Exhibit 13
----------
FINANCIAL SUMMARY
(Millions except per share amounts, ratios and store and associate data)
@2001 *2000 @1999 @1998 1997 1996 @&*1995 1994 @1993 1992 &1991
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales $ 9,363 $ 10,105 $ 9,766 $ 9,365 $ 9,200 $ 8,652 $ 7,893 $ 7,321 $ 7,245 $ 6,944 $ 6,149
Gross income $ 3,253 $ 3,437 $ 3,323 $ 2,940 $ 2,736 $ 2,424 $ 2,033 $ 2,108 $ 1,959 $ 1,991 $ 1,794
Operating income +$ 918 +$ 866 +$ 931 +$ 2,424 +$ 469 +$ 636 +$ 612 $ 796 +$ 702 $ 789 $ 713
Operating income as a
percentage of sales + 9.8% +8.6% +9.5% +25.9% +5.1% +7.4% +7.8% 10.9% +9.7% 11.4% 11.6%
Net income #$ 519 #$ 428 #$ 461 #$ 2,046 #$ 212 #$ 434 #$ 961 $ 447 #$ 391 #$ 455 $ 403
Net income as a
percentage of sales #5.5% #4.2% #4.7% #21.9% #2.3% #5.0% #12.2% 6.1% #5.4% #6.6% 6.6%
====================================================================================================================================
Per Share Results
Basic net income #$ 1.21 #$ 1.00 #$ 1.05 #$ 4.25 #$ 0.39 #$ 0.78 #$ 1.35 $ 0.63 #$ 0.55 #$ 0.63 $ 0.56
Diluted net income #$ 1.19 #$ 0.96 #$ 1.00 #$ 4.15 #$ 0.39 #$ 0.77 #$ 1.34 $ 0.63 #$ 0.54 #$ 0.63 $ 0.56
Dividends $ 0.30 $ 0.30 $ 0.30 $ 0.26 $ 0.24 $ 0.20 $ 0.20 $ 0.18 $ 0.18 $ 0.14 $ 0.14
Book value $ 6.39 $ 5.44 $ 5.00 $ 4.78 $ 3.64 $ 3.45 $ 4.43 $ 3.78 $ 3.41 $ 3.13 $ 2.60
Weighted average
diluted shares
outstanding 435 443 456 493 549 564 717 717 726 727 727
====================================================================================================================================
Other Financial
Information
Total assets $ 4,719 $ 4,088 $ 4,126 $ 4,550 $ 4,301 $ 4,120 $ 5,267 $ 4,570 $ 4,135 $ 3,846 $ 3,419
Return on average
assets #12% #10% #11% #46% #5% #9% #20% 10% #10% #13% 13%
Working capital $ 1,363 $ 1,068 $ 1,049 $ 1,127 $ 1,001 $ 712 $ 1,962 $ 1,694 $ 1,513 $ 1,063 $ 1,084
Current ratio 2.0 2.1 1.8 2.0 2.0 1.9 3.3 3.0 3.1 2.5 3.1
Capital expenditures $ 337 $ 446 $ 376 $ 347 $ 363 $ 361 $ 374 $ 320 $ 296 $ 430 $ 523
Long-term debt $ 250 $ 400 $ 400 $ 550 $ 650 $ 650 $ 650 $ 650 $ 650 $ 542 $ 714
Debt-to-equity ratio 9% 17% 19% 25% 33% 35% 21% 24% 27% 24% 38%
Shareholders' equity $ 2,744 $ 2,316 $ 2,147 $ 2,167 $ 1,986 $ 1,869 $ 3,148 $ 2,705 $ 2,441 $ 2,268 $ 1,877
Return on average
shareholders' equity #21% #19% #21% #99% #11% #17% #33% 17% #17% #22% 23%
Comparable store
sales increase
(decrease) (4%) 5% 9% 6% 0% 3% (2%) (3%) (1%) 2% 3%
====================================================================================================================================
Stores and Associates
at End of Year
Total number of
stores open 4,614 5,129 5,023 5,382 5,640 5,633 5,298 4,867 4,623 4,425 4,194
Selling square feet 20,146 23,224 23,592 26,316 28,400 28,405 27,403 25,627 24,426 22,863 20,355
Number of associates 100,300 123,700 114,600 126,800 131,000 123,100 106,900 105,600 97,500 100,700 83,800
====================================================================================================================================
* Fifty-three-week fiscal year.
@ Includes the results of the following companies disposed of up to their
separation date: 1) Lane Bryant effective August 16, 2001; 2) Galyan's Trading
Co. ("Galyan's") effective August 31, 1999; 3) Limited Too ("TOO") effective
August 23, 1999; 4) Abercrombie & Fitch ("A&F") effective May 19, 1998; 5)
Alliance Data Systems ("ADS") effective January 31, 1996; and 6) Brylane, Inc.
effective August 31, 1993.
& Includes the results of Galyan's and Gryphon subsequent to their acquisitions
on July 2, 1995 and June 1, 1991.
+ Operating income includes the net effect of special and nonrecurring items of
$170 million in 2001, ($10) million in 2000, and $24 million in 1999 (see Note
2 to the Consolidated Financial Statements), $1.740 billion in 1998, ($213)
million in 1997, ($12) million in 1996, $1 million in 1995 and $3 million in
1993. Inventory liquidation charges of ($13) million related to Henri Bendel
store closings are also included in 1997.
# In addition to the items discussed in + above, net income includes the effect
of the following gains: 1) $62 million related to ADS and Galyan's in 2001;
2) $11 million related to Galyan's in 1999; 3) $9 million related to Brylane,
Inc. in 1997; 4) $118 million related to A&F in 1996; 5) $649 million related
to Intimate Brands, Inc. in 1995; and 6) $9 million related to United Retail
Group in 1992.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net sales for the thirteen-week fourth quarter of 2001 were $3.138 billion, an
11% decrease from $3.522 billion for the fourteen-week fourth quarter of 2000.
Comparable store sales decreased 2% for the quarter. Gross income increased 4%
to $1.323 billion in the fourth quarter of 2001 from $1.277 billion in 2000 and
operating income increased 31% to $624 million from $478 million in 2000. Net
income was $327 million in the fourth quarter of 2001 versus $238 million in
2000, and earnings per share were $0.75 versus $0.54 in 2000.
Net sales for the fifty-two-week year ended February 2, 2002 were $9.363
billion, a 7% decrease from $10.105 billion for the fifty-three-week year ended
February 3, 2001. Gross income decreased 5% to $3.253 billion in 2001 from
$3.437 billion in 2000 and operating income was $918 million in 2001 versus $866
million in 2000. Net income for 2001 was $519 million, or $1.19 per share,
compared to $428 million, or $0.96 per share, last year.
There were a number of items in 2001 and 2000 that impact comparability of the
Company's reported financial results. See the "Special and Nonrecurring Items"
and "Other Data" sections for a discussion of these items.
29
The following summarized financial data compares reported 2001 results to the
comparable periods for 2000 and 1999:
% Change
(Millions) 2001 @2000 1999 2001-2000 2000-1999
- ----------------------------------------------------------------------------------------------------------------
Net Sales
Express $ 1,542 $ 1,594 $ 1,367 (3%) 17%
Lerner New York 940 1,025 1,001 (8%) 2%
Limited Stores 618 673 704 (8%) (4%)
Structure 502 569 607 (12%) (6%)
Other (principally Mast) 209 158 108 32% 46%
- ----------------------------------------------------------------------------------------------------------------
Total apparel businesses $ 3,811 $ 4,019 $ 3,787 (5%) 6%
- ----------------------------------------------------------------------------------------------------------------
Victoria's Secret Stores 2,403 2,339 2,122 3% 10%
Bath & Body Works 1,747 1,785 1,530 (2%) 17%
Victoria's Secret Direct 869 962 956 (10%) 1%
Other 2 31 24 (94%) 29%
- ----------------------------------------------------------------------------------------------------------------
Total Intimate Brands $ 5,021 $ 5,117 $ 4,632 (2%) 10%
- ----------------------------------------------------------------------------------------------------------------
Henri Bendel 36 39 38 (8%) 3%
Lane Bryant (through August 16, 2001) 495 930 922 nm 1%
Galyan's (through August 31, 1999) - - 165 nm nm
TOO (through August 23, 1999) - - 222 nm nm
- ----------------------------------------------------------------------------------------------------------------
Total net sales $ 9,363 $ 10,105 $ 9,766 (7%) 3%
================================================================================================================
Operating Income
Apparel businesses $ 64 $ 116 $ 79 (45%) 47%
Intimate Brands 667 754 794 (12%) (5%)
Other 17 6 34 nm nm
- ----------------------------------------------------------------------------------------------------------------
Subtotal 748 876 907 (15%) (3%)
Special and nonrecurring items# 170 (10) 24 nm nm
- ----------------------------------------------------------------------------------------------------------------
Total operating income $ 918 $ 866 $ 931 6% (7%)
================================================================================================================
@ Fifty-three-week fiscal year.
# Special and nonrecurring items -
2001: a $170 million gain resulting from the sale of Lane Bryant, which
relates to the "Other" category.
2000: a $10 million charge for Intimate Brands to close Bath & Body Works'
nine stores in the United Kingdom.
