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  • 1. limited inc 1997 THREE LIMITED PARKWAY • PO BOX 16000 • COLUMBUS • OHIO 43216 • 614. 415 7000 annual report
  • 2. The complete Financial Summary, Management’s Discussion and Analysis, Financial Statements and Notes to the Financial Statements can be found in the accompanying piece entitled “financial info” inserted into the center of this two-part annual report.
  • 3. financial highlights t KEY Women’s Brands he Limited, Inc. is a $9.2 billion specialty Annual Growth Emerging Brands retailer which sells women’s, men’s and Intimate Brands Abercrombie & Fitch children’s apparel; lingerie; personal care products and sporting goods through its SALES ($ in millions) 1997 1996 1995 5,640 stores and two catalogues. The past few years have seen significant, positive 3,901 change in the business. This report seeks 4,282 4,294 to outline and clarify that change. 1,148 1,031 Operating Results 835 3,618 (Thousands except per share amounts) 2,997 2,517 1997 1996 1995 235 335 522 $9,188,804 $8,644,791 $7,881,437 Net Sales Total: $9,189 Total: $8,645 Total: $7,881 $480,099 $636,067 $613,349 Operating Income SELLING SQUARE FEET (in thousands) Adjusted Operating Income 1997 1996 1995 (excluding special charges) $706,314 $648,067 $612,035 $217,390 $434,208 $961,511 Net Income Adjusted Net Income (excluding gain in connection with IPOs and special charges) $341,199 $321,830 $311,230 18,780 18,075 19,235 $.79 $1.54 $2.68 Net Income per Diluted Share Adjusted Net Income per Diluted Share (excluding gain in connection with IPOs and special charges) $1.24 $1.14 $.87 3,763 3,572 3,146 $.48 $.40 $.40 Dividends per Share 5,047 5,328 4,230 1,006 792 1,234 Year-end Position Total: 28,400 Total: 28,405 Total: 27,403 (Thousands except financial ratios) NUMBER OF STORES 1997 1996 1995 1997 1996 1995 $4,300,761 $4,120,002 $5,266,563 Total Assets $937,739 $638,204 $2,018,960 Working Capital 1.9 1.7 3.5 Current Ratio 2,907 3,038 3,093 $650,000 $650,000 $650,000 Long-term Debt 32% 34% 20% Debt-to-equity Ratio $2,044,957 $1,922,582 $3,201,041 Shareholders’ Equity 867 859 812 11% 17% 32% Return on Average Shareholders’ Equity q 17% q 16% q 10% Adjusted Return on Average Shareholders’ Equity 1,710 A A A 1,609 1,293 q Excludes the effect on net income of the gain in connection with initial public offerings of $8,606 in 1997, 127 A 156 100 $118,178 in 1996, and $649,467 in 1995. Also excludes special charges of ($226,215) in 1997, ($12,000) in 1996 Total: 5,640 Total: 5,633 Total: 5,298 and $1,314 in 1995 (see Note 2 to the Consolidated Financial Statements). FACT: The Limited, Inc.’s 28,400,000 square feet of selling space equals 652 acres, which is roughly the size of 493 football fields. 1
  • 4. chairman’s letter Dear Partner b had to be channeled into dis- ing Crosby’s been on my ciplined growth strategies. mind lately. Can’t get his Strategies that would yield voice out of my head. I the greatest return. Designed to unlock and just keep hearing him In my view, it’s just the beginning. Because, create even greater value for shareholders. singing: “You’ve got to what all these initiatives really do is allow us Let me share just some of the initiatives accentuate the positive. to put energy into the places where we get undertaken in the past few years: Eliminate the negative. the greatest payback. This is not about doing Latch on to the affirma- more things. It’s about doing fewer things. 1998 tive. Don’t mess with Mr. In-between.” Very well. Focusing on top stores, top busi- •Announced intent to establish Abercrombie & How true. How true. For me, and the nesses, top people. Not the bottom. Recog- Fitch as a fully independent public company business, they’ve become words to live by. nizing, and focusing on, what we’re best at. through an exchange offer If I could take one major lesson from the And doing it. 1997 past year, and continue to emphasize and We are not about averages. Or average per- • Sale of Newport Office Building apply it as we go forward, it would be to un- formance. In fact, I hate it when a business • Sale of The Tuttle Mall in Columbus derstand and appreciate the power of doing reports “average store performance.” It’s non- • Sale of Brylane stock a few things and doing them very well. sense. That’s not what performance is about. • Closure of 186 underperforming stores What’s really working? What’s driving Performance is about consistently focus- • Closure of Cacique performance? What matters? What doesn’t? ing on the top third, eliminating the bottom • Closure of all but one Henri Bendel store What do you do about it? third, and constantly raising the bar. 1996 If you had asked me, even three or four Let me give you an example. We spent a • 85 million share stock repurchase years ago, I would have said that we were significant amount of time in the past year • Sale of Penhaligon’s focused. And I would have believed it. repositioning Structure. We developed a • Initial public offering of Abercrombie & Fitch In retrospect, we weren’t. strategy to yield substantially better results • Closure of 135 underperforming stores In the past few years, our business has in pants, a critical category. And we tested it. 1995 gone through enormous streamlining, sig- When the results of the test were analyzed, •Initial public offering of Intimate Brands nificant growth, and substantial changes in I was, frankly, disappointed. Sales gains, on •Securitization of $1.2 billion in credit card leadership. We’ve eliminated entire business- average, were negligible. Then we probed a receivables es, sold significant but distracting assets, little deeper. “How’d the top third of the •Sale of 60% interest in Alliance Data Systems and strengthened our core brands. Indeed, stores perform?” The answer: “Up 65%.” •Closure of 79 underperforming stores we’ve reviewed our entire portfolio, and the Up 65%?! That’s not a win. It’s a gusher. Accentuate the positive. Eliminate the amount of energy that should be applied to “Why are we talking about averages? Get negative. each piece of that portfolio. We are not per- Substantial change. Streamlined opera- the best store managers together. Find out sonally immune to the laws of supply and tions. A multitude of distractions eliminated. what they did. Share best practices. Now.” demand. Our resources, while substantial, Unlocking shareholder value. Accentuate the positive. FACT: www.limited.com received 220,000+ visitors since its launch, 8/1/97, and 2,000+ copies of last year’s annual report have been downloaded. 2
  • 5. I’m not really interested in what Finance Retail doesn’t wait. It moves. And so must Women’s Brands thinks of commercials, or display, or fashion. we. And as we move, I am determined that 1997 I want them to focus on their expertise, how we employ no tactics, none, zero, zilch, that % OF TOTAL SALES (in millions) they contribute to the brand. By the way, erode one scintilla of our brand equity. Those 1997 1996 1995 for you financial types reading this letter, I days are over. And they aren’t coming back. $3,901 $4,282 $4,294 42% will also note, no doubt to your great relief, Our focus on branding has forced us to re- 42% 49% 54% that I also have little interest in what the align our entire organization. We are, remem- advertising staff has to say about finance. ber, a collection of specialty store brands, SALES PER AVERAGE SELLING SQUARE FOOT Or distribution. I want each person concen- and, by definition as specialists, we must 1997 1996 1995 trating on what he or she can do, creatively, be best at, must dominate, single categories $251 $298 $323 Express that most reflect brand personalities. to add value. Focus the resources. Relent- $162 $169 $155 Lerner New York lessly. Even maniacally. Do the things you t $235 $228 $231 Lane Bryant o do that, you have to align, and know how to do. Do them well. And do them $200 $209 $198 The Limited even distort, the organization until they’re done. $736 $904 $1,002 Henri Bendel to win. Again, that’s not about Leaders must lead this process. And chal- $212 $225 $223 Total averages. It’s about intention- lenge their organizations to change. Peo- ally focusing design, market- ple, I’ve learned, do not, by nature, like to % OF TOTAL OPERATING INCOME (in millions) ing, display, finance, stores, distort. They like balance. And they worry 1997 1996 1995 q ($268) q $54 CEO time, everything, to win about being “out of balance.” And, I be- $64 A B the category. You can’t just be lieve, they bring that to the office. (56%) 10% 9% competitive. You have to be best at every- Baloney! q 1997 includes special and nonrecurring charges of A approximately $187 million relating to the closure of thing that makes the category important to Great businesses are all about distortion. five out of six Henri Bendel stores and charges the customer. How many styles? Fits? Col- Jack Welch doesn’t talk about averages. He associated with asset valuation impairment and the ors? Where’s the freshness? talks about excellence. Ray Kroc dominated closure and downsizing of certain stores, plus $13 million in inventory liquidation charges associated Look at Limited Too, a business posi- hamburgers. And announced every one he with the Henri Bendel closings. tioned to young girls. There, new fashions sold. You can’t win by pushing everything q 1995 includes a special and nonrecurring charge of $48 B million, primarily for store closings and downsizings. must land every week. That’s what their at once. We’ll win at what we’re best at. If Understand and appreciate the po customers expect. It’s what they demand. someone beats us there, they’ve really done Intimate Brands Limited Too has to be organized to deliver, something. 1997 or they can’t win. I’m also taking my own medicine. In addi- % OF TOTAL SALES (in millions) Getting ahead. Being first to market. tion to all of the initiatives outlined earlier, 1997 1996 1995 Lapping competition. All are important. I’ve taken steps to free myself up for what 39% $3,618 $2,997 $2,517 Victoria’s Secret was first to market with I believe I’m best at: spotting market voids, 39% 35% 32% “Angels,” a collection of sheer bras and pan- and inventing and refining brands with ties. That proved to be an enormous advan- large, mass consumer appeal and economic SALES PER AVERAGE SELLING SQUARE FOOT tage resulting in high sales and margins. viability to fill them. Last summer, I named 1997 1996 1995 Now, “English Lace” is ahead of the pack, and Ken Gilman Chief Administrative Officer, $495 $458 $459 Victoria's Secret Stores the results, not coincidentally, are terrific. to complement his duties as Vice Chair- $676 $684 $710 Bath & Body Works Being first isn’t an accident. It’s deli- man and better describe his role. He took on $260 $240 $225 Cacique berate. And well planned. You get focused, the added responsibilities of overseeing Real $532 $494 $482 Total and you make opportunities. You align the Estate, Legal, Distribution, and MIS func- organization around them. No sideshows. tions, and is leading the important initia- % OF TOTAL OPERATING INCOME (in millions) Relentlessly pursuing a few things. Doing tive to ensure our information technology 1997 1996 1995 q $505 q $458 them very well. systems are ready for any Year 2000 issues. $386 A B I expect each part of the business to apply In order for him to take on these addi- 105% 72% 63% q 1997 includes a $68 million charge related to the closing the same philosophy. Take the finance depart- tional responsibilities, Ken essentially had A of the Cacique business effective January 31, 1998. ment: inventory is the life of the business, to replace himself. He had to find a world- q 1996 includes a $12 million special and nonrecurring B and finance must focus its efforts around class CFO, one who understood large, mul- charge in connection with the sale of Penhaligon’s in early 1997. this critical piece of the whole. tidivisional businesses, and could step in FACT: If each of the 426 million Victoria’s Secret Catalogues printed in 1997 were lined up end-to-end, they would circle the earth 2.7 times. 4
  • 6. in a number of the businesses’ greatest suc- quickly. In Ann Hailey, I believe he, and Emerging Brands cesses. I have, frankly, skewed his time over the business, made a perfect choice. She’s 1997 the past three years toward Victoria’s Secret, a world-class executive with important ex- % OF TOTAL SALES (in millions) 13% and the results, I think, have been obvious. perience in large, multidivisional, branded 1997 1996 1995 From the Fashion Show, to the “Angels” companies. Experience that is essential to $1,148 $1,031 $835 launch, to the “Million Dollar Miracle Bra,” our growth strategy. 