EXHIBIT 13
----------
financials
Financial Summary
- --------------------------------------------------------------------------------
(Thousands except per share amounts, ratios and store and associate data)
1997 1996 A B E 1995 1994 A 1993 1992
SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $9,188,804 $8,644,791 $7,881,437 $7,320,792 $7,245,088 $6,944,296
....................................................................................................................................
Gross Income $2,817,977 $2,496,579 $2,087,532 $2,114,363 $1,958,835 $1,990,740
....................................................................................................................................
Operating Income $480,099 $636,067 $613,349 $798,989 $701,556 $788,698
....................................................................................................................................
Operating Income
as a Percentage of Sales 5.2% 7.4% 7.8% 10.9% 9.7% 11.4%
....................................................................................................................................
Adjusted Operating
Income C$706,314 C$648,067 C$612,035 798,989 C$698,939 $788,698
....................................................................................................................................
Adjusted Operating
Income as a
Percentage of Sales C7.7% C7.5% C7.8% 10.9% C9.6% 11.4%
....................................................................................................................................
Net Income $217,390 $434,208 $961,511 $448,343 $390,999 $455,497
....................................................................................................................................
Net Income as a
Percentage of Sales 2.4% 5.0% 12.2% 6.1% 5.4% 6.6%
....................................................................................................................................
Adjusted Net Income D$341,199 D$321,830 D$311,230 $448,343 D$389,382 D$446,380
....................................................................................................................................
Adjusted Net Income
as a Percentage of Sales D3.7% D3.7% D4.0% 6.1% D5.4% D6.4%
PER SHARE RESULTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Per Basic Share $0.80 $1.55 $2.69 $1.25 $1.09 $1.26
....................................................................................................................................
Net Income Per Diluted Share $0.79 $1.54 $2.68 $1.25 $1.08 $1.25
....................................................................................................................................
Adjusted Net Income
Per Diluted Share D$1.24 D$1.14 D$0.87 $1.25 D$1.08 D$1.23
....................................................................................................................................
Dividends $0.48 $0.40 $0.40 $0.36 $0.36 $0.28
....................................................................................................................................
Book Value $7.50 $7.09 $9.01 $7.72 $6.82 $6.25
....................................................................................................................................
Weighted Average Diluted
Shares Outstanding 274,483 282,053 358,371 358,601 363,234 363,738
OTHER FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $4,300,761 $4,120,002 $5,266,563 $4,570,077 $4,135,105 $3,846,450
....................................................................................................................................
Return on Average Assets 5% 9% 20% 10% 10% 13%
....................................................................................................................................
Adjusted Return on
Average Assets D8% D7% D6% 10% D10% D12%
....................................................................................................................................
Working Capital $937,739 $638,204 $2,018,960 $1,750,111 $1,513,181 $1,063,352
....................................................................................................................................
Current Ratio 1.9 1.7 3.5 3.2 3.1 2.5
....................................................................................................................................
Capital Expenditures $404,602 $409,260 $374,374 $319,676 $295,804 $429,545
....................................................................................................................................
Long-Term Debt $650,000 $650,000 $650,000 $650,000 $650,000 $541,639
....................................................................................................................................
Debt-to-Equity Ratio 32% 34% 20% 24% 27% 24%
....................................................................................................................................
Shareholders' Equity $2,044,957 $1,922,582 $3,201,041 $2,760,956 $2,441,293 $2,267,617
....................................................................................................................................
Return on Average
Shareholders' Equity 11% 17% 32% 17% 17% 22%
....................................................................................................................................
Adjusted Return on Average
Shareholders' Equity D17% D16% D10% 17% D17% D22%
....................................................................................................................................
Comparable Store Sales
Increase (Decrease) 0% 3% (2%) (3%) (1%) 2%
STORES AND ASSOCIATES AT END OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Total Number of
Stores Open 5,640 5,633 5,298 4,867 4,623 4,425
....................................................................................................................................
Selling Square Feet 28,400,000 28,405,000 27,403,000 25,627,000 24,426,000 22,863,000
....................................................................................................................................
Number of Associates 131,000 123,100 106,900 105,600 97,500 100,700
B 1991 B 1990 A E 1989 B 1988 1987
SUMMARY OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
Net Sales $6,149,218 $5,253,509 $4,647,916 $4,070,777 $3,527,941
...................................................................................................................
Gross Income $1,793,543 $1,630,439 $1,446,635 $1,214,703 $992,775
...................................................................................................................
Operating Income $712,700 $697,537 $625,254 $467,418 $408,872
...................................................................................................................
Operating Income
as a Percentage of Sales 11.6% 13.3% 13.5% 11.5% 11.6%
...................................................................................................................
Adjusted Operating
Income $712,700 $697,537 $625,254 $467,418 $408,872
...................................................................................................................
Adjusted Operating
Income as a
Percentage of Sales 11.6% 13.3% 13.5% 11.5% 11.6%
...................................................................................................................
Net Income $403,302 $398,438 $346,926 $245,136 $235,188
...................................................................................................................
Net Income as a
Percentage of Sales 6.6% 7.6% 7.5% 6.0% 6.7%
...................................................................................................................
Adjusted Net Income $403,302 $398,438 $346,926 $245,136 $235,188
...................................................................................................................
Adjusted Net Income
as a Percentage of Sales 6.6% 7.6% 7.5% 6.0% 6.7%
PER SHARE RESULTS
- -------------------------------------------------------------------------------------------------------------------
Net Income Per Basic Share $1.12 $1.11 $0.97 $0.68 $0.63
...................................................................................................................
Net Income Per Diluted Share $1.11 $1.10 $0.96 $0.68 $0.62
...................................................................................................................
Adjusted Net Income
Per Diluted Share $1.11 $1.10 $0.96 $0.68 $0.62
...................................................................................................................
Dividends $0.28 $0.24 $0.16 $0.12 $0.12
...................................................................................................................
Book Value $5.19 $4.33 $3.45 $2.64 $2.04
...................................................................................................................
Weighted Average Diluted
Shares Outstanding 363,594 362,044 361,288 360,186 376,626
OTHER FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------
Total Assets $3,418,856 $2,871,878 $2,418,486 $2,145,506 $1,929,477
...................................................................................................................
Return on Average Assets 13% 15% 15% 12% 13%
...................................................................................................................
Adjusted Return on
Average Assets 13% 15% 15% 12% 13%
...................................................................................................................
Working Capital $1,084,205 $884,004 $685,524 $567,639 $629,783
...................................................................................................................
Current Ratio 3.1 2.8 2.4 2.2 2.9
...................................................................................................................
Capital Expenditures $523,082 $428,844 $318,427 $288,972 $283,590
...................................................................................................................
Long-Term Debt $713,758 $540,446 $445,674 $517,952 $681,000
...................................................................................................................
Debt-to-Equity Ratio 38% 35% 36% 55% 93%
...................................................................................................................
Shareholders' Equity $1,876,792 $1,560,052 $1,240,454 $946,207 $729,171
...................................................................................................................
Return on Average
Shareholders' Equity 23% 28% 32% 29% 31%
...................................................................................................................
Adjusted Return on Average
Shareholders' Equity 23% 28% 32% 29% 31%
...................................................................................................................
Comparable Store Sales
Increase (Decrease) 3% 3% 9% 8% 3%
STORES AND ASSOCIATES AT END OF YEAR
- -------------------------------------------------------------------------------------------------------------------
Total Number of
Stores Open 4,194 3,760 3,344 3,497 3,115
...................................................................................................................
Selling Square Feet 20,355,000 17,008,000 14,374,000 14,296,000 12,795,000
...................................................................................................................
Number of Associates 83,800 72,500 63,000 56,700 50,200
A Includes the results of companies disposed of up to the disposition date.
Effective April 30, 1989, the Company sold its Lerner Woman Division,
effective August 31, 1993, the Company sold 60% of its interest in Brylane,
Inc. and effective January 31, 1996 the Company sold 60% of its interest in
World Financial Network National Bank.
B Includes the results of Abercrombie & Fitch subsequent to the February 1,
1988 acquisition date, Penhaligon's subsequent to the July 2, 1990
acquisition date, Gryphon subsequent to June 1, 1991 when the Company
acquired a controlling interest and Galyan's subsequent to the July 2, 1995
acquisition date.
C Excludes the effect on operating income of special and nonrecurring items
of ($213,215) in 1997, ($12,000) in 1996, $1,314 in 1995 (see Note 2 to the
Consolidated Financial Statements) and $2,617 in 1993. Additionally,
inventory liquidation charges of ($13,000) related to Henri Bendel store
closings are excluded from 1997.
D In addition to excluding special charges listed in (c) above, excludes the
effect on net income of the gain resulting from the initial public
offerings of $8,606 for Brylane, Inc. in 1997, $118,178 for a 15.8%
interest in Abercrombie & Fitch in 1996, $649,467 for a 16.9% interest in
Intimate Brands, Inc. in 1995 (see Note 1 to the Consolidated Financial
Statements) and $9,117 for United Retail Group in 1992.
E Fifty-three-week fiscal year.
- --------------------------------------------------------------------------------
3
financials
Management's Discussion and Analysis
Results of Operations
Net sales for the fourth quarter of 1997 grew 10% to $3.268 billion from $2.966
billion for the same period a year ago. Net income was $85.3 million versus
$213.4 million in the fourth quarter of 1996, and earnings per diluted share
were $.31 versus $.78 in the fourth quarter of 1996. Excluding special and
nonrecurring items and inventory liquidation charges associated with the closing
of five Henri Bendel stores, net income was $252.5 million versus $220.2 million
in the fourth quarter of 1996, and earnings per diluted share were $.91 versus
$.81 in the fourth quarter of 1996.