1999: 1) a $13 million charge for transaction costs related to the TOO
spin-off; and 2) the reversal of a $37 million liability related to
downsizing costs for Henri Bendel. These special items relate to the "Other"
category.
nm not meaningful
2001 2000 1999
- --------------------------------------------------------------------------------
Comparable Store Sales
Express (2%) 15% 5%
Lerner New York (5%) 4% 12%
Limited Stores (2%) 5% 5%
Structure (8%) (4%) 4%
- --------------------------------------------------------------------------------
Total apparel businesses (3%) 8% 7%
- --------------------------------------------------------------------------------
Victoria's Secret Stores 0% 5% 12%
Bath & Body Works (11%) 1% 11%
- --------------------------------------------------------------------------------
Total Intimate Brands (5%) 4% 12%
- --------------------------------------------------------------------------------
Henri Bendel (6%) (1%) 7%
Lane Bryant (through August 16, 2001) 3% 2% 5%
Galyan's (through August 31, 1999) - - 9%
TOO (through August 23, 1999) - - 9%
- --------------------------------------------------------------------------------
Total comparable store sales (4%) 5% 9%
================================================================================
30
% Change
2001 2000 1999 2001-2000 2000-1999
- -------------------------------------------------------------------------------------------------------------
Store Data
Retail sales increase (decrease) due to
net new (closed) and remodeled stores
Apparel businesses (2%) (5%) (4%)
Intimate Brands 7% 7% 7%
- -------------------------------------------------------------------------------------------------------------
Retail sales per average selling square foot
Apparel businesses $ 288 $ 291 $ 256 (1%) 14%
Intimate Brands $ 547 $ 601 $ 596 (9%) 1%
- -------------------------------------------------------------------------------------------------------------
Retail sales per average store (thousands)
Apparel businesses $ 1,765 $ 1,792 $ 1,582 (2%) 13%
Intimate Brands $ 1,658 $ 1,833 $ 1,826 (10%) -
- -------------------------------------------------------------------------------------------------------------
Average store size at end of year (selling square feet)
Apparel businesses 6,107 6,130 6,182 - (1%)
Intimate Brands 3,027 3,032 3,064 - (1%)
- -------------------------------------------------------------------------------------------------------------
Selling square feet at end of year (thousands)
Apparel businesses 12,190 12,781 13,748 (5%) (7%)
Intimate Brands 7,921 7,246 6,466 9% 12%
=============================================================================================================
Apparel and Other Businesses Intimate Brands
2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------------
Number of Stores
Beginning of year 2,739 2,913 3,492 2,390 2,110 1,890
Opened 24 25 54 251 305 241
Closed (113) (199) (280) (24) (25) (21)
Businesses disposed of
Lane Bryant (653) - - - - -
Galyan's - - (18) - - -
TOO - - (335) - - -
- -------------------------------------------------------------------------------------------
End of year 1,997 2,739 2,913 2,617 2,390 2,110
===========================================================================================
Net Sales
Fourth Quarter
Net sales for the thirteen-week fourth quarter of 2001 decreased 11% to $3.138
billion from $3.522 billion for the fourteen-week fourth quarter of 2000.
Excluding sales from Lane Bryant (which was sold on August 16, 2001) and the
extra week in the fourth quarter of 2000, net sales increased 1% from the
comparable thirteen-week period last year. The increase was due to the net
addition of 138 new stores (84,000 selling square feet) in fiscal year 2001,
partially offset by a comparable store sales decrease of 2%.
At Intimate Brands ("IBI"), net sales for the fourth quarter of 2001 were $1.936
billion compared to $1.938 billion in 2000. Excluding sales from the extra week
in the fourth quarter of 2000, net sales increased 4% from last year. The
increase was due to the net addition of 227 new stores (675,000 selling square
feet) in fiscal year 2001, partially offset by a 5% decrease in sales at
Victoria's Secret Direct. Victoria's Secret Stores' sales increased 9% to $903
million in 2001 from $829 million in 2000, primarily due to a 10% increase in
comparable store sales. Bath & Body Works' sales decreased 6% to $767 million in
2001 from $820 million in 2000, primarily due to a 10% decrease in comparable
store sales, partially offset by the net addition of 183 new stores (424,000
selling square feet) in fiscal year 2001.
At the apparel retail businesses, net sales for the fourth quarter of 2001
decreased 10% to $1.138 billion from $1.261 billion in 2000. Excluding sales
from the extra week in the fourth quarter of 2000, net sales decreased 5% from
last year. The decrease was due to a comparable store sales decrease of 3% and
the net closure of 89 stores (591,000 selling square feet) in fiscal year 2001.
Net sales for the fourteen-week fourth quarter of 2000 increased 7% to $3.522
billion from $3.296 billion for the thirteen-week fourth quarter of 1999. The
increase was due to the net addition of 106 new stores in fiscal year 2000, the
inclusion of sales for the fourteenth week and a comparable store sales increase
of 2%.
At IBI, net sales for the fourth quarter of 2000 increased 5% to $1.938 billion
from $1.838 billion in 1999. The increase was due to the net addition of 280 new
stores in fiscal year 2000 and the inclusion of sales for the fourteenth week.
These factors were partially offset by a 3% decrease in comparable store sales
and a 9% decrease in sales at Victoria's Secret Direct, both of which were the
result of a difficult holiday season and a promotional retail environment.
At the apparel retail businesses, net sales for the fourth quarter of 2000
increased 10% to $1.261 billion from $1.150 billion in 1999. The increase was
due to a 9% increase in comparable store sales and the inclusion of sales for
the fourteenth week, partially offset by the net closure of 139 stores in fiscal
year 2000.
Full Year
Net sales for the fifty-two-week fiscal year 2001 decreased 7% to $9.363 billion
from $10.105 billion for the fifty-three-week fiscal year 2000. Excluding sales
from Lane Bryant and the extra week in 2000, net sales decreased 2% from the
comparable fifty-two-week period last year. The decrease was due to a 4%
comparable store sales decrease, partially offset by the net addition of 138 new
stores (84,000 selling square feet) in fiscal year 2001.
In 2001, IBI net sales decreased 2% to $5.021 billion from $5.117 billion in
2000. Excluding sales from the extra week in 2000, net sales were about flat to
last year. A 5% decrease in comparable store sales and an 8% decrease in sales
at Victoria's Secret Direct (excluding the extra week in 2000) were offset by
the net addition of 227 new stores (675,000 selling square feet). Bath & Body
Works' sales decreased 2% to $1.747 billion in 2001 from $1.785 billion in 2000,
primarily due to a comparable store sales decline of 11%, partially offset by
the net addition of 183 new stores (424,000 selling square feet). Victoria's
Secret Stores' sales increased 3% to $2.403 billion in 2001 from $2.339 billion
in 2000, primarily due to the net addition of 44 new stores (251,000 selling
square feet).
The apparel retail businesses reported a net sales decrease of 7% to $3.602
billion from $3.861 billion in 2000. Excluding sales from the extra week in
2000, net sales decreased 5% from last year. The sales decrease was primarily
due to a 3% comparable store sales decrease, and the net closure of 89 stores
(591,000 selling square feet).
Net sales for the fifty-three-week fiscal year 2000 were $10.105 billion
compared to $9.766 billion for the fifty-two-week fiscal year 1999. The sales
increase was due to a 5% comparable store sales increase, the net addition of
106 new stores and, to a small extent, the inclusion of sales for the
fifty-third week. These gains were partially offset by the loss of sales from
Galyan's, following the third party purchase of a 60% majority interest
effective August 31, 1999, and from TOO, after its August 23, 1999 spin-off.
In 2000, IBI sales increased 10% to $5.117 billion from $4.632 billion in 1999.
The increase was primarily due to the net addition of 280 new stores and a 4%
increase in comparable store sales. Bath & Body Works led IBI with sales
increasing 17% to $1.785 billion from $1.530 billion in 1999, primarily due to
the net addition of 218 new stores (549,000 selling square feet). Victoria's
Secret Stores' sales increased 10% to $2.339 billion from $2.122 billion in
1999. The sales increase was primarily due to a 5% increase in comparable store
sales and the net addition of 62 new stores (231,000 selling square feet). Sales
at Victoria's Secret Direct increased 1% to $962 million from $956 million in
1999.
31
In 2000, the apparel retail businesses reported a sales increase of 5% to $3.861
billion from $3.679 billion in 1999. The sales increase was primarily due to an
8% comparable store sales increase, partially offset by the net closure of 139
stores (1.0 million selling square feet).
Gross Income
Fourth Quarter
For the fourth quarter of 2001, the gross income rate (expressed as a percentage
of sales) increased to 42.2% from 36.3% for the same period in 2000. The rate
increase was primarily due to a significant increase in the merchandise margin
rate at both IBI and the apparel businesses due to favorable product assortment
and tighter inventory management. This resulted in lower markdowns in 2001
compared to the difficult fourth quarter in 2000. The buying and occupancy
expense rate was about flat for the quarter.
For the fourth quarter of 2000, the gross income rate decreased to 36.3% from
39.2% for the same period in 1999. The rate decrease was primarily due to a
decrease in the merchandise margin rate as a result of higher markdowns to clear
slower selling inventory assortments during and after a highly promotional
holiday season. Additionally, a slight increase in the buying and occupancy
expense rate resulted from an increase at IBI that was partially offset by the
positive impact of closing underperforming stores at the apparel businesses.
Full Year
In 2001, the gross income rate increased to 34.7% from 34.0% in 2000, as an
increase in the merchandise margin rate was partially offset by an increase in
the buying and occupancy expense rate. The increase in the merchandise margin
rate was primarily due to lower markdowns, principally in the fourth quarter.
The increase in the buying and occupancy expense rate was primarily the result
of the inability to achieve leverage as comparable store sales decreased 4%.
In 2000, the gross income rate was 34.0%, unchanged from 1999, as a decrease in
the merchandise margin rate was offset by an improvement in the buying and
occupancy expense rate. The decrease in the merchandise margin rate was
primarily due to higher markdowns, principally in the fourth quarter. The
overall buying and occupancy expense rate improvement was a result of the
benefit from store closings at the apparel businesses, which more than offset a
slight increase in the buying and occupancy expense rate at IBI.
General, Administrative and Store Operating Expenses
Fourth Quarter
For the fourth quarter of 2001, the general, administrative and store operating
expense rate (expressed as a percentage of sales) was 22.3% compared to 22.5% in
2000. The slight rate improvement was primarily due to a reduction in selling
expenses per average store, which offset the lack of leverage resulting from a
2% decrease in comparable store sales. Additionally, lower fulfillment costs at
Victoria's Secret Direct contributed to the improvement.
For the fourth quarter of 2000, the general, administrative and store operating
expense rate increased to 22.5% from 21.5% in 1999. The increase was primarily
due to a rate increase at IBI from increased investments in store selling at
Bath & Body Works and Victoria's Secret Stores in anticipation of the normal
holiday sales peak. These investments were not fully leveraged due to a 3%
decrease in comparable store sales. The IBI rate increase was offset by sales
leverage at the apparel businesses from a 7% comparable store sales increase.