13% 12% 11% Ed knows how to create “on-brand” market- I’ve always believed my strength is creat- ing strong brands. And now, I’ve set up ing that gets noticed and creates sales. I’ve SALES PER AVERAGE SELLING SQUARE FOOT the infrastructure to support that strength. charged Ed with building his organization 1997 1996 1995 Years ago, understanding that store design so that same creativity can be applied across $310 $321 $308 Structure was one of the longest lead-time brand the brands. $331 $277 $273 Limited Too issues, and one the businesses had to live With these additions, I now have trusted, Galyan’s Trading Co. with for years, I created a separate internal highly capable creative executives working (since 7/2/95) $283 $293 $184 division, run by Charlie Hinson, to control with me on the most critical pieces of the $311 $306 $288 Total store design and construction. Charlie and brand process: store design, fashion and % OF TOTAL OPERATING INCOME (in millions) his group have done spectacular work, the marketing. It’s leveraging my time, and, I 1997 1996 1995 envy of the industry, and he did afford believe, creating value for the business. q $159 $68 q $149 A B me great leverage in this important area of Clearly, there is much to do. The women’s 33% 11% 24% brand positioning. But in retrospect, we businesses need improvement, and we will didn’t go far enough. “Brand” encompasses focus significant energies there. Michael q 1997 includes $42 million of special and A more than store design. It’s also fashion Weiss has made quick and substantial pro- nonrecurring income relating to the gain from the sale of approximately one-half of the Company’s design. And it’s marketing. gress at Express, and I’m optimistic they interest in Brylane, offset by a valuation adjustment That’s why we recently created two new will recapture all of their lost momentum. on an investment where the carrying value is businesses, and named two new presidents The Limited is in the midst of a major permanently impaired. q 1995 includes 100% of WFNNB’s operating income B to work with me on these additional critical repositioning, with substantial work in front before interest expense and the gain from the components. We spent years recruiting Marie of them. Still the stores look the best they sale of a 60% interest in WFNNB, partially offset by special and nonrecurring charges. Holman-Rao because we believed she was have in years. If you haven’t been to one wer of doing a few things very well. the best leader for retail/brand design in lately, I’d strongly encourage you to do so. Abercrombie & Fitch America, with a proven track record, an ex- The IBI brands, Victoria’s Secret and 1997 cellent eye, and a great sense of what sells. Bath & Body Works, continue to perform % OF TOTAL SALES (in millions) 6% This year, she became President of Limited very well, and we will remain focused on 1997 1996 1995 Design Services, and, all I can say is, I wish their success. For our other businesses to $522 $335 $235 we could have been more persuasive earlier. succeed at the expense of these great brands 6% 4% 3% Marie’s impact, steady hand and maturity would not be a victory for anyone. are a great addition to our team, and she’s I’ve tried to give you a sense, in these few SALES PER AVERAGE SELLING SQUARE FOOT a great partner to me. pages, of how committed I am, and the bus- 1997 1996 1995 Now we have someone I can rely on to iness is, to identifying the few things that $462 $373 $354 Abercrombie & Fitch organize visual presentation and fashion di- create real value, and how we plan to con- rection. Someone I am in sync with, and centrate our efforts around them. These are presidents can respond to. Marie is com- not things we’re talking about. This is what pletely in tune with the direction of the we’re doing in every area of the businesses. businesses, and her instincts are uncanny. Unproductive stores are being closed. Brands We can talk in shorthand, and I already feel with big potential are being supported. In as if we’ve worked together for years. every way possible. It’s what we’ve done. It’s Speaking of working with someone for what we’ll continue to do. % OF TOTAL OPERATING INCOME (in millions) years, that is certainly the case with Ed Accentuate the positive. Eliminate the 1997 1996 1995 Razek, the new President of Limited Brand negative. Don’t mess with Mr. In-between. $84 $46 $24 and Creative Services. Ed has been my busi- 18% 7% 4% ness partner for years, and has been involved LESLIE H. WEXNER, CHAIRMAN
  • 7. brands We are not building brand leadership. We are building leadership brands. l ast year, we kept talking about mer could care less about theory or process. close to their customer, well defined, and building brand leadership and, The customer responds to leadership clearly differentiated. It is our intention that frankly, I was never comfortable brands. The best in the market. Disney. each of our brands be as well defined, and with it. It sounded like academi- Coke. Victoria’s Secret. Leadership brands. differentiated, to their customer. Our newly cians spouting theory and devel- Big brands. Top of mind awareness. formed Design, and Brand and Creative Ser- oping process. Our goal is clear: we want to have fewer vices businesses were created to help clarify That’s not what we’re in busi- brands, but better brands. Lifestyle-focused and differentiate market positions, by brand, ness for. brands that can be category leaders. and keep them fresh. And brands that do major volume. I’ve We intend to support great brands in We’re in business to create cus- said it before: We’re only interested in brands every way possible. I’ve never believed, not tomer demand. Nothing happens until the with the potential to do $1 billion or more for a minute, that you can make a bad brand customer says “I’ll take it,” and the custo- Our focus on branding has forced us to realign our entire organization. annually. By that criterion, our brands must good through advertising. All you really be first, or, at the very worst, a damn fast sec- do is kill it. But a great brand, like Victoria’s ond, in their category, or they shouldn’t exist. Secret, should be, and is, supported with Fewer brands. Better brands. powerful, brand-right advertising. Victoria’s Why did we close Cacique? Because it was Secret, alone, will spend over $50 million on a bad idea? No. It wasn’t a bad idea. In fact, advertising this year. It wouldn’t surprise it was a good idea. But Victoria’s Secret is a me if that figure reached $100 million in the better one. Already positioned as the cate- very near future. gory leader. With infinitely greater opportun- To be frank, four years ago Victoria’s Secret ities. We elected to concentrate our resources, would not have been deserving of any media our energies, on the brand that has the great- support. They were really just another pro- est potential for return and brand exten- motionally priced retailer. Not anymore. In sions. That’s good for the brand, good for the four years, they’ve undergone a remarkable business, and good for our shareholders. transformation. Today, they are recognized Limited Too has quickly emerged as the worldwide. leader in its category. They are incredibly As a great brand. FACT: A recent “Most Recognized Brands” survey showed that Victoria’s Secret had moved from 26th to 9th in just two years. 8
  • 8. Victoria’s Secret Stores NYSE: IBI The world’s most successful brand of elegant intimate apparel, foundations and related products for women. Galyan’s Trading Company The coolest interactive retail destination for sports enthusiasts and wannabes of all ages. Lerner New York Lerner New York brings its customers great style and value with the New York & Company sportswear brand.
  • 9. Structure Geared to urban, active, creative young men in their mid-20s, Structure offers authentic, American-influenced classic sportswear with an edge. Victoria’s Secret Catalogue NYSE: IBI The world’s most famous catalogue is also an industry leader in profitability. Christmas dreams & fantasies
  • 10. The Limited Modern American sportswear for women. Express A lifestyle brand offering hot new international fashion to young women. Limited Too Limited Too, the only specialty store specifically developed for fashion-aware girls, sells apparel and lifestyle and personal care products. 11
  • 11. Lane Bryant The key fashion destination for the large- size customer (size 14–28); offering the best in jeans, sweaters, sportswear, suit separates and dresses as well as intimate apparel, hosiery and accessories. Henri Bendel Catering to today’s higher-income, modern, thirty-something woman, Bendel’s offers fashion apparel, cosmetics, accessories and gifts. 12
  • 12. Abercrombie & Fitch NYSE: ANF Quality, casual, classic American sportswear brand, targeted to the young, hip customer. Bath & Body Works NYSE: IBI Healthy, natural, good- for-you personal care products and gifts from America’s heartland, presented in a service-oriented country environment. 13
  • 13. talent Leaders must challenge their organizations to change. i ’ll let you in on a little Recent Changes & Additions secret—in any mall, the cool kids always work in the hot stores. management. Integrating ROB BERNARD big-time, heavyweight President, The Limited The same is true in our supply chain processes experience at multidivisional from factories to stores international businesses Rob’s career encompasses retail businesses. Want to is critical to our success. that, more important, think more than 20 years in know where the former of themselves as brands. American retailing, including President of J. Crew Group, Ann is an insightful, well- senior executive positions ED RAZEK the President of Banana rounded business executive at Liz Claiborne and Macy’s. President, Limited Brand and who is able to bring her vast Prior to joining The Limited, Republic, the President of Creative Services experience and objective Inc. he was President J. Crew catalogue, the Ed has worked, in one way approach to the disciplines of and Chief Operating Officer or another, with the children’s GMM at Sears, retailing. She’s a major at the J. Crew Group. businesses for over twenty partner in helping to build our Rob’s depth and breadth the GMM of Talbot’s, years. In partnership with businesses into brands while of experience will be and the Vice President of Stores at Pottery Les, he developed both unlocking shareholder value. essential as we continue Forenza and Outback Red for Barn work now? to reestablish The Limited The Limited, worked on the The Limited, Inc. as a dominant brand. MARIE HOLMAN-RAO initial positioning of Express, They all joined the business in the past President, Limited Design and has, for the past three Services year. As did the head designer at Eddie KEN GILMAN years, been involved in Vice Chairman and Chief every aspect of the Victoria’s The former President Bauer, a lead designer at Anne Klein, the Administrative Officer Secret brand. He will of Banana Republic, Marie head menswear designer at Calvin Klein, continue to extend that reports directly to Les, In addition to his duties as and many, many others. brand while spending and has responsibility not Vice Chairman, Ken assumed We’re talking about savvy, street smart, substantially more time with only for the overall design all responsibility for Real the women’s businesses in position of each business, Estate, MIS, Legal, seasoned professionals. People who could get the coming year. but also for the quality of Distribution, and Information a job anywhere. People whose former com- each individual business’s Technology in the past panies would have been very happy if they’d design organization. Marie is year. He leads the effort in PETER WHITFORD initially spending the bulk how to maximize the just stayed put. President, Structure of her time working with Rob profitability of our Real Estate Peter assumed the role of Bernard and The Limited, assets, and is charged President after serving as So, why here? Why now? clarifying their merchandise with the critical IT Year 2000 Structure’s General Because they see the future. This business, mix and customer profile. transformation. Ken played Merchandise Manager. Prior a senior role in all of the one of the great retail success stories of the to joining, Peter was recent IPOs, real estate sell- twentieth century, is positioned even better NICK LAHOWCHIC President of the retailer, offs, and store and business President, Limited Distribution “Country Road Australia.” for the twenty-first. closings. His expertise is Services He’s a good leader who A big acknowledgment for this enormous respected in both the retail understands brands. He has Nick joined us this year and financial communities. influx of new talent goes to Arnie Kanarick already begun to integrate from Becton Dickinson his design and merchandising where he was President of and his team in Human Resources, who set ANN HAILEY functions into the brand- Supply Chain Services. out to erase some enormous misconceptions Chief Financial Officer building process, while Before that, he led logistic about our business, and did just that. When radically transforming the management at Colgate- With stints at Pepsi, the real picture emerged, when seasoned business’s pants category Palmolive and Nabisco Brands. Nabisco, and Pillsbury, Ann to become immediately Nick is a proven leader, who brings important skills to professionals saw the opportunity, they came. more competitive. understands supply chain our executive mix: first-hand, In droves. FACT: The Limited, Inc. is the 18th largest employer in the U.S. (excluding the government and nonprofits) and the 7th largest retail employer. 14
  • 14. There isn’t I left a good job for a great a brand one. Reinventing, refocusing The in the Limited is the best opportunity portfolio in retail. We’re putting together a that can’t team that will do just that. Rob Bernard be as President, The Limited Our brands can’t powerful be successful unless as Victoria’s all functional Secret. areas are aligned behind That’s the Les’ vision. goal. That’s my focus. Ken Gilman Ed Razek Vice Chairman and Chief Administrative Officer President, Limited Brand and Creative Services My goal is to set up design environments where creativity can flourish—incubators for brand innovation! Out of this comes an enormous opportunity for excitement, newness and fashion direction. Marie Holman-Rao President, Limited Design Services Don’t talk about I believe in brands—they are averages. Focus on the strategic platform for the top third. building shareholder value. Ann Hailey Les Wexner Chief Financial Officer Chairman 15