As a result of an ongoing review of the Company's retail businesses and
investments as well as implementation of initiatives intended to promote and
strengthen the Company's various retail brands (including closing businesses,
identification and disposal of non-core assets and identification of store
locations not consistent with a particular brand) during the fourth quarter of
1997, the Company recognized total charges of $289 million (approximately $30
million after-tax cash impact) or $.60 per diluted share, consisting of $276
million in special and nonrecurring charges and a $13 million cost of sales
charge for inventory liquidation at Henri Bendel. These charges included:
. A $68 million charge for closing the 118 store Cacique lingerie business
effective January 31, 1998. The amount includes $38 million in cash charges
relating to cancellation of merchandise on order and other exit costs such as
severance, service contract termination fees and lease termination costs;
. $95 million in charges related to Henri Bendel, which include an $82 million
special and nonrecurring charge related to streamlining Henri Bendel from six
stores to a one-store operation by September 1, 1998. The amount includes $56
million in cash charges that are recorded in other current liabilities. In
addition, the Company incurred a $13 million cost of sales charge for inventory
liquidation. The charge to cost of sales is in accordance with Emerging Issues
Task Force ("EITF") Issue No. 96-9, "Classification of Inventory Markdowns and
Other Costs Associated with a Restructuring";
. $86 million of impaired asset charges related principally to the women's
apparel businesses, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." This charge has no cash impact but
is an SFAS No. 121 required accounting adjustment to measure the fair value of
store assets, and will provide a noncash benefit in future periods from reduced
depreciation and amortization;
. A $28 million provision for closing or downsizing approximately 80 oversized
stores, primarily in the Limited, Lane Bryant, Lerner New York and Express
women's businesses, and a $12 million write-down to net realizable value of a
real estate investment previously acquired in connection with closing and
downsizing certain stores.
Net sales for the fiscal year ended January 31, 1998, increased 6% to
$9.189 billion from sales of $8.645 billion for the same period ended February
1, 1997. Net income was $217.4 million, or $.79 per diluted share, compared to
$434.2 million, or $1.54 per diluted share last year.
Excluding the impact of special and nonrecurring items, gains in connection
with initial public offerings ("IPO"), and the Henri Bendel inventory
liquidation charges, the Company would have earned $1.24 per diluted share
compared to last year's $1.14. These excluded items consisted of: 1) $213.2
million related to the previously described fourth quarter charges that was net
of a third quarter net gain of $62.8 million related principally to the sale of
approximately one-half of the Company's investment in Brylane, Inc. ("Brylane"),
a 26% owned (post-IPO) catalogue retailer; 2) in 1997, a pretax gain of $8.6
million in connection with the IPO of Brylane; 3) $12 million of special and
nonrecurring charges in 1996 related to the April 1997 sale of Penhaligon's; and
4) in 1996, a gain of $118.2 million resulting from the Abercrombie & Fitch
("A&F") IPO.
Business highlights for 1997 include the following:
. Intimate Brands, Inc. ("IBI"), led by strong performances at Bath & Body Works
and Victoria's Secret Stores, recorded earnings per diluted share of $1.14,
compared to $1.02 in 1996, including special and nonrecurring charges of $.16 in
1997 and $.03 in 1996.
. A&F delivered 1997 earnings per diluted share of $.94, a 74% increase over
1996 as comparable store sales increased 21% on top of 13% for 1996.
. However, much of the gains from IBI and A&F were offset by a decline in
operating income for each of the women's businesses, which finished the year
with a pretax operating loss aggregating $268 million, including special and
nonrecurring charges of $187 million and the $13 million inventory liquidation
charge related to the closing of five Henri Bendel stores.
. Limited Too led the emerging businesses with a significant improvement in
operating income and 20% comparable store sales gains.
. During the year, the Company also completed the sales of its interests in the
Newport Office Tower in Jersey City, New Jersey, and The Mall at Tuttle Crossing
in Columbus, Ohio, and approximately one-half of its interest in Brylane for
cash proceeds of $343.2 million.
. On February 17, 1998, a registration statement was filed with the Securities
and Exchange Commission in connection with a plan to establish A&F as a fully
independent company via a tax-free exchange offer pursuant to which The Limited
shareholders will be given an opportunity to tender some or all of their shares
of The Limited in return for shares of A&F. The transaction is subject to
certain customary conditions.
. On February 20, 1998, the Company entered into a definitive agreement with
Pinault Printemps-Radoute to sell its remaining 2.6 million shares of Brylane
for $51 per share, generating net cash proceeds of $131 million. The transaction
is expected to close in the first quarter of 1998.
The Company does not believe that the consummation of the transactions and
the taking of the other actions outlined above will have a material effect on
the Company's liquidity (i.e., its ability to provide the resources to support
operations, projected growth, seasonal requirements and capital expenditures).
Furthermore, although the Company believes that such transactions and other
actions should have a favorable impact on the Company's results of operations,
there can be no assurance with respect to the effect of these actions.
4
financials
The following summarized financial data compares 1997 to the comparable periods
for 1996 and 1995 (millions):
% Change
1997 1996 1995 1997-96 1996-95
Net Sales
- ----------------------------------------------------------------------------------
Express $1,189 $1,386 $1,445 (14%) (4%)
..................................................................................
Lerner New York 946 1,045 1,005 (9%) 4%
..................................................................................
Lane Bryant 907 905 903 -- --
..................................................................................
The Limited 776 855 850 (9%) 1%
..................................................................................
Henri Bendel 83 91 91 (9%) --
- ----------------------------------------------------------------------------------
Total Women's Brands $3,901 $4,282 $4,294 (9%) --
Structure 660 660 576 -- 15%
..................................................................................
Limited Too 322 259 214 24% 21%
..................................................................................
Galyan's Trading Co.
(since 7/2/95) 160 108 45 48% n/m
..................................................................................
Other 6 4 -- n/m n/m
- ----------------------------------------------------------------------------------
Total Emerging Brands $1,148 $1,031 $835 11% 23%
Victoria's Secret Stores 1,702 1,450 1,286 17% 13%
..................................................................................
Victoria's Secret
Catalogue 734 684 661 7% 3%
..................................................................................
Bath & Body Works 1,057 753 475 40% 59%
..................................................................................
Cacique 95 88 80 8% 10%
..................................................................................
Other 30 22 15 n/m n/m
- ----------------------------------------------------------------------------------
Total Intimate
Brands $3,618 $2,997 $2,517 21% 19%
Abercrombie & Fitch $522 $335 $235 56% 43%
- ----------------------------------------------------------------------------------
Total Net Sales $9,189 $8,645 $7,881 6% 10%
Operating Income
- ----------------------------------------------------------------------------------
Women's Brands A$(268) $64 E$54 n/m 19%
..................................................................................
Emerging Brands
and Other B159 68 F149 134% (54%)
..................................................................................
Intimate Brands C505 D458 386 10% 19%
..................................................................................
Abercrombie & Fitch 84 46 24 83% 92%
- ----------------------------------------------------------------------------------
Total Operating Income $480 $636 $613 (25%) 4%
A 1997 includes special and nonrecurring charges of approximately $187
million relating to the closure of five out of six Henri Bendel stores and
charges associated with asset valuation impairment and the closure and
downsizing of certain stores, plus $13 million in inventory liquidation
charges associated with the Henri Bendel closings.
B 1997 includes $42 million of special and nonrecurring income relating to
the gain from the sale of approximately one-half of the Company's interest
in Brylane, offset by a valuation adjustment on an investment.
C 1997 includes a $68 million charge related to the closing of the Cacique
business effective January 31, 1998.
D 1996 includes a special and nonrecurring charge of $12 million for
revaluation of certain assets in connection with the sale of Penhaligon's
in April 1997.
E 1995 includes a special and nonrecurring charge of approximately $48
million, primarily for store closings and downsizings.
F 1995 includes 100% of WFNNB's operating income of $114 million before
interest expense versus $4 million, representing 40% of net income of $11
million in 1996; 1995 also includes an approximate $73 million gain from
the sale of a 60% interest in WFNNB, partially offset by $23 million of
special and nonrecurring charges representing write-downs to net realizable
value of certain assets.
n/m not meaningful
The following summarized financial data compares 1997 to the comparable periods
for 1996 and 1995:
1997 1996 1995
Comparable Store Sales:
- ----------------------------------------------------------------------------------
Express (15%) (6%) (2%)
..................................................................................
Lerner New York (5%) 8% (1%)
..................................................................................
Lane Bryant 1% 0% (8%)
..................................................................................
The Limited (7%) 3% (4%)
..................................................................................
Henri Bendel (13%) (5%) 6%
- ----------------------------------------------------------------------------------
Total Women's Brands (8%) 0% (3%)
Structure (3%) 7% (9%)
..................................................................................
Limited Too 20% 8% (4%)
..................................................................................
Galyan's Trading Co.
(since 7/2/96) 0% 12% --
- ----------------------------------------------------------------------------------
Total Emerging Brands 3% 7% (8%)
Victoria's Secret Stores 11% 5% (1%)
..................................................................................
Bath & Body Works 11% 11% 21%
..................................................................................
Cacique 10% 8% (20%)
- ----------------------------------------------------------------------------------
Total Intimate Brands 11% 7% 1%
Abercrombie & Fitch 21% 13% 5%
- ----------------------------------------------------------------------------------
Total Comparable Store
Sales Increase (Decrease) 0% 3% (2%)
% Change
1997 1996 1995 1997-96 1996-95
Store Data:
- ----------------------------------------------------------------------------------
Retail Sales Increase
Attributable to New
and Remodeled Stores 6% 8% 9%
..................................................................................
Retail Sales per
Average Selling
Square Foot $295 $285 $272 4% 5%
..................................................................................
Retail Sales per
Average Store
(thousands) $1,478 $1,453 $1,419 2% 2%
..................................................................................
Average Store Size
at End of Year
(selling square feet) 5,035 5,043 5,172 -- (2%)
..................................................................................
Retail Selling Square
Feet at End of Year
(thousands) 28,400 28,405 27,403 -- 4%
Number of Stores:
- ----------------------------------------------------------------------------------
Beginning of Year 5,633 5,298 4,867
..................................................................................
Opened 315 470 504
..................................................................................
Acquired (Sold) (4) -- 6
..................................................................................
Closed (304) (135) (79)
- ----------------------------------------------------------------------------------
End of Year 5,640 5,633 5,298
- ----------------------------------------------------------------------------------
Net Sales
Fourth quarter 1997 sales as compared to sales for the fourth quarter 1996
increased 10% to $3.268 billion due to 5% comparable store sales gains with the
balance of the increase attributable to new and remodeled stores and increased
catalogue sales. Thirteen-week fourth quarter 1996 sales as compared to sales
for the fourteen-week fourth quarter 1995 increased 7% to $2.966 billion due to
a 9%
5
financials
increase in sales attributable to new and remodeled stores and a 3% increase in
comparable store sales, offset by a 5% decrease due to the fifty-third week in
1995.