Full Year
In 2001, the general, administrative and store operating expense rate increased
to 26.8% from 25.3% in 2000. The increase was due to the inability to achieve
leverage on store selling expenses due to the 4% comparable store sales
decrease, as well as higher store selling expenses, primarily at Bath & Body
Works.
In 2000, the general, administrative and store operating expense rate increased
to 25.3% from 24.7% in 1999. The increase was primarily due to increased
investments in store selling at Bath & Body Works and Victoria's Secret Stores.
These investments were not fully leveraged in large part due to the difficult
fourth quarter that resulted in a full year comparable store sales increase of
only 4%. Additionally, Bath & Body Works expanded into profitable non-mall
locations, which typically have higher payroll costs as a percentage of sales.
Special and Nonrecurring Items
During the third quarter of 2001, the Company sold one of its apparel
businesses, Lane Bryant, to Charming Shoppes, Inc. for $280 million of cash and
8.7 million shares of Charming Shoppes, Inc. common stock valued at $55 million.
On December 12, 2001, the Company received an additional 0.8 million shares of
Charming Shoppes, Inc. common stock valued at $4 million based on a final
determination of Lane Bryant's net tangible assets at closing. The transaction
resulted in a pretax gain of $170 million (net of $24 million of transaction
costs) and a $68 million tax provision.
During the fourth quarter of 2000, the Company recorded a $10 million special
and nonrecurring charge to close Bath & Body Works' nine stores in the United
Kingdom. The charge consisted of non-cash store and other asset write-offs of $5
million and accruals for lease termination and other costs of $5 million, which
were paid during fiscal 2001.
In 1999, the Company recognized a $13 million charge for transaction costs
related to the TOO spin-off and a reversal of a $37 million liability related to
downsizing costs for Henri Bendel, initially recognized as a special and
nonrecurring charge to operating income in 1997. The execution of the plan to
downsize the remaining Henri Bendel store in New York was primarily based on
negotiations with the original landlord. However, a change in landlords
ultimately resulted in the termination of negotiations during the fourth quarter
of 1999, which prevented the completion of the original plan. As a result, the
Company reversed the $37 million liability through the special and nonrecurring
items classification.
Operating Income
Fourth Quarter
The operating income rate in the fourth quarter of 2001 (expressed as a
percentage of sales) increased to 19.9% from 13.6% in 2000. The rate increase
was primarily due to a 5.9% increase in the gross income rate.
The operating income rate in the fourth quarter of 2000 decreased to 13.6% from
18.8% in 1999. Excluding special and nonrecurring items in 2000 and 1999, the
fourth quarter operating income rate decreased to 13.8% in 2000 from 17.7% in
1999. The rate decrease was due to a 2.9% decline in the gross income rate and a
1.0% increase in the general, administrative and store operating expense rate.
Full Year
In 2001, the operating income rate was 9.8% versus 8.6% in 2000. Excluding
special and nonrecurring items in both years, the operating income rate was 8.0%
in 2001 versus 8.7% in 2000. The rate decrease was driven by a 1.4% increase in
the general, administrative and store operating expense rate, partially offset
by a 0.7% increase in the gross income rate.
In 2000, the operating income rate was 8.6% versus 9.5% in 1999. Excluding
special and nonrecurring items in both years, the operating income rate was 8.7%
in 2000 versus 9.3% in 1999. The rate decrease was driven by a 0.6% increase in
the general, administrative and store operating expense rate.
Interest Expense
In 2001, the Company incurred $9 million and $34 million in interest expense for
the fourth quarter and year, compared to $17 million and $58 million in 2000 for
the same periods. These decreases were primarily the result of decreased
borrowing levels during 2001.
Fourth Quarter Year
2001 2000 2001 2000 1999
- ---------------------------------------------------------------
Average daily
borrowings
(millions) $ 400 $ 778 $ 400 $ 717 $ 970
Average
effective
interest rate 7.6% 7.6% 7.6% 7.9% 8.1%
===============================================================
Other Income, Net
For the fourth quarter of 2001, other income (expense), net, was $7 million
versus ($5) million in 2000. For fiscal year 2001, other income was $22 million
compared to $20 million in 2000. These increases are primarily due to increases
in the equity in income of investees in 2001, which more than offset decreases
in interest income resulting from significantly lower average effective interest
rates.
Gains on Sale of Stock by Investees
In accordance with SEC Staff Accounting Bulletin No. 51, "Accounting for Sales
of Stock of a Subsidiary," the Company records a non-operating gain when its
proportionate share of an investee's equity increases as a result of the
investee's initial public stock offering ("IPO").
During the second quarter of 2001, the Company recognized $62 million of pretax
gains from the IPO's of Alliance Data Systems Corp. ("ADS") and 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, footwear and accessories. Prior to the IPO's,
the Company's ownership interest in ADS and Galyan's was approximately 31% and
37%, respectively. As of February 2, 2002, the Company owns approximately 14.7
million shares of ADS common stock, representing a 20% ownership interest, and
4.2 million shares of Galyan's common stock, representing a 24% ownership
interest. Deferred taxes were provided on the gains using the Company's
effective tax rate.
Effective August 31, 1999, a third party purchased a 60% majority interest in
Galyan's. As a result, the Company recorded a pretax gain of $11 million, offset
by a $6 million provision for taxes. In addition, the revised tax basis of the
Company's remaining investment in Galyan's resulted in an additional $7 million
of deferred tax expense.
Other Data
The following adjusted income information gives effect to the significant
transactions and events in 2001, 2000 and 1999 that impacted the comparability
of the Company's results. These items are more fully described in the "Special
and Nonrecurring Items" and "Gains on Sale of Stock by Investees" sections in
Management's Discussion and Analysis and in Notes 1 and 2 to the Consolidated
Financial Statements.
32
Management believes this presentation provides a reasonable basis on which to
present the adjusted income information. Although the adjusted income
information should not be construed as an alternative to the reported results
determined in accordance with generally accepted accounting principles, it is
provided to assist in investors' understanding of the Company's results of
operations.
Adjusted Income Information
(Millions except per share amounts)
2001 2000 1999
Reported Adjustments Adjusted Reported Adjustments Adjusted Reported Adjustments Adjusted
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 9,363 $ (495) $ 8,868 $ 10,105 $ (930) $ 9,175 $ 9,766 $ (1,144) $ 8,622
- ------------------------------------------------------------------------------------------------------------------------------------
Gross income 3,253 (155) 3,098 3,437 (248) 3,189 3,323 (341) 2,982
General, administrative
and store operating
expenses (2,505) 117 (2,388) (2,561) 218 (2,343) (2,416) 257 (2,159)
Special and nonrecurring
items, net 170 (170) - (10) 10 - 24 (24) -
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 918 (208) 710 866 (20) 846 931 (108) 823
Interest expense (34) - (34) (58) - (58) (78) - (78)
Other income, net 22 - 22 20 - 20 41 - 41
Minority interest (64) - (64) (69) (1) (70) (73) - (73)
Gains on sale of stock
by investees 62 (62) - - - - 11 (11) -
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 904 (270) 634 759 (21) 738 832 (119) 713
Income tax expense 385 (108) 277 331 (8) 323 371 (57) 314
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 519 $ (162) $ 357 $ 428 $ (13) $ 415 $ 461 $ (62) $ 399
====================================================================================================================================
Net income per share $ 1.19 $ 0.82 $ 0.96 $ 0.93 $ 1.00 $ 0.86
====================================================================================================================================
Weighted average diluted
shares outstanding 435 435 443 443 456 456
====================================================================================================================================
Notes to Adjusted Income Information
A) Excluded businesses
. Lane Bryant results were excluded in determining adjusted results for
2001, 2000 and 1999 as a result of its sale to Charming Shoppes, Inc. on
August 16, 2001.
. TOO results were excluded in determining adjusted results for 1999 as a
result of its spin-off on August 23, 1999.
B) Special items
The following special items were excluded in determining adjusted results:
. In 2001, a $170 million gain related to the sale of Lane Bryant and $62
million in gains as a result of the IPO's of ADS and Galyan's.
. In 2000, a $10 million charge to close Bath & Body Works' nine stores
in the United Kingdom.
. In 1999, a $37 million reversal of a liability related to downsizing
costs for Henri Bendel, an $11 million gain from the purchase by a
third party of a 60% majority interest in Galyan's and a $13 million
charge for transaction costs related to the TOO spin-off.
C) Provision for income taxes
The tax effect of the adjustments for excluded businesses and special items
was calculated using the Company's overall effective rate of 39.75% in 2001
and 40% in 2000 and 1999. Additionally, in 1999, the Company's $11 million
pretax gain from the Galyan's transaction described above resulted in a $6
million provision for taxes, and the revised tax basis of the Company's
remaining investment in Galyan's resulted in an additional $7 million of
deferred tax expense.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash provided by 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. Changes in consumer spending patterns, consumer preferences and
overall economic conditions could impact the availability of future operating
cash flows.
A summary of the Company's working capital position and capitalization follows:
(Millions) 2001 2000 1999
- -----------------------------------------------------------------------------
Cash provided by
operating activities $ 969 $ 769 $ 599
Working capital $ 1,363 $ 1,068 $ 1,049
Capitalization
Long-term debt $ 250 $ 400 $ 400
Shareholders' equity 2,744 2,316 2,147
- -----------------------------------------------------------------------------
Total capitalization $ 2,994 $ 2,716 $ 2,547
=============================================================================
Additional amounts available
under long-term credit
agreements $ 1,250 $ 1,000 $ 1,000
=============================================================================
The Company considers the following to be relevant measures of liquidity and
capital resources:
2001 2000 1999
- -------------------------------------------------------------------
Debt-to-equity ratio
(Long-term debt divided by
shareholders' equity) 9% 17% 19%
Debt-to-capitalization ratio
(Long-term debt divided by
total capitalization) 8% 15% 16%
Interest coverage ratio
(Income, excluding special
and nonrecurring items
and gains on sale of stock
by investees, before interest
expense, income taxes,
depreciation and amortization
divided by interest expense) 29x 19x 15x
Cash flow to capital investment
(Net cash provided by operating
activities divided by capital
expenditures) 288% 172% 159%
===================================================================
The Company's operations are seasonal in nature and consist of two principal
selling seasons: spring (the first and second quarters) and fall (the third and
fourth quarters). The fourth quarter, including the holiday season has accounted
for approximately one-third of net sales in 2001, 2000 and 1999. Accordingly,
cash requirements are highest in the third quarter as the Company's inventory
builds in anticipation of the holiday season, which generates a substantial
portion of the Company's operating cash flow for the year.