  • 15. process Being first isn’t accidental; it’s deliberate and well planned. t from initial concept to quality control, right hroughout the business, our making up lost ground. And the sweater through to delivery. It means changing from processes have been reexamined inventory just looks better and better. merchant generalists to a team of special- and refined. It is all part of an ists: designers, sourcing and manufacturing ongoing effort to boost our Structure becomes the “pants authority” people, planning and allocation specialists, women’s businesses while con- You’ve got to be best at something. And for and merchants, all experts on the brand’s tinuing to grow our emerging young men, if you’re not a pants authority, customer. concepts, and strengthen our you’re nowhere. The Lerner New York team, led by Structure, while world-class brands. Here are a Richard Crystal, President; Jackie Corso, working on their few examples: Executive Vice President of Merchandis- brand positioning, ing; and Charlotte Neuville, Vice President Limited Too/Gryphon and the development changed their entire of Design, used the of “Girl Care” philosophy on pants MPR process to develop It started as a simple test of nail polish in in the past year. From the fit, to the styles, to 100 percent of Lerner June ’96 that was an immediate success, sell- the washes, to the pricing—everything was New York’s Spring ’98 ing 30,000 bottles per week. reviewed and revised to be brand consistent. merchandise. Since then, Limited Too, Gryphon, and The result? Pant transactions are up, The result? The best Mast Industries have developed 65 “Girl across all categories. made, best coordinated, Care” products with over 325 SKUs. And Stores have been deluged with product best designed spring knowledge and given targets to hit. Troops our customers love them. Particularly the presentation in the history of the business, have been rallied. Our VP of Stores even glitter toiletries, cosmetics and accessories. selling at ticket prices, and achieving broad changed his name from Pat to “Pant.” Well, Young girls, as it turns out, want it all. customer acceptance for the New York & not permanently. Limited Too has invented fabulous new Company brand. products, all of which are scented, like “Spar- Victoria’s Secret “ Angels” launch Express, Sweaters and MPR kle Splash” (glitter “Sheer” was big news in fashion. Victoria’s Express’s sweater team is the first Express body splash), “Glimmer Secret translated that news into one of team to be up and running with MPR. And Dust” (glitter powder), the biggest lingerie successes ever. it’s working. The rest of Express should be “Shimmerin’” (glitter “Angels,” a collection of sheer bras and on-line with it by Fall ’98. body lotion) and “Hi-Lite” (glitter hair panties, was developed, and subsequently Today, sweater designers are working with mascara). Yes, you read that right. launched, as the first major coordinated merchants. Discussing trends. And how they The “Girl Care” product line now repre- marketing effort between Stores and Cata- translate to the brand. Discussing voids. sents significant sales and profits and, logue. Five of the world’s most beautiful And how they are going to be filled. In turn, importantly, it drives traffic. The addition supermodels were cast, a both teams are working with production of these products has enhanced Limited famous director hired, wings people to get brand-right Too’s position as a destination store for girls were made, sets designed, ages 7–14, a place where they can go to and Tom Jones was added fashion made to high-qual- have fun. for humor. ity standards, and deliv- The national advertising ered on time. These specialists know campaign was picked up as Lerner New York & “MPR” news, by the media, and seen MPR. Merchandise Process Redesign. It how to do their jobs. by over 150 million people worldwide. means the complete rethinking and rework- And they’re doing them The rest is lingerie, and retailing, history. ing of a business’s merchandising process well. Express is quickly FACT: Founded in 1963, The Limited, Inc. was “born” the same year as Jim Carrey, Johnny Depp, Whitney Houston, Meg Ryan and Wesley Snipes. 16
  • 16. “Girl Care” drives traffic, making Limited Too a true Express, Sweaters and MPR destination for girls Trends must translate to the brand Limited Too/Gryphon and the development of “Girl Care” Fit is an important part of getting the customer to say “I’ll take it!” Design fills the void 17
  • 17. Lerner New York & “MPR” MPR, teamwork, and a commitment to quality Reviewing the merchandise plan Is it “on-brand?” Jeans, a must-win category, being fitted
  • 18. Structure becomes the “pants authority” Inspiration comes from many places Every detail was considered , everything revised Being a pants authority is key when meeting the needs of urban, active young men. Victoria’s Secret “Angels” launch Great product + coordinated effort + supermodels, wings and Tom Jones = powerful new product launch Over 150 million people worldwide saw this launch 19
  • 19. limited inc information Directors SAMUEL P. FRIED GALYAN’S TRADING COMPANY Vice President, General Counsel and Secretary Joel L. Silverman, Chief Operating Officer LESLIE H. WEXNER PETER Z. HORVATH VICTORIA’S SECRET STORES Chairman qC Vice President, Chief Financial Officer, Grace A. Nichols, President KENNETH B. GILMAN Merchandising Apparel VICTORIA’S SECRET CATALOGUE Vice Chairman and Chief Administrative Officer JACK LISTANOWSKY Cynthia D. Fields, President MARTIN TRUST Vice President and Chief Sourcing BATH & BODY WORKS President: Mast Industries, Inc. and Production Officer Beth M. Pritchard, President Andover, Massachusetts TIM LYONS EUGENE M. FREEDMAN GRYPHON Vice President, Taxes Senior Advisor to and Robert J. Ruttenberg, President Director of Monitor Company, Inc. q JON J. RICKER D ABERCROMBIE & FITCH CO. Vice President and Chief Information Officer Cambridge, Massachusetts Michael S. Jeffries, President E. GORDON GEE Other Officers MAST INDUSTRIES President: Brown University q A Martin Trust, President R. RICHARD AMARI Providence, Rhode Island Vice President, Group Chief Information Officer LIMITED BRAND AND CREATIVE SERVICES DAVID T. KOLLAT Edward G. Razek, President Chairman: 22, Inc. FRANK BALL Westerville, Ohio Vice President, Staffing LIMITED DESIGN SERVICES Marie Holman-Rao, President CLAUDINE B. MALONE PAUL E. DAWSON Financial & Management Consulting, Inc. q q Vice President, Information Services BD LIMITED DISTRIBUTION SERVICES McLean, Virginia Nicholas LaHowchic, President AL DIETZEL LEONARD A. SCHLESINGER Vice President, Public Affairs LIMITED REAL ESTATE George F. Baker Jr. Professor of George R. Sappenfield, President PATRICK HECTORNE Business Administration Vice President, Treasurer Harvard Business School LIMITED STORE PLANNING Cambridge, Massachusetts Charles W. Hinson, President THOMAS J. KATZENMEYER Vice President, Investor Relations DONALD B. SHACKELFORD Company Information Chairman of the Board: State Savings Bank q q q ABD THOMAS B. MCFADDEN Columbus, Ohio HEADQUARTERS Vice President, Group Chief Information Officer The Limited, Inc. ALLAN R. TESSLER JOHN S. MITCHELL Three Limited Parkway, Columbus, Ohio 43230 Chairman and Chief Executive Officer: Vice President, Taxes 614. 415 7000 International Financial Group, Inc. q q q BCD www.limited.com ROBERT A. MYERS New York, New York Vice President, Organization and ANNUAL MEETING ABIGAIL S. WEXNER Leadership Development The Annual Meeting of Shareholders is scheduled for: Attorney at Law q D 9:00 A.M., Monday, May 18, 1998 JEANNINE A. RALSTON Columbus, Ohio Three Limited Parkway, Columbus, Ohio 43230 Vice President, Store Systems BELLA WEXNER STOCK EXCHANGE LISTINGS PHILIP S. RENAUD, II Director Emeritus New York Stock Exchange (Trading Symbol “LTD”) Vice President, Insurance RAYMOND ZIMMERMAN London Stock Exchange Retired Chairman of the Board: ROBERT W. SEYBOLD Commonly listed in newspapers as “Limitd” Service Merchandise Co., Inc. q q Vice President, Group Chief Information Officer BD INDEPENDENT PUBLIC ACCOUNTANTS Brentwood, Tennessee RITA TREVINO-FLYNN Coopers & Lybrand L.L.P., Columbus, Ohio Vice President, Communications Company Officers OVERSEAS OFFICES COLLEEN A. WOODBURN Executive Committee Budapest, Hong Kong, Jakarta, London, Milan, Paris, Vice President, Compensation and Benefits Porto, Seoul, Shanghai, Taipei, Tokyo LESLIE H. WEXNER 10-K REPORT AND INFORMATION REQUESTS Business Leaders Chairman A copy of form 10-K is available without charge KENNETH B. GILMAN EXPRESS through the website, www.limited.com, or Vice Chairman and Chief Administrative Officer Michael A. Weiss, President upon written request to Thomas J. Katzenmeyer, Vice President, Investor Relations, at the V. ANN HAILEY LERNER NEW YORK headquarters listed above. For information please Executive Vice President and Chief Financial Officer Richard P. Crystal, President call 614. 415 6400. ARNOLD F. KANARICK LANE BRYANT STOCK TRANSFER AGENT, REGISTER, AND Executive Vice President and Chief Human Jill Dean, President DIVIDEND AGENT Resources Officer THE LIMITED First Chicago Trust Company of New York DANIEL P. FINKELMAN Robert E. Bernard, President PO Box 2500, Jersey City, New Jersey 07303-2500 Vice President, Planning 800. 317 4445 HENRI BENDEL BRUCE A. SOLL Tedford G. Marlow, President THE LIMITED, INC. Vice President and Counsel Founded 1963 STRUCTURE As of January 31, 1998, Functional Leaders Peter D. Whitford, President number of associates: 131,000 WADE BUFF LIMITED TOO Approximate shareholder base: 241,000 Vice President, Internal Audit Michael W. Rayden, President © 1997 The Limited, Inc. q Member of Compensation Committee q Member of Audit Committee q Member of Nominating Committee q Member of Finance Committee A B C D 20
  • 20. Design: Sisman Design • Printing: Heritage Press • “Ac-cent-tchu-ate the Positive”: Lyric by Johnny Mercer, Music by Harold Arlen, © 1944 (Renewed) HARWIN MUSIC CO., All Rights Reserved
  • 21. limited inc 1997 THREE LIMITED PARKWAY • PO BOX 16000 • COLUMBUS • OHIO 43216 • 614. 415 7000 financial info
  • 22. The Chairman’s Letter, and a description of the brands, our talent and processes can be found in the accompanying piece of this year’s two-part annual report.
  • 23. contents 3 Financial Summary 4 Management’s Discussion and Analysis 11 Consolidated Statements of Income 11 Consolidated Statements of Shareholders’ Equity 12 Consolidated Balance Sheets 12 Consolidated Statements of Cash Flows 13 Notes to Consolidated Financial Statements 19 Market Price and Dividend Information 19 Report of Independent Accountants
  • 24. The Limited, Inc.’s balance sheet 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 and working capital increased 47%.
  • 25. Financial Summary (Thousands except per share amounts, ratios and store and associate data) 1996 q q q 1995 q 1993 q 1991 q 1990 q q 1989 q 1988 1997 1994 1992 1987 ABE A B B AE B SUMMARY OF OPERATIONS $9,188,804 $8,644,791 $7,881,437 $7,320,792 $7,245,088 $6,944,296 $6,149,218 $5,253,509 $4,647,916 $4,070,777 $3,527,941 Net Sales $2,817,977 $2,496,579 $2,087,532 $2,114,363 $1,958,835 $1,990,740 $1,793,543 $1,630,439 $1,446,635 $1,214,703 $992,775 Gross Income $480,099 $636,067 $613,349 $798,989 $701,556 $788,698 $712,700 $697,537 $625,254 $467,418 $408,872 Operating Income Operating Income 5.2% 7.4% 7.8% 10.9% 9.7% 11.4% 11.6% 13.3% 13.5% 11.5% 11.6% as a Percentage of Sales Adjusted Operating q $706,314 q $648,067 q $612,035 798,989 q $698,939 $788,698 $712,700 $697,537 $625,254 $467,418 $408,872 Income C C C C Adjusted Operating Income as a q 7.7% q 7.5% q 7.8% q 9.6% 10.9% 11.4% 11.6% 13.3% 13.5% 11.5% 11.6% Percentage of Sales C C C C $217,390 $434,208 $961,511 $448,343 $390,999 $455,497 $403,302 $398,438 $346,926 $245,136 $235,188 Net Income Net Income as a 2.4% 5.0% 12.2% 6.1% 5.4% 6.6% 6.6% 7.6% 7.5% 6.0% 6.7% Percentage of Sales q $341,199 q $321,830 q $311,230 $448,343 q $389,382 q $446,380 $403,302 $398,438 $346,926 $245,136 $235,188 Adjusted Net Income D D D D D Adjusted Net Income q 3.7% q 3.7% q 4.0% q 5.4% q 6.4% 6.1% 6.6% 7.6% 7.5% 6.0% 6.7% as a Percentage of Sales D D D D D PER SHARE RESULTS $0.80 $1.55 $2.69 $1.25 $1.09 $1.26 $1.12 $1.11 $0.97 $0.68 $0.63 Net Income Per Basic Share Net Income Per Diluted Share $0.79 $1.54 $2.68 $1.25 $1.08 $1.25 $1.11 $1.10 $0.96 $0.68 $0.62 Adjusted Net Income q $1.24 q $1.14 q $0.87 q $1.08 q $1.23 $1.25 $1.11 $1.10 $0.96 $0.68 $0.62 Per Diluted Share D D D D D $0.48 $0.40 $0.40 $0.36 $0.36 $0.28 $0.28 $0.24 $0.16 $0.12 $0.12 Dividends $7.50 $7.09 $9.01 $7.72 $6.82 $6.25 $5.19 $4.33 $3.45 $2.64 $2.04 Book Value Weighted Average Diluted 274,483 282,053 358,371 358,601 363,234 363,738 363,594 362,044 361,288 360,186 376,626 Shares Outstanding OTHER FINANCIAL INFORMATION $4,300,761 $4,120,002 $5,266,563 $4,570,077 $4,135,105 $3,846,450 $3,418,856 $2,871,878 $2,418,486 $2,145,506 $1,929,477 Total Assets 5% 9% 20% 10% 10% 13% 13% 15% 15% 12% 13% Return on Average Assets Adjusted Return on q 8% q 7% q 6% q 10% q 12% 10% 13% 15% 15% 12% 13% Average Assets D D D D D $937,739 $638,204 $2,018,960 $1,750,111 $1,513,181 $1,063,352 $1,084,205 $884,004 $685,524 $567,639 $629,783 Working Capital 1.9 1.7 3.5 3.2 3.1 2.5 3.1 2.8 2.4 2.2 2.9 Current Ratio $404,602 $409,260 $374,374 $319,676 $295,804 $429,545 $523,082 $428,844 $318,427 $288,972 $283,590 Capital Expenditures $650,000 $650,000 $650,000 $650,000 $650,000 $541,639 $713,758 $540,446 $445,674 $517,952 $681,000 Long-Term Debt 32% 34% 20% 24% 27% 24% 38% 35% 36% 55% 93% Debt-to-Equity Ratio $2,044,957 $1,922,582 $3,201,041 $2,760,956 $2,441,293 $2,267,617 $1,876,792 $1,560,052 $1,240,454 $946,207 $729,171 Shareholders’ Equity Return on Average 11% 17% 32% 17% 17% 22% 23% 28% 32% 29% 31% Shareholders’ Equity Adjusted Return on Average q 17% q 16% q 10% q 17% q 22% 17% 23% 28% 32% 29% 31% Shareholders’ Equity D D D D D Comparable Store Sales 0% 3% (2%) (3%) (1%) 2% 3% 3% 9% 8% 3% Increase (Decrease) STORES AND ASSOCIATES AT END OF YEAR Total Number of 5,640 5,633 5,298 4,867 4,623 4,425 4,194 3,760 3,344 3,497 3,115 Stores Open 28,400,000 28,405,000 27,403,000 25,627,000 24,426,000 22,863,000 20,355,000 17,008,000 14,374,000 14,296,000 12,795,000 Selling Square Feet 131,000 123,100 106,900 105,600 97,500 100,700 83,800 72,500 63,000 56,700 50,200 Number of Associates q 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, A 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. q 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 B to June 1, 1991 when the Company acquired a controlling interest and Galyan’s subsequent to the July 2, 1995 acquisition date. q 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 C Statements) and $2,617 in 1993. Additionally, inventory liquidation charges of ($13,000) related to Henri Bendel store closings are excluded from 1997. q 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 D 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. q Fifty-three-week fiscal year. E 3