The 1997 retail sales increase of 6% was attributable to the Company adding
315 new stores, remodeling 206 stores and closing 186 stores (excluding closing
118 Cacique stores in January 1998 and the sale of four Penhaligon's stores in
the first quarter of 1997). This net addition of 129 stores represents over
365,000 square feet of new retail selling space. For the year, average sales
productivity increased 4% to $295 per square foot.
In 1997, IBI accounted for 114% of the Company's total net sales increase
and 39% of total Company sales. IBI posted a $620 million sales gain over the
prior year due to the net addition of 223 stores (before the impact of the
Cacique store closings and the Penhaligon's sale) representing over 650,000 new
retail selling square feet, an 11% increase in comparable store sales and an 18%
increase in catalogues mailed by Victoria's Secret Catalogue. Additionally, A&F
reported a $186 million sales increase over the prior year, bolstered by a 21%
increase in comparable store sales, while Limited Too experienced a $63 million
sales increase over the prior year on a 20% increase in comparable store sales.
However, sales at the women's businesses in 1997 declined $382 million from
1996, primarily due to an 8% decrease in comparable store sales, as well as a
net decrease of 131 stores representing over 705,000 retail selling square feet,
due principally to closures of underperforming locations.
The 1996 retail sales increase of 10% was attributable to an 8% increase in
sales due to the Company adding 470 new stores, remodeling 252 stores and
closing 135 stores, and a 3% increase in comparable store sales, offset by a 1%
decrease due to the fifty-third week in 1995. This net addition of 335 stores
represents approximately 1 million square feet of new retail selling space. For
the year, average sales productivity increased 5% to $285 per square foot.
In 1996, IBI accounted for 63% of the annual sales increase, and nearly 35%
of total Company sales, posting a $480 million sales increase over the prior
year due to the net addition of 316 stores representing over 817,000 selling
square feet, a 7% increase in comparable store sales and an 11% increase in
catalogues mailed by Victoria's Secret Catalogue. Sales at the women's
businesses in 1996 were flat to 1995, primarily due to flat comparable store
sales. Disappointing results at Express, which experienced a 6% decline in
comparable store sales, were offset by improved results at the Lerner New York
and Limited businesses, which had 8% and 3% increases in comparable store sales.
In addition, the overall sales increase for the Company included sales increases
at Structure, A&F and Limited Too, which experienced 7%, 13% and 8% increases in
comparable store sales.
Gross Income
Gross income increased to 35.4% as a percentage of sales for the fourth quarter
1997 from 33.0% for the fourth quarter 1996. The merchandise margin rate
(representing gross income before deduction of buying and occupancy costs),
increased 2.3%, expressed as a percentage of sales, due principally to improved
initial markup ("IMU"), which was partially offset by a slightly higher markdown
rate and the $13 million Henri Bendel inventory liquidation charge (.4% of
sales). Buying and occupancy costs, expressed as a percentage of sales, were
flat for the fourth quarter as compared to last year.
Gross income, expressed as a percentage of sales, was 33.0% for the fourth
quarter 1996 compared to 29.2% for the fourth quarter 1995. The merchandise
margin rate increased 3.4%, expressed as a percentage of sales, due principally
to improved IMU and lower markdown rates, as the Company was less
price-promotional than the year before. Buying and occupancy costs decreased
.4%, expressed as a percentage of sales, primarily due to sales productivity
associated with the 3% increase in comparable store sales.
The Company's 1997 gross income rate increased 1.8% to 30.7% as compared to
1996. The merchandise margin rate increased 1.7% due principally to improved
IMU, while buying and occupancy costs, expressed as a percentage of sales, were
flat to last year.
The 1996 gross income rate of 28.9% increased 2.4% as compared to 1995.
Merchandise margins, expressed as a percentage of sales, increased 1.7%, due
principally to improved initial markup. Buying and occupancy costs decreased .7%
expressed as a percentage of sales, primarily due to sales productivity
associated with the 3% increase in comparable store sales.
General, Administrative and Store Operating Expenses
General, administrative and store operating expenses increased to 20.8%,
expressed as a percentage of sales, in the fourth quarter of 1997, compared to
18.7% in the fourth quarter of 1996. This increase was attributable to: 1) a
2.5% rate increase at the IBI businesses (discussed below) combined with an
increase of IBI sales in the total Company mix to 42.7% from 39.1%; 2) the
inability to leverage these expenses at the women's businesses due to
disappointing sales performance; and 3) additional compensation charges for
restricted stock plans.
IBI's increase is primarily the result of advertising costs at Victoria's
Secret Stores, the growth of Bath & Body Works in the overall mix of IBI net
sales from 25.1% in fiscal 1996 to 29.2% in fiscal 1997 and an increase in
restricted stock plan compensation expense. Due to an emphasis on point-of-sale
marketing and sales floor coverage for personal care products, Bath & Body Works
has higher store operating expenses as a percentage of net sales, which has been
more than offset by higher gross margins.
The Company anticipates that these expenses, expressed as a percentage of
sales, will increase slightly in 1998, since the IBI businesses, in particular
Bath & Body Works, will represent a greater portion of total Company sales.
General, administrative and store operating expenses, expressed as a
percentage of sales, increased to 18.7% in the fourth quarter of 1996 compared
to 17.7% in the fourth quarter of 1995. This
6
financials
increase as a percentage of sales was attributable to a 2.2% rate increase at
the IBI businesses and the inability to leverage expenses due to disappointing
sales performance at the women's businesses, particularly Express.
General, administrative and store operating expenses increased, expressed
as a percentage of sales, to 23.1% in 1997, compared to 21.4% in 1996. This
increase was primarily attributable to the reasons discussed above for the 1997
fourth quarter. These costs increased, expressed as a percentage of sales, to
21.4% in 1996 compared to 20.0% in 1995, also primarily due to reasons discussed
above for fourth quarter 1996.
Special and Nonrecurring Items
As described in Note 2 to the Consolidated Financial Statements, the Company
recognized special and nonrecurring charges of $276 million during the fourth
quarter of 1997 comprised of: 1) a $68 million charge for the closing of the
Cacique lingerie business effective January 31, 1998; 2) an $82 million charge
related to streamlining the Henri Bendel business from six stores to one store;
3) an $86 million impaired-asset charge in accordance with SFAS No. 121, related
principally to the women's apparel businesses, covering certain store locations
where the asset carrying values are permanently impaired; and 4) a $28 million
provision for closing and downsizing approximately 80 oversized stores primarily
within the Limited, Lerner New York, Lane Bryant and Express women's businesses
and for a $12 million write-down to net realizable value of a real estate
investment previously acquired in connection with closing and downsizing certain
stores. Additionally, the Company recognized a $13 million charge to cost of
sales in the fourth quarter of 1997 for inventory liquidation in accordance with
EITF Issue No. 96-9. The Company, in accordance with EITF Issue No. 94-3,
anticipates charges for severance and other associate termination costs for
Henri Bendel in the first quarter of 1998 (the period the associates are
notified). Additionally, the Company recognized a net $62.8 million pretax gain
during the third quarter of 1997 relating to the sale of approximately one-half
of its investment in Brylane, partially offset by valuation adjustments on
certain assets where the carrying values were permanently impaired.
In 1996, the Company recorded a $12 million pretax, special and
nonrecurring charge in connection with the 1997 sale of Penhaligon's, a
U.K.-based subsidiary of IBI.
In the fourth quarter of 1995, the Company recognized a $73.2 million
pretax gain in connection with the sale of a 60% interest in the Company's
wholly-owned credit card bank, World Financial Network National Bank ("WFN"). In
addition, the Company recognized a special and nonrecurring charge during the
fourth quarter of 1995 of approximately $71.9 million. Of this amount, $25.8
million was provided for the closing of 26 stores and $19.8 million was provided
for the downsizing of 33 stores, primarily at Limited and Lerner New York. The
remaining charge of approximately $26.3 million represented the write-down to
market or net realizable value of certain assets arising from nonoperating
activities. The net pretax gain from these special and nonrecurring items was
$1.3 million.
Operating Income
Fourth quarter operating income, expressed as a percentage of sales, was 6.1% in
1997, compared to 13.9% in 1996, and for the year was 5.2% in 1997 compared to
7.4% in 1996. Excluding charges for special and nonrecurring items in both years
and the Henri Bendel inventory liquidation charge in 1997, fourth quarter
operating income, expressed as a percentage of sales, would have been 15.0% in
1997 compared to 14.3% in 1996, and for the year would have been 7.7% in 1997
compared to 7.5% in 1996. These increases were due to increases in the gross
income rate, which more than offset the general, administrative and store
operating expense rate increase.
The fourth quarter operating income rate increased 2.4% in 1996, from 11.5%
on an adjusted basis in 1995, and for the year increased .9% in 1996 from 6.5%
on an adjusted basis in 1995. The 1995 rates were adjusted to reflect the 1995
sale of a 60% interest in WFN as if the sale was consummated at the beginning of
the year. These increases were also due to increases in gross income, which more
than offset the general, administrative and store operating expense rate
increase.
Interest Expense
- --------------------------------------------------------------------------------
FOURTH QUARTER YEAR
1997 1996 1997 1996 1995
Average Daily Borrowings
(millions) $891.4 $1,039.5 $835.9 $964.3 $887.7
................................................................................
Average Effective
Interest Rate 8.07% 7.49% 8.22% 7.82% 8.73%
- --------------------------------------------------------------------------------
Interest expense decreased by $1.5 million in the fourth quarter of 1997 and
decreased by $6.6 million for the year. For the quarter, lower average borrowing
levels reduced interest expense by $2.8 million, offset by a $1.3 million
increase resulting from higher rates. For the year, lower average borrowing
levels reduced interest expense by $10.0 million, offset by $3.4 million of
increased expense due to higher interest rates.
Other Income
The $5.1 million decrease in other income for 1997 compared to 1996 was
primarily attributable to approximately $10.5 million of interest income earned
in the first quarter of 1996, which arose from $1.615 billion of temporarily
invested funds that were used to consummate the Company's self-tender in March
1996. Excluding this $10.5 million in 1996, interest earnings increased $5.4
million from higher temporary investments in 1997, $3.5 million of which was
realized in the fourth quarter.