Operating Activities
Net cash provided by operating activities, the Company's primary source of
liquidity, was $969 million in 2001, $769 million in 2000 and $599 million in
1999.
33
The increase in cash provided by operating activities between 2001 and 2000 was
primarily driven by a decrease in inventories and an increase in income taxes
payable. The inventory decline was the result of conservative inventory
management in anticipation of a difficult retail environment in 2001. The
increase in income taxes payable was primarily due to an increase in pretax
income, timing of payments and the taxes due on the gain from the sale of Lane
Bryant.
The increase in cash provided by operating activities between 2000 and 1999 was
primarily due to changes in inventories, accounts payable, accrued expenses and
income taxes. The cash used for inventories was higher in 2000 than 1999 because
of relatively higher inventories at the apparel businesses at February 3, 2001.
The net increase in accounts payable and accrued expenses versus 1999 related to
higher inventories and timing of payments. The reduction in the change in income
tax accruals primarily related to a 1999 payment of $112 million for taxes and
interest related to an Internal Revenue Service assessment for previous year's
taxes (see Note 7 to the Consolidated Financial Statements).
Investing Activities
In 2001, investing activities included cash proceeds of $280 million from the
sale of Lane Bryant, $337 million in capital expenditures (see "Capital
Expenditures" section), and $11 million in net expenditures associated with
Easton (see "Easton Investment" section).
In 2000, investing activities included $446 million in capital expenditures and
$22 million in net expenditures associated with Easton.
In 1999, investing activities included the following: 1) $352 million decrease
in restricted cash related to the rescission of the Contingent Stock Redemption
Agreement; 2) $182 million in proceeds from the third party purchase of a 60%
majority interest in Galyan's and the sale of related property; 3) $376 million
in capital expenditures; and 4) $11 million in net proceeds associated with
Easton.
Financing Activities
Financing activities in 2001 consisted of the quarterly dividend payments of
$0.075 per share or $129 million for the year. In addition, IBI repurchased 1
million shares of common stock from its public shareholders for $8 million.
These cash outflows were partially offset by proceeds from the exercise of stock
options.
Financing activities in 2000 included repayment of $150 million of term debt,
redemption of the $100 million Series C floating rate notes and quarterly
dividend payments of $0.075 per share or $128 million for the year. In addition,
the Company repurchased 9 million shares of its common stock for $200 million.
Finally, in 2000, IBI repurchased 9 million shares of its common stock for $198
million, of which 7 million shares were repurchased on a proportionate basis
from The Limited for $167 million. The repurchase did not change The Limited's
84% ownership interest in IBI.
Noncash financing activities in 2000 included a two-for-one stock split in the
form of a stock dividend distributed on May 30, 2000 to shareholders of record
on May 12, 2000. Shareholders' equity reflects the reclassification of an amount
equal to the par value of the increase in issued common shares ($108 million)
from paid-in capital to common stock. Also, in connection with the stock split,
the Company retired 327 million treasury shares, representing $4.3 billion at
cost. A noncash charge was made to retained earnings for the excess cost of
treasury stock over its par value.
Financing activities in 1999 included proceeds of $300 million from floating
rate notes, $200 million of which was repaid during the year, repayment of $100
million of term debt and quarterly dividend payments of $0.075 per share or $130
million for the year. The cash from the rescission of the Contingent Stock
Redemption Agreement and other available funds were used to repurchase shares
under a self-tender, which was funded June 14, 1999. A total of 30 million
shares of the Company's common stock were repurchased at $25 per share,
resulting in a cash outflow of $750 million plus transaction costs.
Additionally, IBI completed a $500 million stock repurchase program that began
in 1998 through the repurchase of 20 million shares of its common stock for $404
million, of which 17 million shares were repurchased on a proportionate basis
from The Limited for $341 million. Financing activities also included a $50
million dividend and a $12 million repayment of advances to TOO in connection
with its spin-off.
The Company has available $1.25 billion under its unsecured revolving credit
facility (the "Facility"), none of which was used during fiscal year 2001. The
Facility is comprised of a $500 million 364-day agreement and a $750 million
5-year agreement. Borrowings under the agreement, if any, are due July 13, 2002
and July 13, 2006, respectively. The Company also has the ability to offer up to
$250 million of additional debt securities under its shelf registration
statement.
The Company has $150 million, 7 4/5% notes due in May 2002, classified as
current portion of long-term debt (see Note 8 to the Consolidated Financial
Statements).
STORES AND SELLING SQUARE FEET
A summary of stores and selling square feet by business follows:
End of Year Change From
Plan 2002 2001 2000 2002-2001 2001-2000
- ---------------------------------------------------------------------------------------------------------
Express
Stores 682 667 667 15 -
Selling square feet 4,400,000 4,280,000 4,288,000 120,000 (8,000)
Lerner New York
Stores 504 522 560 (18) (38)
Selling square feet 3,751,000 3,823,000 4,163,000 (72,000) (340,000)
Limited Stores
Stores 354 368 389 (14) (21)
Selling square feet 2,244,000 2,313,000 2,445,000 (69,000) (132,000)
Structure
Stores 409 439 469 (30) (30)
Selling square feet 1,673,000 1,774,000 1,885,000 (101,000) (111,000)
- ---------------------------------------------------------------------------------------------------------
Total apparel businesses
Stores 1,949 1,996 2,085 (47) (89)
Selling square feet 12,068,000 12,190,000 12,781,000 (122,000) (591,000)
- ---------------------------------------------------------------------------------------------------------
Victoria's Secret Stores
Stores 1,017 1,002 958 15 44
Selling square feet 4,682,000 4,458,000 4,207,000 224,000 251,000
Bath & Body Works
Stores 1,690 1,615 1,432 75 183
Selling square feet 3,710,000 3,463,000 3,039,000 247,000 424,000
- ---------------------------------------------------------------------------------------------------------
Total Intimate Brands
Stores 2,707 2,617 2,390 90 227
Selling square feet 8,392,000 7,921,000 7,246,000 471,000 675,000
- ---------------------------------------------------------------------------------------------------------
Henri Bendel
Stores 1 1 1 - -
Selling square feet 35,000 35,000 35,000 - -
Lane Bryant
Stores - - 653 - (653)
Selling square feet - - 3,162,000 - (3,162,000)
- ---------------------------------------------------------------------------------------------------------
Total retail businesses
Stores 4,657 4,614 5,129 43 (515)
Selling square feet 20,495,000 20,146,000 23,224,000 349,000 (3,078,000)
34
Capital Expenditures
Capital expenditures amounted to $337 million, $446 million and $376 million for
2001, 2000 and 1999, of which $230 million, $324 million and $277 million were
for new stores and for the remodeling of and improvements to existing stores.
Remaining capital expenditures were primarily related to information technology,
distribution centers and investments in intellectual property assets.
The Company anticipates spending approximately $430 million for capital
expenditures in 2002, of which approximately $300 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 2002 capital expenditures will be funded
principally by net cash provided by operating activities.
The Company expects to increase selling square footage by approximately 350,000
square feet in 2002. It is anticipated that the increase will result from the
addition of approximately 140 stores (primarily within IBI), offset by the
closing of approximately 100 stores (primarily within the apparel businesses).
Easton Investment
The Company has land, infrastructure and other financial investments in Easton,
a 1,200-acre planned community in Columbus, Ohio, that integrates office, hotel,
retail, residential and recreational space. These investments totaled $85
million at February 2, 2002 and $74 million at February 3, 2001 and are included
in other assets (see Note 4 to the Consolidated Financial Statements).
Cash flow activity relating to the Company's Easton investments was as follows:
(Millions) 2001 2000 1999
- ---------------------------------------------------------------------
Property sales and other
cash proceeds $ 7 $ 8 $ 32
Cash expenditures (2000
amount includes a loan
of $18 million to
Easton Town Center, LLC) (18) (30) (21)
- ---------------------------------------------------------------------
Net cash flow source (use) $ (11) $ (22) $ 11
=====================================================================
Included in the Company's Easton investments is a non-controlling interest in
Easton Town Center, LLC ("ETC"), which owns and is developing the Easton Town
Center, a commercial entertainment and shopping center. ETC's principal funding
source is a $189 million secured bank loan, $183 million of which was
outstanding at February 2, 2002. The loan is payable in full on December 6,
2003, with the option of two twelve-month extensions if certain requirements are
met. The Company and one of the ETC members have guaranteed the first $75
million of this loan. If ETC does not meet the debt service coverage ratio
required by the loan agreement, the members have the option to make additional
cash contributions to ETC. Otherwise, the bank may call the loan under the
agreement's default provisions. The Company does not anticipate that it will be
required to advance funds to ETC in order for ETC to meet its debt service costs
on this loan.
The Company and one of the ETC members have also indemnified the bank against
any environmental matters related to the Easton Town Center. The Company is not
currently aware of any such environmental matters.
The Company has issued a $30 million standby letter of credit, on which the City
of Columbus, Ohio can draw solely to pay principal and interest on public bonds
issued by the City for infrastructure development at Easton. The bonds mature on
December 1, 2024. Under the terms of the letter of credit, the City can draw
funds if Easton property tax revenues are insufficient to cover the debt service
requirements of the bonds. The Company does not currently anticipate that the
City will be required to draw funds under the letter of credit.
Contractual Obligations and Contingent Liabilities
The Company's significant contractual obligations and contingent liabilities
include its long-term debt obligations, operating lease commitments related
principally to its stores, guarantees of store lease obligations of former
subsidiaries and certain Easton-related contingent liabilities.