  • 26. Excluding the impact of special and nonrecurring items, gains in Management’s Discussion and Analysis connection with initial public offerings (“IPO”), and the Henri Ben- Results of Operations del inventory liquidation charges, the Company would have earned Net sales for the fourth quarter of 1997 grew 10% to $3.268 billion $1.24 per diluted share compared to last year’s $1.14. These exclud- from $2.966 billion for the same period a year ago. Net income was ed items consisted of: 1) $213.2 million related to the previously $85.3 million versus $213.4 million in the fourth quarter of 1996, described fourth quarter charges that was net of a third quarter net and earnings per diluted share were $.31 versus $.78 in the fourth gain of $62.8 million related principally to the sale of approximately quarter of 1996. Excluding special and nonrecurring items and one-half of the Company’s investment in Brylane, Inc. (“Brylane”), inventory liquidation charges associated with the closing of five a 26% owned (post- IPO) catalogue retailer; 2) in 1997, a pretax gain Henri Bendel stores, net income was $252.5 million versus $220.2 of $8.6 million in connection with the IPO of Brylane; 3) $12 mil- million in the fourth quarter of 1996, and earnings per diluted share lion of special and nonrecurring charges in 1996 related to the April were $.91 versus $.81 in the fourth quarter of 1996. 1997 sale of Penhaligon’s; and 4) in 1996, a gain of $118.2 million As a result of an ongoing review of the Company’s retail busi- resulting from the Abercrombie & Fitch (“A&F”) IPO. nesses and investments as well as implementation of initiatives Business highlights for 1997 include the following: intended to promote and strengthen the Company’s various retail • Intimate Brands, Inc. (“IBI”), led by strong performances at brands (including closing businesses, identification and disposal Bath & Body Works and Victoria’s Secret Stores, recorded earnings of non-core assets and identification of store locations not consis- per diluted share of $1.14, compared to $1.02 in 1996, including tent with a particular brand) during the fourth quarter of 1997, the special and nonrecurring charges of $.16 in 1997 and $.03 in 1996. Company recognized total charges of $289 million (approximately • A&F delivered 1997 earnings per diluted share of $.94, a 74% $30 million after-tax cash impact) or $.60 per diluted share, con- increase over 1996 as comparable store sales increased 21% on top sisting of $276 million in special and nonrecurring charges and a of 13% for 1996. $13 million cost of sales charge for inventory liquidation at Henri • However, much of the gains from IBI and A&F were offset by a Bendel. These charges included: decline in operating income for each of the women’s businesses, • A $68 million charge for closing the 118 store Cacique lingerie which finished the year with a pretax operating loss aggregating business effective January 31, 1998. The amount includes $38 mil- $268 million, including special and nonrecurring charges of $187 lion in cash charges relating to cancellation of merchandise on million and the $13 million inventory liquidation charge related to order and other exit costs such as severance, service contract ter- the closing of five Henri Bendel stores. mination fees and lease termination costs; • Limited Too led the emerging businesses with a significant improve- • $95 million in charges related to Henri Bendel, which include an ment in operating income and 20% comparable store sales gains. $82 million special and nonrecurring charge related to streamlining • During the year, the Company also completed the sales of its Henri Bendel from six stores to a one-store operation by Septem- interests in the Newport Office Tower in Jersey City, New Jersey, ber 1, 1998. The amount includes $56 million in cash charges that and The Mall at Tuttle Crossing in Columbus, Ohio, and approx- are recorded in other current liabilities. In addition, the Company imately one-half of its interest in Brylane for cash proceeds of incurred a $13 million cost of sales charge for inventory liquidation. $343.2 million. The charge to cost of sales is in accordance with Emerging Issues • On February 17, 1998, a registration statement was filed with the Task Force (“EITF”) Issue No. 96-9, “Classification of Inventory Securities and Exchange Commission in connection with a plan to Markdowns and Other Costs Associated with a Restructuring”; establish A&F as a fully independent company via a tax-free ex- • $86 million of impaired asset charges related principally to the change offer pursuant to which The Limited shareholders will be women’s apparel businesses, in accordance with Statement of Fi- given an opportunity to tender some or all of their shares of The nancial Accounting Standards (“SFAS”) No. 121, “Accounting for Limited in return for shares of A&F. The transaction is subject to the Impairment of Long-Lived Assets and for Long-Lived Assets certain customary conditions. to be Disposed Of.” This charge has no cash impact but is an SFAS • On February 20, 1998, the Company entered into a definitive No. 121 required accounting adjustment to measure the fair value agreement with Pinault Printemps-Radoute to sell its remaining of store assets, and will provide a noncash benefit in future periods 2.6 million shares of Brylane for $51 per share, generating net cash from reduced depreciation and amortization; proceeds of $131 million. The transaction is expected to close in • A $28 million provision for closing or downsizing approximately the first quarter of 1998. 80 oversized stores, primarily in the Limited, Lane Bryant, Lerner The Company does not believe that the consummation of the New York and Express women’s businesses, and a $12 million write- transactions and the taking of the other actions outlined above will down to net realizable value of a real estate investment previously have a material effect on the Company’s liquidity (i.e., its ability to acquired in connection with closing and downsizing certain stores. provide the resources to support operations, projected growth, sea- Net sales for the fiscal year ended January 31, 1998, increased 6% sonal requirements and capital expenditures). Furthermore, although to $9.189 billion from sales of $8.645 billion for the same period the Company believes that such transactions and other actions should ended February 1, 1997. Net income was $217.4 million, or $.79 have a favorable impact on the Company’s results of operations, per diluted share, compared to $434.2 million, or $1.54 per diluted there can be no assurance with respect to the effect of these actions. share last year. 4
  • 27. The following summarized financial data compares 1997 to the comparable periods The following summarized financial data compares 1997 to the comparable periods for 1996 and 1995 (millions): for 1996 and 1995: % Change 1997 1996 1995 1997 1996 1995 1997–96 1996–95 COMPARABLE STORE SALES: (15%) (6%) (2%) Express NET SALES (5%) 8% (1%) Lerner New York $1,189 $1,386 $1,445 (14%) (4%) Express 1% 0% (8%) Lane Bryant 946 1,045 1,005 (9%) 4% Lerner New York (7%) 3% (4%) The Limited 907 905 903 — — Lane Bryant (13%) (5%) 6% Henri Bendel 776 855 850 (9%) 1% The Limited (8%) 0% (3%) Total Women’s Brands 83 91 91 (9%) — Henri Bendel $3,901 $4,282 $4,294 (9%) — Total Women’s Brands (3%) 7% (9%) Structure 20% 8% (4%) Limited Too 660 660 576 — 15% Structure Galyan’s Trading Co. 322 259 214 24% 21% Limited Too (since 7/2/96) 0% 12% — Galyan’s Trading Co. 3% 7% (8%) Total Emerging Brands (since 7/2/95) 160 108 45 48% n/m 6 4 — n/m n/m Other 11% 5% (1%) Victoria’s Secret Stores $1,148 $1,031 $835 11% 23% Total Emerging Brands 11% 11% 21% Bath & Body Works 10% 8% (20%) Cacique 1,702 1,450 1,286 17% 13% Victoria’s Secret Stores 11% 7% 1% Total Intimate Brands Victoria’s Secret 734 684 661 7% 3% Catalogue 21% 13% 5% Abercrombie & Fitch 1,057 753 475 40% 59% Bath & Body Works Total Comparable Store 95 88 80 8% 10% Cacique 0% 3% (2%) Sales Increase (Decrease) 30 22 15 n/m n/m Other Total Intimate % Change $3,618 $2,997 $2,517 21% 19% Brands 1997 1996 1995 1997–96 1996–95 $522 $335 $235 56% 43% Abercrombie & Fitch STORE DATA: $9,189 $8,645 $7,881 6% 10% Total Net Sales Retail Sales Increase Attributable to New 6% 8% 9% and Remodeled Stores OPERATING INCOME Retail Sales per q $(268) q $54 $64 n/m 19% Women’s Brands A E Average Selling $295 $285 $272 4% 5% Square Foot Emerging Brands q 159 q 149 68 134% (54%) and Other B F Retail Sales per Average Store q 505 q 458 386 10% 19% Intimate Brands C D (thousands) $1,478 $1,453 $1,419 2% 2% 84 46 24 83% 92% Abercrombie & Fitch Average Store Size $480 $636 $613 (25%) 4% Total Operating Income at End of Year (selling square feet) 5,035 5,043 5,172 — (2%) Retail Selling Square Feet at End of Year (thousands) q 1997 includes special and nonrecurring charges of approximately $187 million 28,400 28,405 27,403 — 4% A 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 NUMBER OF STORES: certain stores, plus $13 million in inventory liquidation charges associated 5,633 5,298 4,867 Beginning of Year with the Henri Bendel closings. 315 470 504 Opened q 1997 includes $42 million of special and nonrecurring income relating to the B gain from the sale of approximately one-half of the Company’s interest in Brylane, (4) — 6 Acquired (Sold) offset by a valuation adjustment on an investment. (304) (135) (79) Closed q 1997 includes a $68 million charge related to the closing of the Cacique business C effective January 31, 1998. 5,640 5,633 5,298 End of Year q 1996 includes a special and nonrecurring charge of $12 million for revaluation of D certain assets in connection with the sale of Penhaligon’s in April 1997. q 1995 includes a special and nonrecurring charge of approximately $48 million, E Net Sales primarily for store closings and downsizings. q 1995 includes 100% of WFNNB’s operating income of $114 million before Fourth quarter 1997 sales as compared to sales for the fourth quar- F interest expense versus $4 million, representing 40% of net income of $11 ter 1996 increased 10% to $3.268 billion due to 5% comparable million in 1996; 1995 also includes an approximate $73 million gain from store sales gains with the balance of the increase attributable to new 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 and remodeled stores and increased catalogue sales. Thirteen-week of certain assets. fourth quarter 1996 sales as compared to sales for the fourteen-week n/m not meaningful fourth quarter 1995 increased 7% to $2.966 billion due to a 9% 5
  • 28. Gross Income increase in sales attributable to new and remodeled stores and a 3% Gross income increased to 35.4% as a percentage of sales for the increase in comparable store sales, offset by a 5% decrease due to the fourth quarter 1997 from 33.0% for the fourth quarter 1996. The fifty-third week in 1995. merchandise margin rate (representing gross income before deduc- The 1997 retail sales increase of 6% was attributable to the Com- tion of buying and occupancy costs), increased 2.3%, expressed as pany adding 315 new stores, remodeling 206 stores and closing 186 a percentage of sales, due principally to improved initial markup stores (excluding closing 118 Cacique stores in January 1998 and (“IMU”), which was partially offset by a slightly higher markdown the sale of four Penhaligon’s stores in the first quarter of 1997). rate and the $13 million Henri Bendel inventory liquidation charge This net addition of 129 stores represents over 365,000 square feet (.4% of sales). Buying and occupancy costs, expressed as a percen- of new retail selling space. For the year, average sales productivity tage of sales, were flat for the fourth quarter as compared to last year. increased 4% to $295 per square foot. Gross income, expressed as a percentage of sales, was 33.0% In 1997, IBI accounted for 114% of the Company’s total net for the fourth quarter 1996 compared to 29.2% for the fourth quar- sales increase and 39% of total Company sales. IBI posted a $620 ter 1995. The merchandise margin rate increased 3.4%, expressed million sales gain over the prior year due to the net addition of 223 as a percentage of sales, due principally to improved IMU and low- stores (before the impact of the Cacique store closings and the er markdown rates, as the Company was less price-promotional Penhaligon’s sale) representing over 650,000 new retail selling than the year before. Buying and occupancy costs decreased .4%, square feet, an 11% increase in comparable store sales and an 18% expressed as a percentage of sales, primarily due to sales produc- increase in catalogues mailed by Victoria’s Secret Catalogue. Addi- tivity associated with the 3% increase in comparable store sales. tionally, A&F reported a $186 million sales increase over the prior The Company’s 1997 gross income rate increased 1.8% to 30.7% year, bolstered by a 21% increase in comparable store sales, while as compared to 1996. The merchandise margin rate increased 1.7% Limited Too experienced a $63 million sales increase over the due principally to improved IMU, while buying and occupancy costs, prior year on a 20% increase in comparable store sales. However, expressed as a percentage of sales, were flat to last year. sales at the women’s businesses in 1997 declined $382 million from The 1996 gross income rate of 28.9% increased 2.4% as com- 1996, primarily due to an 8% decrease in comparable store sales, pared to 1995. Merchandise margins, expressed as a percentage of as well as a net decrease of 131 stores representing over 705,000 sales, increased 1.7%, due principally to improved initial markup. retail selling square feet, due principally to closures of underper- Buying and occupancy costs decreased .7% expressed as a percent- forming locations. age of sales, primarily due to sales productivity associated with the The 1996 retail sales increase of 10% was attributable to an 8% 3% increase in comparable store sales. increase in sales due to the Company adding 470 new stores, re- modeling 252 stores and closing 135 stores, and a 3% increase in General, Administrative and Store Operating Expenses comparable store sales, offset by a 1% decrease due to the fifty-third General, administrative and store operating expenses increased to week in 1995. This net addition of 335 stores represents approxi- 20.8%, expressed as a percentage of sales, in the fourth quarter mately 1 million square feet of new retail selling space. For the year, of 1997, compared to 18.7% in the fourth quarter of 1996. This average sales productivity increased 5% to $285 per square foot. increase was attributable to: 1) a 2.5% rate increase at the IBI bus- In 1996, IBI accounted for 63% of the annual sales increase, and inesses (discussed below) combined with an increase of IBI sales nearly 35% of total Company sales, posting a $480 million sales in the total Company mix to 42.7% from 39.1%; 2) the inability to increase over the prior year due to the net addition of 316 stores leverage these expenses at the women’s businesses due to disap- representing over 817,000 selling square feet, a 7% increase in pointing sales performance; and 3) additional compensation charges comparable store sales and an 11% increase in catalogues mailed for restricted stock plans. by Victoria’s Secret Catalogue. Sales at the women’s businesses in IBI’s increase is primarily the result of advertising costs at Vic- 1996 were flat to 1995, primarily due to flat comparable store sales. toria’s Secret Stores, the growth of Bath & Body Works in the over- Disappointing results at Express, which experienced a 6% decline all mix of IBI net sales from 25.1% in fiscal 1996 to 29.2% in in comparable store sales, were offset by improved results at the fiscal 1997 and an increase in restricted stock plan compensation Lerner New York and Limited businesses, which had 8% and 3% expense. Due to an emphasis on point-of-sale marketing and sales increases in comparable store sales. In addition, the overall sales floor coverage for personal care products, Bath & Body Works has increase for the Company included sales increases at Structure, higher store operating expenses as a percentage of net sales, which A&F and Limited Too, which experienced 7%, 13% and 8% has been more than offset by higher gross margins. increases in comparable store sales. The Company anticipates that these expenses, expressed as a per- centage of sales, will increase slightly in 1998, since the IBI busi- nesses, 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