Gains in Connection with Initial Public Offerings
As discussed in Note 1 to the Consolidated Financial Statements, the Company
recognized a pretax gain of $8.6 million during
the first quarter of 1997, in connection with the IPO of Brylane,
a 26% owned (post-IPO) catalogue retailer. In 1996, the Company recognized a
$118.2 million gain in connection with the IPO of a 15.8% interest (8.05 million
shares) of A&F. In 1995, the Company recognized a $649.5 million gain in
connection with the IPO
7
financials
of 16.9% (42.7 million shares) of the stock of IBI. The gains recorded by the
Company in 1996 and 1995 were not subject to tax.
Other Data
There were a number of significant events in fiscal years 1997 and 1996 that
impacted the comparability of the Company's net income per diluted share data.
Although the following information is not intended to be presented in accordance
with SEC guidelines for pro forma financial information, it is provided to
assist in investors' understanding of the Company's results of operations.
. In 1997 and 1996, the Company recognized $213.2 million and $12 million in
special and nonrecurring charges along with the $13 million Henri Bendel
inventory liquidation charge in 1997 as more fully described in Note 2 to the
Consolidated Financial Statements. The impact of these charges also reduced
earnings attributable to minority interest by $6.8 million and $1.0 million in
1997 and 1996.
. The Company recognized pretax gains in connection with IPOs of $8.6 million
and $118.2 million in 1997 and 1996 (see Note 1 to the Consolidated Financial
Statements).
. The Company repurchased 85 million shares via a self-tender and, as a result
of investing funds used to facilitate the self-tender, recognized approximately
$10.5 million of interest income in 1996 up to the effective date.
Adjusted for the income tax effect (an $87 million expense in 1997 and a
$1.0 million expense in 1996), earnings per diluted share would have increased
$.45 per share in 1997 to $1.24 and would have decreased $.38 per share to $1.16
in 1996.
Acquisition
Effective July 2, 1995, the Company acquired all of the outstanding common stock
of Galyan's for $18 million in cash and stock. The Company's financial
statements include the results of operations of Galyan's since the acquisition
date.
Financial Condition
The Company's balance sheet at January 31, 1998, provides continuing evidence of
financial strength and flexibility. The Company's long-term debt-to-equity ratio
declined to 32% at the end of 1997 from 34% in 1996, and working capital
increased 47% over 1996 to $938 million. A more detailed discussion of
liquidity, capital resources and capital requirements follows.
Liquidity and Capital Resources
Cash provided by operating activities, commercial paper backed by funds
available under committed long-term credit agreements, and the Company's capital
structure continue to provide the resources to support current operations,
projected growth, seasonal requirements and capital expenditures.
- --------------------------------------------------------------------------------
A summary of the Company's working capital position and capitalization follows
(thousands):
A Adjusted
1997 1996 1995 1995
Cash Provided by
Operating Activities $589,981 $712,069 $340,732 $340,732
................................................................................
Working Capital $937,739 $638,204 $403,960 $2,018,960
................................................................................
Capitalization:
................................................................................
Long-Term Debt $650,000 $650,000 $650,000 $650,000
................................................................................
Shareholders' Equity 2,044,957 1,922,582 1,586,041 3,201,041
- --------------------------------------------------------------------------------
Total Capitalization $2,694,957 $2,572,582 $2,236,041 $3,851,041
- --------------------------------------------------------------------------------
Additional Amounts
Available Under Long-
Term Credit Agreements $1,000,000 $1,000,000 $1,000,000 $1,000,000
A Adjusted 1995 reflects the impact of the $1.615 billion repurchase of 85
million shares of common stock.
- --------------------------------------------------------------------------------
Net cash provided by operating activities totaled $590.0 million, $712.1
million and $340.7 million for 1997, 1996 and 1995 and continued to serve as the
Company's primary source of liquidity.
- --------------------------------------------------------------------------------
The Company considers the following to be several measures of liquidity and
capital resources:
A Adjusted
1997 1996 1995 1995
Debt-to-Equity Ratio 32% 34% 41% 20%
(Long-Term Debt Divided by
Shareholders' Equity)
................................................................................
Debt-to-Capitalization Ratio 24% 25% 29% 17%
(Long-Term Debt Divided by
Total Capitalization)
................................................................................
Interest Coverage Ratio 11x 12x 12x 12x
(Income, Excluding Gain in
Connection with Initial Public
Offerings, Before Interest
Expense, Depreciation,
Amortization and Income Taxes
Divided by Interest Expense)
................................................................................
Cash Flow to Capital Investment 146% 174% 91% 91%
(Net Cash Provided by
Operating Activities Divided by
Capital Expenditures)
A Adjusted 1995 reflects the impact of the $1.615 billion repurchase of 85
million shares of common stock.
- --------------------------------------------------------------------------------
8
financials
Net cash provided from operating activities in 1997 decreased $122.1
million from the prior year principally due to an increase in income tax
payments, that was partially offset by slightly higher income from operations
adjusted for special and nonrecurring items and gains from initial public
offerings.
Investing activities included capital expenditures of $405 million, about
half of which was for new and remodeled stores. Investing activities also
included $235 million in net proceeds from the sales of the Newport Tower, an
office building in Jersey City, New Jersey, and the Company's interest in The
Mall at Tuttle Crossing in Columbus, Ohio, and $108.3 million of net proceeds
from the third quarter sale of slightly less than one-half of the Company's
investment in Brylane. In 1996, $41.3 million was invested in the Alliance Data
Systems (formerly WFN) credit card venture. 1995 reflects the acquisition of
Galyan's, the proceeds from the securitization of WFN's credit card receivables
of $1.2 billion (see Note 3 to the Consolidated Financial Statements) and the
transfer of $351.6 million to a restricted cash account (see Note 6 to the
Consolidated Financial Statements).
Cash used for financing activities for 1997 reflects an increase in the
quarterly dividend to $.12 per share from $.10 per share in 1996. Financing
activities in 1996 included proceeds from and repayment of $150 million in
short-term debt borrowed by A&F and net proceeds of $118.2 million from A&F's
initial public offering. Financing activities also included $1.615 billion used
to repurchase 85 million shares of the Company's common stock via the
self-tender consummated in March 1996. Cash dividends paid in 1996 and 1995 were
$.40 per share.
At January 31, 1998, the Company had available $1 billion under its
long-term credit agreement. The Company also has the ability to offer up to $250
million of additional debt securities under its shelf registration statement.
Stores and Selling Square Feet
- --------------------------------------------------------------------------------
A summary of actual stores and selling square feet by business for 1997 and
1996, and the 1998 goals by business (including the impact of the estimated 280
stores that will be closed/downsized during the year) follows:
End of Year Change From
Goal 1998 1997 1996 1998-97 1997-96
EXPRESS
- ------------------------------------------------------------------------------------------
Stores 712 753 753 (41) --
..........................................................................................
Selling Square Ft. 4,481,000 4,739,000 4,726,000 (258,000) 13,000
LERNER NEW YORK
- ------------------------------------------------------------------------------------------
Stores 668 746 784 (78) (38)
..........................................................................................
Selling Square Ft. 5,041,000 5,698,000 5,984,000 (657,000) (286,000)
LANE BRYANT
- ------------------------------------------------------------------------------------------
Stores 760 773 832 (13) (59)
..........................................................................................
Selling Square Ft. 3,666,000 3,735,000 3,980,000 (69,000) (245,000)
THE LIMITED
- ------------------------------------------------------------------------------------------
Stores 570 629 663 (59) (34)
- ------------------------------------------------------------------------------------------
Selling Square Ft. 3,398,000 3,790,000 3,977,000 (392,000) (187,000)
HENRI BENDEL
- ------------------------------------------------------------------------------------------
Stores 1 6 6 (5) --
..........................................................................................
Selling Square Ft. 35,000 113,000 113,000 (78,000) --
STRUCTURE
- ------------------------------------------------------------------------------------------
Stores 545 544 542 1 2
..........................................................................................
Selling Square Ft. 2,161,000 2,143,000 2,117,000 18,000 26,000
LIMITED TOO
- ------------------------------------------------------------------------------------------
Stores 317 312 308 5 4
..........................................................................................
Selling Square Ft. 1,002,000 979,000 967,000 23,000 12,000
GALYAN'S TRADING CO.
- ------------------------------------------------------------------------------------------
Stores 15 11 9 4 2
..........................................................................................
Selling Square Ft. 1,026,000 641,000 488,000 385,000 153,000
VICTORIA'S SECRET STORES
- ------------------------------------------------------------------------------------------
Stores 874 789 736 85 53
..........................................................................................
Selling Square Ft. 3,795,000 3,555,000 3,326,000 240,000 229,000
BATH & BODY WORKS
- ------------------------------------------------------------------------------------------
Stores 1,101 921 750 180 171
..........................................................................................
Selling Square Ft. 2,183,000 1,773,000 1,354,000 410,000 419,000
CACIQUE
- ------------------------------------------------------------------------------------------
Stores -- -- 119 -- (119)
..........................................................................................
Selling Square Ft. -- -- 365,000 -- (365,000)
PENHALIGON'S
- ------------------------------------------------------------------------------------------
Stores -- -- 4 -- (4)
..........................................................................................
Selling Square Ft. -- -- 2,000 -- (2,000)
ABERCROMBIE & FITCH
- ------------------------------------------------------------------------------------------
Stores 186 156 127 30 29
..........................................................................................
Selling Square Ft. 1,453,000 1,234,000 1,006,000 219,000 228,000
ABERCROMBIE (KIDS)
- ------------------------------------------------------------------------------------------
Stores 13 -- -- 13 --
..........................................................................................
Selling Square Ft. 42,000 -- -- 42,000 --
TOTAL RETAIL BUSINESSES
- ------------------------------------------------------------------------------------------
Stores 5,762 5,640 5,633 122 7
..........................................................................................
Selling Square Ft. 28,283,000 28,400,000 28,405,000 (117,000) (5,000)
- ------------------------------------------------------------------------------------------
9
FINANCIALS
Capital Expenditures
Capital expenditures amounted to $404.6 million, $409.3 million and $374.4
million for 1997, 1996 and 1995, of which $194.4 million, $235.7 million and
$274.5 million were for new stores and remodeling and expanding existing stores.
In 1997 and 1996 the Company expended $55.3 million and $53.1 million on land
acquisition and development costs. Also, in 1997 and 1996 the Company expended
$30.2 million and $42.1 million in connection with the Bath & Body Works
distribution center.