As detailed in Note 8 to the Consolidated Financial Statements, the Company's
long-term debt totals $400 million, $150 million of which is due in May, 2002.
Minimum rent commitments under noncancelable leases total $3.254 billion
(excluding additional payments required under store leases covering taxes,
common area costs and certain other expenses) and are detailed by year in Note 5
to the Consolidated Financial Statements.
The Company has guaranteed $333 million of minimum rent payments of A&F, TOO,
Galyan's and Lane Bryant under noncancelable leases expiring at various dates
through 2014. These guarantees relate only to leases that commenced prior to the
disposition of these subsidiaries. The Company does not intend and is not
required to renew its guarantees at the expiration of these leases. Contingent
liabilities also include the $75 million guarantee and the $30 million standby
letter of credit related to Easton as previously discussed. These contingent
liabilities are further detailed in Note 5 to the Consolidated Financial
Statements.
Recently Issued Accounting Pronouncements
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 has determined that adopting the provisions
of SFAS No. 142 will not have a material impact on its results of operations or
its financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes a single accounting
model for long-lived assets to be disposed of by sale and resolves significant
implementation issues related to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and is effective
for fiscal years beginning after December 15, 2001. The Company is currently
evaluating the impact of adopting SFAS No. 144, but does not expect it to have a
material impact on its results of operations or its financial position.
Market Risk
Management believes the Company's exposure to interest rate and market risk
associated with financial instruments (such as investments and borrowings) is
not material.
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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period, as well as the related disclosure of contingent assets and
liabilities at the date of the financial statements. On an on-going basis,
management evaluates its estimates and judgments, including those related to
inventories, long-lived assets, and claims and contingencies. Management bases
its estimates and judgments on historical experience and various other factors
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates. Management believes the following accounting
principles are the most critical because they involve the most significant
judgments, assumptions and estimates used in preparation of the Company's
financial statements.
. Inventories - Inventories are valued at the lower of average cost or
market, on a first-in, first-out basis, using the retail method. The
Company records a charge to cost of goods sold for all inventory on
hand when a permanent retail price reduction is reflected in its
stores. In addition, management makes estimates and judgments
regarding, among other things, initial markup, markdowns, future demand
and market conditions, all of which significantly impact inventory
valuation. If actual future demand or market conditions are different
than those projected by management, additional inventory write-downs
may be required. Other significant estimates by management include
shrinkage, obsolete and excess inventory. These estimates are based on
historical experience and other factors.
. Long-Lived Assets - Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Factors used in the
valuation include, but are not limited to, management's plans for
future operations, brand initiatives, recent operating results and
projected cash flows. If future economic conditions are different than
those projected by management, additional impairment charges may be
required.
. Claims and Contingencies - The Company is subject to various claims and
contingencies related to lawsuits, income taxes, insurance and other
matters arising out of the normal course of business. The Company's
financial statement treatment of claims and contingencies is based on
management's view of the expected outcome of the applicable claim or
contingency. The Company consults with legal counsel on matters related
to litigation and seeks input from other experts both within and
outside the Company with respect to matters in the ordinary course of
business. The Company accrues a liability if the likelihood of an
adverse outcome is probable and the amount is estimable.
While the Company's recognition of revenue does not involve significant
judgment, revenue recognition represents an important accounting policy of the
Company. As discussed in Note 1 to the Consolidated Financial Statements, the
Company recognizes revenue upon customer receipt of the merchandise and provides
a reserve for projected merchandise returns based on historical experience.
35
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, 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
management: changes in consumer spending patterns, 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 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.
CONSOLIDATED STATEMENTS OF INCOME
(Millions except per share amounts)
2001 2000 1999
Net sales $ 9,363 $10,105 $ 9,766
Costs of goods sold, buying and occupancy (6,110) (6,668) (6,443)
- ---------------------------------------------------------------------------------------------------------
Gross income 3,253 3,437 3,323
General, administrative and store operating expenses (2,505) (2,561) (2,416)
Special and nonrecurring items, net 170 (10) 24
- ---------------------------------------------------------------------------------------------------------
Operating income 918 866 931
Interest expense (34) (58) (78)
Other income, net 22 20 41
Minority interest (64) (69) (73)
Gains on sale of stock by investees 62 - 11
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 904 759 832
Income tax expense 385 331 371
- ---------------------------------------------------------------------------------------------------------
Net income $ 519 $ 428 $ 461
=========================================================================================================
Net income per share:
Basic $ 1.21 $ 1.00 $ 1.05
Diluted $ 1.19 $ 0.96 $ 1.00
=========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED BALANCE SHEETS
(Millions except for per share amounts)
February 2, 2002 February 3, 2001
- -------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 1,375 $ 564
Accounts receivable 79 94
Inventories 966 1,157
Other 262 253
- -------------------------------------------------------------------------------------------------
Total current assets 2,682 2,068
Property and equipment, net 1,359 1,395
Deferred income taxes 67 132
Other assets 611 493
- -------------------------------------------------------------------------------------------------
Total assets $ 4,719 $ 4,088
=================================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 245 $ 273
Current portion of long-term debt 150 -
Accrued expenses and other 648 581
Income taxes 276 146
- -------------------------------------------------------------------------------------------------
Total current liabilities 1,319 1,000
Long-term debt 250 400
Other long-term liabilities 229 229
Minority interest 177 143
Shareholders' equity
Preferred stock - $1.00 par value; 10 shares
authorized; none issued - -
Common stock - $0.50 par value; 1,000 shares
authorized; 432 shares issued in 2001 and 2000 216 216
Paid-in capital 53 83
Retained earnings 2,552 2,168
Less: treasury stock, at average cost; 3 shares
in 2001 and 6 shares in 2000 (77) (151)
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 2,744 2,316
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,719 $ 4,088
=================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Millions)
Common Stock Treasury Total
Shares Par Paid-In Retained Stock, at Shareholders'
Outstanding Value Capital Earnings Average Cost Equity
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 30, 1999 453 $ 180 $ 157 $ 5,471 $ (3,641) $ 2,167
- ----------------------------------------------------------------------------------------------------------------------------
Net income - - - 461 - 461
Cash dividends - - - (130) - (130)
Repurchase of common stock, including transaction
costs (30) - - - (753) (753)
Spin-off of Limited Too - - - (25) - (25)
Rescission of contingent stock redemption agreement - 10 8 334 - 352
Exercise of stock options and other 7 - 13 (2) 64 75
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2000 430 $ 190 $ 178 $ 6,109 $ (4,330) $ 2,147
- ----------------------------------------------------------------------------------------------------------------------------
Net income - - - 428 - 428
Cash dividends - - - (128) - (128)
Repurchase of common stock, including transaction
costs (9) - - - (200) (200)
Retirement of treasury stock - (82) - (4,241) 4,323 -
Two-for-one stock split - 108 (108) - - -
Exercise of stock options and other 5 - 13 - 56 69
- ----------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 2001 426 $ 216 $ 83 $ 2,168 $ (151) $ 2,316
- ----------------------------------------------------------------------------------------------------------------------------
Net income - - - 519 - 519
Cash dividends - - - (129) - (129)
Exercise of stock options and other 3 - (30) (6) 74 38
- ----------------------------------------------------------------------------------------------------------------------------
Balance, February 2, 2002 429 $ 216 $ 53 $ 2,552 $ (77) $ 2,744
============================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 519 $ 428 $ 461
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 277 271 272
Deferred income taxes 76 46 (78)
Special and nonrecurring items, net (170) 10 (24)
Minority interest, net of dividends paid 43 47 51
Gains on sale of stock by investees (62) - (11)
Changes in assets and liabilities:
Accounts receivable 15 15 (37)
Inventories 82 (106) (54)
Accounts payable, accrued expenses and other 75 53 (20)
Income taxes payable 118 (60) 18
Other assets and liabilities (4) 65 21
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 969 769 599
- ---------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from sale of subsidiary 280 - -
Capital expenditures (337) (446) (376)
Net proceeds (expenditures) related to Easton investment (11) (22) 11
Net proceeds from sale of partial interest in subsidiary - - 182
Decrease in restricted cash - - 352
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (68) (468) 169
- ---------------------------------------------------------------------------------------------------------
Financing Activities
Repayment of long-term debt - (250) (300)
Proceeds from issuance of long-term debt - - 300
Repurchase of common stock, including transaction costs - (200) (753)
Repurchase of Intimate Brands, Inc. common stock (8) (31) (63)
Dividends paid (129) (128) (130)
Dividend received from Limited Too - - 50
Settlement of Limited Too intercompany account - - 12
Proceeds from exercise of stock options and other 47 55 63
- ---------------------------------------------------------------------------------------------------------
Net cash used for financing activities (90) (554) (821)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 811 (253) (53)
Cash and equivalents, beginning of year 564 817 870
- ---------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 1,375 $ 564 $ 817
=========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The Limited, Inc. (the "Company" or "The Limited") 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"), an 84%-owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation. The consolidated financial statements include the
results of Galyan's Trading Co. ("Galyan's") through August 31, 1999, when a
third party purchased a majority interest; Limited Too ("TOO") through August
23, 1999, when it was established as an independent company; and Lane Bryant
through August 16, 2001, when it was sold to a third party.
Investments in unconsolidated affiliates 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 those
unconsolidated affiliates is included in other income (expense).
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31. Fiscal
years are designated in the financial statements and notes by the calendar year
in which the fiscal year commences. The results for fiscal year 2001 represent
the fifty-two-week period ended February 2, 2002 and results for fiscal years
2000 and 1999 represent the fifty-three-week and fifty-two-week periods ended
February 3, 2001 and January 29, 2000.
Cash and Equivalents
Cash and equivalents include amounts on deposit with financial institutions and
money market investments with original maturities of less than 90 days.
Inventories
Inventories are principally valued at the lower of average cost or market, on a
first-in first-out basis, using the retail method.