  • 29. Operating Income increase as a percentage of sales was attributable to a 2.2% rate Fourth quarter operating income, expressed as a percentage of sales, increase at the IBI businesses and the inability to leverage expenses was 6.1% in 1997, compared to 13.9% in 1996, and for the year was due to disappointing sales performance at the women’s businesses, 5.2% in 1997 compared to 7.4% in 1996. Excluding charges for spe- particularly Express. cial and nonrecurring items in both years and the Henri Bendel General, administrative and store operating expenses increased, inventory liquidation charge in 1997, fourth quarter operating expressed as a percentage of sales, to 23.1% in 1997, compared to income, expressed as a percentage of sales, would have been 15.0% 21.4% in 1996. This increase was primarily attributable to the rea- in 1997 compared to 14.3% in 1996, and for the year would have sons discussed above for the 1997 fourth quarter. These costs been 7.7% in 1997 compared to 7.5% in 1996. These increases were increased, expressed as a percentage of sales, to 21.4% in 1996 com- due to increases in the gross income rate, which more than offset the pared to 20.0% in 1995, also primarily due to reasons discussed general, administrative and store operating expense rate increase. above for fourth quarter 1996. The fourth quarter operating income rate increased 2.4% in 1996, from 11.5% on an adjusted basis in 1995, and for the year Special and Nonrecurring Items increased .9% in 1996 from 6.5% on an adjusted basis in 1995. The As described in Note 2 to the Consolidated Financial Statements, 1995 rates were adjusted to reflect the 1995 sale of a 60% interest the Company recognized special and nonrecurring charges of $276 in WFN as if the sale was consummated at the beginning of the million during the fourth quarter of 1997 comprised of: 1) a $68 mil- year. These increases were also due to increases in gross income, lion charge for the closing of the Cacique lingerie business effective which more than offset the general, administrative and store oper- January 31, 1998; 2) an $82 million charge related to streamlining ating expense rate increase. the Henri Bendel business from six stores to one store; 3) an $86 million impaired-asset charge in accordance with SFAS No. 121, Interest Expense related principally to the women’s apparel businesses, covering certain store locations where the asset carrying values are perma- FOURTH QUARTER YEAR nently impaired; and 4) a $28 million provision for closing and downsizing approximately 80 oversized stores primarily within 1997 1996 1997 1996 1995 the Limited, Lerner New York, Lane Bryant and Express women’s Average Daily Borrowings businesses and for a $12 million write-down to net realizable value (millions) $891.4 $1,039.5 $835.9 $964.3 $887.7 of a real estate investment previously acquired in connection with Average Effective 8.07% 7.49% 8.22% 7.82% 8.73% Interest Rate closing and downsizing certain stores. Additionally, the Company Interest expense decreased by $1.5 million in the fourth quarter of recognized a $13 million charge to cost of sales in the fourth 1997 and decreased by $6.6 million for the year. For the quarter, quarter of 1997 for inventory liquidation in accordance with lower average borrowing levels reduced interest expense by $2.8 EITF Issue No. 96-9. The Company, in accordance with EITF Issue million, offset by a $1.3 million increase resulting from higher No. 94-3, anticipates charges for severance and other associate ter- rates. For the year, lower average borrowing levels reduced interest mination costs for Henri Bendel in the first quarter of 1998 (the expense by $10.0 million, offset by $3.4 million of increased period the associates are notified). Additionally, the Company rec- expense due to higher interest rates. ognized a net $62.8 million pretax gain during the third quarter of 1997 relating to the sale of approximately one-half of its investment Other Income in Brylane, partially offset by valuation adjustments on certain The $5.1 million decrease in other income for 1997 compared to assets where the carrying values were permanently impaired. 1996 was primarily attributable to approximately $10.5 million of In 1996, the Company recorded a $12 million pretax, special interest income earned in the first quarter of 1996, which arose from and nonrecurring charge in connection with the 1997 sale of Pen- $1.615 billion of temporarily invested funds that were used to con- haligon’s, a U.K.–based subsidiary of IBI. summate the Company’s self-tender in March 1996. Excluding this In the fourth quarter of 1995, the Company recognized a $73.2 $10.5 million in 1996, interest earnings increased $5.4 million from million pretax gain in connection with the sale of a 60% interest higher temporary investments in 1997, $3.5 million of which was in the Company’s wholly-owned credit card bank, World Financial realized in the fourth quarter. Network National Bank (“WFN”). In addition, the Company rec- ognized a special and nonrecurring charge during the fourth quar- Gains in Connection with Initial Public Offerings ter of 1995 of approximately $71.9 million. Of this amount, $25.8 As discussed in Note 1 to the Consolidated Financial Statements, million was provided for the closing of 26 stores and $19.8 million the Company recognized a pretax gain of $8.6 million during was provided for the downsizing of 33 stores, primarily at Limited the first quarter of 1997, in connection with the IPO of Brylane, and Lerner New York. The remaining charge of approximately a 26% owned (post-IPO) catalogue retailer. In 1996, the Company $26.3 million represented the write-down to market or net realiz- recognized a $118.2 million gain in connection with the IPO of able value of certain assets arising from nonoperating activities. a 15.8% interest (8.05 million shares) of A&F. In 1995, the Com- The net pretax gain from these special and nonrecurring items was pany recognized a $649.5 million gain in connection with the IPO $1.3 million. 7
  • 30. of 16.9% (42.7 million shares) of the stock of IBI. The gains re- Financial Condition corded by the Company in 1996 and 1995 were not subject to tax. The Company’s balance sheet at January 31, 1998, provides con- tinuing evidence of financial strength and flexibility. The Com- Other Data pany’s long-term debt-to-equity ratio declined to 32% at the end of There were a number of significant events in fiscal years 1997 and 1997 from 34% in 1996, and working capital increased 47% over 1996 that impacted the comparability of the Company’s net income 1996 to $938 million. A more detailed discussion of liquidity, capi- per diluted share data. Although the following information is not tal resources and capital requirements follows. intended to be presented in accordance with SEC guidelines for pro forma financial information, it is provided to assist in investors’ Liquidity and Capital Resources understanding of the Company’s results of operations. Cash provided by operating activities, commercial paper backed by • In 1997 and 1996, the Company recognized $213.2 million and $12 funds available under committed long-term credit agreements, and million in special and nonrecurring charges along with the $13 the Company’s capital structure continue to provide the resources million Henri Bendel inventory liquidation charge in 1997 as more to support current operations, projected growth, seasonal require- fully described in Note 2 to the Consolidated Financial Statements. ments and capital expenditures. The impact of these charges also reduced earnings attributable to A summary of the Company’s working capital position and capitalization follows minority interest by $6.8 million and $1.0 million in 1997 and 1996. (thousands): • The Company recognized pretax gains in connection with IPOs q Adjusted A 1997 1996 1995 1995 of $8.6 million and $118.2 million in 1997 and 1996 (see Note 1 to the Consolidated Financial Statements). Cash Provided by $589,981 $712,069 $340,732 $340,732 Operating Activities • The Company repurchased 85 million shares via a self-tender $937,739 $638,204 $403,960 $2,018,960 Working Capital and, as a result of investing funds used to facilitate the self-tender, Capitalization: recognized approximately $10.5 million of interest income in 1996 $650,000 $650,000 $650,000 $650,000 Long-Term Debt up to the effective date. 2,044,957 1,922,582 1,586,041 3,201,041 Shareholders’ Equity Adjusted for the income tax effect (an $87 million expense in $2,694,957 $2,572,582 $2,236,041 $3,851,041 Total Capitalization 1997 and a $1.0 million expense in 1996), earnings per diluted share Additional Amounts would have increased $.45 per share in 1997 to $1.24 and would Available Under Long- have decreased $.38 per share to $1.16 in 1996. $1,000,000 $1,000,000 $1,000,000 $1,000,000 Term Credit Agreements q Adjusted 1995 reflects the impact of the $1.615 billion repurchase of 85 million A shares of common stock. Acquisition Effective July 2, 1995, the Company acquired all of the outstanding Net cash provided by operating activities totaled $590.0 million, common stock of Galyan’s for $18 million in cash and stock. The $712.1 million and $340.7 million for 1997, 1996 and 1995 and con- Company’s financial statements include the results of operations of tinued to serve as the Company’s primary source of liquidity. Galyan’s since the acquisition date. The Company considers the following to be several measures of liquidity and capital resources: q Adjusted A 1997 1996 1995 1995 32% 34% 41% 20% Debt-to-Equity Ratio (Long-Term Debt Divided by Shareholders’ Equity) 24% 25% 29% 17% Debt-to-Capitalization Ratio (Long-Term Debt Divided by Total Capitalization) 11x 12x 12x 12x Interest Coverage Ratio (Income, Excluding Gain in Connection with Initial Public Offerings, Before Interest Expense, Depreciation, Amortization and Income Taxes Divided by Interest Expense) 146% 174% 91% 91% Cash Flow to Capital Investment (Net Cash Provided by Operating Activities Divided by Capital Expenditures) q Adjusted 1995 reflects the impact of the $1.615 billion repurchase of 85 million A shares of common stock. 8
  • 31. Stores and Selling Square Feet Net cash provided from operating activities in 1997 decreased $122.1 million from the prior year principally due to an increase in A summary of actual stores and selling square feet by business for 1997 and 1996, income tax payments, that was partially offset by slightly higher and the 1998 goals by business (including the impact of the estimated 280 stores that will be closed/downsized during the year) follows: income from operations adjusted for special and nonrecurring End of Year Change From items and gains from initial public offerings. Goal 1998 1997 1996 1998–97 1997–96 Investing activities included capital expenditures of $405 mil- lion, about half of which was for new and remodeled stores. Invest- EXPRESS ing activities also included $235 million in net proceeds from the 712 753 753 (41) — Stores sales of the Newport Tower, an office building in Jersey City, New 4,481,000 4,739,000 4,726,000 (258,000) 13,000 Selling Square Ft. Jersey, and the Company’s interest in The Mall at Tuttle Crossing LERNER NEW YORK in Columbus, Ohio, and $108.3 million of net proceeds from the 668 746 784 (78) (38) Stores third quarter sale of slightly less than one-half of the Company’s 5,041,000 5,698,000 5,984,000 (657,000) (286,000) Selling Square Ft. investment in Brylane. In 1996, $41.3 million was invested in the LANE BRYANT Alliance Data Systems (formerly WFN) credit card venture. 1995 760 773 832 (13) (59) Stores reflects the acquisition of Galyan’s, the proceeds from the securiti- 3,666,000 3,735,000 3,980,000 (69,000) (245,000) Selling Square Ft. zation of WFN’s credit card receivables of $1.2 billion (see Note 3 THE LIMITED to the Consolidated Financial Statements) and the transfer of 570 629 663 (59) (34) Stores $351.6 million to a restricted cash account (see Note 6 to the Con- 3,398,000 3,790,000 3,977,000 (392,000) (187,000) Selling Square Ft. solidated Financial Statements). Cash used for financing activities for 1997 reflects an increase HENRI BENDEL 1 6 6 (5) — Stores in the quarterly dividend to $.12 per share from $.10 per share in 35,000 113,000 113,000 (78,000) — Selling Square Ft. 1996. Financing activities in 1996 included proceeds from and repayment of $150 million in short-term debt borrowed by A&F STRUCTURE and net proceeds of $118.2 million from A&F’s initial public offer- 545 544 542 1 2 Stores ing. Financing activities also included $1.615 billion used to repur- 2,161,000 2,143,000 2,117,000 18,000 26,000 Selling Square Ft. chase 85 million shares of the Company’s common stock via the self- LIMITED TOO tender consummated in March 1996. Cash dividends paid in 1996 317 312 308 5 4 Stores and 1995 were $.40 per share. 1,002,000 979,000 967,000 23,000 12,000 Selling Square Ft. At January 31, 1998, the Company had available $1 billion under GALYAN’S TRADING CO. its long-term credit agreement. The Company also has the ability 15 11 9 4 2 Stores to offer up to $250 million of additional debt securities under its 1,026,000 641,000 488,000 385,000 153,000 Selling Square Ft. shelf registration statement. VICTORIA’S SECRET STORES 874 789 736 85 53 Stores 3,795,000 3,555,000 3,326,000 240,000 229,000 Selling Square Ft. BATH & BODY WORKS 1,101 921 750 180 171 Stores 2,183,000 1,773,000 1,354,000 410,000 419,000 Selling Square Ft. CACIQUE — — 119 — (119) Stores — — 365,000 — (365,000) Selling Square Ft. PENHALIGON’S — — 4 — (4) Stores — — 2,000 — (2,000) Selling Square Ft. ABERCROMBIE & FITCH 186 156 127 30 29 Stores 1,453,000 1,234,000 1,006,000 219,000 228,000 Selling Square Ft. ABERCROMBIE (KIDS) 13 — — 13 — Stores 42,000 — — 42,000 — Selling Square Ft. TOTAL RETAIL BUSINESSES 5,762 5,640 5,633 122 7 Stores 28,283,000 28,400,000 28,405,000 (117,000) (5,000) Selling Square Ft. 9