The Company anticipates spending $480 to $500 million for capital
expenditures in 1998, of which $270 to $295 million will be for new stores, the
remodeling of existing stores and related improvements for the retail
businesses, $50 to $60 million will be for information technology related to
Year 2000 expenditures and $30 to $40 million will be for land acquisition and
development costs, principally the Easton development project in Columbus, Ohio.
The Company expects that substantially all 1998 capital expenditures will be
funded by net cash provided by operating activities.
The Company intends to reduce selling square footage by approximately
117,000 selling square feet in 1998, which represents a .4% decrease from
year-end 1997. It is anticipated that the decrease will result from the closing
of 250 stores offset by the addition of approximately 370 stores (over half of
which are Bath & Body Works stores averaging 2,300 square feet) and the
remodeling of approximately 125 stores.
Information Systems and "Year 2000" Compliance
The Company recently completed a comprehensive review of its information systems
and is involved in an enterprise-wide program to update computer systems and
applications in preparation for the year 2000. The Company will incur internal
staff costs as well as outside consulting and other expenditures related to this
initiative. Total expenditures related to remediation, testing, conversion,
replacement and upgrading system applications are expected to range from $85 to
$100 million from 1997 through 2000. Of the total, approximately $50 to $60
million will be capital expenditures related to acquisition and implementation
of new package systems. The balance, approximately $35 to $40 million, will be
expenses associated with remediation and testing of existing systems. Total
incremental expenses, including depreciation and amortization of new package
systems, remediation to bring current systems into compliance and writing off
legacy systems, are not expected to have a material impact on the Company's
financial condition during any year during the conversion process from 1997
through 2000. However, incremental expenses could total approximately $30 to $35
million in 1998, of which the majority will impact the first three fiscal
quarters of 1998, at a rate of $9 to $10 million per quarter.
The Company is attempting to contact vendors and others on whom it relies
to assure that their systems will be converted in a timely fashion. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely will also be converted in a timely fashion, or that any
such failure to convert by another company would not have an adverse effect on
the Company's systems. Furthermore, no assurance can be given that any or all of
the Company's systems are or will be Year 2000 compliant, or that the ultimate
costs required to address the Year 2000 issue or the impact of any failure to
achieve substantial Year 2000 compliance will not have a material adverse effect
on the Company's financial condition.
Impact of Inflation
The Company's results of operations and financial condition are presented based
upon 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 that the effects of inflation, if any, on the results of operations and
financial condition have been minor.
Adoption of New Accounting Standards
During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which requires the Company to disclose basic and diluted earnings
per share for all periods presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." While the
standard has no impact in determining earnings and earnings per share, the
Company will adopt the disclosure standards in 1998.
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, the Company's Form 10-K or made by management of the Company
involve risks and uncertainties, and are subject to change based on various
important factors. The following factors, among others, in some cases have
affected and in the future could affect the Company's financial performance and
actual results and could cause actual results for 1998 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: changes in consumer spending patterns, consumer preferences and
overall economic conditions, the impact of competition and pricing, changes in
weather patterns, political stability, currency and exchange risks and changes
in existing or potential duties, tariffs or quotas, postal rate increases and
charges, paper and printing costs, availability of suitable store locations at
appropriate terms, ability to develop new merchandise and ability to hire and
train associates.
10
Consolidated Statements of Income
- --------------------------------------------------------------------------------
(Thousands except per share amounts)
1997 1996 1995
Net Sales $9,188,804 $8,644,791 $7,881,437
..............................................................................................................................
Costs of Goods Sold, Occupancy and Buying Costs (6,370,827) (6,148,212) (5,793,905)
- ------------------------------------------------------------------------------------------------------------------------------
Gross Income 2,817,977 2,496,579 2,087,532
..............................................................................................................................
General, Administrative and Store Operating Expenses (2,124,663) (1,848,512) (1,475,497)
..............................................................................................................................
Special and Nonrecurring Items, Net (213,215) (12,000) 1,314
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income 480,099 636,067 613,349
..............................................................................................................................
Interest Expense (68,728) (75,363) (77,537)
..............................................................................................................................
Other Income, Net 36,886 41,972 21,606
..............................................................................................................................
Minority Interest (56,473) (45,646) (22,374)
..............................................................................................................................
Gain in Connection with Initial Public Offerings 8,606 118,178 649,467
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 400,390 675,208 1,184,511
..............................................................................................................................
Provision for Income Taxes 183,000 241,000 223,000
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $217,390 $434,208 $961,511
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
..............................................................................................................................
Basic $.80 $1.55 $2.69
..............................................................................................................................
Diluted $.79 $1.54 $2.68
..............................................................................................................................
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
(Thousands)
s COMMON STOCK Treasury Total
Shares Retained Stock, Shareholders'
Outstanding Par Value Paid-In Capital Earnings at Cost Equity
Balance, January 28, 1995 357,604 $189,727 $132,938 $2,716,516 $(278,225) $2,760,956
...................................................................................................................................
Net Income -- -- -- 961,511 -- 961,511
...................................................................................................................................
Cash Dividends -- -- -- (143,091) -- (143,091)
...................................................................................................................................
Purchase of Treasury Stock (3,361) -- -- -- (55,239) (55,239)
...................................................................................................................................
Common Shares Subject to
Contingent Stock Redemption Agreement -- (9,375) (7,639) (334,586) -- (351,600)
...................................................................................................................................
Stock Issued for Acquisition 730 -- 7,769 -- 8,231 16,000
...................................................................................................................................
Exercise of Stock Options and Other 393 -- 4,066 -- 8,438 12,504
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 3, 1996 355,366 $180,352 $137,134 $3,200,350 $(316,795) $3,201,041
...................................................................................................................................
Net Income -- -- -- 434,208 -- 434,208
...................................................................................................................................
Cash Dividends -- -- -- (108,302) -- (108,302)
...................................................................................................................................
Purchase of Treasury Stock (85,000) -- -- -- (1,615,000) (1,615,000)
...................................................................................................................................
Exercise of Stock Options and Other 705 -- 5,726 -- 4,909 10,635
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, February 1, 1997 271,071 $180,352 $142,860 $3,526,256 $(1,926,886) $1,922,582
...................................................................................................................................
Net Income -- -- -- 217,390 -- 217,390
...................................................................................................................................
Cash Dividends -- -- -- (130,472) -- (130,472)
...................................................................................................................................
Exercise of Stock Options and Other 1,729 -- 5,158 -- 30,299 35,457
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 272,800 $180,352 $148,018 $3,613,174 $(1,896,587) $2,044,957
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
- --------------------------------------------------------------------------------
++++++++++++
+financials+
++++++++++++
11
financials
Consolidated Balance Sheets
- ---------------------------------------------------------------------------
(Thousands)
January 31, 1998 February 1, 1997
ASSETS
- ---------------------------------------------------------------------------
Current Assets:
...........................................................................
Cash and Equivalents $746,395 $312,796
...........................................................................
Accounts Receivable 83,370 69,337
...........................................................................
Inventories 1,002,710 1,007,303
...........................................................................
Store Supplies 99,167 90,400
...........................................................................
Other 99,509 65,261
- ---------------------------------------------------------------------------
Total Current Assets 2,031,151 1,545,097
...........................................................................
Property and Equipment, Net 1,519,908 1,828,869
...........................................................................
Restricted Cash 351,600 351,600
...........................................................................
Deferred Income Taxes 56,586 --
...........................................................................
Other Assets 341,516 394,436
- ---------------------------------------------------------------------------
Total Assets $4,300,761 $4,120,002
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------
Current Liabilities:
...........................................................................
Accounts Payable $300,703 $307,841
...........................................................................
Accrued Expenses 676,715 481,744
...........................................................................
Income Taxes 115,994 117,308
- ---------------------------------------------------------------------------
Total Current Liabilities 1,093,412 906,893
...........................................................................
Long-Term Debt 650,000 650,000
...........................................................................
Deferred Income Taxes -- 169,932
...........................................................................
Other Long-Term Liabilities 58,720 51,659
...........................................................................
Minority Interest 102,072 67,336
...........................................................................
Contingent Stock Redemption Agreement 351,600 351,600
...........................................................................
Shareholders' Equity:
...........................................................................
Common Stock 180,352 180,352
...........................................................................
Paid-In Capital 148,018 142,860
...........................................................................
Retained Earnings 3,613,174 3,526,256
- ---------------------------------------------------------------------------
3,941,544 3,849,468
...........................................................................
Less: Treasury Stock, at Cost (1,896,587) (1,926,886)
- ---------------------------------------------------------------------------
Total Shareholders' Equity 2,044,957 1,922,582
- ---------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $4,300,761 $4,120,002
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
- ---------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Thousands)
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
- ----------------------------------------------------------------------------------------------
Net Income $217,390 $434,208 $961,511
IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS
- ----------------------------------------------------------------------------------------------
Depreciation and Amortization 313,292 289,643 285,889
..............................................................................................
Special and Nonrecurring Items, Net 128,215 7,200 (1,314)
..............................................................................................
Minority Interest, Net of Dividends Paid 34,736 21,637 17,250
..............................................................................................
Gain in Connection with
Initial Public Offerings, Net (5,606) (118,178) (649,467)
CHANGE IN ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------
Accounts Receivable (14,033) 8,179 (104,121)
..............................................................................................
Inventories (5,407) (48,350) (70,813)
..............................................................................................
Accounts Payable and
Accrued Expenses 81,833 116,599 50,883
..............................................................................................
Income Taxes (145,832) (5,915) (132,560)
..............................................................................................
Other Assets and Liabilities (14,607) 7,046 (16,526)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 589,981 712,069 340,732
INVESTING ACTIVITIES
- ----------------------------------------------------------------------------------------------
Capital Expenditures (404,602) (409,260) (374,374)
..............................................................................................
Proceeds from Sale of
Property and Related Interests 234,976 -- --
..............................................................................................
Net Proceeds from Partial
Sale of Interest in Investee 108,259 -- --
..............................................................................................
Businesses Acquired -- (41,255) (2,000)
..............................................................................................
Increase in Restricted Cash -- -- (351,600)
..............................................................................................
