thirteen and thirty-nine weeks ended November 2, 2002 and November 3, 2001 follows (in thousands):

Sale of Business

Issuance of Debt Securities

To the Board of Directors and

Shareholders of

Limited Brands, Inc.:

Net sales for the third quarter of 2002 were $1.983 billion compared to $1.906 billion in 2001. Excluding Lane Bryant’s net sales in the third quarter of 2001 (Lane Bryant was sold to Charming Shoppes, Inc. on August 16, 2001), net sales increased 6% from $1.879 billion. Comparable store sales increased 3% for the quarter. Operating income decreased to $21.5 million from $153.5 million in 2001. Net income decreased to $15.8 million from $90.2 million in 2001, and earnings per share decreased to $0.03 from $0.21 in 2001.

Net income in the third quarter of 2002 included a pre-tax non-operating gain of $6.1 million related to the sale of Charming Shoppes, Inc. stock received in connection with the sale of Lane Bryant. In 2001, third quarter net income included a pre-tax special and nonrecurring gain of $170 million related to the sale of Lane Bryant. Excluding these gains and giving effect to the Intimate Brands recombination in 2001, net income increased to $11.7 million or $0.02 per share from a net loss of $13.8 million or $0.03 per share in 2001.

Net sales for the thirty-nine weeks ended November 2, 2002 were $6.123 billion compared to $6.225 billion in 2001. Excluding Lane Bryant’s net sales in 2001, net sales increased 7% from $5.730 billion. Operating income decreased to $265.7 million from $293.2 million in 2001. Net income decreased to $148.9 million from $192.4 million in 2001, and earnings per share decreased to $0.29 from $0.44 in 2001.

Net income for the thirty-nine weeks ended November 2, 2002 included: 1) a pre-tax, non-cash special and nonrecurring charge of $33.8 million resulting from the Intimate Brands, Inc. recombination and 2) the non-operating gain from the sale of Charming Shoppes, Inc. stock.

Net income for the thirty-nine weeks ended November 3, 2001 included: 1) pre-tax non-operating gains totaling $62.1 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 non-controlling ownership interest 2) the special and nonrecurring gain from the sale of Lane Bryant and 3) the operating results of Lane Bryant.

Excluding the above items and giving effect to the Intimate Brands recombination in 2001, net income for the thirty-nine weeks ended November 2, 2002 increased to $176.6 million or $0.33 per share from $45.7 million or $0.09 per share in 2001.

See the “Special and Nonrecurring Items” and “Other Data” sections for an additional discussion of these items and the impact on 2002 and 2001 earnings.

The following summarized financial and statistical data compares reported results for the thirteen week and thirty-nine week periods ended November 2, 2002 to the comparable periods for 2001:

2001: Represents a pre-tax $170 million gain resulting from the sale of Lane Bryant.