  • 32. pany’s systems. Furthermore, no assurance can be given that any Capital Expenditures or all of the Company’s systems are or will be Year 2000 compliant, Capital expenditures amounted to $404.6 million, $409.3 million or that the ultimate costs required to address the Year 2000 issue and $374.4 million for 1997, 1996 and 1995, of which $194.4 mil- or the impact of any failure to achieve substantial Year 2000 com- lion, $235.7 million and $274.5 million were for new stores and pliance will not have a material adverse effect on the Company’s remodeling and expanding existing stores. In 1997 and 1996 the financial condition. Company expended $55.3 million and $53.1 million on land acqui- sition and development costs. Also, in 1997 and 1996 the Company Impact of Inflation expended $30.2 million and $42.1 million in connection with the The Company’s results of operations and financial condition are Bath & Body Works distribution center. presented based upon historical cost. While it is difficult to accu- The Company anticipates spending $480 to $500 million for cap- rately measure the impact of inflation due to the imprecise nature ital expenditures in 1998, of which $270 to $295 million will be for of the estimates required, the Company believes that the effects of new stores, the remodeling of existing stores and related improve- inflation, if any, on the results of operations and financial condition ments for the retail businesses, $50 to $60 million will be for infor- have been minor. mation technology related to Year 2000 expenditures and $30 to $40 million will be for land acquisition and development costs, princi- Adoption of New Accounting Standards pally the Easton development project in Columbus, Ohio. The During the fourth quarter of 1997, the Company adopted SFAS Company expects that substantially all 1998 capital expenditures No. 128, “Earnings Per Share,” which requires the Company to dis- will be funded by net cash provided by operating activities. close basic and diluted earnings per share for all periods presented. The Company intends to reduce selling square footage by In June 1997, the Financial Accounting Standards Board issued approximately 117,000 selling square feet in 1998, which represents SFAS No. 131, “Disclosures about Segments of an Enterprise and a .4% decrease from year-end 1997. It is anticipated that the Related Information.” While the standard has no impact in deter- decrease will result from the closing of 250 stores offset by the addi- mining earnings and earnings per share, the Company will adopt the tion of approximately 370 stores (over half of which are Bath & disclosure standards in 1998. Body Works stores averaging 2,300 square feet) and the remodeling of approximately 125 stores. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Information Systems and “Year 2000” Compliance The Company cautions that any forward-looking statements (as The Company recently completed a comprehensive review of its such term is defined in the Private Securities Litigation Reform Act information systems and is involved in an enterprise-wide program of 1995) contained in this Report, the Company’s Form 10-K or to update computer systems and applications in preparation for made by management of the Company involve risks and uncertain- the year 2000. The Company will incur internal staff costs as well ties, and are subject to change based on various important factors. as outside consulting and other expenditures related to this initia- The following factors, among others, in some cases have affected tive. Total expenditures related to remediation, testing, conversion, and in the future could affect the Company’s financial performance replacement and upgrading system applications are expected to and actual results and could cause actual results for 1998 and range from $85 to $100 million from 1997 through 2000. Of the beyond to differ materially from those expressed or implied in total, approximately $50 to $60 million will be capital expendi- any such forward-looking statements: changes in consumer spend- tures related to acquisition and implementation of new package ing patterns, consumer preferences and overall economic condi- systems. The balance, approximately $35 to $40 million, will be tions, the impact of competition and pricing, changes in weather expenses associated with remediation and testing of existing patterns, political stability, currency and exchange risks and systems. Total incremental expenses, including depreciation and changes in existing or potential duties, tariffs or quotas, postal rate amortization of new package systems, remediation to bring current increases and charges, paper and printing costs, availability of systems into compliance and writing off legacy systems, are not suitable store locations at appropriate terms, ability to develop expected to have a material impact on the Company’s financial con- new merchandise and ability to hire and train associates. dition during any year during the conversion process from 1997 through 2000. However, incremental expenses could total approx- imately $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 Com- 10
  • 33. Consolidated Statements of Income (Thousands except per share amounts) 1997 1996 1995 $9,188,804 $8,644,791 $7,881,437 Net Sales (6,370,827) (6,148,212) (5,793,905) Costs of Goods Sold, Occupancy and Buying Costs 2,817,977 2,496,579 2,087,532 Gross Income (2,124,663) (1,848,512) (1,475,497) General, Administrative and Store Operating Expenses (213,215) (12,000) 1,314 Special and Nonrecurring Items, Net 480,099 636,067 613,349 Operating Income (68,728) (75,363) (77,537) Interest Expense 36,886 41,972 21,606 Other Income, Net (56,473) (45,646) (22,374) Minority Interest 8,606 118,178 649,467 Gain in Connection with Initial Public Offerings 400,390 675,208 1,184,511 Income Before Income Taxes 183,000 241,000 223,000 Provision for Income Taxes $217,390 $434,208 $961,511 Net Income Net Income Per Share: $.80 $1.55 $2.69 Basic $.79 $1.54 $2.68 Diluted The accompanying Notes are an integral part of these Consolidated Financial Statements. Consolidated Statements of Shareholders’ Equity (Thousands) COMMON STOCK Treasury Total Shares Retained Stock, Shareholders’ Outstanding Par Value Paid-In Capital Earnings at Cost Equity 357,604 $189,727 $132,938 $2,716,516 $(278,225) $2,760,956 Balance, January 28, 1995 — — — 961,511 — 961,511 Net Income — — — (143,091) — (143,091) Cash Dividends (3,361) — — — (55,239) (55,239) Purchase of Treasury Stock Common Shares Subject to — (9,375) (7,639) (334,586) — (351,600) Contingent Stock Redemption Agreement 730 — 7,769 — 8,231 16,000 Stock Issued for Acquisition 393 — 4,066 — 8,438 12,504 Exercise of Stock Options and Other 355,366 $180,352 $137,134 $3,200,350 $(316,795) $3,201,041 Balance, February 3, 1996 — — — 434,208 — 434,208 Net Income — — — (108,302) — (108,302) Cash Dividends (85,000) — — — (1,615,000) (1,615,000) Purchase of Treasury Stock 705 — 5,726 — 4,909 10,635 Exercise of Stock Options and Other 271,071 $180,352 $142,860 $3,526,256 $(1,926,886) $1,922,582 Balance, February 1, 1997 — — — 217,390 — 217,390 Net Income — — — (130,472) — (130,472) Cash Dividends 1,729 — 5,158 — 30,299 35,457 Exercise of Stock Options and Other 272,800 $180,352 $148,018 $3,613,174 $(1,896,587) $2,044,957 Balance, January 31, 1998 The accompanying Notes are an integral part of these Consolidated Financial Statements. 11
  • 34. Consolidated Balance Sheets Consolidated Statements of Cash Flows (Thousands) (Thousands) January 31, 1998 February 1, 1997 1997 1996 1995 ASSETS CASH FLOWS FROM OPERATING ACTIVITIES $217,390 $434,208 $961,511 Current Assets: Net Income $746,395 $312,796 Cash and Equivalents IMPACT OF OTHER OPERATING ACTIVITIES ON CASH FLOWS 83,370 69,337 Accounts Receivable 313,292 289,643 285,889 Depreciation and Amortization 1,002,710 1,007,303 Inventories 128,215 7,200 (1,314) Special and Nonrecurring Items, Net 99,167 90,400 Store Supplies 34,736 21,637 17,250 Minority Interest, Net of Dividends Paid 99,509 65,261 Other Gain in Connection with (5,606) (118,178) (649,467) Initial Public Offerings, Net 2,031,151 1,545,097 Total Current Assets 1,519,908 1,828,869 Property and Equipment, Net CHANGE IN ASSETS AND LIABILITIES 351,600 351,600 Restricted Cash (14,033) 8,179 (104,121) Accounts Receivable 56,586 — Deferred Income Taxes (5,407) (48,350) (70,813) Inventories 341,516 394,436 Other Assets Accounts Payable and 81,833 116,599 50,883 Accrued Expenses $4,300,761 $4,120,002 Total Assets (145,832) (5,915) (132,560) Income Taxes LIABILITIES AND SHAREHOLDERS’ EQUITY (14,607) 7,046 (16,526) Other Assets and Liabilities Current Liabilities: Net Cash Provided by $300,703 $307,841 Accounts Payable 589,981 712,069 340,732 Operating Activities 676,715 481,744 Accrued Expenses INVESTING ACTIVITIES 115,994 117,308 Income Taxes (404,602) (409,260) (374,374) Capital Expenditures 1,093,412 906,893 Total Current Liabilities Proceeds from Sale of 650,000 650,000 234,976 — — Long-Term Debt Property and Related Interests — 169,932 Deferred Income Taxes Net Proceeds from Partial 108,259 — — Sale of Interest in Investee 58,720 51,659 Other Long-Term Liabilities — (41,255) (2,000) Businesses Acquired 102,072 67,336 Minority Interest — — (351,600) Increase in Restricted Cash 351,600 351,600 Contingent Stock Redemption Agreement — — 1,212,630 Proceeds from Credit Card Securitization Shareholders’ Equity: Net Cash Provided by (Used (61,367) (450,515) 484,656 for) Investing Activities 180,352 180,352 Common Stock FINANCING ACTIVITIES 148,018 142,860 Paid-In Capital Net Repayments of Commercial 3,613,174 3,526,256 Retained Earnings Paper Borrowings and 3,941,544 3,849,468 — — (25,200) Certificates of Deposit (1,896,587) (1,926,886) Less: Treasury Stock, at Cost — 150,000 250,000 Proceeds from Short-Term Borrowings 2,044,957 1,922,582 Total Shareholders’ Equity — (150,000) (250,000) Repayment of Short-Term Borrowings $4,300,761 $4,120,002 Total Liabilities and Shareholders’ Equity Net Proceeds from Issuance and — 118,178 788,589 Sale of Subsidiary Stock The accompanying Notes are an integral part of these Consolidated (130,472) (108,302) (143,091) Dividends Paid Financial Statements. — (1,615,000) (55,239) Purchase of Treasury Stock 35,457 10,635 12,504 Stock Options and Other Net Cash Provided by (95,015) (1,594,489) 577,563 (Used for) Financing Activities Net Increase (Decrease) 433,599 (1,332,935) 1,402,951 in Cash and Equivalents Cash and Equivalents, 312,796 1,645,731 242,780 Beginning of Year Cash and Equivalents, $746,395 $312,796 $1,645,731 End of Year 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
  • 35. stream, which is principally from three to six months from the date Notes to Consolidated Financial Statements catalogues are mailed. All other advertising costs are expensed at 1. Summary of Significant Accounting Policies the time the promotion first appears in media or in the store. Cat- Principles of Consolidation alogue and advertising costs amounted to $275 million, $242 mil- The consolidated financial statements include the accounts of lion and $237 million in 1997, 1996 and 1995. The Limited, Inc. (the “Company”) and all significant subsidiaries Interest Rate Swap Agreements that are more than 50% owned and controlled. All significant The difference between the amount of interest to be paid and the intercompany balances and transactions have been eliminated in amount of interest to be received under interest rate swap agree- consolidation. ments due to changing interest rates is charged or credited to Investments in other entities (including joint ventures) where the interest expense over the life of the swap agreement. Gains and Company has the ability to significantly influence operating and losses from the disposition of swap agreements are deferred and financial policies are accounted for on the equity method. amortized over the term of the related agreements. Fiscal Year Income Taxes The Company’s fiscal year ends on the Saturday closest to January The Company accounts for income taxes in accordance with State- 31. Fiscal years are designated in the financial statements and ment of Financial Accounting Standards (“SFAS”) No. 109, notes by the calendar year in which the fiscal year commences. The “Accounting for Income Taxes,” which requires the use of the lia- results for fiscal years 1997 and 1996 represent the fifty-two-week bility method. Under this method, deferred tax assets and liabili- periods ended January 31, 1998, and February 1, 1997. The results ties are recognized based on the difference between the financial for fiscal year 1995 represent the fifty-three-week period ended Feb- statement carrying amounts of existing assets and liabilities and ruary 3, 1996. their respective tax bases. Deferred tax assets and liabilities are mea- Cash and Equivalents sured using enacted tax rates in effect in the years in which those Cash and equivalents include amounts on deposit with financial temporary differences are expected to reverse. Under SFAS No. institutions and money-market investments with maturities of 109, the effect on deferred taxes of a change in tax rates is recog- less than 90 days. nized in income in the period that includes the enactment date. Inventories Shareholders’ Equity Inventories are principally valued at the lower of average cost or Five hundred million shares of $.50 par value common stock are market, on a first-in first-out basis, utilizing the retail method. authorized, of which 272.8 million shares and 271.1 million shares Store Supplies were outstanding, net of 106.7 million shares and 108.4 million The initial inventory of supplies for new stores including, but shares held in treasury at January 31, 1998, and February 1, 1997. not limited to, hangers, signage, security tags and point-of-sale Ten million shares of $1.00 par value preferred stock are authorized, supplies, are capitalized at the store opening date. Subsequent none of which have been issued. shipments are expensed, except for new merchandise presentation On March 17, 1996, the Company completed the repurchase programs, which are capitalized. of 85 million shares of its common stock under a self-tender offer Property and Equipment at $19.00 per share. Approximately $1.615 billion was paid in Depreciation and amortization of property and equipment are exchange for the outstanding shares which was funded with funds computed for financial reporting purposes on a straight-line basis, made available from a series of transactions that included: 1) the using service lives ranging principally from 10–30 years for build- initial public offering of a 16.9% interest in Intimate Brands, ings and improvements and 3–10 years for other property and Inc. (“IBI”); 2) the securitization of World Financial Network equipment. The cost of assets sold or retired and the related accu- National Bank (“WFN”) credit card receivables; and 3) the sale of mulated depreciation or amortization are removed from the a 60% interest in WFN. accounts with any resulting gain or loss included in net income. Revenue Recognition Maintenance and repairs are charged to expense as incurred. Major Sales are recorded upon purchase by customers. A reserve is pro- renewals and betterments that extend service lives are capitalized. vided equal to the gross profit on projected catalogue merchandise Long-lived assets are reviewed for impairment whenever events or returns, based on prior experience. changes in circumstances indicate that full recoverability is ques- Earnings Per Share tionable. Factors used in the valuation include, but are not limited Net income per share is computed in accordance with SFAS to, management’s plans for future operations, brand initiatives, No. 128, “Earnings Per Share,” which the Company adopted in recent operating results and projected cash flows. the fourth quarter of 1997. Earnings per basic share are computed Goodwill Amortization based on the weighted average number of outstanding common Goodwill represents the excess of the purchase price over the fair shares. Earnings per diluted share include the weighted average value of the net assets of acquired companies and is amortized on a effect of dilutive options and restricted stock. 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 13