Proceeds from Credit Card Securitization -- -- 1,212,630
- ----------------------------------------------------------------------------------------------
Net Cash Provided by (Used
for) Investing Activities (61,367) (450,515) 484,656
FINANCING ACTIVITIES
- ----------------------------------------------------------------------------------------------
Net Repayments of Commercial
Paper Borrowings and
Certificates of Deposit -- -- (25,200)
..............................................................................................
Proceeds from Short-Term Borrowings -- 150,000 250,000
..............................................................................................
Repayment of Short-Term Borrowings -- (150,000) (250,000)
..............................................................................................
Net Proceeds from Issuance and
Sale of Subsidiary Stock -- 118,178 788,589
..............................................................................................
Dividends Paid (130,472) (108,302) (143,091)
..............................................................................................
Purchase of Treasury Stock -- (1,615,000) (55,239)
..............................................................................................
Stock Options and Other 35,457 10,635 12,504
- ----------------------------------------------------------------------------------------------
Net Cash Provided by
(Used for) Financing Activities (95,015) (1,594,489) 577,563
- ----------------------------------------------------------------------------------------------
Net Increase (Decrease)
in Cash and Equivalents 433,599 (1,332,935) 1,402,951
..............................................................................................
Cash and Equivalents,
Beginning of Year 312,796 1,645,731 242,780
- ----------------------------------------------------------------------------------------------
Cash and Equivalents,
End of Year $746,395 $312,796 $1,645,731
Noncash investing activities included $2.2 million in 1997 and $16 million in
1995 for stock issued in connection with the acquisition of Galyan's.
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
- --------------------------------------------------------------------------------
12
FINANCIALS
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of The Limited, Inc.
(the "Company") and all significant subsidiaries that are more than 50% owned
and controlled. All significant intercompany balances and transactions have been
eliminated in consolidation.
Investments in other entities (including joint ventures) where the Company
has the ability to significantly influence operating and financial policies are
accounted for on the equity method.
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 years 1997 and 1996
represent the fifty-two-week periods ended January 31, 1998, and February 1,
1997. The results for fiscal year 1995 represent the fifty-three-week period
ended February 3, 1996.
Cash and Equivalents
Cash and equivalents include amounts on deposit with financial institutions and
money-market investments with 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, utilizing the retail method.
Store Supplies
The initial inventory of supplies for new stores including, but not limited to,
hangers, signage, security tags and point-of-sale supplies, are capitalized at
the store opening date. Subsequent shipments are expensed, except for new
merchandise presentation programs, which are capitalized.
Property and Equipment
Depreciation and amortization of property and equipment are computed for
financial reporting purposes on a straight-line basis, using service lives
ranging principally from 10-30 years for buildings and improvements and 3-10
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. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. 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.
Goodwill Amortization
Goodwill represents the excess of the purchase price over the fair value of the
net assets of acquired companies and is amortized on a straight-line basis,
principally over 30 years.
Catalogue Costs and Advertising
Catalogue costs, primarily consisting of catalogue production and mailing costs,
are amortized over the expected future revenue stream, which is principally from
three to six months from the date catalogues are mailed. All other advertising
costs are expensed at the time the promotion first appears in media or in the
store. Catalogue and advertising costs amounted to $275 million, $242 million
and $237 million in 1997, 1996 and 1995.
Interest Rate Swap Agreements
The difference between the amount of interest to be paid and the amount of
interest to be received under interest rate swap agreements due to changing
interest rates is charged or credited to interest expense over the life of the
swap agreement. Gains and losses from the disposition of swap agreements are
deferred and amortized over the term of the related agreements.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires the use of the 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 in which those temporary differences
are expected to reverse. Under SFAS No. 109, 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
Five hundred million shares of $.50 par value common stock are authorized, of
which 272.8 million shares and 271.1 million shares were outstanding, net of
106.7 million shares and 108.4 million shares held in treasury at January 31,
1998, and February 1, 1997. Ten million shares of $1.00 par value preferred
stock are authorized, none of which have been issued.
On March 17, 1996, the Company completed the repurchase of 85 million
shares of its common stock under a self-tender offer at $19.00 per share.
Approximately $1.615 billion was paid in exchange for the outstanding shares
which was funded with funds made available from a series of transactions that
included: 1) the initial public offering of a 16.9% interest in Intimate Brands,
Inc. ("IBI"); 2) the securitization of World Financial Network National Bank
("WFN") credit card receivables; and 3) the sale of a 60% interest in WFN.
Revenue Recognition
Sales are recorded upon purchase by customers. A reserve is provided equal to
the gross profit on projected catalogue merchandise returns, based on prior
experience.
Earnings Per Share
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share," which the Company adopted in the fourth quarter of 1997. Earnings per
basic share are computed based on the weighted average number of outstanding
common shares. Earnings per diluted share include the weighted average effect of
dilutive options and restricted stock.
13
financials
- --------------------------------------------------------------------
(Thousands)
1997 1996 1995
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
- --------------------------------------------------------------------
Common Shares Issued 379,454 379,454 379,454
....................................................................
Treasury Shares (107,556) (98,755) (21,862)
- --------------------------------------------------------------------
Basic Shares 271,898 280,699 357,592
....................................................................
Dilutive Effect of Options
and Restricted Shares 2,585 1,354 779
- --------------------------------------------------------------------
Diluted Shares 274,483 282,053 358,371
- --------------------------------------------------------------------
Options to purchase .7 million, 5.9 million and 7.9 million shares of
common stock were outstanding at year-end 1997, 1996 and 1995, but were not
included in the computation of earnings per diluted share because the options'
exercise price was greater than the average market price of the common shares.
Exercise of the 18.75 million shares subject to the Contingent Stock Redemption
Agreement (see Notes 6 and 10) was determined not to dilute earnings per share.
Subsequent to January 31, 1998, the Company announced an exchange offer for
Abercrombie & Fitch Co. ("A&F") shares that, if consummated, would result in a
substantial decrease in total common shares outstanding (see Note 14).
Gains in Connection With Initial Public Offerings
Gains in connection with initial public offerings are recognized in the
current year's income. During the first quarter of 1997, the Company recognized
a pretax gain of $8.6 million in connection with the initial public offering
("IPO") of Brylane, Inc. ("Brylane"), a 26% owned (post-IPO) catalogue retailer.
In 1996, the Company recognized a $118.2 million gain in connection with the IPO
of a 15.8% interest (8.05 million shares) of A&F. In 1995, the Company
recognized a $649.5 million gain in connection with the IPO of a 16.9% interest
(42.7 million shares) of IBI. IBI consists of the Victoria's Secret Stores,
Victoria's Secret Catalogue, Bath & Body Works and Gryphon businesses. The IPO
gains recorded by the Company in 1996 and 1995 were not subject to income tax.
Minority interest of $102.1 million at January 31, 1998, represents a 16.9%
interest in the net equity of IBI and a 15.8% interest in the net equity of A&F.
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. Since actual results may differ from those estimates, the
Company revises its estimates and assumptions as new information becomes
available.
Reclassifications
Certain amounts on previously reported financial statement captions have been
reclassified to conform with current year presentation.
2. Special and Nonrecurring Items
As a result of an ongoing review of the Company's retail businesses and
investments as well as implementation of initiatives intended to promote and
strengthen the Company's various retail brands (including closing businesses,
identification and disposal of non-core assets and identification of store
locations not consistent with a particular brand), the Company recognized
special and nonrecurring charges of $276 million during the fourth quarter of
1997 comprised of: 1) a $68 million charge for the closing of the 118 store
Cacique lingerie business effective January 31, 1998. The amount includes
noncash charges of $30 million comprised principally of write-offs and
liquidations of store assets and accruals of $38 million related to
cancellations of merchandise on order and other exit costs such as severance,
service contract termination fees and lease termination costs. Other than
contractual obligations of $5 million, the accrued costs are expected to be paid
in fiscal year 1998; 2) an $82 million charge related to streamlining the Henri
Bendel business from six stores to one store by September 1, 1998. The amount
includes $26 million of noncash charges related primarily to write-offs of store
assets, and accruals of $56 million related primarily to contract cancellations
and lease termination costs. Other than contractual obligations of $18 million,
the accrued costs are expected to be paid in 1998. Termination costs related to
Henri Bendel closings will be recognized in first quarter 1998 when the
associates are notified; 3) $86 million of impaired asset charges, related
principally to the women's businesses, covering certain store locations where
the carrying values are permanently impaired; and 4) a $28 million provision for
closing and downsizing approximately 80 oversized stores, primarily within the
Limited, Lerner New York, Lane Bryant and Express women's businesses and a $12
million write-down to net realizable value of a real estate investment
previously acquired in connection with closing and downsizing certain stores.
The $28 million charge includes $13 million of noncash charges related to
write-offs of store assets and accruals of $15 million related to lease
termination costs. Other than contractual obligations of $7 million, the accrued
costs are expected to be paid within 18 months. Additionally, the Company
recognized a $13 million cost of sales charge in the fourth quarter for
inventory liquidation at Henri Bendel. The after-tax cash impact of these
charges is estimated to be approximately $30 million. The Company will recognize
charges for severance and other associate termination costs for Henri Bendel in
the first quarter of 1998 (at the time the associates are notified).
Additionally, the Company recognized a $75.3 million pretax gain during the
third quarter of 1997 in connection with the sale of 2.4 million shares of
Brylane, which is carried on the equity method, for $46 per share generating
cash proceeds of $108 million. This sale represented approximately one-half of
its investment in Brylane. This gain was partially offset by valuation adjust-
ments of $12.5 million on certain assets where the carrying values were
permanently impaired. On February 20, 1998, the Company entered into an
agreement with Pinault Printemps-Radoute to sell its remaining 2.6 million
shares of Brylane for $51 per share, or cash proceeds of $131 million. The
transaction is expected to close in April 1998.
The $86 million impaired asset charge was in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." As a result of
14
the Company's strategic review process, including the implementation of brand
initiatives within individual businesses, updated analyses were prepared to
determine if there was impairment of any long-lived assets. The revised carrying
values of these assets were calculated on the basis of discounted cash flows.
The impaired asset charge had no impact on the Company's 1997 or future cash
flows. As a result of this charge, depreciation and amortization expense related
to these assets will decrease in future periods.
In 1996, the Company recorded a $12 million pretax, special and nonrecurring
charge in connection with the April 1997 sale of Penhaligon's, a U.K.-based
subsidiary of IBI.