Store Supplies
The initial shipment of selling-related supplies (including, but not limited to,
hangers, signage, security tags and packaging) is capitalized at the store
opening date. Subsequent shipments are expensed, except for new merchandise
presentation programs, which are capitalized. Store supplies are adjusted as
appropriate for changes in actual quantities or costs.
Direct Response Advertising
Direct response advertising relates primarily to the production and distribution
of the Company's catalogs and is amortized over the expected future revenue
stream, which is principally three months from the date catalogs are mailed. All
other advertising costs are expensed at the time the promotion first appears in
media or in the store. Catalog and advertising costs amounted to $446 million,
$480 million and $432 million in 2001, 2000 and 1999.
Long-lived Assets
Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives
ranging principally from 10 to 15 years for building and leasehold improvements,
and 3 to 10 years for other property and equipment. The cost of assets sold or
retired and the related accumulated depreciation or amortization are removed
from the accounts with any resulting gain or loss included in net income.
Maintenance and repairs are charged to expense as incurred. Major renewals and
betterments that extend service lives are capitalized.
Goodwill is amortized on a straight-line basis over 30 years. Additionally,
goodwill related to IBI stock buybacks reverses as the shares are reissued to
cover shares needed for employee benefit plans. The cost of intellectual
property assets is amortized based on the sell-through of the related products,
over the shorter of the term of the license agreement or the estimated useful
life of the asset, not to exceed 10 years.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Factors used in the valuation include, but are not limited to,
management's plans for future operations, brand initiatives, recent operating
results and projected cash flows.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the difference between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect in the years when
those temporary differences are expected to reverse. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Shareholders' Equity
On May 2, 2000, the Company declared a two-for-one stock split ("stock split")
in the form of a stock dividend distributed on May 30, 2000 to shareholders of
record on May 12, 2000. Shareholders' equity reflects the reclassification of an
amount equal to the par value of the increase in issued common shares ($108
million) from paid-in capital to common stock. Also, in connection with the
stock split, the Company retired 327 million treasury shares with a cost of $4.3
billion. A noncash charge was made to retained earnings for the excess cost of
treasury stock over its par value. All share and per share data throughout this
report has been restated to reflect the stock split.
Also in 2000, the Company repurchased 9 million shares of its common stock for
$200 million.
On June 3, 1999, the Company completed an issuer tender offer by purchasing 30
million shares of its common stock at $25 per share.
Revenue Recognition
The Company recognizes sales upon customer receipt of the merchandise. Shipping
and handling revenues are included in net sales and the related costs are
included in costs of goods sold, buying and occupancy. Revenue for gift
certificate sales and store credits is recognized at redemption. A reserve is
provided for projected merchandise returns based on prior experience.
Earnings Per Share
Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." 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 as a reduction to earnings. This
resulted in a $0.01 reduction to 2000 and 1999 earnings per diluted share, but
had no impact to 2001 earnings per diluted share.
(Millions) 2001 2000 1999
- ----------------------------------------------------------
Weighted Average Common
Shares Outstanding
Common shares issued 432 432 759
Treasury shares (4) (4) (320)
- ----------------------------------------------------------
Basic shares 428 428 439
Effect of dilutive options
and restricted stock 7 15 17
- ----------------------------------------------------------
Diluted shares 435 443 456
==========================================================
The computation of earnings per diluted share excludes options to purchase 11.3
million, 1.1 million and 0.6 million shares of common stock in 2001, 2000 and
1999, because the options' exercise price was greater than the average market
price of the common shares during the year.
Gains on Sale of Stock by Investees
In accordance with SEC Staff Accounting Bulletin No. 51, "Accounting for Sales
of Stock of a Subsidiary," the Company records a non-operating gain when its
proportionate share of an investee's equity increases as a result of the
investee's initial public stock offering ("IPO").
During the second quarter of 2001, the Company recognized $62 million of pretax
gains as a result of the 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, footwear and accessories. Prior to the IPO's, the Company's
ownership interest in ADS and Galyan's was approximately 31% and 37%,
respectively. As of February 2, 2002, the Company owns approximately 14.7
million shares of ADS common stock, representing a 20% ownership interest, and
4.2 million shares of Galyan's common stock, representing a 24% ownership
interest. Deferred taxes were provided on the gains using the Company's
effective tax rate.
Effective August 31, 1999, an affiliate of Freeman, Spogli & Co. (together with
Galyan's management) purchased a 60% majority interest in Galyan's, and the
Company retained a 40% interest. In addition, the Company sold certain property
for $77 million to a third party, which then leased the property to Galyan's
under operating leases. The Company received total cash proceeds from these
transactions of approximately $182 million, as well as subordinated debt and
warrants of $20 million from Galyan's. During the first five years, interest (at
12% to 13%) on the subordinated debt may be paid in kind rather than in cash.
The transactions resulted in a third quarter pretax gain of $11 million, offset
by a $6 million provision for taxes. In addition, the revised tax basis of the
Company's remaining investment in Galyan's resulted in an additional $7 million
of deferred tax expense.
38
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Because actual results may differ from those estimates,
the Company revises its estimates and assumptions as new information becomes
available.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Special and Nonrecurring Items
During the third quarter of 2001, the Company sold one of its apparel
businesses, Lane Bryant, to Charming Shoppes, Inc. for $280 million of cash and
8.7 million shares of Charming Shoppes, Inc. common stock valued at $55 million.
On December 12, 2001, the Company received an additional 0.8 million shares of
Charming Shoppes, Inc. common stock valued at $4 million based on a final
determination of Lane Bryant's net tangible assets at closing. The transaction
resulted in a third quarter pretax gain of $170 million (net of $24 million of
transaction costs) and a $68 million tax provision.
As a result of the transaction, the Company owns approximately 9% of Charming
Shoppes, Inc. outstanding common stock, and is prohibited from selling the stock
until August 16, 2002. The Company will continue to provide certain corporate
services to Lane Bryant through a transition period under service agreements.
During the fourth quarter of 2000, the Company recorded a $10 million special
and nonrecurring charge to close Bath & Body Works' nine stores in the United
Kingdom. The charge consisted of non-cash store and other asset write-offs of $5
million and accruals for lease termination and other costs of $5 million, which
were paid during 2001.
During the fourth quarter of 1999, the Company recognized the reversal of a $37
million liability related to downsizing costs for Henri Bendel, initially
recognized as a special and nonrecurring charge to operating income in 1997. The
execution of the plan to downsize the remaining Henri Bendel store in New York
was primarily based on negotiations with the original landlord. However, a
change in landlords ultimately resulted in the termination of negotiations
during the fourth quarter of 1999, which prevented the completion of the
original plan. As a result, the Company reversed the $37 million liability
through the special and nonrecurring items classification.
On July 15, 1999, the Company's Board of Directors approved a formal plan to
spin-off Limited Too. The record date for the spin-off was August 11, 1999, with
Limited shareholders receiving one share of Too, Inc. (the successor company to
Limited Too) common stock for every seven shares of Limited common stock held on
that date. The spin-off was completed on August 23, 1999. The Company recorded
the spin-off as a $25 million dividend, which represented the carrying value of
the net assets underlying the common stock distributed. As part of the
transaction, the Company received total proceeds of $62 million that included a
$50 million dividend from TOO and a $12 million repayment of advances to TOO.
During the second quarter of 1999, the Company recognized a $13 million charge
for transaction costs related to the spin-off.
3. Property and Equipment, Net
(Millions) 2001 2000
- ------------------------------------------------------------------------
Property and Equipment, at Cost
Land, buildings and improvements $ 365 $ 367
Furniture, fixtures and equipment 1,956 2,080
Leaseholds and improvements 675 656
Construction in progress 22 42
- ------------------------------------------------------------------------
Total 3,018 3,145
Less: accumulated depreciation
and amortization 1,659 1,750
- ------------------------------------------------------------------------
Property and equipment, net $ 1,359 $ 1,395
========================================================================
4. Other Assets
(Millions) 2001 2000
- ------------------------------------------------------------------------
Goodwill and other intangibles,
net of accumulated amortization
of $63 and $53 $ 152 $ 162
Investments in equity securities 198 83
Easton 85 74
Other 176 174
- ------------------------------------------------------------------------
Total $ 611 $ 493
========================================================================
The Company's investments in equity securities include ADS (20% ownership) and
Galyan's (24% ownership), both of which began trading publicly in 2001 and are
accounted for using the equity method. The carrying value of the ADS and
Galyan's investments is $145 million and the aggregate market value is $364
million at February 2, 2002. Additionally, the Company owns approximately 9% of
Charming Shoppes, Inc. common stock. This investment is publicly traded,
classified as an available for sale security and is carried at its market value
of $53 million (cost basis of $59 million) at February 2, 2002. The current year
unrealized loss of $6 million is included, net of tax, within retained earnings.
The Company also has land, infrastructure and other financial investments in
Easton, a 1,200-acre planned community in Columbus, Ohio, that integrates
office, hotel, retail, residential and recreational space.
5. Leased Facilities, Commitments and Contingencies
Annual store rent consists of a fixed minimum amount and/or contingent rent
based on a percentage of sales exceeding a stipulated amount.
(Millions) 2001 2000 1999
- -------------------------------------------------------
Rent Expense
Store rent
Fixed minimum $ 605 $ 625 $ 636
Contingent 49 57 53
- -------------------------------------------------------
Total store rent 654 682 689
Equipment and other 35 29 32
- -------------------------------------------------------
Total rent expense $ 689 $ 711 $ 721
=======================================================
For leases that contain predetermined fixed escalations of the minimum rentals
and/or rent abatements, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the recognized rental
expense and amounts payable under the leases as deferred lease credits, which
are included in other long-term liabilities. At February 2, 2002 and February 3,
2001, this liability amounted to $86 million and $107 million.
At February 2, 2002, the Company was committed to noncancelable leases with
remaining terms generally from one to ten years. A substantial portion of these
commitments consists of store leases generally with an initial term of ten
years, with options to renew at varying terms. Store lease terms generally
require additional payments covering taxes, common area costs and certain other
expenses. The obligations for these additional payments are excluded from the
following table:
(Millions)
- ---------------------------------------------
Minimum Rent Commitments
Under Noncancelable Leases
2002 $ 587
2003 544
2004 490
2005 423
2006 347
Thereafter 863
=============================================
Additionally, the Company has guaranteed $333 million of minimum rent payments
of Abercrombie & Fitch, TOO, Galyan's and Lane Bryant under noncancelable leases
expiring at various dates through 2014. These guarantees relate only to leases
that commenced prior to the disposition of these subsidiaries. The Company does
not intend and is not required to renew its guarantees at the expiration of
these leases.