  • 36. (including closing businesses, identification and disposal of non-core (Thousands) assets and identification of store locations not consistent with a 1997 1996 1995 particular brand), the Company recognized special and nonre- curring charges of $276 million during the fourth quarter of 1997 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 379,454 379,454 379,454 Common Shares Issued comprised of: 1) a $68 million charge for the closing of the 118 store Cacique lingerie business effective January 31, 1998. The amount (107,556) (98,755) (21,862) Treasury Shares includes noncash charges of $30 million comprised principally 271,898 280,699 357,592 Basic Shares of write-offs and liquidations of store assets and accruals of $38 Dilutive Effect of Options 2,585 1,354 779 and Restricted Shares million related to cancellations of merchandise on order and other 274,483 282,053 358,371 Diluted Shares exit costs such as severance, service contract termination fees and lease termination costs. Other than contractual obligations of $5 Options to purchase .7 million, 5.9 million and 7.9 million shares million, the accrued costs are expected to be paid in fiscal year 1998; of common stock were outstanding at year-end 1997, 1996 and 1995, 2) an $82 million charge related to streamlining the Henri Bendel but were not included in the computation of earnings per diluted business from six stores to one store by September 1, 1998. The share because the options’ exercise price was greater than the aver- amount includes $26 million of noncash charges related primarily age market price of the common shares. Exercise of the 18.75 mil- to write-offs of store assets, and accruals of $56 million related pri- lion shares subject to the Contingent Stock Redemption Agreement marily to contract cancellations and lease termination costs. Other (see Notes 6 and 10) was determined not to dilute earnings per share. than contractual obligations of $18 million, the accrued costs are Subsequent to January 31, 1998, the Company announced an expected to be paid in 1998. Termination costs related to Henri exchange offer for Abercrombie & Fitch Co. (“A&F”) shares that, if Bendel closings will be recognized in first quarter 1998 when the consummated, would result in a substantial decrease in total com- associates are notified; 3) $86 million of impaired asset charges, mon shares outstanding (see Note 14). related principally to the women’s businesses, covering certain Gains in Connection With Initial Public Offerings store locations where the carrying values are permanently impaired; Gains in connection with initial public offerings are recognized in and 4) a $28 million provision for closing and downsizing approxi- the current year’s income. During the first quarter of 1997, the mately 80 oversized stores, primarily within the Limited, Lerner Company recognized a pretax gain of $8.6 million in connection New York, Lane Bryant and Express women’s businesses and a with the initial public offering (“IPO”) of Brylane, Inc. (“Brylane”), $12 million write-down to net realizable value of a real estate a 26% owned (post-IPO) catalogue retailer. In 1996, the Company investment previously acquired in connection with closing and recognized a $118.2 million gain in connection with the IPO of a downsizing certain stores. The $28 million charge includes $13 15.8% interest (8.05 million shares) of A&F. In 1995, the Compa- million of noncash charges related to write-offs of store assets ny recognized a $649.5 million gain in connection with the IPO of a and accruals of $15 million related to lease termination costs. 16.9% interest (42.7 million shares) of IBI. IBI consists of the Vic- Other than contractual obligations of $7 million, the accrued costs toria’s Secret Stores, Victoria’s Secret Catalogue, Bath & Body are expected to be paid within 18 months. Additionally, the Com- Works and Gryphon businesses. The IPO gains recorded by the pany recognized a $13 million cost of sales charge in the fourth Company in 1996 and 1995 were not subject to income tax. quarter for inventory liquidation at Henri Bendel. The after-tax Minority interest of $102.1 million at January 31, 1998, repre- cash impact of these charges is estimated to be approximately $30 sents a 16.9% interest in the net equity of IBI and a 15.8% interest million. The Company will recognize charges for severance and in the net equity of A&F. other associate termination costs for Henri Bendel in the first Use of Estimates in the Preparation of Financial Statements quarter of 1998 (at the time the associates are notified). The preparation of financial statements in conformity with gener- Additionally, the Company recognized a $75.3 million pretax ally accepted accounting principles requires management to make gain during the third quarter of 1997 in connection with the sale of estimates and assumptions that affect the reported amounts of 2.4 million shares of Brylane, which is carried on the equity assets and liabilities at the date of the financial statements and the method, for $46 per share generating cash proceeds of $108 mil- reported amounts of revenues and expenses during the reporting lion. This sale represented approximately one-half of its investment period. Since actual results may differ from those estimates, the in Brylane. This gain was partially offset by valuation adjust- Company revises its estimates and assumptions as new information ments of $12.5 million on certain assets where the carrying values becomes available. were permanently impaired. On February 20, 1998, the Company Reclassifications entered into an agreement with Pinault Printemps-Radoute to sell Certain amounts on previously reported financial statement captions its remaining 2.6 million shares of Brylane for $51 per share, or have been reclassified to conform with current year presentation. cash proceeds of $131 million. The transaction is expected to close in April 1998. 2. Special and Nonrecurring Items The $86 million impaired asset charge was in accordance with As a result of an ongoing review of the Company’s retail business- SFAS No. 121, “Accounting for the Impairment of Long-Lived es and investments as well as implementation of initiatives intend- Assets and for Long-Lived Assets to be Disposed Of.” As a result of ed to promote and strengthen the Company’s various retail brands 14
  • 37. 5. Leased Facilities and Commitments the Company’s strategic review process, including the implemen- Annual store rent is comprised of a fixed minimum amount, plus tation of brand initiatives within individual businesses, updated contingent rent based on a percentage of sales exceeding a stipulat- analyses were prepared to determine if there was impairment of any ed amount. Store lease terms generally require additional payments long-lived assets. The revised carrying values of these assets were covering taxes, common area costs and certain other expenses. calculated on the basis of discounted cash flows. The impaired asset charge had no impact on the Company’s 1997 or future cash flows. (Thousands) As a result of this charge, depreciation and amortization expense 1997 1996 1995 RENT EXPENSE related to these assets will decrease in future periods. $721,283 $689,319 $643,200 Fixed Minimum In 1996, the Company recorded a $12 million pretax, special and 26,630 23,117 18,812 Contingent nonrecurring charge in connection with the April 1997 sale of Pen- 747,913 712,436 662,012 Total Store Rent haligon’s, a U.K.–based subsidiary of IBI. 23,492 25,163 26,101 Equipment and Other In the fourth quarter of 1995, the Company recognized a $73.2 $771,405 $737,599 $688,113 Total Rent Expense million pretax gain from the sale of a 60% interest in the Company’s At January 31, 1998, the Company was committed to noncance- wholly-owned credit card bank, WFN. Along with the sale of the lable leases with remaining terms generally from one to twenty 60% interest in WFN, the Company recognized a special and non- years. A substantial portion of these commitments are store leases recurring charge during the fourth quarter of 1995 of approxi- with initial terms ranging from ten to twenty years, with options to mately $71.9 million. Of this amount, $25.8 million was provided renew at varying terms. 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. (Thousands) The remaining charge of approximately $26.3 million represented MINIMUM RENT COMMITMENTS UNDER NONCANCELABLE LEASES the write-down to market or net realizable value of certain assets $731,233 1998 arising from nonoperating activities. The net pretax gain from these 712,804 1999 special and nonrecurring items was $1.3 million. 688,317 2000 645,229 2001 3. Accounts Receivable 595,377 2002 As discussed in Note 2, the sale of a 60% interest in WFN was com- $2,062,453 Thereafter pleted in the fourth quarter of 1995, and WFN’s outstanding debt to the Company of approximately $1.2 billion was repaid. Finance 6. Restricted Cash charge revenue on the deferred payment accounts amounted to At January 31, 1998, Special Funding, Inc., a wholly-owned sub- $235.6 million in 1995 and the provision for uncollectible accounts sidiary of the Company, had $351.6 million of restricted cash amounted to $91.4 million in 1995. These amounts are classified invested in short-term, highly liquid securities. This amount is as components of the cost to administer the deferred payment pro- classified as a noncurrent asset, since it has been reserved for use gram and are included in the Company’s general, administrative and in the event that the Wexner Children’s Trust, established by store operating expenses for that year. Leslie H. Wexner, the Company’s principal shareholder, exercises its opportunity to require the Company to redeem, or the Company 4. Property and Equipment exercises its opportunity to redeem from the Trust, shares of The (Thousands) Limited, Inc. common stock in accordance with the terms of the 1997 1996 Contingent Stock Redemption Agreement (see Note 10). Interest PROPERTY AND EQUIPMENT, AT COST earnings of $18.6 million and $17.9 million in 1997 and 1996 on the $394,885 $530,259 Land, Buildings and Improvements segregated cash accrued to the Company. 1,951,172 1,929,951 Furniture, Fixtures and Equipment 539,047 641,200 Leaseholds and Improvements 7. Accrued Expenses 219,508 188,834 Construction in Progress 3,104,612 3,290,244 Total (Thousands) Less: Accumulated Depreciation 1997 1996 1,584,704 1,461,375 and Amortization ACCRUED EXPENSES $1,519,908 $1,828,869 Property and Equipment, Net $135,701 $100,526 Compensation, Payroll Taxes and Benefits 152,850 123,421 Rent 42,321 47,297 Taxes, Other than Income 21,129 21,510 Interest 86,803 3,509 Store Closings 237,911 185,481 Other $676,715 $481,744 Total 15
  • 38. 9. Income Taxes 8. Long-Term Debt (Thousands) (Thousands) 1997 1996 1997 1996 1995 UNSECURED LONG-TERM DEBT PROVISION FOR INCOME TAXES 8 7⁄8% Notes due August 1999 $100,000 $100,000 Currently Payable: 1 150,000 150,000 9 ⁄8% Notes due February 2001 $304,300 $210,400 $190,900 Federal 4 150,000 150,000 7 ⁄5% Notes due May 2002 33,800 34,000 24,700 State 7 1 ⁄2 % Debentures due March 2023 250,000 250,000 $650,000 $650,000 3,700 2,400 4,500 Total Foreign 341,800 246,800 220,100 Total The Company maintains a $1 billion unsecured credit agreement Deferred: (the “Agreement”), established on September 29, 1997 (the “Effec- (156,600) (13,800) (9,400) Federal tive Date”). Borrowings outstanding under the Agreement are (2,200) 8,000 12,300 State due September 28, 2002. However, the revolving term of the Agree- (158,800) (5,800) 2,900 Total ment may be extended an additional two years upon notification $183,000 $241,000 $223,000 Total Provision by the Company on the second and fourth anniversaries of the The foreign component of pretax income, arising principally from Effective Date, subject to the approval of the lending banks. The overseas sourcing operations, was $62.3 million, $45.9 million and Agreement has several borrowing options, including interest rates $60.8 million in 1997, 1996 and 1995. 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. 1997 1996 1995 Facilities fees payable under the Agreement are based on the Com- STATUTORY FEDERAL INCOME TAX RATE RECONCILIATION pany’s long-term credit ratings, and currently approximate .1% of the committed amount per annum. The Agreement contains 35.0% 35.0% 35.0% Federal Income Tax Rate covenants relating to the Company’s working capital, debt and net State Income Tax, Net of 4.5% 4.5% 4.5% Federal Income Tax Effect worth. No amounts were outstanding under the Agreement at Jan- .6% .5% .7% Other Items, Net uary 31, 1998. 40.1% 40.0% 40.2% Total The Agreement supports the Company’s commercial paper pro- The reconciliation between the statutory Federal income tax gram, which is used from time to time to fund working capital and rate and the effective income tax rate on pretax earnings excludes other general corporate requirements. No commercial paper was the nontaxable gains from sales of subsidiary stock in 1996 and 1995 outstanding at January 31, 1998. and minority interest. Up to $250 million of debt securities and warrants to purchase debt securities may be issued under the Company’s shelf registration (Thousands) statement. The Company periodically enters into interest rate swap 1997 1996 agreements with the intent to manage interest rate exposure. At Jan- Assets Liabilities Total Assets Liabilities Total uary 31, 1998, the Company had an interest rate swap position of DEFERRED INCOME TAXES $100 million notional principal amount outstanding. This contract effectively changed the Company’s interest rate exposure on $100 mil- Excess of Tax Over Book lion of variable rate debt to a fixed rate of 8.09% through July 2000. — $(1,400) $(1,400) — $(20,000) $(20,000) Depreciation Long-term debt maturities within the next five years consist of Undistributed $100 million which matures August 15, 1999, $150 million which Earnings of Foreign matures February 1, 2001, and $150 million which matures May 15, — (102,400) (102,400) — (116,600) (116,600) Affiliates 2002. Interest paid approximated $69.1 million, $65.5 million and Special and Nonrecurring $88.4 million in 1997, 1996 and 1995. $99,200 — 99,200 $24,100 — 24,100 Items 62,100 — 62,100 — (17,500) (17,500) Rent 43,700 — 43,700 40,000 — 40,000 Inventory Investments — (24,900) (24,900) — (54,000) (54,000) in Affiliates State Income 24,900 — 24,900 9,600 — 9,600 Taxes 18,500 — 18,500 — (35,300) (35,300) Other Total Deferred Income $248,400 $(128,700) $119,700 $73,700 $(243,400) $(169,700) Taxes 16