In the fourth quarter of 1995, the Company recognized a $73.2 million pretax
gain from the sale of a 60% interest in the Company's wholly-owned credit card
bank, WFN. Along with the sale of the 60% interest in WFN, the Company
recognized a special and nonrecurring charge during the fourth quarter of 1995
of approximately $71.9 million. Of this amount, $25.8 million was provided for
the closing of 26 stores and $19.8 million was provided for the downsizing of 33
stores, primarily at Limited and Lerner New York. The remaining charge of
approximately $26.3 million represented the write-down to market or net
realizable value of certain assets arising from nonoperating activities. The net
pretax gain from these special and nonrecurring items was $1.3 million.
3. Accounts Receivable
As discussed in Note 2, the sale of a 60% interest in WFN was completed in the
fourth quarter of 1995, and WFN's outstanding debt to the Company of
approximately $1.2 billion was repaid. Finance charge revenue on the deferred
payment accounts amounted to $235.6 million in 1995 and the provision for
uncollectible accounts amounted to $91.4 million in 1995. These amounts are
classified as components of the cost to administer the deferred payment program
and are included in the Company's general, administrative and store operating
expenses for that year.
4. Property and Equipment
- --------------------------------------------------------------------------------
(Thousands)
1997 1996
PROPERTY AND EQUIPMENT, AT COST
------------------------------------------------------------------------------
Land, Buildings and Improvements $394,885 $530,259
..............................................................................
Furniture, Fixtures and Equipment 1,951,172 1,929,951
..............................................................................
Leaseholds and Improvements 539,047 641,200
..............................................................................
Construction in Progress 219,508 188,834
------------------------------------------------------------------------------
Total 3,104,612 3,290,244
..............................................................................
Less: Accumulated Depreciation
and Amortization 1,584,704 1,461,375
------------------------------------------------------------------------------
Property and Equipment, Net $1,519,908 $1,828,869
- --------------------------------------------------------------------------------
5. Leased Facilities and Commitments
Annual store rent is comprised of a fixed minimum amount, plus contingent rent
based on a percentage of sales exceeding a stipulated amount. Store lease terms
generally require additional payments covering taxes, common area costs and
certain other expenses.
- --------------------------------------------------------------------------------
(Thousands)
1997 1996 1995
RENT EXPENSE
------------------------------------------------------------------------------
Fixed Minimum $721,283 $689,319 $643,200
..............................................................................
Contingent 26,630 23,117 18,812
------------------------------------------------------------------------------
Total Store Rent 747,913 712,436 662,012
..............................................................................
Equipment and Other 23,492 25,163 26,101
------------------------------------------------------------------------------
Total Rent Expense $771,405 $737,599 $688,113
- --------------------------------------------------------------------------------
At January 31, 1998, the Company was committed to noncancelable leases with
remaining terms generally from one to twenty years. A substantial portion of
these commitments are store leases with initial terms ranging from ten to twenty
years, with options to renew at varying terms.
- --------------------------------------------------------------------------------
(Thousands)
MINIMUM RENT COMMITMENTS UNDER NONCANCELABLE LEASES
------------------------------------------------------------------------------
1998 $731,233
..............................................................................
1999 712,804
..............................................................................
2000 688,317
..............................................................................
2001 645,229
..............................................................................
2002 595,377
..............................................................................
Thereafter $2,062,453
- --------------------------------------------------------------------------------
6. Restricted Cash
At January 31, 1998, Special Funding, Inc., a wholly-owned subsidiary of the
Company, had $351.6 million of restricted cash invested in short-term, highly
liquid securities. This amount is classified as a noncurrent asset, since it has
been reserved for use in the event that the Wexner Children's Trust, established
by Leslie H. Wexner, the Company's principal shareholder, exercises its
opportunity to require the Company to redeem, or the Company exercises its
opportunity to redeem from the Trust, shares of The Limited, Inc. common stock
in accordance with the terms of the Contingent Stock Redemption Agreement (see
Note 10). Interest earnings of $18.6 million and $17.9 million in 1997 and 1996
on the segregated cash accrued to the Company.
7. Accrued Expenses
- --------------------------------------------------------------------------------
(Thousands)
1997 1996
ACCRUED EXPENSES
------------------------------------------------------------------------------
Compensation, Payroll Taxes and Benefits $135,701 $100,526
..............................................................................
Rent 152,850 123,421
..............................................................................
Taxes, Other than Income 42,321 47,297
..............................................................................
Interest 21,129 21,510
..............................................................................
Store Closings 86,803 3,509
..............................................................................
Other 237,911 185,481
------------------------------------------------------------------------------
Total $676,715 $481,744
- --------------------------------------------------------------------------------
15
financials
8. Long-Term Debt
- --------------------------------------------------------------------------------
(Thousands)
1997 1996
UNSECURED LONG-TERM DEBT
------------------------------------------------------------------------------
8 7/8% Notes due August 1999 $100,000 $100,000
..............................................................................
9 1/8% Notes due February 2001 150,000 150,000
..............................................................................
7 4/5% Notes due May 2002 150,000 150,000
..............................................................................
7 1/2% Debentures due March 2023 250,000 250,000
------------------------------------------------------------------------------
Total $650,000 $650,000
- --------------------------------------------------------------------------------
The Company maintains a $1 billion unsecured credit agreement (the "Agreement"),
established on September 29, 1997 (the "Effective Date"). Borrowings outstanding
under the Agreement are due September 28, 2002. However, the revolving term of
the Agreement may be extended an additional two years upon notification by the
Company on the second and fourth anniversaries of the Effective Date, subject to
the approval of the lending banks. The Agreement has several borrowing options,
including interest rates that are based on either the lender's "Base Rate," as
defined, LIBOR, CD-based options or at a rate submitted under a bidding process.
Facilities fees payable under the Agreement are based on the Company's long-term
credit ratings, and currently approximate .1% of the committed amount per annum.
The Agreement contains covenants relating to the Company's working capital, debt
and net worth. No amounts were outstanding under the Agreement at January 31,
1998.
The Agreement supports the Company's commercial paper program, which is used
from time to time to fund working capital and other general corporate
requirements. No commercial paper was outstanding at January 31, 1998.
Up to $250 million of debt securities and warrants to purchase debt
securities may be issued under the Company's shelf registration statement. The
Company periodically enters into interest rate swap agreements with the intent
to manage interest rate exposure. At January 31, 1998, the Company had an
interest rate swap position of $100 million notional principal amount
outstanding. This contract effectively changed the Company's interest rate
exposure on $100 million of variable rate debt to a fixed rate of 8.09% through
July 2000.
Long-term debt maturities within the next five years consist of $100 million
which matures August 15, 1999, $150 million which matures February 1, 2001, and
$150 million which matures May 15, 2002. Interest paid approximated $69.1
million, $65.5 million and $88.4 million in 1997, 1996 and 1995.
9. Income Taxes
- --------------------------------------------------------------------------------
(Thousands)
1997 1996 1995
PROVISION FOR INCOME TAXES
------------------------------------------------------------------------------
Currently Payable:
..............................................................................
Federal $304,300 $210,400 $190,900
..............................................................................
State 33,800 34,000 24,700
..............................................................................
Foreign 3,700 2,400 4,500
..............................................................................
Total 341,800 246,800 220,100
..............................................................................
Deferred:
..............................................................................
Federal (156,600) (13,800) (9,400)
..............................................................................
State (2,200) 8,000 12,300
..............................................................................
Total (158,800) (5,800) 2,900
------------------------------------------------------------------------------
Total Provision $183,000 $241,000 $223,000
- --------------------------------------------------------------------------------
The foreign component of pretax income, arising principally from overseas
sourcing operations, was $62.3 million, $45.9 million and $60.8 million in 1997,
1996 and 1995.
- --------------------------------------------------------------------------------
1997 1996 1995
STATUTORY FEDERAL INCOME TAX RATE RECONCILIATION
------------------------------------------------------------------------------
Federal Income Tax Rate 35.0% 35.0% 35.0%
..............................................................................
State Income Tax, Net of
Federal Income Tax Effect 4.5% 4.5% 4.5%
..............................................................................
Other Items, Net .6% .5% .7%
------------------------------------------------------------------------------
Total 40.1% 40.0% 40.2%
- --------------------------------------------------------------------------------
The reconciliation between the statutory Federal income tax rate and the
effective income tax rate on pretax earnings excludes the nontaxable gains from
sales of subsidiary stock in 1996 and 1995 and minority interest.
- --------------------------------------------------------------------------------
(Thousands)
1997 1996
Assets Liabilities Total Assets Liabilities Total
DEFERRED INCOME TAXES
------------------------------------------------------------------------------
Excess of Tax
Over Book
Depreciation - $(1,400) $(1,400) - $(20,000) $(20,000)
..............................................................................
Undistributed
Earnings
of Foreign
Affiliates - (102,400) (102,400) - (116,600) (116,600)
..............................................................................
Special and
Nonrecurring
Items $99,200 - 99,200 $24,100 - 24,100
..............................................................................
Rent 62,100 - 62,100 - (17,500) (17,500)
..............................................................................
Inventory 43,700 - 43,700 40,000 - 40,000
..............................................................................
Investments
in Affiliates - (24,900) (24,900) - (54,000) (54,000)
..............................................................................
State Income
Taxes 24,900 - 24,900 9,600 - 9,600
..............................................................................
Other 18,500 - 18,500 - (35,300) (35,300)
------------------------------------------------------------------------------
Total
Deferred
Income
Taxes $248,400 $(128,700) $119,700 $73,700 $(243,400) $(169,700)
- --------------------------------------------------------------------------------
16
financials
Income taxes payable included net current deferred tax assets of $63.1
million and $.3 million at January 31, 1998 and February 1, 1997.
Income tax payments approximated $410.8 million, $233.8 million and $306.1
million for 1997, 1996 and 1995.
The Internal Revenue Service has assessed the Company for additional taxes
and interest for the years 1992 to 1994 relating to the treatment of
transactions involving the Company's foreign operations for which the Company
has provided deferred taxes on the undistributed earnings of foreign affiliates.
The Company strongly disagrees with the assessment and is vigorously contesting
the matter. Management believes resolution of this matter will not have a
material adverse effect on the Company's results of operations or financial
condition.