The Company has a non-controlling interest in Easton Town Center, LLC ("ETC"),
which owns and is developing the Easton Town Center, a commercial entertainment
and shopping center. ETC's principal funding source is a $189 million secured
bank loan, $183 million of which was outstanding at February 2, 2002. The loan
is payable in full on December 6, 2003, with the option of two twelve-month
extensions if certain requirements are met. The Company and one of the ETC
members have guaranteed the first $75 million of this loan. If ETC does not meet
the debt service coverage ratio required by the loan agreement, the members have
the option to make additional cash contributions to ETC. Otherwise, the bank may
call the loan under the agreement's default provisions.
The Company and one of the ETC members have also indemnified the bank against
any environmental matters related to the Easton Town Center. The Company is not
currently aware of any such environmental matters.
The Company has issued a $30 million standby letter of credit, on which the City
of Columbus, Ohio can draw solely to pay principal and interest on public bonds
issued by the City for infrastructure development at Easton. The bonds mature on
December 1, 2024. Under the terms of the letter of credit, the City can draw
funds if Easton property
39
tax revenues are insufficient to cover the debt service requirements of the
bonds. The Company does not currently anticipate that the City will be required
to draw funds under the letter of credit.
The Company is subject to various claims and contingencies related to lawsuits,
income taxes and other matters arising out of the normal course of business.
Management believes that the ultimate liability arising from such claims or
contingencies, if any, is not likely to have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
6. Accrued Expenses and Other
(Millions) 2001 2000
- --------------------------------------------------------------
Deferred revenue $ 165 $ 151
Compensation, payroll taxes
and benefits 118 85
Taxes, other than income 52 57
Insurance 41 39
Rent 40 43
Other 232 206
- --------------------------------------------------------------
Total $ 648 $ 581
==============================================================
7. Income Taxes
(Millions) 2001 2000 1999
- --------------------------------------------------------------
Income Tax Expense
Currently payable
Federal $ 261 $ 252 $ 389
State 43 27 58
Foreign 5 6 2
- --------------------------------------------------------------
Total 309 285 449
- --------------------------------------------------------------
Deferred
Federal 55 17 (82)
State 21 29 4
- --------------------------------------------------------------
Total 76 46 (78)
- --------------------------------------------------------------
Total income tax expense $ 385 $ 331 $ 371
==============================================================
The foreign component of pretax income, arising principally from overseas
sourcing operations, was $59 million, $70 million and $42 million in 2001, 2000
and 1999.
2001 2000 1999
- --------------------------------------------------------------
Reconciliation Between the
Statutory Federal Income Tax
Rate and the Effective Tax Rate
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
Federal income tax effect 4.3% 4.5% 4.5%
Other items, net 0.5% 0.5% 0.5%
- --------------------------------------------------------------
Total 39.8% 40.0% 40.0%
==============================================================
The reconciliation between the statutory Federal income tax rate and the
effective income tax rate on pretax earnings excludes minority interest.
Income taxes payable included net current deferred tax liabilities of $25
million and $14 million at February 2, 2002 and February 3, 2001. Income tax
payments were $181 million, $316 million and $409 million for 2001, 2000 and
1999.
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 for which the Company has provided deferred
taxes. 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.
Management believes the ultimate resolution of this matter will not have a
material adverse effect on the Company's results of operations or financial
condition.
2001 2000
(Millions) Assets Liabilities Total Assets Liabilities Total
- --------------------------------------------------------------------------------------------
Effect of Temporary
Differences That
Give Rise to
Deferred
Income Taxes
Property and
equipment $ 1 - $ 1 $ 19 - $ 19
Undistributed
earnings of
foreign
affiliates - $ (41) (41) - $ (35) (35)
Leases 22 - 22 24 - 24
Inventory 16 - 16 25 - 25
Investments in
unconsolidated
affiliates - (24) (24) 6 - 6
Other, net 68 - 68 79 - 79
- ---------------------------------------------------------------------------------------------
Total deferred
income taxes $ 107 $ (65) $ 42 $ 153 $ (35) $ 118
8. Long-term Debt
(Millions) 2001 2000
- ---------------------------------------------------------------------------
Unsecured Long-term Debt
7 1/2% Debentures due March 2023 $ 250 $ 250
7 4/5% Notes due May 2002 150 150
- ---------------------------------------------------------------------------
400 400
Less: current portion of long-term debt 150 -
- ---------------------------------------------------------------------------
Total $ 250 $ 400
===========================================================================
The 7 1/2% debentures may be redeemed, in whole or in part, at the option of the
Company at any time on or after March 15, 2003, at declining premiums.
On July 13, 2001, the Company entered into 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 July 13, 2002 and July 13, 2006,
respectively. The Facility has several borrowing and interest rate options, both
fixed and variable rate. Fees payable under the Facility are based on the
Company's long-term credit ratings, and are 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
February 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 2001. In addition, no commercial paper or amounts
under the Facility (or the previous credit facility) were outstanding at
February 3, 2001.
The Company has a shelf registration statement under which up to $250 million of
debt securities and warrants to purchase debt securities may be issued.
Interest paid was $34 million, $66 million and $81 million in 2001, 2000 and
1999.
9. Contingent Stock Redemption Agreement and Restricted Cash
On May 3, 1999, the Company, Leslie H. Wexner, Chairman and CEO of the Company,
and The Wexner Children's Trust (the "Trust") entered into an agreement (the
"Rescission Agreement") rescinding the Contingent Stock Redemption Agreement
dated as of January 26, 1996, as amended, among the Company, Mr. Wexner and the
Trust. Pursuant to the Rescission Agreement, the rights and obligations of the
Company, Mr. Wexner and the Trust under the Contingent Stock Redemption
Agreement were terminated, and the Company used the $352 million of restricted
cash to purchase shares in the Company's tender offer, which expired on June 1,
1999.
The Company earned interest of $4 million in 1999 on the restricted cash.
40
10. Stock-based Compensation
Stock Options
Under the Company's stock plans, associates may be granted up to a total of 63
million restricted shares and options to purchase the Company's common stock at
the market price on the date of grant. Options have a maximum term of ten years
and generally vest over periods from four to six years.
Under separate IBI stock plans, IBI associates may be granted up to a total of
37 million restricted shares and options to purchase IBI's common stock at the
market price on the date of grant. As of February 2, 2002, options to purchase
13 million IBI shares were outstanding, of which 6 million options were
exercisable. These options have a weighted average exercise price of $12.75 and
$13.01, respectively. Under these plans, options generally vest over periods
from four to six years.
The Company measures compensation expense under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." If compensation expense had been determined
under SFAS No. 123, "Accounting for Stock-Based Compensation," the pro forma
effects on net income and earnings per share, including the impact of options
issued by IBI, would have been a reduction of approximately $28 million or $0.07
per share in 2001, $22 million or $0.05 per share in 2000 and $19 million or
$0.04 per share in 1999.
The weighted average per share fair value of options granted by The Limited
($5.84, $5.19 and $5.64 during 2001, 2000 and 1999) was used to calculate the
pro forma compensation expense. The fair value was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 2001, 2000 and 1999: dividend yields of 2.3%, 2.3% and 2.1%;
volatility of 41%, 36% and 32%; risk-free interest rates of 4%, 5% and 7%; and
expected lives of 4.5 years, 4.3 years and 5.2 years. For 2000 and 1999, the
Company used an assumed forfeiture rate of 20%.
Restricted Stock
Approximately 75,000, 41,000 and 1,040,000 restricted Limited shares were
granted in 2001, 2000 and 1999, with market values at date of grant of $1
million in each of 2001 and 2000 and $18 million in 1999. Restricted shares
generally vest over a period of four to six years. Approximately 314,000
restricted shares granted in 1999 include performance requirements, all of which
were met.
Additionally, IBI granted 59,000 and 340,000 restricted shares in 2000 and 1999.
No IBI restricted shares were granted in 2001. Vesting terms for the IBI
restricted shares are similar to those of The Limited. The market value of
restricted shares is being amortized as compensation expense over the vesting
period, generally four to six years.
Total expense related to stock-based compensation, including expense related to
awards granted at IBI, amounted to $13 million in 2001, $15 million in 2000 and
$29 million in 1999.
Limited Stock Options Outstanding at February 2, 2002
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- --------------------------------------------------------------------------------------------
$ 7- $ 10 7,482,000 5.0 $ 8.86 3,995,000 $ 8.62
$ 11- $ 15 10,273,000 5.8 $ 11.64 4,919,000 $ 11.60
$ 16- $ 20 11,249,000 8.0 $ 17.42 2,960,000 $ 16.18
$ 21- $ 27 1,460,000 8.1 $ 22.35 398,000 $ 22.37
- --------------------------------------------------------------------------------------------
$ 7- $ 27 30,464,000 6.5 $ 13.61 12,272,000 $ 12.08
============================================================================================
Weighted Average
Number of Option Price
Shares Per Share
- --------------------------------------------------------------------------------
Limited Stock Option Activity
1999
Outstanding at beginning of year 29,846,000 $ 10.71
Granted 10,014,000 17.31
Exercised (5,348,000) 9.20
Canceled (1,938,000) 11.95
- --------------------------------------------------------------------------------
Outstanding at end of year 32,574,000 $ 12.03
- --------------------------------------------------------------------------------
Options exercisable at end of year 8,114,000 $ 9.68
================================================================================
2000
Outstanding at beginning of year 32,574,000 $ 12.03
Granted 4,075,000 17.39
Exercised (4,157,000) 10.22
Canceled (2,285,000) 14.03
- --------------------------------------------------------------------------------
Outstanding at end of year 30,207,000 $ 12.86
- --------------------------------------------------------------------------------
Options exercisable at end of year 10,474,000 $ 11.53
================================================================================
2001
Outstanding at beginning of year 30,207,000 $ 12.86
Granted 5,818,000 17.71
Exercised (2,464,000) 10.68
Canceled (3,097,000) 16.43
- --------------------------------------------------------------------------------
Outstanding at end of year 30,464,000 $ 13.61
- --------------------------------------------------------------------------------
Options exercisable at end of year 12,272,000 $ 12.08
================================================================================
41
11. Retirement Benefits
The Company sponsors a qualified defined contribution retirement plan and a
nonqualified supplemental retirement plan. Participation in the qualified plan
is available to all associates who have completed 1,000 or more hours of service
with the Company during certain 12-month periods and attained the age of 21.