  • 39. The Company adopted the disclosure requirements of SFAS Income taxes payable included net current deferred tax assets of No. 123, “Accounting for Stock-Based Compensation,” effective $63.1 million and $.3 million at January 31, 1998 and February 1, 1997. with the 1996 financial statements, but elected to continue to mea- Income tax payments approximated $410.8 million, $233.8 mil- sure compensation expense in accordance with APB Opinion No.25, lion and $306.1 million for 1997, 1996 and 1995. “Accounting for Stock Issued to Employees.” Accordingly, no com- The Internal Revenue Service has assessed the Company for addi- pensation expense for stock options has been recognized. If com- tional taxes and interest for the years 1992 to 1994 relating to the pensation expense had been determined based on the estimated fair treatment of transactions involving the Company’s foreign opera- value of options granted since 1995, consistent with the methodol- tions for which the Company has provided deferred taxes on the ogy in SFAS No. 123, the pro forma effects on net income and earn- undistributed earnings of foreign affiliates. The Company strong- ings per diluted share, including the impact of options issued by IBI ly disagrees with the assessment and is vigorously contesting the and A&F, would have been a reduction of approximately $11.4 mil- matter. Management believes resolution of this matter will not lion or $.04 per share in 1997 and $4.0 million or $.01 per share in have a material adverse effect on the Company’s results of opera- 1996. The weighted-average per share fair value of options granted tions or financial condition. ($5.79, $4.72 and $5.48 during 1997, 1996 and 1995) was estimated using the Black-Scholes option-pricing model with the following 10. Contingent Stock Redemption Agreement weighted-average assumptions for 1997, 1996 and 1995: dividend In connection with the reconfiguration of its business, the Company yields of 2.8%; volatility of 27%, 31% and 31%; risk-free interest purchased from shareholders, via a self-tender offer, 85 million rates of 6%, 5.25% and 7%; assumed forfeiture rates of 15%, 20% shares of The Limited, Inc. common stock for approximately $1.615 and 20%; and expected lives of 6.5 years, 5 years and 5 years. The billion on March 17, 1996. Leslie H. Wexner, Chairman and CEO of pro forma effect on net income for 1997 and 1996 is not representa- the Company, as well as the Company’s founder and principal share- tive of the pro forma effect on net income in future years because it holder, did not participate in the self-tender. However, the Company does not take into consideration pro forma compensation expense entered into an agreement, as amended in 1996, which provides the related to grants made prior to 1995. Wexner Children’s Trust the opportunity, commencing on February 1, Approximately 2,120,000, 468,000 and 569,000 restricted Limited 1998, and for a period of eight years thereafter (the exercise period), shares were granted in 1997, 1996 and 1995, with market values to require the Company to redeem up to 18.75 million shares for a at date of grant of $43.9 million, $8.3 million and $10.0 million. price per share equal to $18.75 (a price equal to the price per share Included in the 1997 grants were 1.7 million restricted shares, of paid in the self-tender less $.25 per share). Under certain circum- which 685,000 had performance requirements, with a graduated stances, lenders to the Trust, if any, may exercise this opportunity, vesting schedule over six years. The remaining restricted shares gen- beginning February 1, 1997. The Company received the opportu- erally vest either on a graduated scale over four years or 100% at the nity to redeem an equivalent number of shares from the Trust at end of a fixed vesting period, principally five years. Additionally, $25.07 per share for a period beginning on July 31, 2006, and for six IBI granted 1,442,000, 169,000 and 357,000 restricted shares in months thereafter. As a result of these events, the Company has 1997, 1996 and 1995 and A&F granted 540,000 and 50,000 restrict- transferred $351.6 million to temporary equity identified as Con- ed shares in 1997 and 1996. Vesting terms for the IBI and A&F tingent Stock Redemption Agreement in the Consolidated Balance restricted shares are similar to those of The Limited. The market Sheets. In addition, approximately $351.6 million has been desig- value of restricted shares, subject to adjustment at measurement nated as restricted cash to consummate either of the above rights date for the performance awards, is being amortized as compen- (see Note 6). The terms of this agreement were approved by the sation expense over the vesting period, generally four to six years. Company’s Board of Directors. Compensation expense related to restricted stock awards, including expense related to awards granted at IBI and A&F, amounted to 11. Stock Options and Restricted Stock $29.0 million in 1997 and $9.1 million in both 1996 and 1995. 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 STOCK OPTIONS OUTSTANDING Company’s common stock at the market price on the date of grant. OPTIONS OUTSTANDING OPTIONS EXERCISABLE In 1997, the Company granted approximately 5.6 million options with a graduated vesting schedule over six years. The remaining Weighted Average Weighted Weighted options generally vest 25% per year over the first four years of the Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercisable grant. Virtually all options have a maximum term of ten years. Prices at 1/31/98 Life Price at 1/31/98 Price Under separate stock plans, up to 17.5 million IBI shares and 3.5 $15–$16 1,350,000 6.1 $16 618,000 $16 million A&F shares are available to grant restricted shares and $17–$18 2,827,000 7.3 $17 1,227,000 $17 options to IBI and A&F associates. As of January 31, 1998, options $19–$21 5,658,000 7.9 $20 1,651,000 $21 to purchase 4.3 million IBI shares and 1.9 million A&F shares were $22–$27 2,646,000 7.9 $23 773,000 $24 outstanding, of which 418,000 IBI options and 35,000 A&F options $9–$31 1,589,000 7.5 $20 638,000 $20 were exercisable. Under these plans, options generally vest over $9–$31 14,070,000 7.5 $20 4,907,000 $20 periods from four to six years. 17
  • 40. Interest Rate Swap Agreement Weighted Average The fair value of the interest rate swap is the estimated amount that Number of Option Price Shares Per Share the Company would receive or pay to terminate the swap agreement STOCK OPTION ACTIVITY at the reporting date, taking into account current interest rates and 1995 the current creditworthiness of the swap counterparty. 8,414,000 $19.56 Outstanding at Beginning of Year (Thousands) 2,196,000 17.81 Granted 1997 1996 (280,000) 12.43 Exercised Carrying Fair Carrying Fair (1,188,000) 19.90 Canceled Amount Value Amount Value 9,142,000 $19.32 Outstanding at End of Year ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS 4,800,000 $19.62 Options Exercisable at Year-End 1996 $(650,000) $(667,391) $(650,000) $(638,798) Long-Term Debt 9,142,000 $19.32 Outstanding at Beginning of Year $(328) $(5,345) $(351) $(5,267) Interest Rate Swaps 1,899,000 17.30 Granted (531,000) 14.89 Exercised 14. Subsequent Event—Registration Statement for A&F Exchange Offer (1,311,000) 19.45 Canceled On February 17, 1998, a registration statement was filed with the 9,199,000 $19.14 Outstanding at End of Year Securities and Exchange Commission in connection with a plan 5,249,000 $20.24 Options Exercisable at Year-End to establish A&F as a fully independent company via a tax-free 1997 exchange offer pursuant to which The Limited shareholders will be 9,199,000 $19.14 Outstanding at Beginning of Year given an opportunity to tender some or all of their shares of The 7,331,000 20.02 Granted Limited in return for shares of A&F. The transaction is subject to (1,377,000) 17.70 Exercised certain customary conditions. (1,083,000) 19.64 Canceled 14,070,000 $19.70 Outstanding at End of Year 15. Quarterly Financial Data (Unaudited) 4,907,000 $19.89 Options Exercisable at Year-End (Thousands except per share amounts): First Second Third Fourth 12. Retirement Benefits 1997 QUARTERLY FINANCIAL DATA (UNAUDITED) The Company sponsors a qualified defined contribution retire- $1,829,780 $2,020,084 $2,070,559 $3,268,381 Net Sales ment plan and a nonqualified supplemental retirement plan. Par- 501,471 538,907 620,982 1,156,617 Gross Income ticipation in the qualified plan is available to all associates who 24,873 27,574 79,682 85,261 Net Income have completed 1,000 or more hours of service with the Company .09 .10 .29 .31 Net Income Per Basic Share during certain 12-month periods and attained the age of 21. Par- q .09 q .29 q .31 .10 Net Income Per Diluted Share A A A ticipation in the nonqualified plan is subject to service and com- 1996 QUARTERLY FINANCIAL DATA (UNAUDITED) pensation requirements. Company contributions to these plans are $1,787,943 $1,895,601 $1,994,986 $2,966,261 Net Sales based on a percentage of associates’ eligible annual compensation. 469,541 491,909 555,374 979,755 Gross Income The cost of these plans was $36.4 million in 1997, $36.2 million in 28,152 33,150 159,513 213,393 Net Income 1996 and $33.3 million in 1995. .09 .12 .59 .79 Net Income Per Basic Share q .59 q .78 .09 .12 Net Income Per Diluted Share A A 13. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the q Gains in connection with initial public offerings included an $8.6 million A fair value of each class of financial instruments for which it is prac- ($.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) ticable to estimate that value. catalogue retailer and a $118.2 million ($.44 per diluted share) gain in the third Current Assets, Current Liabilities and Restricted Cash 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 The carrying value of cash equivalents, restricted cash, accounts special and nonrecurring items and an additional $13 million ($.03 per payable and accrued expenses approximates fair value because of diluted share) in inventory liquidation charges during the fourth quarter of 1997, their short maturity. 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 Long-Term Debt investment in Brylane, and $12 million ($.02 per diluted share) in special The fair value of the Company’s long-term debt is estimated based and nonrecurring charges during the fourth quarter of 1996 in connection with the sale of the Penhaligon’s business (see Note 2). 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 remain- ing maturities. 18
  • 41. Market Price and Dividend Information Report of Independent Accountants To the Board of Directors and Shareholders of The Limited, Inc. Market Price Cash Dividend We have audited the accompanying consolidated balance sheets High Low Per Share of The Limited, Inc. and subsidiaries as of January 31, 1998 and FISCAL YEAR END 1997 February 1, 1997, and the related consolidated statements of in- $27 1⁄4 $23 9⁄1 6 $.12 4th Quarter come, shareholders’ equity, and cash flows for each of the three fis- 1 3 25 ⁄2 21 ⁄8 .12 3rd Quarter cal years in the period ended January 31, 1998 (on pages 11–18). 22 5⁄1 6 18 5⁄8 .12 2nd Quarter These financial statements are the responsibility of the Com- 1 $20 ⁄8 $17 $.12 1st Quarter pany’s management. Our responsibility is to express an opinion FISCAL YEAR END 1996 on these financial statements based on our audits. $20 1⁄8 $16 5⁄8 $.10 4th Quarter We conducted our audits in accordance with generally accepted 1 3 20 ⁄4 17 ⁄4 .10 3rd Quarter auditing standards. Those standards require that we plan and per- 18 1⁄4 22 .10 2nd Quarter form the audit to obtain reasonable assurance about whether the 3 5 $20 ⁄4 $16 ⁄8 $.10 1st Quarter financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts The Company’s common stock is traded on the New York Stock and disclosures in the financial statements. An audit also includes Exchange (“LTD”) and the London Stock Exchange. On January 31, assessing the accounting principles used and significant estimates 1998, there were 81,534 shareholders of record. However, when made by management, as well as evaluating the overall financial including active associates who participate in the Company’s statement presentation.We believe that our audits provide a rea- stock purchase plan, associates who own shares through Company- sonable basis for our opinion. sponsored retirement plans and others holding shares in broker In our opinion, the financial statements referred to above present accounts under street names, the Company estimates the share- fairly, in all material respects, the consolidated financial position holder base to be approximately 241,000. of The Limited, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Columbus, Ohio February 20, 1998 19
  • 42. Our actions in 1997 demonstrate our ongoing commitment to building and delivering value to shareholders through heightened focus and disciplined asset management.
  • 43. Design: Sisman Design • Printing: Heritage Press