10. Contingent Stock Redemption Agreement
In connection with the reconfiguration of its business, the Company purchased
from shareholders, via a self-tender offer, 85 million shares of The Limited,
Inc. common stock for approximately $1.615 billion on March 17, 1996. Leslie H.
Wexner, Chairman and CEO of the Company, as well as the Company's founder and
principal shareholder, did not participate in the self-tender. However, the
Company entered into an agreement, as amended in 1996, which provides the Wexner
Children's Trust the opportunity, commencing on February 1, 1998, and for a
period of eight years thereafter (the exercise period), to require the Company
to redeem up to 18.75 million shares for a price per share equal to $18.75 (a
price equal to the price per share paid in the self-tender less $.25 per share).
Under certain circumstances, lenders to the Trust, if any, may exercise this
opportunity, beginning February 1, 1997. The Company received the opportunity to
redeem an equivalent number of shares from the Trust at $25.07 per share for a
period beginning on July 31, 2006, and for six months thereafter. As a result of
these events, the Company has transferred $351.6 million to temporary equity
identified as Contingent Stock Redemption Agreement in the Consolidated Balance
Sheets. In addition, approximately $351.6 million has been designated as
restricted cash to consummate either of the above rights (see Note 6). The terms
of this agreement were approved by the Company's Board of Directors.
11. Stock Options and Restricted Stock
Under the Company's stock plans, associates may be granted up to a total of 17.3
million restricted shares and options to purchase the Company's common stock at
the market price on the date of grant. In 1997, the Company granted
approximately 5.6 million options with a graduated vesting schedule over six
years. The remaining options generally vest 25% per year over the first four
years of the grant. Virtually all options have a maximum term of ten years.
Under separate stock plans, up to 17.5 million IBI shares and 3.5 million A&F
shares are available to grant restricted shares and options to IBI and A&F
associates. As of January 31, 1998, options to purchase 4.3 million IBI shares
and 1.9 million A&F shares were outstanding, of which 418,000 IBI options and
35,000 A&F options were exercisable. Under these plans, options generally vest
over periods from four to six years.
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," effective with the 1996 financial statements, but
elected to continue to measure compensation expense in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense for stock options has been recognized. If compensation
expense had been determined based on the estimated fair value of options granted
since 1995, consistent with the methodology in SFAS No. 123, the pro forma
effects on net income and earnings per diluted share, including the impact of
options issued by IBI and A&F, would have been a reduction of approximately
$11.4 million or $.04 per share in 1997 and $4.0 million or $.01 per share in
1996. The weighted-average per share fair value of options granted ($5.79, $4.72
and $5.48 during 1997, 1996 and 1995) was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for 1997,
1996 and 1995: dividend yields of 2.8%; volatility of 27%, 31% and 31%; risk-
free interest rates of 6%, 5.25% and 7%; assumed forfeiture rates of 15%, 20%
and 20%; and expected lives of 6.5 years, 5 years and 5 years. The pro forma
effect on net income for 1997 and 1996 is not representative of the pro forma
effect on net income in future years because it does not take into consideration
pro forma compensation expense related to grants made prior to 1995.
Approximately 2,120,000, 468,000 and 569,000 restricted Limited shares were
granted in 1997, 1996 and 1995, with market values at date of grant of $43.9
million, $8.3 million and $10.0 million. Included in the 1997 grants were 1.7
million restricted shares, of which 685,000 had performance requirements, with a
graduated vesting schedule over six years. The remaining restricted shares
generally vest either on a graduated scale over four years or 100% at the end of
a fixed vesting period, principally five years. Additionally, IBI granted
1,442,000, 169,000 and 357,000 restricted shares in 1997, 1996 and 1995 and A&F
granted 540,000 and 50,000 restricted shares in 1997 and 1996. Vesting terms for
the IBI and A&F restricted shares are similar to those of The Limited. The
market value of restricted shares, subject to adjustment at measurement date for
the performance awards, is being amortized as compensation expense over the
vesting period, generally four to six years. Compensation expense related to
restricted stock awards, including expense related to awards granted at IBI and
A&F, amounted to $29.0 million in 1997 and $9.1 million in both 1996 and 1995.
- --------------------------------------------------------------------------------
STOCK OPTIONS OUTSTANDING
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercisable
Prices at 1/31/98 Life Price at 1/31/98 Price
$15-$16 1,350,000 6.1 $16 618,000 $16
..............................................................................
$17-$18 2,827,000 7.3 $17 1,227,000 $17
..............................................................................
$19-$21 5,658,000 7.9 $20 1,651,000 $21
..............................................................................
$22-$27 2,646,000 7.9 $23 773,000 $24
..............................................................................
$9-$31 1,589,000 7.5 $20 638,000 $20
------------------------------------------------------------------------------
$9-$31 14,070,000 7.5 $20 4,907,000 $20
- --------------------------------------------------------------------------------
17
financials
- -----------------------------------------------------------------------
Weighted Average
Number of Option Price
Shares Per Share
STOCK OPTION ACTIVITY
- -----------------------------------------------------------------------
1995
.......................................................................
Outstanding at Beginning of Year 8,414,000 $19.56
.......................................................................
Granted 2,196,000 17.81
.......................................................................
Exercised (280,000) 12.43
.......................................................................
Canceled (1,188,000) 19.90
- -----------------------------------------------------------------------
Outstanding at End of Year 9,142,000 $19.32
- -----------------------------------------------------------------------
Options Exercisable at Year-End 4,800,000 $19.62
- -----------------------------------------------------------------------
1996
.......................................................................
Outstanding at Beginning of Year 9,142,000 $19.32
.......................................................................
Granted 1,899,000 17.30
.......................................................................
Exercised (531,000) 14.89
.......................................................................
Canceled (1,311,000) 19.45
- -----------------------------------------------------------------------
Outstanding at End of Year 9,199,000 $19.14
- -----------------------------------------------------------------------
Options Exercisable at Year-End 5,249,000 $20.24
- -----------------------------------------------------------------------
1997
.......................................................................
Outstanding at Beginning of Year 9,199,000 $19.14
.......................................................................
Granted 7,331,000 20.02
.......................................................................
Exercised (1,377,000) 17.70
.......................................................................
Canceled (1,083,000) 19.64
- -----------------------------------------------------------------------
Outstanding at End of Year 14,070,000 $19.70
- -----------------------------------------------------------------------
Options Exercisable at Year-End 4,907,000 $19.89
- -----------------------------------------------------------------------
12. 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 $36.4
million in 1997, $36.2 million in 1996 and $33.3 million in 1995.
13. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Current Assets, Current Liabilities and Restricted Cash
The carrying value of cash equivalents, restricted cash, accounts payable and
accrued expenses approximates fair value because of their short maturity.
Long-Term Debt
The fair value of the Company's 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.
Interest Rate Swap Agreement
The fair value of the interest rate swap is the estimated amount that the
Company would receive or pay to terminate the swap agreement at the reporting
date, taking into account current interest rates and the current
creditworthiness of the swap counterparty.
- ----------------------------------------------------------------------
(Thousands)
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
ESTIMATED FAIR VALUES OF
FINANCIAL INSTRUMENTS
- ----------------------------------------------------------------------
Long-Term Debt $(650,000) $(667,391) $(650,000) $(638,798)
......................................................................
Interest Rate Swaps $(328) $(5,345) $(351) $(5,267)
- ----------------------------------------------------------------------
14. Subsequent Event--Registration Statement for A&F Exchange Offer
On February 17, 1998, a registration statement was filed with the Securities and
Exchange Commission in connection with a plan to establish A&F as a fully
independent company via a tax-free exchange offer pursuant to which The Limited
shareholders will be given an opportunity to tender some or all of their shares
of The Limited in return for shares of A&F. The transaction is subject to
certain customary conditions.
15. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
(Thousands except per share amounts):
First Second Third Fourth
1997 QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Net Sales $1,829,780 $2,020,084 $2,070,559 $3,268,381
................................................................................
Gross Income 501,471 538,907 620,982 1,156,617
................................................................................
Net Income 24,873 27,574 79,682 85,261
................................................................................
Net Income Per Basic Share .09 .10 .29 .31
................................................................................
Net Income Per Diluted Share A.09 .10 A.29 A.31
1996 QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Net Sales $1,787,943 $1,895,601 $1,994,986 $2,966,261
................................................................................
Gross Income 469,541 491,909 555,374 979,755
................................................................................
Net Income 28,152 33,150 159,513 213,393
................................................................................
Net Income Per Basic Share .09 .12 .59 .79
................................................................................
Net Income Per Diluted Share .09 .12 A.59 A.78
A Gains in connection with initial public offerings included an $8.6 million
($.02 per diluted share) pretax gain in the first quarter of 1997 in
connection with the Company's ownership portion of Brylane a 26% owned
(post-IPO) catalogue retailer and a $118.2 million ($.44 per diluted share)
gain in the third quarter of 1996 in connection with the IPO of a 15.8%
interest of A&F (see Note 1). Special charges included $276 million ($.57
per diluted share) in special and nonrecurring items and an additional $13
million ($.03 per diluted share) in inventory liquidation charges during
the fourth quarter of 1997, a net $62.8 million ($.14 per diluted share)
pretax gain during the third quarter of 1997 relating to the sale of
approximately one-half of the Company's investment in Brylane, and $12
million ($.02 per diluted share) in special and nonrecurring charges during
the fourth quarter of 1996 in connection with the sale of the Penhaligon's
business (see Note 2).
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18
financials
Market Price and Dividend Information
- --------------------------------------------------------------------------------
Market Price Cash Dividend
High Low Per Share
FISCAL YEAR END 1997
- ----------------------------------------------------------------------------
4th Quarter $27 1/4 $23 9/16 $.12
............................................................................
3rd Quarter 25 1/2 21 3/8 .12
............................................................................
2nd Quarter 22 5/16 18 5/8 .12
............................................................................
1st Quarter $20 1/8 $17 $.12
FISCAL YEAR END 1996
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4th Quarter $20 1/8 $16 5/8 $.10
............................................................................
3rd Quarter 20 1/4 17 3/4 .10
............................................................................
2nd Quarter 22 18 1/4 .10
............................................................................
1st Quarter $20 3/4 $16 5/8 $.10
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The Company's common stock is traded on the New York Stock Exchange ("LTD") and
the London Stock Exchange. On January 31, 1998, there were 81,534 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 241,000.
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