Participation in the nonqualified plan is subject to service and compensation
requirements. Company contributions to these plans are based on a percentage of
associates' eligible annual compensation. The cost of these plans was $61
million in 2001, $58 million in 2000 and $54 million in 1999. The liability for
the nonqualified plan, including contributions made by employees and the
Company, amounted to $109 million and $107 million at February 2, 2002 and
February 3, 2001 and is included in other long-term liabilities.
12. Derivatives, Fair Value of Financial Instruments and Credit Risk
Derivatives
The Company uses forward and energy contracts on a limited basis, in order to
reduce market risk exposure associated with fluctuations in foreign currency and
energy rates.
The forward contracts are designated at inception as hedges, and are monitored
to determine their effectiveness as hedges.
During 2001, the Company entered into contracts to purchase electricity from its
utility suppliers in three states, representing a commitment of approximately $8
million per year for the next two to three years. At the inception of these
contracts, forecasted electricity requirements, which were estimated primarily
based on historical energy usage, indicated that it was probable that all of the
electricity would be used in the operations of the Company. Accordingly, these
contracts initially qualified for, and continue to qualify for, the normal
purchases and normal sales exception under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (as amended by SFAS No. 138),
which eliminates the requirement to account for these contracts as derivatives.
The Company monitors its energy requirements on a regular basis, including an
assessment of expected usage under the contracts.
The Company does not hold or issue financial instruments for trading purposes.
Fair Value
The carrying value of cash equivalents, accounts receivable, accounts payable,
current portion of long-term debt, and accrued expenses approximates fair value
because of their short maturity. The fair value of long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
The estimated fair value of the Company's long-term debt at February 2, 2002 and
February 3, 2001 was $221 million and $396 million compared to the carrying
value of $250 million and $400 million, respectively.
Credit Risk
The Company maintains cash and equivalents with various major financial
institutions, as well as corporate commercial paper. The Company monitors the
relative credit standing of these financial institutions and other entities and
limits the amount of credit exposure with any one entity. The Company also
monitors the creditworthiness of the entities to which it grants credit terms in
the normal course of business.
13. Segment Information
The apparel segment derives its revenues from sales of women's and men's
apparel. The Intimate Brands segment derives its revenues from sales of women's
intimate and other apparel, and personal care products and accessories. Sales
outside the United States were not significant.
The Company and IBI have entered into intercompany agreements for services that
include merchandise purchases, capital expenditures, real estate management and
leasing, inbound and outbound transportation and corporate services. These
agreements specify that identifiable costs be passed through to IBI and that
other service-related costs be allocated based on various methods. Costs are
passed through and allocated to the apparel businesses in a similar manner.
Management believes that the methods of allocation are reasonable.
As a result of its sale in fiscal 2001, the operating results of Lane Bryant are
included in the "Other" category for all periods presented.
Apparel Intimate Reconciling
(Millions) Businesses Brands *Other Items Total
- -------------------------------------------------------------------------------------------------
Segment Information
2001
Net sales $ 3,811 $ 5,021 $ 531 - $ 9,363
Intersegment sales 711 - - @$ (711) -
Depreciation and amortization 76 137 64 - 277
Operating income 64 667 17 ++ 170 918
Total assets 898 1,483 2,567 /\ (229) 4,719
Capital expenditures 71 198 68 - 337
- -------------------------------------------------------------------------------------------------
2000
Net sales $ 4,019 $ 5,117 $ 969 - $ 10,105
Intersegment sales 786 - - @$ (786) -
Depreciation and amortization 83 122 66 - 271
Operating income 116 754 6 ** (10) 866
Total assets 970 1,457 1,548 /\ 113 4,088
Capital expenditures 90 245 111 - 446
- -------------------------------------------------------------------------------------------------
1999
Net sales $ 3,787 $ 4,632 $ 1,347 - $ 9,766
Intersegment sales 719 - - @$ (719) -
Depreciation and amortization 89 105 78 - 272
Operating income 79 794 34 + 24 931
Total assets 927 1,384 1,791 /\ 24 4,126
Capital expenditures 103 206 67 - 376
=================================================================================================
* Included in the "Other" category are Henri Bendel, Lane Bryant (through
August 16, 2001), Galyan's (through August 31, 1999), TOO (through August
23, 1999), non-core real estate, equity investments and corporate. None of
the businesses included in "Other" are significant operating segments.
@ Represents intersegment sales elimination.
/\ Represents intersegment receivable/payable elimination.
Special and nonrecurring items -
++ 2001: a $170 million gain resulting from the sale of Lane Bryant.
** 2000: a $10 million charge for Intimate Brands to close Bath & Body Works'
nine stores in the United Kingdom.
+ 1999: 1) a $13 million charge for transaction costs related to the TOO spin-
off; and 2) the reversal of a $37 million liability related to downsizing
costs for Henri Bendel. These special items relate to the "Other" category.
42
14. Subsequent Event
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 total
purchase price was approximately $1.6 billion, based on approximately 89 million
Limited common shares issued or to be issued in the transaction.
The acquisition was effected through an offer to exchange 1.1 shares of Limited
common stock for each share of IBI Class A common stock tendered. Upon
completion of the tender offer and subsequent exchange, the Company owned
greater than 90% of the outstanding common stock of IBI. Thereafter, the Company
acquired the remaining outstanding common stock of IBI through a merger in which
all publicly-held shares not tendered were exchanged for Limited common stock.
As a result, IBI became a wholly-owned subsidiary of The Limited and the former
public shareholders of IBI became shareholders of The Limited. IBI stock is no
longer traded publicly on any exchange.
The Company's acquisition of the IBI minority interest will be accounted for
using the purchase method of accounting, as prescribed by SFAS No. 141,
"Business Combinations." Accordingly, the Company will allocate the purchase
price to the minority interest portion of the fair values of identifiable net
assets acquired. Any excess purchase price remaining after this allocation will
be accounted for as goodwill which, in accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets," will not be amortized.
The preliminary purchase price allocation includes approximately $400 million of
acquired intangible assets that relate to trademarks, tradenames and Internet
domain names with indefinite lives. In accordance with SFAS No. 142, these
intangible assets will not be amortized. The remaining purchase price allocation
includes fair market value adjustments related to customer relationships and
lists, property and equipment, leases, long-term debt and deferred rent. These
adjustments will be amortized over their respective useful lives (primarily five
years) resulting in a non-cash expense of approximately $5 million per year. In
addition, the acquisition will result in approximately $1.2 billion of goodwill.
None of the amounts recognized in the purchase price allocation, including
goodwill, will be deductible for tax purposes.
In connection with the acquisition, vested and unvested IBI stock options and
restricted stock were exchanged for similar Limited stock awards. 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 Company will record a pretax, non-cash, nonrecurring
expense for fully vested awards of approximately $35 million in the first
quarter of 2002. In addition, a pretax, non-cash compensation cost relating to
the exchange of unvested Intimate Brands awards for Limited awards of
approximately $50 million will be recorded as deferred compensation in the first
quarter of 2002. This compensation cost will be recognized as expense over the
remaining vesting periods, primarily the next two years.
15. Quarterly Financial Data (Unaudited)
Summarized quarterly financial results for 2001 and 2000 follow:
(Millions except per share amounts) First Second Third Fourth
- --------------------------------------------------------------------------------
2001 Quarters
Net sales $2,127 $2,192 $1,906 $3,138
Gross income 671 692 567 1,323
Net income 31 72 89 327
Net income per share:
Basic $ 0.07 $ 0.17 $ 0.21 $ 0.76
Diluted 0.07 0.16 0.21 0.75
- --------------------------------------------------------------------------------
2000 Quarters
Net sales $2,125 $2,289 $2,169 $3,522
Gross income 698 742 720 1,277
Net income 63 78 49 238
Net income per share:
Basic $ 0.15 $ 0.18 $ 0.12 $ 0.55
Diluted 0.14 0.17 0.11 0.54
================================================================================
The following special items are included in the above results:
... In 2001, a $170 million gain in the third quarter resulting from the sale
of Lane Bryant and $62 million in gains in the second quarter resulting
from the IPO's of ADS and Galyan's.
... In 2000, a $10 million charge in the fourth quarter to close Bath & Body
Works' nine stores in the United Kingdom.
MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the New York Stock Exchange ("LTD"). On
February 2, 2002, there were approximately 67,000 shareholders of record.
However, when including active associates who participate in the Company's stock
purchase plan, associates who own shares through Company-sponsored retirement
plans and others holding shares in broker accounts under street names, the
Company estimates the shareholder base to be approximately 200,000.
Market Price Cash Dividend
High Low Per Share
- --------------------------------------------------------------------------------
Fiscal Year 2001
4th quarter $ 18.98 $ 11.56 $ 0.075
3rd quarter 17.63 9.00 0.075
2nd quarter 17.50 14.94 0.075
1st quarter 19.99 14.61 0.075
- --------------------------------------------------------------------------------
Fiscal Year 2000
4th quarter $ 27.88 $ 14.50 $ 0.075
3rd quarter 25.00 18.31 0.075
2nd quarter 25.84 20.94 0.075
1st quarter 25.88 14.44 0.075
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Limited, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of The Limited, Inc.
and its subsidiaries at February 2, 2002 and February 3, 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended February 2, 2002 (on pages 36 - 43) in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
February 28, 2002, except for Note 14
as to which the date is March 21, 2002
43